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

FORM 10-Q
 
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 20192020
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 West Washington Ave, Madison, WI 53703
(Address of principal executive offices)
(608) 443-1600
(Registrant’s telephone number including area code)
 
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  x           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  x            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 ¨ Accelerated filer ¨
       
Non-accelerated filer ¨ Smaller reporting company x
       
    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.
Yes  ¨     No   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨            No  x
State the number of shares outstanding of each of the issuer’s common equity as of the last practicable date:
Class 
Outstanding
April 29, 201930, 2020
Common Stock, $0.01 par value 6,006,9336,788,321
 

PART I. FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. For a more complete discussion of accounting policies and certain other information, refer to the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2018.2019.


TABLE OF CONTENTS
 
  PAGE NO.
PART I
   
Item 1.
   
 
   
 
   
 
   
 
   
 
   
Item 2.
   
Item 3.
   
Item 4.
   
PART II 
   
Item 1.
   
Item 1A.
   
Item 6.
   


Item 1
Sonic Foundry, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share data)
(Unaudited)

March 31,
2019
 September 30,
2018
Assets
 
Current assets:
 
Cash and cash equivalents$1,182
 $1,189
Accounts receivable, net of allowances of $45 and $5246,092
 7,418
Financing receivables, current, net of allowances of $526, respectively103
 100
Inventories1,641
 1,027
Investment in sales-type lease, current155
 150
Capitalized commissions, current459
 
Prepaid expenses and other current assets968
 941
Total current assets10,600
 10,825
Property and equipment:
 
Leasehold improvements1,113
 1,105
Computer equipment5,977
 5,718
Furniture and fixtures1,179
 1,099
Total property and equipment8,269
 7,922
Less accumulated depreciation and amortization6,533
 6,009
Property and equipment, net1,736
 1,913
Other assets:
 
Financing receivables, long-term187
 181
Investment in sales-type lease, long-term258
 249
Capitalized commissions, long-term129
 
Other long-term assets414
 415
Total assets$13,324
 $13,583
Liabilities and stockholders’ deficit
 
Current liabilities:
 
Revolving lines of credit$451
 $885
Accounts payable1,832
 1,610
Accrued liabilities1,595
 1,609
Unearned revenue8,301
 11,645
Current portion of capital lease and financing arrangements205
 248
Current portion of notes payable and warrant debt, net of discounts770
 593
Total current liabilities13,154
 16,590
Long-term portion of unearned revenue2,329
 1,691
Long-term portion of capital lease and financing arrangements97
 187
Long-term portion of notes payable and warrant debt, net of discounts4,658
 1,357
Derivative liability, at fair value10
 14
Other liabilities174
 202
Total liabilities20,422
 20,041
Commitments and contingencies
 
Stockholders’ 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; 2,056 and 2,678 shares issued and outstanding, respectively, at amounts paid in1,187
 1,651
5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 1,000,000 shares, none issued
 
Common stock, $.01 par value, authorized 10,000,000 shares; 5,291,494 and 5,113,400 shares issued and 5,278,778 and 5,100,684 shares outstanding53
 51
Additional paid-in capital201,490
 200,130
Accumulated deficit(209,002) (207,419)
Accumulated other comprehensive loss(631) (676)
Receivable for common stock issued(26) (26)
Treasury stock, at cost, 12,716 shares(169) (169)

(Unaudited)  

March 31,
2020
 September 30,
2019
Assets
 
Current assets:
 
Cash and cash equivalents$4,586
 $4,295
Accounts receivable, net of allowances of $135 & $1356,344
 6,532
Inventories, net of reserves of $30 and $0602
 558
Investment in sales-type lease, current11
 163
Capitalized commissions, current334
 464
Prepaid expenses and other current assets910
 972
Total current assets12,787
 12,984
Property and equipment:
 
Leasehold improvements1,121
 1,121
Computer equipment6,499
 5,610
Furniture and fixtures1,291
 1,233
Total property and equipment8,911
 7,964
Less accumulated depreciation and amortization6,838
 6,396
Property and equipment, net2,073
 1,568
Other assets:
 
Investment in sales-type lease, long-term159
 134
Capitalized commissions, long-term102
 106
Right-of-use assets under operating leases1,972
 
Other long-term assets384
 388
Total assets$17,477
 $15,180
Liabilities and stockholders’ deficit
 
Current liabilities:
 
Accounts payable$1,994
 $843
Accrued liabilities1,649
 2,216
Unearned revenue9,453
 9,610
Current portion of finance lease obligations155
 194
Current portion of operating lease obligations1,160
 
Current portion of notes payable and warrant debt, net of discounts1,915
 968
Total current liabilities16,326
 13,831
Long-term portion of unearned revenue2,055
 1,842
Long-term portion of finance lease obligations130
 179
Long-term portion of operating lease obligations840
 
Long-term portion of notes payable and warrant debt, net of discounts4,743
 5,429
Derivative liability, at fair value72
 9
Other liabilities142
 143
Total liabilities24,308
 21,433
Commitments and contingencies
 
Stockholders’ 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; zero shares issued and outstanding, 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
 
Common stock, $.01 par value, authorized 10,000,000 shares; 6,800,037 and 6,749,359 shares issued, respectively and 6,787,321 and 6,736,643 shares outstanding, respectively68
 67
Additional paid-in capital203,884
 203,735
Accumulated deficit(210,065) (209,340)
Accumulated other comprehensive loss(549) (546)
Treasury stock, at cost, 12,716 shares(169) (169)
Total stockholders’ deficit(7,098) (6,458)(6,831) (6,253)
Total liabilities and stockholders’ deficit$13,324
 $13,583
$17,477
 $15,180
See accompanying notes to the condensed consolidated financial statements.



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

Three Months Ended March 31, Six Months Ended March 31,Three Months Ended March 31, Six Months Ended March 31,

2019
2018 2019 20182020 2019 2020 2019
Revenue:              
Product and other$1,796
 $2,690
 3,547
 $5,713
$2,812
 $1,796
 $4,867
 $3,547
Services6,201
 5,770
 11,952
 11,642
5,854
 6,201
 11,814
 11,952
Total revenue7,997
 8,460
 15,499
 17,355
8,666
 7,997
 16,681
 15,499
Cost of revenue:
      
      
Product and other645
 1,203
 1,296
 2,426
1,158
 645
 1,989
 1,296
Services1,359
 1,328
 2,550
 2,530
1,247
 1,359
 2,595
 2,550
Total cost of revenue2,004
 2,531
 3,846
 4,956
2,405
 2,004
 4,584
 3,846
Gross margin5,993
 5,929
 11,653
 12,399
6,261
 5,993
 12,097
 11,653
Operating expenses:
      
      
Selling and marketing3,836
 3,867
 7,779
 7,977
3,057
 3,836
 6,453
 7,779
General and administrative1,345
 1,509
 2,883
 3,082
1,176
 1,345
 2,617
 2,883
Product development1,935
 1,812
 3,768
 3,565
1,499
 1,935
 3,089
 3,768
Total operating expenses7,116
 7,188
 14,430
 14,624
5,732
 7,116
 12,159
 14,430
Loss from operations(1,123) (1,259) (2,777) (2,225)
Non-operating income (expenses):       
Income (loss) from operations529
 (1,123) (62) (2,777)
Non-operating expenses:       
Interest expense, net(227) (103) (381) (195)(218) (227) (481) (381)
Other income (expense), net(11) 19
 (3) 10
Other expense, net(58) (11) (43) (3)
Total non-operating expenses(238) (84) (384) (185)(276) (238) (524) (384)
Loss before income taxes(1,361) (1,343) (3,161) (2,410)
Benefit (provision) for income taxes(125) (106) (113) 1,281
Net loss$(1,486) $(1,449) $(3,274) (1,129)
Income (loss) before income taxes253
 (1,361) (586) (3,161)
Income tax expense(158) (125) (139) (113)
Net income (loss)$95
 $(1,486) $(725) $(3,274)
Dividends on preferred stock(45) (50) (98) (122)
 (45) 
 (98)
Net loss attributable to common stockholders$(1,531) $(1,499) $(3,372) $(1,251)
Loss per common share
      
Net income (loss) attributable to common stockholders$95
 $(1,531) $(725) $(3,372)
Income (loss) per common share
      
– basic$(0.29) $(0.34) $(0.64) $(0.28)$0.01
 $(0.29) $(0.11) $(0.64)
– diluted$(0.29) $(0.34) $(0.64) $(0.28)$0.01
 $(0.29) $(0.11) $(0.64)
Weighted average common shares              
– basic5,278,500
 4,461,310
 5,232,449
 4,459,675
6,785,180
 5,278,500
 6,760,779
 5,232,449
– diluted5,278,500
 4,461,310
 5,232,449
 4,459,675
6,933,227
 5,278,500
 6,760,779
 5,232,449
See accompanying notes to the condensed consolidated financial statements


Sonic Foundry, Inc.
Condensed Consolidated Statements of Comprehensive LossIncome (Loss)
(in thousands)
(Unaudited)
 Three Months Ended March 31, Six Months Ended March 31,
 2019 2018 2019 2018
Net loss$(1,486) $(1,449) $(3,274) $(1,129)
Foreign currency translation adjustment(18) 309
 45
 329
Comprehensive loss$(1,504) $(1,140) $(3,229) $(800)
 Three Months Ended March 31, Six Months Ended March 31,
 2020 2019 2020 2019
Net income (loss)$95
 $(1,486) $(725) $(3,274)
Foreign currency translation adjustment5
 (17) (3) 45
Comprehensive income (loss)$100
 $(1,503) $(728) $(3,229)
See accompanying notes to the condensed consolidated financial statements


Sonic Foundry, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
(in thousands)
(Unaudited)

 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, September 30, 2018$1,651
 $51
 $200,130
 $(207,419) $(676) $(26) $(169) $(6,458)
Cumulative effect of ASC 606 adoption Note 6
 
 
 1,691
 
 
 
 1,691
Adjusted balance, October 1, 20181,651
 51
 200,130
 (205,728) (676) (26) (169) (4,767)
Stock compensation
 
 220
 
 
 
 
 220
Issuance of common stock and warrants
 
 4
 
 
 
 
 4
Warrants issued in connection with subordinated notes payable
 
 674
 
 
 
 
 674
Conversion of preferred stock(563) 2
 561
 
 
 
 
 
Preferred stock dividends99
 
 (99) 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 45
 
 
 45
Net loss
 
 
 (3,274) 
 
 
 (3,274)
Balance, March 31, 2019$1,187
 $53
 $201,490
 $(209,002) $(631) $(26) $(169) $(7,098)



 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, December 31, 2018$1,141
 $53
 $200,802
 $(207,516) $(614) $(26) $(169) $(6,329)
Stock compensation
 
 56
 
 
 
 
 56
Issuance of common stock and warrants
 
 4
 
 
 
 
 4
Warrants issued in connection with subordinated notes payable
 
 674
 
 
 
 
 674
Preferred stock dividends46
 
 (46) 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 (17) 
 
 (17)
Net loss
 
 
 (1,486) 
 
 
 (1,486)
Balance, March 31, 2019$1,187
 $53
 $201,490
 $(209,002) $(631) $(26) $(169) $(7,098)

Sonic Foundry, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
(in thousands)
(Unaudited)

 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, September 30, 2019
 $67
 203,735
 (209,340) (546) 
 (169) (6,253)
Stock compensation
 
 86
 
 
 
 
 86
Issuance of common stock
 1
 63
 
 
 
 
 64
Foreign currency translation adjustment
 
 
 
 (3) 
 
 (3)
Net loss
 
 
 (725) 
 
 
 (725)
Balance, March 31, 2020$
 $68
 $203,884
 $(210,065) $(549) $
 $(169) $(6,831)



 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, December 31, 2019$
 $67
 $203,787
 $(210,160) $(554) $
 $(169) $(7,029)
Stock compensation
 
 34
 
 
 
 
 34
Issuance of common stock
 1
 63
 
 
 
 
 64
Foreign currency translation adjustment
 
 
 
 5
 
 
 5
Net income
 
 
 95
 
 
 
 95
Balance, March 31, 2020$
 $68
 $203,884
 $(210,065) $(549) $
 $(169) $(6,831)







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

Six Months Ended
March 31,
Six Months Ended
March 31,

2019 20182020 2019
Operating activities
 

 
Net loss$(3,274) $(1,129)(725) (3,274)
Adjustments to reconcile net loss to net cash used in operating activities:
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
Amortization of other intangibles97
 268
150
 97
Depreciation and amortization of property and equipment516
 536
433
 516
Provision for doubtful accounts - including financing receivables26
 175
9
 26
Deferred taxes
 (1,361)
Stock-based compensation expense related to stock options and warrants219
 320
86
 219
Remeasurement gain on derivative liability(7) (9)
Deferred loan interest to related party264
 
Stock issued for board of director fees64
 
Remeasurement loss (gain) on derivative liability63
 (7)
Changes in operating assets and liabilities:
 

 
Accounts receivable1,354
 995
175
 1,354
Financing receivables(2) 1,525

 (2)
Inventories(612) (59)(45) (612)
Investment in sales-type lease126
 
Capitalized commissions105
 
134
 105
Prepaid expenses and other current assets(25) 381
64
 (25)
Right-of-use assets under operating leases562
 
Operating lease obligations(578) 
Other long-term assets
 
4
 
Accounts payable and accrued liabilities89
 700
(162) 89
Other long-term liabilities(33) (101)(1) (33)
Unearned revenue(1,704) (2,789)57
 (1,704)
Net cash used in operating activities(3,251) (548)
Net cash provided by (used in) operating activities680
 (3,251)
Investing activities
 

 
Purchases of property and equipment(222) (238)(118) (222)
Net cash used in investing activities(222) (238)(118) (222)
Financing activities
 

 
Proceeds from notes payable4,500
 1,000
463
 4,500
Proceeds from revolving lines of credit8,748
 10,822
Proceeds from lines of credit
 8,748
Payments on notes payable(333) (681)(618) (333)
Payments on revolving lines of credit(9,186) (10,743)
Payments on lines of credit
 (9,186)
Payment of debt issuance costs(110) (20)
 (110)
Proceeds from issuance of preferred stock and common stock5
 508

 5
Payments on capital lease and financing arrangements(134) (159)
Net cash provided by financing activities3,490
 727
Proceeds from exercise of common stock options1
 
Payments on finance lease obligations(124) (134)
Net cash provided by (used in) financing activities(278) 3,490
Changes in cash and cash equivalents due to changes in foreign currency(24) 28
7
 (24)
Net decrease in cash and cash equivalents(7) (31)
Net increase (decrease) in cash and cash equivalents291
 (7)
Cash and cash equivalents at beginning of year1,189
 1,211
4,295
 1,189
Cash and cash equivalents at end of year$1,182
 $1,180
Cash and cash equivalents at end of period$4,586
 $1,182
Supplemental cash flow information:      
Interest paid$264
 $169
$479
 $264
Income taxes paid, foreign160
 43
90
 160
Non-cash financing and investing activities:      
Property and equipment financed by capital lease or accounts payable112
 256
Property and equipment financed by finance lease or accounts payable821
 112
Debt discount676
 

 676
Deemed dividend for beneficial conversion feature of preferred stock
 28
Preferred stock dividends paid in additional shares98
 50

 98
Conversion of preferred shares563
 

 563
See accompanying notes to the condensed consolidated financial statements.

Sonic Foundry, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 20192020
(Unaudited)

1.Basis of Presentation and Significant Accounting Policies
Financial Statements
The accompanying condensed consolidated financial statements are unaudited and have been prepared on a basis substantially consistent with the Company's audited financial statements as of and for the year ended September 30, 2019 included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Operating results for the six month period ended March 31, 20192020 are not necessarily indicative of the results that might be expected for the year ending September 30, 2019.2020.
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 of product and credit risk evaluation.lease.

Amounts receivable of $526 thousand at September 30, 2019 primarily represents sales of perpetual software licenses to a single international distributor on invoices outstanding for product delivered from March 2016 through June 2017.

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 receivablereceivables 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 at March 31, 2019 and September 30, 2018.2019.

The Company's financing receivables are aggregated intoDuring 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 $290 thousand and $281 thousand of receivables outstanding for long-term customer support contracts as ofperiod ended March 31, 2019 and September 30, 2018, 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 receivable 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 as2020 it was fully allowed for as a loss. As a result ofdetermined that the circumstances described,financing receivable would not be collected. Therefore, both the entire allowance for losses on financing receivablesreceivable of $526 thousand is considered attributable to this classand the corresponding reserve of customer as of March 31, 2019.

Financing receivables consisted of the following (in thousands) as of:
 March 31, 2019 September 30, 2018
Customer support contracts, current and long-term, gross$290
 $281
Product receivables, gross526
 526
Allowance for losses on financing receivables(526) (526)
 $290
 $281
$526 thousand were written off.
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 consists of the following (in thousands):

as of March 31, 2020:
 March 31, 2019 September 30, 2018
Investment in sales-type lease$413
 $399
 $413
 $399
  
Investment in sales-type lease, gross: 
   2020$13
   2021147
   202213
Gross investment in sales-type lease173
Less: Unearned income3
Total investment in sales-type lease$170
  
Current portion of total investment in sales-type lease$11
Long-term portion of total investment in sales-type lease159
 $170


Inventory Valuation
Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. An obsolescence reserve has been established to account for slow moving inventory.
Inventory consists of the following (in thousands):
March 31,
2019
 September 30, 2018March 31,
2020
 September 30, 2019
Raw materials and supplies$438
 $358
$230
 $163
Finished goods1,203
 669
402
 395
Less: Obsolescence reserve(30) 
$1,641
 $1,027
$602
 $558
Asset Retirement Obligation
An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is recognized as a liability in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-term asset.  The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset.  As of March 31, 2020 and September 30, 2019, the Company has recorded a liability of $130 thousand and $129 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. Asset retirement obligations are included in other-long term liabilities on the condensed consolidated balance sheets.
Fair Value of Financial Instruments

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

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

Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to the Company at the measurement date.
    
Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

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

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

Financial Liabilities Measured at Fair Value on Recurring Basis

The initial fair values of PFG debt and warrant debt and the Burish note purchase agreement (see Note 4) 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 whichassociated with the PFG debt 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):
March 31, 2019 Level 1 Level 2 Level 3 Total Fair Value
March 31, 2020 Level 1 Level 2 Level 3 Total Fair Value
Derivative liability $
 $10
 $
 $10
 $
 $72
 $
 $72

September 30, 2018 Level 1 Level 2 Level 3 Total Fair Value
September 30, 2019 Level 1 Level 2 Level 3 Total Fair Value
Derivative liability $
 $14
 $
 $14
 $
 $9
 $
 $9

The gain or loss related to the fair value remeasurement on the derivative liability is included in the other income (expense) line on the Condensed Consolidated Statementcondensed consolidated statements of Operations.operations.

Financial Liabilities Measured at Fair Value on a Nonrecurring Basis
Included below is a summary
The initial fair values of PFG debt and warrant debt (see Note 4) were based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the changes in our Level 3Company (Level 3). 

The Mr. Mark Burish ("Mr. Burish") warrant was measured at fair value using a Black Scholes model and the remaining fair value was allocated to the related Mr. Burish note purchase agreement (see Note 4) which management believes materially approximates the fair value based on calculating the present value of expected future cash flows (Level 3). The non-recurring fair value measurements (in thousands):
  PFG V Debt, Net of Discount Warrant Debt, PFG V Burish Notes, Net of Discount
Balance as of September 30, 2018 $1,905
 $103
 $
Activity during the period:      
   Disbursement of Tranche 2, net of discount 471
 26
 
   Disbursement of Tranches 1-4 
 
 4,000
   Disbursement of warrants 
 
 (674)
   Payments (333) 
 
   Amortization and accretion expense 51
 9
 13
Balance as of March 31, 2019 $2,094
 $138
 $3,339
See Note 4 - Credit Arrangements for additional details on the fair valueswere performed as of the Burish notesdate of issuance of the note purchase agreement and warrant. The discount is being amortized over the life of the related warrant.debt.

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 and Burish notes, and capital lease obligations. The book values of cash and cash equivalents, accounts receivable, investment in sales-type lease, and accounts payable are considered to be representative of their respective fair values.values due their short term nature. The carrying value of capital lease obligations and debt (excluding the PFG debt and Burish notes), 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
When legal proceedings are brought or claims are made against the Company and the outcome is uncertain, we are required to determine whether it is probable that an asset has been impaired or a liability has been incurred. If such impairment or liability is probable and the amount of loss can be reasonably estimated, the loss must be charged to earnings.

When it is considered probable that a loss has been incurred, but the amount of loss cannot be estimated, disclosure but not accrual of the probable loss is required. Disclosure of a loss contingency is also required when it is reasonably possible, but not probable, that a loss has been incurred and there is a possibility the loss could be material.

No legal contingencies were recorded or were required to be disclosed for the three or six months ended March 31, 20192020 or 2018.2019.
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:
Six Months Ended
March 31,
Six Months Ended
March 31,
2019 20182020 2019
Expected life4.3 years 4.3-4.4 years4.5 years 4.3 years
Risk-free interest rate2.48%-2.93% 1.79%-2.40%1.41% - 1.63% 2.48% - 2.93%
Expected volatility60.19%-66.05% 62.45%-63.49%72.40% - 73.46% 60.19% - 66.05%
Expected forfeiture rate13.51%-14.76% 12.53%-13.53%15.05% - 15.38% 13.51% - 14.76%
Expected exercise factor1.2 1.16-1.171.2 1.2
Expected dividend yield0% 0%0% 0%
A summary of option activity at March 31, 20192020 and changes during the six months then ended is presented below:
Options 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Period in
Years
Options 
Weighted-
Average
Exercise Price
 
Weighted-Average
Remaining Contractual
Period in Years
Outstanding at October 1, 20182,029,741
 $7.04
 5.0
Outstanding at October 1, 20191,654,429
 $5.62
 4.9
Granted199,850
 0.67
 9.8184,750
 1.18
 9.6
Exercised
 
 0.0(1,000) 0.66
 8.7
Forfeited(523,668) 8.93
 4.6(54,700) 4.07
 4.3
Outstanding at March 31, 20191,705,923
 5.71
 6.4
Exercisable at March 31, 20191,144,326
 

 5.4
Outstanding at March 31, 20201,783,479
 5.20
 4.9
Exercisable at March 31, 20201,416,998
 6.21
 3.8
A summary of the status of the Company’s non-vested sharesoptions and changes during the six month period ended March 31, 20192020 is presented below:
2019
Non-vested SharesShares 
Weighted-Average
Grant Date Fair
Value
Non-vested at October 1, 2018680,720
 $1.46
Non-vested OptionsOptions 
Weighted-Average
Grant Date Fair
Value
Non-vested at October 1, 2019357,114
 $0.77
Granted199,850
 2.23
184,750
 0.51
Vested(289,836) 2.02
(153,049) 0.97
Forfeited(29,137) 1.22
(22,334) 0.55
Non-vested at March 31, 2019561,597
 $0.94
Non-vested at March 31, 2020366,481
 $0.57

The weighted average grant date fair value of options granted during the six months ended March 31, 20192020 was $2.23.$0.51. As of March 31, 2019,2020, there was $275$131 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $202$95 thousand. The cost is expected to be recognized over a weighted-average remaining life of 1.22.2 years.
Stock-based compensation recorded in the three and six months ended March 31, 2020 was $34 thousand and $86 thousand. Stock-based compensation recorded in the three and six months ended March 31, 2019 was $57 thousand and $219 thousand, respectively. Stock-based compensation recorded in the three and six months ended March 31, 2018 was $72 thousand and $316 thousand, respectively.thousand. There was no$1 thousand in cash received from exercises under all stock option plans and warrants in either ofduring the three

and six months ended March 31, 2019 or 2018, respectively.2020 and zero during the same periods in 2019. There were no tax benefits realized for tax deductions from option exercises in either of the three and six month periods ended March 31, 20192020 or 2018, respectively.2019. The Company currently expects to satisfy share-based awards with registered shares available to be issued.
The Company also has an Employee Stock Purchase Plan ("Purchase Plan") under which an aggregate of 200,000 common shares may be issued. A total of 39,51423,007 shares are available to be issued under the plan, which includes 8,353 shares issued on January 4, 2019.plan. The Company recorded stock compensation expense under this plan of $1 thousand for each of the three and six monthsmonth periods ended March 31, 2019, respectively. The Company recorded stock compensation expense of $3 thousand2020 and $4 thousand for the three and six months ended March 31, 2018, respectively.2019.



Preferred stockStock 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 November 2017, 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 2,056 and 2,678 shares of Preferred Stock, Series A were issued and outstanding as of March 31, 2019 and September 30, 2018, respectively.
On November 7, 2017, the Company entered into an Agreement in which Mark Burish's right to convert shares of Series A Preferred Stock into common stock is waived until shareholder approval has been obtained. The right to vote said shares of Series A Preferred Stock to approve the issuance of the Series A Preferred Stock has also been waived.
On November 9, 2017, the Company sold to Mr. Burish $500 thousand of shares of Preferred Stock, Series A, at $762.85 per share. Mark Burish is a director of the Company and beneficially owns more than 5% of the Company’s common stock. These agreements were approved by the Special Committee of Disinterested Directors.
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.
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, including related dividends.
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.share.
Per share computationShare 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) attributable to common stockholders. The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:

Three Months Ended
March 31,
 Six Months Ended
March 31,
Three Months Ended
March 31,
 Six Months Ended March 31,
2019 2018 2019 20182020 2019 2020 2019
Denominator for basic net income (loss) per share - weighted average common shares5,278,500
 4,461,310
 5,232,449
 4,459,675
6,785,180
 5,278,500
 6,760,779
 5,232,449
Effect of dilutive options (treasury method)
 
 
 
148,047
   
Denominator for diluted net income (loss) per share - adjusted weighted average common shares5,278,500
 4,461,310
 5,232,449
 4,459,675
6,933,227
 5,278,500
 6,760,779
 5,232,449
Options, warrants and convertible shares outstanding during each period, but not included in the computation of diluted net income (loss) per share because they are antidilutive2,076,083
 2,242,269
 2,076,083
 2,242,269
Options, warrants and convertible shares outstanding during each period, but not included in the computation of diluted net loss per share because they are antidilutive1,933,990
 2,076,083
 2,082,037
 2,076,083
Liquidity
At March 31, 2019,2020, approximately $867 thousand$1.5 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 Burish for $5.0 million in cash.
See Note 4 - Credit Arrangements 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 leaseslease opportunities to finance equipment purchases in the future and anticipate utilizingcontinuing to utilize proceeds from the recent note purchase agreement to support working capital needs. We may also seek additional equity financing andbut there are no assurances that these will be on terms acceptable to the Company.
Assets recognized fromRecent Accounting Pronouncements
In August 2018, the costs to obtain a contract with a customer
Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have determined to be the contract period, typically around 12 months. Assets recorded are included in current assets and other long-term assets. Amortization expense is recorded in sales and marketing expense within our condensed consolidated statement of operations. We calculate a quarterly average percentage based on actual commissions incurred on billings during the same period and apply that percentageFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the respective periods’ unearned revenues to determineDisclosure Requirements for Fair Value Measurements", ("ASU 2018-13"). ASU 2018-13 modifies the capitalized commission amount by contract.

Revenue recognition - ASC 606
We generate revenuesdisclosure requirements on fair value measurements in the form of hardware sales of our Mediasite recorderTopic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and Mediasite related products, such as our server software and other software licenses and related customer support and services fees, including hosting, installations and training. Software license revenues include fees from sales of perpetual and term licenses. Maintenance and services revenues primarily consist of fees for maintenance services (including support and unspecified upgrades and enhancements when and if they are available), hosting, installation, training and other professional services.
In accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange forinterim periods within those goods and services. To achieve this core principle, we apply the following five steps:
1.
Identify the contract with a customer. A contract with a customer exists when: (1) we and the customer have approved the contract and both parties are committed to perform their respective obligations; (2) we can identify each party’s rights regarding the products or services to be transferred; (3) we can identify the payment terms for the products or services to be transferred; (4) the contract has commercial substance as our future cash flows are expected to change; and (5) it is probable that we will collect substantially all of the consideration to which we are entitled in exchange for the products or services. Any subsequent contract modifications are analyzed to determine the treatment of the contract modification as a separate contract, prospectively or through a cumulative catch-up adjustment.
2.
Identify the performance obligations in the contract. Performance obligations are promises to transfer a good or service to the customer. Performance obligations may be each individual promise in a contract, or may be groups of promises within a contract that significantly affect one another. To the extent a contract includes multiple promises, we must apply judgment to determine whether promises are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promises are accounted for as a combined performance obligation.
3.
Determine the transaction price. The transaction price is the total amount of consideration to which we expect to be entitled in exchange for transferring promised products and services to a customer.
4.
Allocate the transaction price to performance obligations in the contract. The allocation of the transaction price to performance obligations is generally done in proportion to their standalone selling prices (“SSP”). SSP is the price that

we would sell a distinct product or service separately to a customer and is determined at contract inception. At times, there will be observable selling prices for our goods and services, such as for our mortgage servicing software platform. If SSP is not available through the analysis of observable inputs, this step is subject to significant judgment and additional analysis so that we can establish an estimated SSP. The estimated SSP considers all reasonably available information, including market conditions, demands, trends, our specific factors and information about the customer or class of customers. The adjusted market approach is generally used for new products or solutions or when observable inputs are not available or limited.
5.
Recognize revenues when or as the company satisfies a performance obligation. We recognize revenues when, or as, distinct performance obligations are satisfied by transferring control of the product or service to the customer. A performance obligation is considered transferred when the customer obtains control of the product or service. Transfer of control is typically evaluated from the customer's perspective. At contract inception, we determine whether we satisfy the performance obligation over time or at a point in time.Revenue is recognized when performance obligations are satisfied.
Our contract payment terms are typically net 30 days. We assess collectability based on a number of factors including collection history and creditworthiness of the customer, and we may mitigate exposures to credit risk by requiring payments in advance. If we determine that collectability related to a contract is not probable, we may not record revenue until collectability becomes probable at a later date.
Our revenues are recorded based on the transaction price excluding amounts collected on behalf of third parties such as sales taxes, which are collected on behalf of and remitted to governmental authorities.

Nature of products and services
Certain software licenses are sold either on-premises or through term-based hosting agreements. These hosting arrangements provide customers with the same product functionality and differ mainly in the duration over which the customer benefits from the software. We deliver our software licenses electronically. Electronic delivery occurs when we provide the customer with access to the software and license key via a secure portal. Revenue from on-premises software licenses is generally recognized upfront at the point in time when the software is made available to the customer.
Our contracts with customers for on-premises software licenses include maintenance services and may also include training and/or professional services. Maintenance services agreements consist of fees for providing software updates on an if and when available basis and for providing technical support for software products for a specified term. We believe that our software updates and technical support each have the same pattern of transfer to the customer and are substantially the same. Therefore, we consider these updates and technical support to be a single distinct performance obligation. Revenues allocated to maintenance services are recognized ratably as the maintenance services are provided. Revenues related to training services are billed on a fixed fee basis and are recognized as the services are delivered. Payments received in advance of services performed are deferred and recognized when the related services are performed. Revenues related to professional services are billed on a time and materials basis and are recognized as the services are performed.
We also provide cloud-based subscriptions, which allow customers to access our software during a contractual period without taking possession of the software. We recognize revenue related to these cloud-based subscriptions ratably over the life of the subscription agreementfiscal years, beginning when the customer first has access to the software.
Judgments and estimates
Our contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately from one another sometimes requires judgment.
Judgment is required to determine standalone selling prices (“SSP”) for each distinct performance obligation. We typically have more than one SSP for each of our products and services based on customer stratification, which is based on the size of the customer, their geographic region and market segment. We use other comparable software license sales to determine SSPs for perpetual software licenses. For our cloud-based subscriptions and for maintenance services, training and professional services, SSPs are generally observable using standalone sales and/or renewals. Our on-premises term-based software licenses generally do not have directly observable inputs for determining SSP. Therefore, we determine SSP using other observable inputs including customer buying patterns, renewal rates, cumulative spend comparisons and other industry data.
We evaluate contracts that include options to purchase additional goods or services to determine whether or not the options give rise to a separate performance obligation that is material. If we determine the options are material, the revenue allocated to such options is not recognized until the option is exercised or the option expires.

Our revenue recognition accounting policy for ASC 605 is included in our Annual Report on Form 10-K for the year ended September 30, 2018, which was filed with the SEC on Marchafter December 15, 2019. We appliedThe Company does not believe the revenue recognition accounting policy for ASC 605 to our disclosures in Note 1, which include amounts presented for 2018.

Recent accounting pronouncementsASU will have a significant impact on its consolidated financial statements.
In February 2016,August 2018, the FASB issued ASU 2016-02, "Leases (Topic 842)"2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", ("ASU 2016-02"2018-15"). ASU 2016-02 aims2018-15 aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in ASU 2016-022018-15 are effective for public business entities for fiscal years beginning after December 15, 2018, including2019, and interim periods within those fiscal years, for public entities. Early application of the amendment is permitted.years. The Company is currently reviewing thisevaluating the guidance and its impact to the financial statements.
In June 2016,November 2018, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses2018-18, "Collaborative Arrangements (Topic 326)808): Measurement of Credit Losses on Financial Instruments"Clarifying the Interaction between Topic 808 and Topic 606", ("ASU 2016-13"2018-18"). ASU 2016-13 affects entities holding financial assets and net investment in leases that are not2018-18 provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.with revenue under Topic 606. The amendments in ASU 2016-132018-18 are effective for all public entities for fiscal years beginning after December 15, 2019, includingand interim periods within those fiscal years. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 326, for entities that have adopted ASU 2016-13,

the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within fiscal those fiscal years. Early adoption is permitted in any interim period after issuance as long as the entity has adopted the amendments in ASU 2016-13. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)", ("ASU 2019-08"). This ASU requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. For entities that have not yet adopted the amendments in ASU 2018-07, the amendments in this Update are effective for public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)", ("ASU 2019-10"). This ASU addressed effective dates of the aforementioned major Accounting Standards Updates as a result of the challenges implementation of major standards poses for private companies, smaller reporting companies, and not-for-profit organizations. ASU 2019-10 is a major update which would first be effective for bucket-one entities, which are public entities that are Securities and Exchange Commission ("SEC") filers, excluding entities eligible to be smaller reporting companies under the SEC's definition. The Company does qualify as a smaller reporting company under the SEC's definition. Financial Instruments - Credit Losses (Topic 326) is currently not effective for any entities; ASU 2019-10 changes the effective date of this update for all other public companies (including smaller reporting companies) to be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because Derivatives and Hedging (Topic 815) and Leases (Topic 842) are already effective for public business entities the Board retained the effective date for those entities, including smaller reporting companies.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", ("ASU 2019-12"). The amendments in this ASU affect entities within the scope of Topic 740. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for public entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. An entity that elects early adoption much adopt all the amendments in the same period. The Company is currently evaluating the guidance and its impact to the financial statements.
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)", ("ASU 2020-01"). The amendments in this ASU affect all entities that apply the guidance in Topics 321, 323, and 815 and either (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. For public business entities, the amendments in this ASU are effective for fiscal year beginning after December 15, 2020, and interim periods with those fiscal years. The amendments in this ASU should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. The Company is currently evaluating the 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.
Recently Adopted Accounting Pronouncements

Leases (ASC Topic 842, Leases ("ASC 842"))
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", ("ASU 2016-02") as well as several other related updates which were codified as ASC 842. On October 1, 2019, we adopted this update using the modified retrospective method through a cumulative-effect adjustment. The reported results for the three and six months ended March 31, 2020 reflect the application of Topic 842, while the comparative information has not been restated and continues to be reported under the related lease accounting standards in effect for those periods. The adoption of this update represents a change in accounting principle and resulted in the recognition of right-of-use assets and lease liabilities of $2.5 million on October 1, 2019. We elected the package of practical expedients, which permits us to leverage our prior conclusions about lease identification, lease classification and initial direct costs incurred. We also elected the practical expedient to combine lease and non-lease components when determining the value

of right-of-use assets and lease liabilities. The primary effect of adopting this update relates to the recognition of our operating leases on our condensed consolidated balance sheets and providing additional disclosures about our leasing activities. Leases previously designated as capital leases are now identified as finance leases and continue to be reported on the condensed consolidated balance sheets. Leases previously identified as sales-type leases, where the Company is a lessor, continue to be reported on the condensed consolidated balance sheets. Refer to Note 3 - Commitments for additional disclosures related to our leasing activities.

Other Accounting Pronouncements
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.periods, and was adopted by the Company as of October 1, 2019. The Company is in the process of assessing the impact, if any,implementation of this ASU onstandard did not result in a material impact to its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging Topic 815): Targeted Improvements to Accounting for Hedging Activities", ("ASU 2017-12"). This update was issued to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.years, and was adopted by the Company as of October 1, 2019. The Company is in the process of assessing the impact, if any,implementation of this ASU onstandard did not result in a material impact to its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting", ("ASU 2018-07"). The standard addresses aspects of the accounting for nonemployee share-based payment transactions. The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently reviewing this guidance and its impact to the financial statements.
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 adoption 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 August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", ("ASU 2018-15"). ASU 2018-15 align the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in ASU 2018-15 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the 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 2018-13 provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. The amendments in ASU 2018-18 are effective for all public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.

In December 2018, the FASB issued ASU 2018-20, "Leases (Topic 842): Narrow - Scope Improvements for Lessors", ("ASU 2018-20"). ASU 2018-20 provides amendments related to sales taxes and other similar taxes collected from lessees, lessor costs for lessor entities that have lease contracts that either require lessees to pay lessor costs directly to a third party or require lessees to reimburse lessors for costs paid by lessors directly to third parties and finally, the recognition of variable payments for contracts with lease and nonlease components. The amendments in ASU 2018-20 are effective for entities that have not adopted Topic 842 before the issuance of this Update are the same as the effective date and transition requirements in Update 2016-02. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements, ("ASU 2019-01"). ASU 2019-01 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing essential information about leasing transactions. The amendments in ASU 2019-01 amend Topic 842 and are effective date of those amendments is for fiscal years beginning December 15, 2019, and interim periods within those fiscal years for public business entities. The Company does not believe the ASU will have a significant impact on its consolidated 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.
Recently adopted accounting pronouncements
Revenue Recognition (ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"))

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 related to revenue recognition and later issued additional ASUs including ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-14, all of which clarified certain aspects of ASU 2014-09, and together with ASU 2014-09, which we refer to collectively as the new revenue recognition standard.
On October 1, 2018, we adopted the new revenue recognition standard using the modified retrospective method. Under this method, we recognized the cumulative effect of applying the new revenue recognition standard to existing revenue contracts that were active as of the adoption date as an adjustment to the opening balance of accumulated deficit. Upon adoption, we recorded an adjustment of $1.7 million to our accumulated deficit. See Note 6 for additional detail.
The new revenue recognition standard materially impacts the timing of revenue recognition related to our on-premises term license agreements. Prior to our adoption of the new revenue recognition standard, we historically recognized revenue related to on-premises term license agreements ratably over the term of the licensing agreement. Under the new revenue recognition standard, revenue allocable to the license portion of the arrangement is recognized upon delivery of the license. Maintenance revenues related to on-premises term license agreements continue to be recognized ratably over the term of the licensing agreement. Under the new revenue recognition standard, we allocate total transaction price to performance obligations based on estimated standalone selling prices, which impacts the timing of revenue recognition depending on when each performance obligation is recognized. These impacts to the timing of revenue recognition also affect our deferred revenue balances.
The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our sales commissions expense. Prior to our adoption of the new revenue recognition standard, we

recognized sales commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of sales commissions expense each period. Upon adoption, we reduced our accumulated deficit by $692 thousand and recognized an offsetting asset for deferred sales commissions related to contracts that were not completed contracts prior to October 1, 2018.
For further discussion regarding the impacts of adopting the new revenue recognition standard, see Note 6.
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,year, and was adopted by the Company as of October 1, 2018. The implementation of this standard did not results in a material impact to its consolidated financial statements.
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, and was adopted by the Company as of October 1, 2018.2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In May 2017,April 2019, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718)"2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2017-09"2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 815, for entities that have not yet adopted ASU 2017-12 as of the issuance date of this ASU, the effective dates and transition requirements for the amendments to Topic 815 are the same as the effective dates and transition requirements in ASU 2017-12. The amendments for Topic 815 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, and was2019-04 were adopted by the Company as of October 1, 2018.2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.

2. Related Party Transactions

During the three and six months ended March 31, 2019,2020, the Company incurred fees of $85$148 thousand and $131$258 thousand respectively, to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $61$85 thousand and $112$131 thousand respectively, during the three and six months ended March 31, 2018.2019. The Company had accrued liabilities for unbilled services of $30$0 thousand and $60$30 thousand at March 31, 20192020 and September 30, 2018,2019, respectively, to the same law firm.
As of March 31, 2019 and September 30, 2018, the Company had a loan outstanding to an executive totaling $26 thousand. The loan is collateralized by Company stock.

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 Mark Burish $500 thousand of shares of Preferred Stock, Series A, at $762.85 per share. Mark Burish is a director of the Company and beneficially owns more than 5% of the Company’s common stock. All sales

On November 17, 2017, the Company entered into an Agreement in which Mr. Burish's right to convert shares of Preferred Stock, Series A, were approved by a special committeeinto common stock was waived until shareholder approval for the issuance of disinterested directors.Preferred Stock, Series A had been obtained. The right to vote said shares of Preferred Stock, Series A was also waived pending shareholder approval of the issuance. Shareholder approval was obtained on May 17, 2018.

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

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 April 25, 2019, Mr. 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.

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

The Company has also been provided with debt financing from Mr. Burish. See Note 4 - Credit Arrangements for additional information on the Warrant issued to, and Note Purchase AgreementAgreements, with Burish.Mr. Burish as well as accrued interest and the related anniversary fee on the Notes.

Mr. Burish beneficially owns more than 5% of the Company’s common stock. TheMr. Burish also serves as the Chairman of the Board of Directors. An affiliated party beneficially owns more than 5% of the Company's common stock. All transactions with Mr. Burish and with the affiliated party were approved by the Disinterested Directors.a special committee of disinterested and independent directors.

3. Commitments
Inventory Purchase Commitments
The Company enters into openunconditional purchase obligationscommitments on a regular basis that represent commitments for the supply of Mediasite product. At March 31, 2019,2020, the Company has an obligation to purchase $1.1 million$319 thousand of Mediasite product, which is not recorded on the Company’s Condensed Consolidated Balance Sheet.condensed consolidated balance sheet.
Operating Leases
In November 2011,The Company has operating leases for corporate office space with various expiration dates. Our leases have remaining lease terms of up to three years, some of which include escalation clauses, renewal options for up to twelve years or termination options within one year.
We determine if an arrangement is a lease upon contract inception. The Company has both operating and finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments according to the arrangement.
A contract contains a lease if the contract conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an an operating or finance lease where the Company occupied office space related tois a lessee, or as an operating, sales-type or direct financing lease agreement entered intowhere the Company is a lessor, based on June 28, 2011.their terms.

Lease right-of-use assets and lease liabilities are recognized as of the commencement date based on the present value of the lease payments over the lease term. The lease right-of-use asset is reduced for tenant incentives and excludes any initial direct costs incurred. We use the implicit rate when it is readily determinable. Otherwise, the present value of future minimum lease payments is determined using the Company's incremental borrowing rate. The incremental borrowing rate is based on the interest rate of the Company's most recent borrowing.
The lease term was from November 2011 through December 2018we use for the valuation of our right-of-use assets and in Q3 2018,lease liabilities may include options to extend or terminate the lease was extendedwhen it is reasonably certain that we will exercise those options. Lease expense is recognized on a straight-line basis over the expected lease term for three years through December 31, 2021. There are two additional three year extensions included inoperating leases. Amortization expense of the initial lease agreement. The lease includes a tenant improvement allowance of $613 thousand that was recorded as a leasehold improvement liability andright-of-use asset for finance leases is being amortized as a credit to rent expenserecognized on a straight-line basis over the lease term. Atterm and interest expense for finance leases is recognized based on the incremental interest rate.
Right-of-use assets and lease liabilities are recognized for our leases. Right-of-use assets under finance leases are included in property and equipment on the condensed consolidated balance sheets.
We have operating lease arrangements with lease and non-lease components. The non-lease components in our arrangements are not significant when compared to the lease components. For all operating leases, we account for the lease and non-lease components as a single component.
As of March 31, 20192020, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 2018,are as follows (in thousands):
 Operating Leases Finance Leases
2020 (remaining)$688
 $88
20211,026
 128
2022292
 79
202394
 8
2024102
 5
Thereafter101
 
Total2,303
 308
Less: imputed interest(303) (23)
Total$2,000
 $285
Effect of Adopting ASC 842
Opening Balance Sheet Adjustment on October 1, 2019
As a result of applying the unamortizedmodified retrospective method to adopt ASC 842, the following amounts on our condensed consolidated balance was zero and $7 thousand, respectively.sheet were adjusted as of October 1, 2019 to reflect the cumulative effect adjustment to the opening balance sheet (in thousands):
In October 2016, the Company also occupied office space
 As reported ASC 842 adoption Adjusted
 September 30, 2019 adjustments October 1, 2019
Right-of-use assets under operating leases
 2,533
 2,533
Total assets$15,180
 $2,533
 $17,713
      
Current portion of operating lease obligations$
 $1,314
 $1,314
Accrued liabilities2,216
 (44) 2,172
Total current liabilities13,831
 1,270
 15,101
      
Long-term portion of operating lease obligations
 1,263
 1,263
Total liabilities$21,433
 $2,533
 $23,966
Supplemental information related to a lease agreement entered into on August 1, 2016. Theleases is as follows (in thousands, except lease term is from October 2016 through December 2020. Theand discount rate):

  Six Months Ended March 31, 2020
Operating lease costs $662
Variable operating lease costs 29
Total operating lease cost $691
   
Finance lease cost:  
   Amortization of right-of-use assets $106
   Interest on lease liabilities 12
Total finance lease cost $118
Variable lease includes five months of freecosts include operating costs for U.S. office lease based on square footage and Consumer Price Index ("CPI") rent of $130 thousand thatescalation and related VAT for office lease in the Netherlands.
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
  Six Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:  
   Operating cash outflows for operating leases $679
   Operating cash outflows for finance leases 12
   Financing cash outflows for finance leases 123
Other information related to leases 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 March 31, 2019 and September 30, 2018, the unamortized balance was $60 thousand and $75 thousand, respectively.follows:
March 31, 2020
Weighted average remaining lease term (in years)

   Operating leases2.6
   Finance leases2.3
Weighted average discount rate

   Operating leases11.82%
   Finance leases7.14%

4. 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 accrued on the revolving line of credit at the variable per annum rate equal to the Prime Rate (as defined) plus two percent (2.00%). 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 was 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 Dollars ($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 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.
The revolving line of credit matured on January 31, 2019. At September 30, 2018, there was no balance outstanding on the term loan with Silicon Valley Bank and a balance of $621 thousand was outstanding on the revolving line of credit.

Partners for Growth V, L.P.
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”).
The 2018 Loan and Security Agreement provides for a Term Loan ("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 up to $150,000 (the "back-end fee"), which will be earned ratably over the three year term of the PFG V loan.$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.

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. All warrants issued in connection with PFG V expire on May 11, 2023.

At March 31, 2020, and September 30, 2019, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $10 thousand. The change$72 thousand and $9 thousand, respectively. Included in other expense, the fair value ofremeasurement loss on the derivative liability forduring the three and six months ended March 31, 2019,2020 was recorded as$61 thousand and $63 thousand, respectively, compared to a remeasurement loss of $8 thousand and a remeasurement gain of $15 thousand respectively, which is included induring the other income (expense).three and six months ended March 31, 2019.
The proceeds from the 2018 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 $2.3 million and $153$156 thousand, respectively. The warrant debt of $153$156 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 the three and six months ended March 31, 2019,2020, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $6 thousand and $11 thousand compared to $5 thousand and $9 thousand respectively, as well asin the same periods last year. In addition, $14 thousand and $28 thousand amortization of the debt discount was recorded in the current three month and six month period compared to $13 thousand and $27 thousand related to amortization ofin the debt discount.prior year. At March 31, 2019,2020, the fair valuescarrying value of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $2.1$1.2 million and $138$160 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 the three and six months ended March 31, 2019,2020, the Company recorded interest expense of $13 thousand and $25 thousand, associated with recognition of the back-end fee.fee compared to $13 thousand and $25 thousand during the three and six months ended March 31, 2019.
The fair values of term debt and warrant debt are basednon-cash effective interest expense is calculated on the present value of expected future cash flows and assumptions about current interest rates and the creditworthinessnet balance of the Company (Level 3). AtPFG V Debt, debt discount, back-end fee and related loan origination fees, on a monthly basis. During the three and six months ended March 31, 2019,2020, we recorded $3 thousand of gain and $1 thousand of non-cash interest expense related to 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 freeeffective interest rate and dividend yield similar to those described previously for share-based compensation which were generally observable (Level 2).on the PFG V loan.
On March 11, 2019, Sonic Foundry, Inc. entered into a Consent, Waiver & Modification to the 2018 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 endedending 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, 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, and (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 anyeach calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be greaterno 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. At March 31, 2020, the Company was in compliance with all covenants per the 2018 Loan and Security Agreement, as modified.
Under the Modification, the Company iswas required to draw the next tranche of $1,000,000 in proceeds on the Note Purchase Agreement (detailed below) 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.Company met this requirement as all tranches were fully drawn prior to April 30, 2019.
The existing terms of the PFG loan in terms of amortization, interest rate, payment schedule and maturity date wereare unchanged.
At March 31, 2019,2020, a gross balance of $2.1$1.2 million was outstanding on the term debt with PFG V net of discount, with an effective interest rate of ten-and-three-quarterssixteen-and-six-tenths percent (10.75%(16.60%). At September 30, 2018,2019, a gross balance of $1.9$1.7 million was outstanding with PFG V.
Initial Notes of the February 28, 2019 Note Purchase Agreement
On January 4, 2019, Sonic Foundry, Inc. and a directorMr. Burish entered into a Promissory Note (the "Promissory Note") pursuant to which Mr. 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 iswas 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 directorMr. Burish entered into a Promissory Note (the "January 31, 2019 Promissory Note") pursuant to which Mr. 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 iswas 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 Mr. 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 onOn February 14, 2019, between Sonic Foundry, Inc. and Mr. Burish wherebyentered into a Promissory Note (the "February 14, 2019 Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash (the "February 14, 2019 Promissory Note").

cash. Interest accrued and outstanding principal on the February 14, 2019 Promissory Note iswas 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 Mr. 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.
February 28, 2019 Note Purchase Agreement
On February 28, 2019, the Disinterested Directors unanimously authorized the Company to enterSonic Foundry, Inc. entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Mr. Burish. Following extended negotiations with an independent third party for similar financing ("Independent Third-Party Financing") that was not consummated, the Disinterested Directors engaged in extensive deliberations and negotiations with Burish for an alternative financing. The Disinterested Directors approved the alternative financing on terms and conditions as set forth in the Note Purchase Agreement, 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.
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 "PromissoryPromissory Note, the January 31st, 2019 Promissory Note, and the February 14, 2019 Promissory Note, collectively referred to as the "Initial Notes").
The fourth tranche of $1,000,000 was disbursed on March 13, 2019 and the fifth and final tranche of $1,000,000 was disbursed on April 4, 2019.
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 ("anniversary 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 thesethe 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 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 greaterno less than $13,000,000. At March 31, 2020, the Company was in compliance with all covenants per the Note Purchase Agreement.
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.

The proceeds from the Note Purchase Agreement contains eventswere allocated between the Subordinated Promissory Notes and the Warrant debt based on their relative fair value on the date of default that include, among others, non-paymentissuance. The warrant debt of principal or$674 thousand is treated together as a debt

discount on the Subordinated Notes Payable and will be accreted to 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 inexpense under the accelerationeffective interest rate method over the five-year term of the Companies’ obligations underSubordinated Notes Payable. During the agreement. Atthree and six months ended March 31, 2020, the Company recorded accretion of discount expense associated with the Subordinated Promissory Notes of $33 thousand and $67 thousand compared to the three and six months ended March 31, 2019 of $13 thousand and $13 thousand.
During the three and six months ended March 31, 2020, the Company recorded an accrued anniversary fee associated with the Subordinated Promissory Notes of $6 thousand and $12 thousand. There was in compliance with all financial covenants.no accrued anniversary fee for the prior periods.
The non-cash effective interest expense is calculated on the net balance of the Subordinated Promissory Notes, Warrant, and related loan origination fees, on a monthly basis. During the three and six months ended March 31, 2020, we recorded $13 thousand and $2 thousand of non-cash interest benefit related to the effective interest rate on the Subordinated Promissory Notes.
At March 31, 2019,2020, a gross principal balance of $3.3$5.0 million was outstanding on the notes, net of discount,Subordinated Promissory Notes, with an effective interest rate of nine-and-one-quartertwelve-and-four-tenths percent (9.25%(12.4%). At September 30, 2018, no2019, a gross principal balance of $5.0 million was outstanding on the Subordinated Promissory Notes.
Accrued interest on the Subordinated Promissory Notes was paid through March 31, 2019, but has been deferred since that date. In April 2019 it was informally agreed between the Company and Mr. Burish that the interest would be deferred. On November 22, 2019, the Company entered into a Note Modification Agreement to formalize the deferment of the accrued interest. The Note Modification Agreement modifies the terms of the Subordinated Promissory Notes by deferring all interest payments due at the end of each calendar month beginning April 30, 2019 and continuing through and including July 31, 2020, in an amount which will be determined based on the variable interest rate on the Subordinated Promissory Notes. The deferred interest amount shall be added to the principal amount due on the Subordinated Notes and shall be paid on the maturity date. As a result of the Note Modification Agreement, $502 thousand and $259 thousand of accrued interest related to the Subordinated Notes Payable was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020 and September 30, 2019, respectively.
The anniversary fee on the notes were funded starting in January 2019.Subordinated Promissory Notes was due on February 28, 2020 ("first year anniversary fee") and has been deferred. On March 24, 2020, the Company entered into a First Amendment to Note Modification Agreement ("First Amendment") to formalize the deferment of the first year anniversary fee. The First Amendment modified the terms of the Subordinated Promissory Notes by deferring the first year anniversary fee due on February 28, 2020. The deferred first year anniversary fee was added to the principal amount due on the Subordinated Notes and is required to be paid on the maturity date. As a result of the First Amendment, $25 thousand was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020.
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.

The proceeds from the Note Purchase Agreement were allocated between the Subordinated Promissory Notes and the Warrant based on their relative fair value on the dateOn April 25, 2019, Mr. Burish exercised his warrant to purchase 728,155 shares of issuance resulted in carrying values of $3.3 million for the promissory notes, netcommon stock of the $674 thousand allocated toCompany at an exercise price of $1.18 per share. A special committee of disinterested and independent directors approved the warrant. The warrant of $674 thousand is treated together as a debt discount on the Subordinated Promissory Notes and will be accreted to interest expenses under the effective interest method over the five-year termissuance of the Subordinated Promissory Notes and the five-year term of the Warrant. During the three and six months ended March 31, 2019, the Company recorded accretion of discount expense associated with the warrants issued with the Subordinated Promissory Notes of $13 thousand.

Other Indebtedness
On January 30, 2020, Mediasite K.K. entered into a Term Loan ("Term Loan") with Sumitomo Mitsui Banking Corporation for $460 thousand in cash. The Term loan accrues interest at an annual rate of 1.475%. Beginning in January 2020, principal is due in 12 equal monthly installments, plus accrued interest, continuing through December 30, 2020, when the principal balance will be paid in full.
At March 31, 2020, $347 thousand was outstanding on the term loan with Mitsui Sumitomo Bank. The term loan accrues interest at an annual rate of approximately one-and-one-half percent (1.475%).
At March 31, 2020 and September 30, 2019, ano balance of $451 thousand was outstanding on the line of credit with Mitsui Sumitomo Bank. At September 30, 2018, a balance of $264 thousand was outstanding on the line of credit. The credit facility is related to Mediasite K.K., and accrues interest at an annual rate of approximately one-and-one half percent (1.5%(1.575%).


5. Income Taxes
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 March 31, 20192020 or September 30, 2018,2019, and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three or six months ended March 31, 20192020 or 2018, respectively.2019.
The Company’s tax rate differs from the expected tax rate each reporting period as a result of permanent differences, the valuation allowance, and international tax items.
The U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law on December 22, 2017. The TCJA included a number of changes to the U.S. corporate income tax including a reduction of the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017.
During the three and six months ended March 31, 2018, we recorded an income tax benefit of $1.3 million resulting from the application of TCJA to existing deferred tax balances based on reasonable estimates for those tax effects.

6. Revenue
We adopted the new revenue recognition accounting standard ASC 606 effective October 1, 2018 on a modified retrospective basis and applied the new standard only to contracts that were not completed contracts prior to October 1, 2018. See Note 1 for a description of our ASC 606 revenue recognition accounting policy. Financial results for reporting periods during fiscal 2019 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to fiscal 2019 have not been retroactively restated and are presented in conformity with amounts previously disclosed under ASC 605. This note includes additional information regarding the impacts from the adoption of the new revenue recognition standard on our financial results for the three and six months ended March 31, 2019. This includes the presentation of financial results during fiscal 2019 under ASC 605 for comparison to the prior year. Our revenue recognition accounting policy for ASC 605 is included in the Company's Annual Report on Form 10-K for the year ended September 30, 2018, which was filed with the SEC on March 15, 2019.
Disaggregation of Revenues
The following table summarizestables summarize revenues from contracts with customers for the three and six months ended March 31, 2020 and 2019, respectively, (in thousands):

Three Months Ended March 31, 2019
Three months ended March 31, 2020Three months ended March 31, 2020
SOFOSFIMSKKEliminationsTotalSOFOSFIMSKKEliminationsTotal
  
Revenue:  
  
Hardware$784
$35
$376
$(189)$1,006
$1,563
$153
$181
$(124)$1,773
Software618
124
120
(159)703
883
64
194
(178)963
Shipping87



87
74
2


76
  
Product and other total1,489
159
496
(348)1,796
2,520
219
375
(302)2,812
  
Support1,961
145
976
(241)2,841
1,887
136
919
(168)2,774
Hosting1,062
115
513

1,690
1,132
160
321

1,613
Events850
38
742

1,630
705
12
655

1,372
Installs and training29
11


40
Installs & training94
1


95
  
Services total3,902
309
2,231
(241)6,201
3,818
309
1,895
(168)5,854
  
Total revenue$5,391
$468
$2,727
$(589)$7,997
$6,338
$528
$2,270
$(470)$8,666
Six months ended March 31, 2020
 SOFOSFIMSKKEliminationsTotal
      
Revenue:     
      
Hardware$2,609
$219
$196
$(197)$2,827
Software1,597
253
231
(234)1,847
Shipping190
3


193
      
Product and other total4,396
475
427
(431)4,867
      
Support3,897
291
1,237
(360)5,065
Hosting2,138
280
697

3,115
Events2,023
74
1,327

3,424
Installs & training208
2


210
      
Services total8,266
647
3,261
(360)11,814
      
Total revenue$12,662
$1,122
$3,688
$(791)$16,681


Three months ended March 31, 2019
 SOFOSFIMSKKEliminationsTotal
      
Revenue:     
      
Hardware$784
$35
$376
$(189)$1,006
Software618
124
120
(159)703
Shipping87



87
      
Product and other total1,489
159
496
(348)1,796
      
Support1,961
145
976
(241)2,841
Hosting1,062
115
513

1,690
Events850
38
742

1,630
Installs & training29
11


40
      
Services total3,902
309
2,231
(241)6,201
      
Total revenue$5,391
$468
$2,727
$(589)$7,997


Six Months Ended March 31, 2019
 SOFOSFIMSKKEliminationsTotal
      
Revenue:     
      
Hardware$1,598
$174
$385
$(300)$1,857
Software1,260
239
318
(276)1,541
Shipping148
1


149
      
Product and other total3,006
414
703
(576)3,547
      
Support3,948
334
1,222
(472)5,032
Hosting2,116
264
866

3,246
Events2,081
76
1,394

3,551
Installs & training108
15


123
      
Services total8,253
689
3,482
(472)11,952
      
Total revenue$11,259
$1,103
$4,185
$(1,048)$15,499
Effect of adopting ASC 606
Opening Balance Sheet Adjustment on October 1, 2018
As a result of applying the modified retrospective method to adopt ASC 606, the following amounts on our Condensed Consolidated Balance Sheet (Unaudited) were adjusted as of October 1, 2018 to reflect the cumulative effect adjustment to the opening balance of accumulated deficit (in thousands):

 As reported ASC 606 adoption Adjusted
 September 30, 2018 adjustments October 1, 2018
Capitalized commissions, current$
 $580
 $580
Total current assets10,825
 580
 11,405
      
Capitalized commissions, long-term
 112
 112
Total assets$13,583
 $692
 $14,275
      
Accrued liabilities1,609
 2
 1,611
Unearned revenue11,645
 (924) 10,721
Total current liabilities16,590
 (922) 15,668
      
Other long-term liabilities202
 (2) 200
Long-term portion of unearned revenue1,691
 (75) 1,616
Total liabilities20,041
 (999) 19,042
      
Accumulated deficit(207,419) 1,691
 (205,728)
Total stockholders' equity (deficit)(6,458) 1,691
 (4,767)
Total liabilities and stockholders' equity (deficit)$13,583
 $692
 $14,275
Effect of ASC 606 as of March 31, 2019 and for the Three and Six Months Ended March 31, 2019
The following table summarizes the effect of adopting ASC 606 on our Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 2019 (in thousands):
     Amounts without
 As reported ASC 606 adoption ASC 606 impact
 March 31, 2019 impact March 31, 2019
Capitalized commissions, current$459
 $(459) $
Prepaid expenses and other current assets968
 
 968
Total current assets10,600
 (459) 10,141
      
Capitalized commissions, long-term129
 (129) 
Total assets$13,324
 $(588) $12,736
      
Accrued liabilities1,595
 (2) 1,593
Unearned revenue8,301
 777
 9,078
Total current liabilities13,154
 775
 13,929
      
Other long-term liabilities174
 2
 176
Long-term portion of unearned revenue2,329
 74
 2,403
Total liabilities20,422
 851
 21,273
      
Accumulated deficit(209,002) (1,439) (210,441)
Total stockholders' equity (deficit)(7,098) (1,439) (8,537)
Total liabilities and stockholders' equity (deficit)$13,324
 $(588) $12,736

The following tables summarize the effects of adopting ASC 606 on our Condensed Consolidated Statement of Operations (Unaudited) for the three and six months ended March 31, 2019, respectively (in thousands):

 As reported   Amounts without
 Three Months Ended ASC 606 adoption ASC 606 impact
 March 31, 2019 impact March 31, 2019
Product and other revenue$1,796
 $20
 $1,816
Total revenue7,997
 20
 8,017
      
Product and other cost of revenue645
 
 645
Total cost of revenue2,004
 
 2,004
      
Gross margin5,993
 20
 6,013
      
Selling and marketing (operating expenses)3,836
 (35) 3,801
Loss from operations(1,123) 55
 (1,068)
Loss before income taxes(1,361) 55
 (1,306)
Net loss$(1,486) $55
 $(1,431)
Net loss attributable to common stockholders$(1,531) $55
 $(1,476)
      
Loss per common share     
     -basic$(0.29) $0.01
 $(0.28)
     -diluted$(0.29) $0.01
 $(0.28)

 As reported   Amounts without
 Six Months Ended ASC 606 adoption ASC 606 impact
 March 31, 2019 impact March 31, 2019
Product and other revenue$3,547
 $146
 $3,693
Total revenue15,499
 146
 15,645
      
Product and other cost of revenue1,296
 
 1,296
Total cost of revenue3,846
 
 3,846
      
Gross margin11,653
 146
 11,799
      
Selling and marketing (operating expenses)7,779
 (105) 7,674
Loss from operations(2,777) 251
 (2,526)
Loss before income taxes(3,161) 251
 (2,910)
Net loss$(3,274) $251
 $(3,023)
Net loss attributable to common stockholders$(3,372) $251
 $(3,121)
      
Loss per common share     
     -basic$(0.64) $0.05
 $(0.59)
     -diluted$(0.64) $0.05
 $(0.59)

The following table summarizes the effect of adopting ASC 606 on our Condensed Consolidated Statement of Cash Flow for the six months ended March 31, 2019 (in thousands):


     Amounts without
 As reported ASC 606 adoption ASC 606 impact
 March 31, 2019 impact March 31, 2019
Cash flows from operating activities:     
Net loss$(3,274) $251
 $(3,023)
      
Changes in operating assets and liabilities:     
Capitalized commissions105
 (105) 
Prepaid expenses and other current assets(25) 
 (25)
Unearned revenue(1,704) (146) (1,850)
Net cash used in operating activities$(3,251) $
 $(3,251)
Transaction price allocated to future performance obligations
ASC 606 allows for the use of certain practical expedients, which we have elected and applied to measure our future performance obligations as of March 31, 2019.2020.

As of March 31, 2019,2020, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately $3.5$3.6 million in the next three months, $8.3$9.5 million in the next twelve months, and the remaining $2.3$2.1 million thereafter.


Disclosures related to our contracts with customers

Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. We record assets for amounts related to performance obligations that are satisfied but not yet billed and/or collected. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. These liabilities are classified as current and non-current unearned revenue.

Unearned revenues

Unearned revenues represent our obligation to transfer products or services to our client for which we have received consideration, or an amount of consideration is due, from the client. During the three and six months ended March 31, 2019,2020, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $2.4 million and $6.7 million compared to $2.6 million and $6.9 million.

million recognized during the three and six months ended March 31, 2019.
Assets recognized from the costs to obtain our contracts with customers

We recognize an asset for the incremental costs of obtaining a contract with a customer. We amortize these deferred costs proportionate with related revenues over the period of the contract. During the three and six months ended March 31, 2019,2020, amortization expense recognized related to the amount included in the capitalized commissions at the beginning of the period was $127 thousand and $330 thousand compared to $147 thousand and $396 thousand.thousand recognized during the three and six months ended March 31, 2019.


7. Subsequent Events

On March 11, 2020, COVID-19 was declared a pandemic by the World Health Organization. The disruption caused by the outbreak is uncertain and continues to evolve rapidly, however, it may result in material adverse impact on the Company's financial position, operations and cash flows. While we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies and their employees affected by the COVID-19 pandemic. Following the approval of the Board of Directors, the Company and First Business Bank entered into a $2,314,815 Promissory Note (the "Promissory Note") under the Paycheck Protection Program (PPP) contained within the (CARES) Act. The PPP loan has a term of two years, is unsecured, and is guaranteed by the U.S. Small Business Administration. The loan carries a fixed interest rate of 1% per annum, with the first six months of interest deferred. Under the terms of the CARES Act, the Company will be eligible to apply for forgiveness of all loan proceeds used for payroll costs, rent, utilities, and other qualifying expenses during the eight-week period following receipt of the loan, provided the Company maintains its employment and compensation within certain parameters during such period, and provided further that not more than 25% of the amount forgiven can be attributable to non-payroll costs. Any amount not forgiven is due in equal installments of principal and interest beginning seven months from the date of the Promissory Note through the maturity date of two years from the date of first disbursement. The note was effective upon receipt of funds on April 21, 2020.
On April 25, 2019,27, 2020, the Company announced that its Special Committee of Independent and Disinterested Directors had accepted an offer from Mr. Mark Burish exercised his warrant to purchase 728,155all outstanding shares of the Company’s common stock not presently held by Mr. Burish at $5.00 per share. The transaction was expected to close in the third calendar quarter of 2020. As previously announced, the Company formed the Special Committee to consider strategic alternatives.
In May 2020, the Special Committee and the Disinterested Directors and Mr. Burish agreed to not pursue the transaction at an exercise price of $1.18 per share, whichthis time. Both Mr. Burish and the Special Committee were concerned that the proposal would not obtain the required shareholder approval, and therefore concluded that converting the debt to equity at the same value proposed by Mr. Burish for the acquisition was the most appropriate way to maximize both Company and Shareholder value, improve the Company's financial position, and provide the Company with resources to further its growth opportunities. In accordance therewith, on May 13, 2020, the Company entered into coincidenta Debt Conversion Agreement with the executionMr. Burish to convert Mr. Burish's existing secured debt 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.approximately $5.6 million into common stock at $5.00 per share.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risks and Uncertainties
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis,” and “Risk Factors.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,”

“strategy, “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part I, Item 1A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 20182019 and Part II, Item 1A of this Form 10-Q), “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q and Part II, Item 7A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2018)2019), and “Management’s Discussion and Analysis” (Part I, Item 2 of this Form 10-Q). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
Overview
Sonic Foundry, Inc. is thea trusted global leader for video capture, management and streaming solutions. Trusted by educational institutions, corporations and government entities, Mediasite Video Platform quickly and cost-effectively automates the capture, management, delivery and search of live and on-demand streaming video and rich media. Mediasite transforms communications, training, education and events for our customers.


Recent Developments

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

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

ASC 842
ASC 606
On October 1, 2018,2019, we adopted ASC Topic 606,842, Revenue from Contracts with CustomersLeases ("ASC 606"842"), using the modified retrospective method. Under this method, we recognized the cumulative effect of applying the new revenue recognition standard to existing revenue contractsleases that were active as of the adoption date as an adjustment to the opening balance of accumulated deficit.sheet. The reported results for the three and six months ended March 31, 20192020 reflect the adoption of ASC 606,842, while the comparative information has not been restated and continues to be reported under the related accounting standards in effect for those periods. Refer to Note 63 - Commitments to the Notesnotes to the Condensed Consolidated Financial Statements (Unaudited)condensed consolidated financial statements (unaudited) for additional information related to the effect of the adoption of ASC 606842 as of and for the three and six months ended March 31, 2019.2020.
Revenue

Revenue from our business includes the sale of Mediasite recorders and server software products and related services contracts, such as customer support, installation, customization services, training, content hosting and event services. We market our products to educational institutions, corporations and government agencies that need to deploy, manage, index and distribute video content on Internet-based networks. We reach both our domestic and international markets through reseller networks, a direct sales effort and partnerships with system integrators.
Q2-2019Q2-2020 compared to Q2-2018Q2-2019
Revenue in Q2-2019Q2-2020 decreased $463increased $669 thousand, or 5%8% to $8.0$8.7 million, from Q2-2018Q2-2019 revenue of $8.5$8.0 million. Revenue consisted of the following:

Product and other revenue from sale of Mediasite recorder units and server software was $1.8$2.8 million in Q2-2019Q2-2020 and $2.7$1.8 million in Q2-2018Q2-2019. Average selling price was uplower in Q2-2019Q2-2020 as compared to Q2-2018Q2-2019 primarily as a result of a higher proportionsales volume of higher-end recorders being sold compared to the same period last year. Recorders sold were substantially less than Q1-2018, partially aslow-cost recorders. Production and other revenue in Q2-2020 included a result of the Company'slarge refresh recorder transaction while Q2-2019 was negatively impacted by our planned reduction of distribution inventory which had an impact of $557 thousand.reduced reliance on distribution.
Q2-2019 Q2-2018Q2-2020 Q2-2019
Recorders sold131
 282
369
 131
Rack units to mobile units ratio3.4 to 1
 34.3 to 1
25.4 to 1
 3.4 to 1
Average sales price, excluding service (000’s)$7.5
 $6.3
$4.7
 $7.5
Refresh Units70
 61
58
 70

Services revenue represents the portion of fees charged for Mediasite customer support contracts amortized over the length of the contract, typically 12 months, as well as training, installation, eventevents and content hosting services. Services revenue increased $431decreased $347 thousand or 7%6% from $5.8 million in Q2-2018 to $6.2 million in Q2-2019 to $5.9 million in Q2-2020primarily due to an increasecancellations in support contract and hosting revenue.event services due to COVID-19.

At March 31, 2019, $10.62020, $11.5 million of revenue was deferred, of which we expect to recognize $8.3$9.5 million in the next twelve months, including approximately $3.5$3.6 million in the quarter ending June 30, 2019.2020. At September 30, 2018, $13.32019, $11.5 million of revenue was deferred. The decrease in deferred revenue is largely a result of the ASC 606 adjustment upon adoption. See Note 6 - Revenue for further details.

Other revenue relates to freight charges billed separately to our customers.
YTD-2019YTD-2020 (six months) compared to YTD-2018YTD-2019 (six months)
Revenues for YTD-2019YTD-2020 totaled $15.5$16.7 million compared to YTD-2018YTD-2019 revenues of $17.4$15.5 million. Revenues included the following:

$3.54.9 million product and other revenue from the sale of 235572 Mediasite recorders and software during YTD-2019YTD-2020 versus $5.7$3.5 million from the delivery of 638235 Mediasite recorders and software in YTD-2018.YTD-2019. Recorders sold were substantially lessmore than YTD-2018,YTD-2019, partially asdue to a result of the Company'slarge refresh order in Q2-2020 and our planned reduction of distribution inventory which had an impact of $1.2 million.
reduced reliance on distribution.

$12.011.8 million from Mediasite customer support contracts, installation, training, eventevents and hosting services versus $11.6$12.0 million in 2018. Services revenue increased primarily due to an increase in support & hosting contract billings.2019.

Gross Margin
Q2-2019Q2-2020 compared to Q2-2018Q2-2019
Gross margin for Q2-2019Q2-2020 was $6.0$6.3 million or 75%72% of revenue compared to Q2-2018Q2-2019 gross margin of $5.9$6.0 million or 70%75%. The significant components of cost of revenue include:

Material and freight costs for the Mediasite recorders. Costs for Q2-2019Q2-2020 Mediasite recorder hardware and other costs totaled $233$453 thousand, along with $50$37 thousand of freight costs, and $383$645 thousand of labor and allocated costs, compared to Q2-2018Q2-2019 Mediasite recorder costs of $588$233 thousand for hardware and other costs, $59$50 thousand for freight and $385$383 thousand of labor and allocated costs. GrossThis resulted in gross margin on products increased toof 59% in Q2-2020 and 64% in Q2-2019 compared to 55% in Q2-2018, mainly as a result of reducing inventory sold through distribution..

Services costs. Staff wages and other costs allocated to cost of service revenue were $1.2 million in Q2-2020 and $1.4 million in Q2-2019 and $1.3 million in Q2-2018, resulting in gross margin on services of 79% in Q2-2020 and 78% in Q2-2019 and 77% in Q2-2018.
YTD-2019YTD-2020 (six months) compared to YTD-2018YTD-2019 (six months)

Gross margin for YTD-2020 was $12.1 million or 73% of revenue compared to YTD-2019 wasgross margin of $11.7 million or 75% of revenue compared to YTD-2018 gross margin of $12.4 million or 71% . The significant components of cost of revenue include:

Material and freight costs for the Mediasite recorders.Costs for YTD-2019YTD-2020 Mediasite recorder hardware and other costs totaled $491$600 thousand, along with $103$58 thousand of freight costs, and $775$1,289 thousand of labor and allocated costs, compared to YTD-2018YTD-2019 Mediasite recorder costs of $1.3 million$491 thousand for hardware and other costs, $125$103 thousand for freight and $770$775 thousand of labor and allocated costs. This resulted in gross margin on products of 59% in YTD-2020 and 63% in YTD-2019 and 58% in YTD-2018.YTD-2019.

Service costs. Staff wages and other costs allocated to cost of service revenue were $2.6$2.6 million in YTD-2020 and $2.6 million in YTD-2019, and $2.5 million in YTD-2018, resulting in gross margin on services of 78% in YTD-2020 and 79% in YTD-2019 and 78% in YTD-2018.YTD-2019.

Operating Expenses
Selling and Marketing Expenses

Selling and marketing expenses include wages and commissions for sales, marketing and business development personnel, print advertising and various promotional expenses for our products. Timing of these costs may vary greatly depending on introduction of new products and services or entrance into new markets, or participation in major tradeshows.
Q2-2019Q2-2020 compared to Q2-2018Q2-2019
Selling and marketing expenses decreased $31$779 thousand or 1%20% from $3.9 million in Q2-2018 to $3.8 million in Q2-2019 to $3.1 million in Q2-2020. Differences in the major categories include:

Salary, commissions, and benefits expense decreased by $48$392 thousand as a result of reduced headcount.

Travel expenses, including entertainment and meals, decreased by $57 thousand.

Costs related to advertising and tradeshows increased by $57$153 thousand.

Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $150$143 thousand and $659$615 thousand respectively, an aggregate increasedecrease of $27$51 thousand from Q2-2018Q2-2019.
YTD-2019YTD-2020 (six months) compared to YTD-2018YTD-2019 (six months)
Selling and marketing expenses decreased $198$1,326 thousand or 2%17% from$8.0 million in YTD-2018 to $7.8 million in YTD-2019.YTD-2019 to $6.5 million in YTD-2020. Differences in the major categories include:

Salary, commissions, and benefits expense decreased by $198$736 thousand as a result of reduced headcount.
Advertising & tradeshow
Travel expenses, including entertainment and meals, decreased by $70$308 thousand.

Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $281 thousand and $1.3 million$1,337 thousand, respectively, an aggregate increasedecrease of $98$43 thousand from YTD-2018.YTD-2019.

We anticipate selling and marketing headcount to remain consistent throughout the remainder of the fiscal year.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities, finance, legal, human resource and information technology departments, as well as other expenses not fully allocated to functional areas.

Q2-2019Q2-2020 compared to Q2-2018Q2-2019

G&A expenses decreased $164$169 thousand or 11%13% from $1.5$1.4 million in Q2-2018Q2-2019 to $1.3$1.2 million in Q2-2019Q2-2020. Differences in the major categories include:

Decrease in compensation and benefits of $48$81 thousand due toas a result of reduced headcount.

Increase in supplies expense of $16 thousand.

Professional services increased by $105$72 thousand primarily due to an increase in auditlegal and legaladvisory fees.

Decrease in bad debt expense of $176 thousand due to decreased allowance for doubtful accounts.

G&A expenses for Sonic Foundry International and Mediasite KK accounted for $31$13 thousand and $245$185 thousand respectively, which is consistent with expenses duringan aggregate decrease of $78 thousand from Q2-2018Q2-2019.

YTD-2019YTD-2020 (six months) compared to YTD-2018YTD-2019 (six months)

G&A expenses decreased $199$266 thousand or 6%9% from $3.1 million in YTD-2018 to $2.9 million in YTD-2019.YTD-2019 to $2.6 million in YTD-2020. Differences in the major categories include:
Decrease in bad debt expense of $174 thousand due to decreased allowance for doubtful accounts.
IncreaseDecrease in compensation and benefits of $18 thousand.$356 thousand as a result of reduced headcount.

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

G&A expenses for Sonic Foundry International and Mediasite KK accounted for $56$30 thousand and $470$425 thousand respectively, which is consistent with expenses during YTD-2018.an aggregate decrease of $71 thousand from YTD-2019.

We anticipate general and administrative headcount to remain consistent throughout the remainder of the fiscal year.
Product Development Expenses
Product development expenses include salaries and wages of the software research and development staff and an allocation of benefits, facility and administrative expenses.

Q2-2019Q2-2020 compared to Q2-2018Q2-2019
Product development expenses increaseddecreased by $123$436 thousand, or 7%23% from $1.8 million in Q2-2018 to $1.9 million in Q2-2019 to $1.5 million in Q2-2020. Differences in the major categories include:

IncreaseDecrease in compensation and benefits of $112$341 thousand as a result of reduced headcount.

Decrease in professional services of $41 thousand.

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


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

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

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

Decrease in professional services of $49 thousand.

Recruiting costs increased by $15 thousand.

Product development expense for Sonic Foundry International and Mediasite KK accounted for $135 thousand and $72 thousand respectively, an aggregate increase of $36 thousand compared to Q2-2018.
YTD-2019 (six months) compared to YTD-2018 (six months)
Product development expenses increased by $203 thousand, or 6% from $3.6 million in YTD-2018 to $3.8 million in YTD-2019. Differences in the major categories include:
Increase in compensation and benefits of $181 thousand related primarily to an increase in compensation rates and the cost of benefits.
Decrease in professional services of $35$50 thousand, due to decreased use of outsourced development.

Product development expense for Sonic Foundry International and Mediasite KK accounted for $251$226 thousand and $152$146 thousand respectively, an aggregate increasedecrease of $69$31 thousand compared to YTD-2018.YTD-2019.

We anticipate product development headcount to remain consistent throughout the remainder of the fiscal year. We do not anticipate that any fiscal 20192020 software development efforts will qualify for capitalization.


Other Income and Expense, Net
Interest expense for the three and six months ended March 31, 2019 increased $1242020 decreased $9 thousand and $186increased $100 thousand, respectively, compared to the same periods last year mainly as a result of accrued interest on the Subordinated Promissory Notes with Mr. Burish, note, the first tranche of which was disbursed on January 4, 2019, as well as2019. Interest payments and the disbursement offirst anniversary fee on the secondBurish notes are currently being deferred. See Note 4 - Credit Arrangements for further details on the deferred interest and final tranche of the PFG debt in November 2018.fees. The Company also recorded $14 thousand and $27$28 thousand of interest expense for the three and six months ended March 31, 20192020 related to the

accretion of discounts on the PFG Loan and Warrant Debt compared to $6$14 thousand and $12$27 thousand for the same periods last year.three and six months ended March 31, 2019. The Company also recorded amortization expense related to the back-end fee on the PFG loan of $13 thousand and $25 thousand in both the three and six month ended March 31, 2020 compared to $13 thousand and $25 thousand for the same periods last year. The Company also recorded $34 thousand and $67 thousand of interest expense during the three and six months ended March 31, 2019. The Company also recorded $13 thousand of interest expense for the three and six months ended March 31, 20192020 related to the accretion of discounts on the Burish notes payable which was first disbursed incompared to $13 thousand for the quarterthree and six months ended March 31, 2019.
During the three and six months ended March 31, 2019,2020, a loss in fair value of $8$61 thousand and a gain of $8$63 thousand, respectively, was recorded related to the fair value remeasurement on the derivative liability associated with the Loan and Security Agreement and Warrant Debt with PFG. GainsPFG compared to a loss in fair value of $6$8 thousand and $9a gain of $15 thousand, respectively, were recorded relatedduring the three and six months ended March 31, 2019.


Foreign Currency Translation Adjustment

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

For the three and six months ended March 31, 2020, the Company's foreign currency translation adjustment was a gain of $5 thousand and a loss of $3 thousand compared to the fair value remeasurementto a loss of $17 thousand and a gain of $45 thousand for the three and six months ended March 31, 2018.2019. The gain is attributable to the strengthening in the Japanese Yen compared to the US dollar compared to the prior period.

Benefit for Income Taxes
The U.S. Tax CutsDuring the three and Jobs Act of 2017 (the “TCJA”) was signed into law on December 22, 2017. The TCJA included a number of changes to the U.S. corporate income tax including a reduction of the corporate income 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 quartersix months ended March 31, 20192020, the Company recorded an aggregate transaction of $0 and a gain of $15 thousand compared to an aggregate loss of $3 thousand and $40 thousand for the three and six months ended March 31, 2019. The aggregate transaction gain or loss is a blended rate reflectingincluded in the anticipated benefitother expense line of the three quarterscondensed consolidated statements of federal tax rate reductions for fiscal 2019.operations.






Liquidity and Capital Resources
The Company’s primary sources of liquidity are its cash from operating activitiesoperations and debt and equity financing. During the first six months of fiscal 2019,2020, the Company used $3.3 milliongenerated $680 thousand of cash infrom operating activities compared with $548 thousand$3.3 million used in the same period of fiscal 2018.2019.
Capital expenditures were $222$118 thousand in the first six months of fiscal 20192020 compared to $238$222 thousand in the same period in fiscal 2018.2019.

The Company generated $3.5 millionused $278 thousand of cash from financing activities during the first six months of fiscal 2020, primarily due to net proceeds from the disbursement of the Mediasite term note of $463 thousand offset by payments of $618 thousand on existing debt. For the same period in fiscal 2019, the Company generated $3.5 million of cash from financing activities, mainly due to notes payable proceeds, primarily due to net proceeds from the disbursement of Tranches 1-4 of the Burish Note Purchase Agreement. For the same period in fiscal 2018,

At March 31, 2020, the Company generated $727 thousandhad $6.7 million outstanding, net of cash from financing activities, mainly duewarrant debt and debt discounts, related to notes payable proceeds, partially offset bywith PFG V, the subordinated notes issued under the Burish Note Purchase Agreement and the Mediasite KK term debt. The Company made principal payments of $250 thousand and $500 thousand for the three and six months ended March 31, 2020 on the linePFG V debt, and $113 thousand on the Mediasite KK term debt in the current quarter.
At March 31, 2020, approximately $1.5 million of credit.cash and cash equivalents was held by the Company’s foreign subsidiaries.

On May 13, 2020, the Company and Mr. Burish entered into a Debt Conversion Agreement to convert Mr. Burish's existing secured debt of approximately $5.6 million into common stock at $5.00 per share. Both the Special Committee and Mr. Burish concluded that converting the debt to equity was the most appropriate way to maximize both Company and Shareholder value, improve the Company's financial position, and provide the Company with resources to further its growth opportunities.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next twelve months. We will likely evaluate operating and capital leaseslease opportunities to finance equipment purchases in the future and anticipate utilizingcontinuing to utilize proceeds from the recently issued promissory notes and term debt to support working capital needs. We may also seek additional equity financing or issue additional shares previously registered in our available shelf registration andbut there are no assurances that these will be on terms acceptable to the Company.
At March 31, 2019, a balance of $451 thousand was outstanding on the line of credit with Mitsui Sumitomo Bank. At September 30, 2018, a balance of $264 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 March 31, 2019, the Company had $5.4 million outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V and the Burish Note Purchase Agreement. The Company drew on Tranches 1-4 of the Burish Note Purchase Agreement during the three months ended March 31, 2019, resulting in a net increase of $4.2 million on notes during the six months ended March 31, 2019 compared to net payments of $319 thousand on notes in the same period of fiscal 2018.
At March 31, 2019, approximately $867 thousand of cash and cash equivalents was held by the Company’s foreign subsidiaries.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year-ended September 30, 2018.2019. At March 31, 2019, $3.32020, $4.9 million of the Company’s $5.9$6.7 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.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on evaluations at March 31, 2019,2020, our principal executive officer and principal financial officer, with the participation of our management team, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act) and determined that our disclosure controls and procedures were effective.. Disclosure controls and procedures ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
During the most recent fiscal year end, Based on this evaluation, our principal executive officer and principal financial officer concluded that our internaldisclosure controls over financial reportingand procedures 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.

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 relates to 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. 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. As such, the weakness is considered fully remediated as of October 1, 2018.March 31, 2020.
Changes in Internal Controls
On October 1, 2018,2019, we adopted ASC 606.842. As a result, changes were made to the relevant business processes and related control activities in order to monitor and maintain appropriate controls over financial reporting.
During the period covered by the quarterly report on Form 10-Q, the Company has not made any other changes to its internal control over financial reporting (as referred to in Paragraph 4(b) of the Certifications of the Company's principal executive officer and principal financial officer included as exhibits to the report) that have materially affected, or are reasonably likely to affect the Company's internal control over financial reporting.




PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.

ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in our Form 10-K for the fiscal year ended September 30, 20182019 filed with the SEC.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.

ITEM 6. EXHIBITS
NUMBER DESCRIPTION
3.1
 
   
3.2
 
3.3
   
3.43.3
 
   
3.53.4
 
   
3.63.5
 
   
10.1*
 
10.2*
   
10.3*10.2*
 
   
10.4*10.3*
 
   
10.510.4
 
   
10.6
10.7
10.8
10.9*10.5*
 

10.10*
10.11
10.1210.6
 
Forms of Subscription Agreements, Lock-Up Agreements and Warrant Agreements dated December 22, 2014 among Sonic Foundry, Inc. and Mark Burish, and Sonic Foundry, Inc. and Andrew Burish, filed as Exhibits 10.1, 10.2, and 10.3 to the Form 8-K filed on December 30, 2014 and hereby incorporated by reference.
   
10.13
10.14
10.15
10.1610.7
 
   
10.17
10.1810.8
 
   
10.1910.9
 
   
10.20
10.2110.10
 
   

10.22
10.11
 
10.23
   
10.2410.12
 
   
10.25
10.2610.13
 
   
10.27
10.2810.14
 
   
10.29
10.30

10.3110.15
 
   
10.3210.16
 
   
10.3310.17
 
   
10.3410.18
 
   
10.35
10.3610.19
 
   
10.3710.20
 
   
10.3810.21
 
   
10.3910.22
 
   
10.4010.23
 
   
10.4110.24
 
   
10.4210.25
 
   
10.43
10.4410.26
 
   
10.4510.27
 
   
10.4610.28
 
   
10.4710.29
 
   
10.47
10.4810.30
 
   
10.4910.31
 
   
10.32
10.33

10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
31.1
 
   
31.2
 
   
32
 
   

101
 The following materials from the Sonic Foundry, Inc. Form 10-Q for the quarter ended March 31, 20192020 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders' Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (v)(vi) Notes to Condensed Consolidated Financial Statements.
Registrant will furnish upon request to the Securities and Exchange Commission a copy of all exhibits, annexes and schedules attached to each contract referenced in item 10.
*Compensatory Plan or Arrangement


SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Sonic Foundry, Inc.
(Registrant)
     
May 17, 201914, 2020 By: /s/ Michael Norregaard
    Michael Norregaard
    Chief Executive Officer
     
May 17, 201914, 2020 By: /s/ Kenneth A. Minor
    Kenneth A. Minor
    Interim Chief Financial Officer and Secretary

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