Sonic Foundry (SOFO) Risk Analysis

On December 5, 2023, our common stock was delisted from the Nasdaq Capital Market and commenced trading on the OTC Markets. As a result of the delisting of our common stock, we and our stockholders could face significant material adverse consequences including: - a limited availability of market quotations for our shares;- reduced liquidity for our shares;- a determination that our common stock is a "penny stock" which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our shares;- a limited amount of news and analyst coverage; and - a decreased ability to issue additional securities or obtain additional financing in the future, including due to our inability to use a Form S-3 for a shelf financing.

We are a "smaller reporting company," as defined in the Securities Exchange Act of 1934, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "smaller reporting companies," including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer a "smaller reporting company." We will remain a "smaller reporting company" until (a) the aggregate market value of our outstanding common stock held by non-affiliates as of the last business day of our most recently completed second fiscal quarter is $250 million or more and we reported annual net revenues as of our most recently completed fiscal year is $100 million or more, or (b) the aggregate market value of our outstanding common stock held by non-affiliates as of the last business day of our most recently completed second fiscal quarter is $700 million or more, regardless of annual revenue.

The announcement and pendency of the Mediasite Asset Sale, whether or not consummated, may adversely affect the trading price of our common stock, our business or our relationships with customers, suppliers and employees. In addition, pending the completion of the Mediasite Asset Sale, we may be unable to attract and retain key personnel and the focus and attention of our management and employee resources may be diverted from operational matters during the pendency of the Mediasite Asset Sale.

Although the Purchase Agreement provides for a total purchase price of up to $15.5 million, the Purchase Agreement includes a number of provisions for adjustment that are expected to reduce the total amount of proceeds we actually receive from the Mediasite Asset Sale. A holdback amount of $1 million will be deducted from the purchase price payable at closing and payable on the first anniversary of the closing date, but will be subject to claims for indemnification and based on the collectability of accounts receivable and the sale of inventory after closing. In addition, the amount of the purchase price is subject to reduction based on the amount by which our net cash assets at closing is less than $0. We currently estimate that the net cash asset adjustment will reduce the purchase price by approximately $4 million.

Although we will repay the NBE Debt upon the closing of the Mediasite Asset Sale, we do not expect to use any of the proceeds of the Mediasite Asset Sale to repay our outstanding debt to Mark Burish (the "Burish Debt"). The Company owes approximately $5.75 million as of the date of this report to Mark Burish, and we may borrow additional amounts from Mr. Burish if he agrees in order to provide funds for the Company's business. Following the closing of the Mediasite Asset Sale, our business operations will be limited to the Vidable and GLX businesses, both of which generate limited revenues, negative cash flow and significant losses. As a result, our ability to make scheduled payments of the principal of, to pay interest on or to refinance the Burish Debt will be limited. Our business likely will not be able to generate cash flow from operations sufficient to service the Burish Debt under its current terms and fund the Company's operating and other expenses. We may be required to adopt one or more alternatives, such as selling assets (including potentially to Mr. Burish in exchange for debt relief), restructuring the Burish Debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to raise equity capital will depend on the capital markets and our financial condition at such time, and will be challenging due to the reduced size of our operations after the Mediasite Asset Sale and the recent delisting of our common stock from the NASDAQ Capital Market. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, our inability to continue as a going concern and the loss of all or a substantial part of the value of our common stock.

As of September 30 2023, we were in breach of certain financial covenants in our loan documents with NBE. In December 2023, the Company received a Conditional Consent Agreement from NBE whereby NBE agreed not to call its loan in default due to breaches of certain financial covenants. NBE has the right to reconsider its consent and withdraw such conditional agreement at any time. If NBE were to do so, it could declare an event of default under the loan and pursue its available legal remedies, which could impair our ability to continue our operations and cause our stockholders to lose all or a part of their investment.

At September 30, 2023, we had cash of $840 thousand, $498 thousand of which was in our foreign operations, compared to total cash of $3.3 million and foreign operations cash of $1.1 million at September 30, 2022. We raised debt of $10.3 million and equity of $1.2 million in fiscal 2023 in order to fund our operations. There can be no assurances that we will comply with the covenants and other restrictions of our debt facilities in the future and nor that other sources of financing will be available, or if available, on acceptable terms. The Company has a history of losses, is investing heavily in new brands in advance of achieving meaningful revenue and has historically financed its operations primarily through cash from sales of equity or debt securities. We cannot ensure that revenue will grow in fiscal 2024 or beyond, even with strategic investment of resources in business lines where we believe there is a greater opportunity for growth. If revenue is determined to be growing at a rate less than anticipated and expenses are not sufficiently matched, our cash resources may not be sufficient to support working capital needs, and we may have to attempt to borrow additional funds from other debt providers, attempt to raise equity capital or significantly reduce expenses. We have managed through periods of poor liquidity by working to accelerate collections from customers and delay payments to vendors. Such near-term solutions can have negative long-term effects on our relationships with customers and vendors and result in discounting of receipts and finance charges associated with delayed payments. Customers or vendors may elect to cease doing business with us as a result. In the event we need to borrow additional money, raise additional equity capital, or sell certain assets, we may not be able to do so on acceptable terms and conditions including discounts from market, warrants, convertible securities or preferred stock, or at all. In that event, we may seek to raise money from entities that are affiliated with the Company, as we have done in the past. The Company has had to rely on its Chairman, Mark Burish, ("Mr. Burish") to provide capital on terms reasonable and acceptable to the independent members of the Board of Directors. There is no assurance, however, that Mr. Burish, or any other affiliated party, will be willing to provide additional capital. In the event we have a need to borrow money, we may incur significant interest charges, or fees, which could harm our profitability. Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common stock. In the event we are able to raise additional equity, the terms of such financing may dilute the ownership interests of current investors and cause our stock price to fall significantly. In the event additional capital is provided by executive officers or directors, then, due to the low price levels of our common stock, control by such executive officers or directors may substantially increase. Given our history of losses, negative cash flow and lack of available credit, management has concluded that factors exist that raise the need to consider the Company's ability to continue as a going concern. However, management has considered its plans to continue the Company as a going concern and believes substantial doubt is alleviated. Management developed a plan to improve liquidity in its operations through reductions in expenses, incentives to accelerate cash collections, monetization of excess inventory, potential additional borrowings from Mark Burish, as well as anticipated exchange of a portion of his debt into equity, exchange of a portion of debt for the sale of certain assets and further financial support in the form of additional debt or equity, and proceeds from the proposed sale of the Company's Mediasite business. The Company believes it will be successful in such initiatives and will be able to continue as a going concern through at least the next twelve months. If the funds held by our foreign subsidiaries are needed for our operations in the United States, the repatriation of some of these funds to the United States could require payment of additional U.S. taxes.

The Purchase Agreement contains provisions that make it more difficult for us to sell our assets or engage in another type acquisition transaction with a party other than the Buyer. These provisions include a non-solicitation provision and a provision obligating us to pay the Buyer a termination fee of $450,000 or be obligated to reimburse the Buyer's transaction expenses up to a maximum of $100,000 under certain circumstances. These provisions could discourage a third party that might have an interest in acquiring Sonic Foundry or the Mediasite business from considering or proposing such an acquisition, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by the Buyer.