Table of Contents

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

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-30407
 
SONIC FOUNDRY, INC.
(Exact name of registrant as specified in its charter)
 
MARYLAND
 
39-1783372
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
222 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
May 4, 2018
Common Stock, $0.01 par value
 
4,693,904
 


Table of Contents

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, 2017 .


2

Table of Contents

TABLE OF CONTENTS
 
 
 
PAGE NO.
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


3

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

March 31,
2018
 
September 30,
2017
Assets

 

Current assets:

 

Cash and cash equivalents
$
1,180

 
$
1,211

Accounts receivable, net of allowances of $450 and $375
7,021

 
7,903

Financing receivables, current, net of allowances of $300 and $200
330

 
925

Inventories
1,047

 
986

Investment in sales-type lease, current
157

 
148

Prepaid expenses and other current assets
672

 
1,085

Total current assets
10,407

 
12,258

Property and equipment:

 

Leasehold improvements
1,055

 
1,041

Computer equipment
6,486

 
6,101

Furniture and fixtures
917

 
789

Total property and equipment
8,458

 
7,931

Less accumulated depreciation and amortization
6,720

 
6,181

Property and equipment, net
1,738

 
1,750

Other assets:

 

Goodwill
10,617

 
10,455

Customer relationships, net of amortization of $1,123 and $990
1,461

 
1,505

Product rights, net of amortization of $473 and $411
200

 
261

Financing receivables, long-term
302

 
1,310

Investment in sales-type lease, long-term
430

 
407

Other long-term assets
484

 
410

Total assets
$
25,639

 
$
28,356

Liabilities and stockholders’ equity

 

Current liabilities:

 

Revolving lines of credit
$
2,170

 
$
2,065

Accounts payable
1,934

 
1,314

Accrued liabilities
1,640

 
1,387

Unearned revenue
9,388

 
11,332

Current portion of capital lease and financing arrangements
259

 
256

Current portion of notes payable and warrant debt, net of discounts
233

 
737

Total current liabilities
15,624

 
17,091

Long-term portion of unearned revenue
2,228

 
2,970

Long-term portion of capital lease and financing arrangements
270

 
244

Long-term portion of notes payable and warrant debt, net of discounts

 
123

Long-term portion of subordinated note payable
1,000

 

Derivative liability, at fair value
3

 
12

Other liabilities
284

 
372

Deferred tax liability
3,084

 
4,426

Total liabilities
22,493

 
25,238

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
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 2,500 shares; 2,259 and 1,510 shares issued and outstanding, respectively, at amounts paid in
1,874

 
1,280

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

 

Common stock, $.01 par value, authorized 10,000,000 shares; 4,474,062 and 4,470,791 shares issued and 4,461,346 and 4,458,075 shares outstanding, respectively
45

 
45

Additional paid-in capital
198,070

 
197,836

Accumulated deficit
(196,382
)
 
(195,253
)

4

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Accumulated other comprehensive loss
(266
)
 
(595
)
Receivable for common stock issued
(26
)
 
(26
)
Treasury stock, at cost, 12,716 shares
(169
)
 
(169
)
Total stockholders’ equity
3,146

 
3,118

Total liabilities and stockholders’ equity
$
25,639

 
$
28,356


See accompanying notes to the condensed consolidated financial statements.

5

Table of Contents

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,

2018
 
2017
2018
 
2017
Revenue:
 
 
 
 
 
 
Product and other
$
2,690

 
$
3,305

$
5,713

 
$
7,029

Services
5,770

 
5,255

11,642

 
10,838

Total revenue
8,460

 
8,560

17,355

 
17,867

Cost of revenue:
 
 
 
 
 

Product and other
1,203

 
1,432

2,426

 
3,074

Services
1,328

 
1,064

2,530

 
2,020

Total cost of revenue
2,531

 
2,496

4,956

 
5,094

Gross margin
5,929

 
6,064

12,399

 
12,773

Operating expenses:
 
 
 
 
 

Selling and marketing
3,867

 
4,008

7,977

 
8,818

General and administrative
1,509

 
1,468

3,082

 
2,918

Product development
1,812

 
1,862

3,565

 
3,813

Total operating expenses
7,188

 
7,338

14,624

 
15,549

Loss from operations
(1,259
)
 
(1,274
)
(2,225
)
 
(2,776
)
Non-operating income (expenses):
 
 
 
 
 
 
Interest expense, net
(103
)
 
(116
)
(195
)
 
(266
)
Other income (expense), net
19

 
(89
)
10

 
(77
)
Total non-operating expenses
(84
)
 
(205
)
(185
)
 
(343
)
Loss before income taxes
(1,343
)
 
(1,479
)
(2,410
)
 
(3,119
)
Benefit (provision) for income taxes
(106
)
 
23

1,281

 
154

Net loss
(1,449
)
 
(1,456
)
(1,129
)
 
(2,965
)
Dividends on preferred stock
(50
)
 

(122
)
 

Net loss attributable to common stockholders
$
(1,499
)
 
$
(1,456
)
$
(1,251
)
 
$
(2,965
)
Loss per common share
 
 
 
 
 
 
– basic
$
(0.34
)
 
$
(0.33
)
$
(0.28
)
 
$
(0.67
)
– diluted
$
(0.34
)
 
$
(0.33
)
$
(0.28
)
 
$
(0.67
)
Weighted average common shares
 
 
 
 
 
 
– basic
4,461,310

 
4,425,720

4,459,675

 
4,418,562

– diluted
4,461,310

 
4,425,720

4,459,675

 
4,418,562

See accompanying notes to the condensed consolidated financial statements


6

Table of Contents

Sonic Foundry, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 
Three Months Ended March 31,
Six Months Ended March 31,
 
2018
 
2017
2018
 
2017
Net loss
$
(1,449
)
 
$
(1,456
)
$
(1,129
)
 
$
(2,965
)
Foreign currency translation adjustment
309

 
373

329

 
(500
)
Comprehensive loss
$
(1,140
)
 
$
(1,083
)
$
(800
)
 
$
(3,465
)
See accompanying notes to the condensed consolidated financial statements


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Table of Contents

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

Six Months Ended
March 31,

2018
 
2017
Operating activities

 

Net loss
$
(1,129
)
 
$
(2,965
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Amortization of other intangibles
268

 
282

Depreciation and amortization of property and equipment
536

 
757

Provision for doubtful accounts
175

 
50

Deferred taxes
(1,361
)
 
(15
)
Stock-based compensation expense related to stock options
320

 
386

Remeasurement gain on subordinated debt

 
(6
)
Remeasurement gain on derivative liability
(9
)
 
(21
)
Changes in operating assets and liabilities:

 

Accounts receivable
995

 
(727
)
Financing receivables
1,525

 
26

Inventories
(59
)
 
457

Prepaid expenses and other current assets
381

 
511

Accounts payable and accrued liabilities
700

 
798

Other long-term liabilities
(101
)
 
141

Unearned revenue
(2,789
)
 
(1,296
)
Net cash used in operating activities
(548
)
 
(1,622
)
Investing activities

 

Purchases of property and equipment
(238
)
 
(586
)
Net cash used in investing activities
(238
)
 
(586
)
Financing activities

 

Proceeds from notes payable
1,000

 

Proceeds from revolving lines of credit
10,822

 
12,529

Payments on notes payable
(681
)
 
(907
)
Payments on revolving lines of credit
(10,743
)
 
(10,249
)
Payment of debt issuance costs
(20
)
 
(26
)
Proceeds from issuance of preferred stock, common stock and warrants
508

 
21

Payments on capital lease and financing arrangements
(159
)
 
(150
)
Net cash provided by financing activities
727

 
1,218

Changes in cash and cash equivalents due to changes in foreign currency
28

 
46

Net decrease in cash and cash equivalents
(31
)
 
(944
)
Cash and cash equivalents at beginning of period
1,211

 
1,794

Cash and cash equivalents at end of period
$
1,180

 
$
850

Supplemental cash flow information:
 
 
 
Interest paid
$
169

 
$
277

Income taxes paid, foreign
43

 
27

Non-cash financing and investing activities:
 
 
 
Property and equipment financed by capital lease or accounts payable
256

 
341

Stock issued for board of director's fees

 
133

Deemed dividend for beneficial conversion feature of preferred stock
28

 

Preferred stock dividends paid in additional shares
50

 

See accompanying notes to the condensed consolidated financial statements.

8

Table of Contents

Sonic Foundry, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)

1.
Basis of Presentation and Significant Accounting Policies
Financial Statements
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, 2018 are not necessarily indicative of the results that might be expected for the year ending September 30, 2018 .
Reclassifications
Reclassifications have been made to the condensed consolidated financial statements to conform to the March 31, 2018 presentation. These reclassifications had no effect on the Company's net loss or stockholders' equity as previously reported.
Financing Receivables
Financing receivables consist of customer receivables resulting from the sale of the Company's products and services, primarily software and long-term customer support contracts, and are presented net of allowance for losses. The Company has a single portfolio consisting of fixed-term receivables, which is further segregated into two classes based on products, customer type, and credit risk evaluation.

The Company generally determines its allowance for losses on financing receivables at the customer class level by considering a number of factors, including the length of time financing receivables 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 were allowances of $300 thousand and $200 thousand as of March 31, 2018 and September 30, 2017, respectively.

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

Long-term customer support contracts: These contracts are typically entered into in conjunction with sale-type lease arrangements, over the life of which the Company agrees to provide support services similar to those offered within Mediasite Customer Care plans. Contract terms range from 3 - 5 years, and payments are generally due from the customer annually on the contract anniversary. There was $406 thousand and $384 thousand of receivables outstanding for long-term customer support contracts as of March 31, 2018 and September 30, 2017, respectively. All amounts due were current as of the balance sheet date and there are no credit losses expected to be incurred related to long-term support contracts.

Product receivables: Amounts due primarily represent sales of perpetual software licenses to a single international distributor on invoices outstanding for product delivered from March 2016 through June 2017. There was $526 thousand and $2.1 million receivable as of March 31, 2018 and September 30, 2017, respectively. As of September 30, 2017, $1.5 million of this balance was deferred for revenue recognition purposes due to a history of delayed payment. As a result of certain events occurring during Q218, the $1.5 million balance for which revenue had previously been deferred was written off as of March 31, 2018. These events include continued delayed payment, effective cancellation of the distributor's exclusivity status, and updated information regarding their capital position. Due to the combined circumstances noted, we have concluded that although the fee amounts previously included in deferred revenue are still owed by the distributor, they are no longer considered to be fixed and determinable, and therefore should not be recognized on the balance sheet.

The entire allowance for losses on financing receivables of $300 thousand is considered attributable to the product receivables class of customer as of March 31, 2018 .

As of March 31, 2018 financing receivables consisted of the following (in thousands):

9


 
March 31, 2018
 
September 30, 2017
Customer support contracts, current and long-term, gross
$
406

 
$
384

Product receivables, gross
526

 
2,051

Allowance for losses on financing receivables
(300
)
 
(200
)
 
$
632

 
$
2,235

Investment in Sales-Type Lease
The Company has entered into sales-type lease arrangements with certain customers, consisting of recorders leased with terms ranging from 3-5 years. All amounts due are current as of the balance sheet date.
Investment in sales-type leases consists of the following (in thousands):
 
March 31, 2018
 
September 30, 2017
Investment in sales-type lease
$
587

 
$
555

 
$
587

 
$
555

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.
Inventory consists of the following (in thousands):
 
March 31,
2018
 
September 30, 2017
Raw materials and supplies
$
137

 
$
156

Finished goods
910

 
830

 
$
1,047

 
$
986

Capitalized Software Development Costs
Software development costs incurred in conjunction with product development are charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the net realizable value of the related product. Typically, the period between achieving technological feasibility of the Company’s products and the general availability of the products has been short. Consequently, software development costs qualifying for capitalization are typically immaterial and are generally expensed to research and development costs, as incurred. Upon product release, the amortization of software development costs is determined annually as the greater of the amount computed using the ratio of current gross revenues for the products to their total of current and anticipated future gross revenues, or the straight-line method over the estimated economic life of the products, expected to be three years . No amortization expense of software development costs was recorded in the three or six months ended March 31, 2018 or 2017 . The gross amount of capitalized external and internal development costs was $533 thousand at both March 31, 2018 and September 30, 2017 , and was fully amortized during the fiscal year ended September 30, 2016. There were no software development efforts that qualified for capitalization for the three or six months ended March 31, 2018 or 2017 .
Fair Value of Financial Instruments

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s goodwill, intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part of a business combination, individually or with a group of other assets. These nonfinancial assets were initially measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Fair value measurements of reporting units are estimated using an income approach involving discounted or undiscounted cash flow models and the public company guideline method that contain certain Level 3 inputs requiring management judgment, including projections of economic conditions and

10


customer demand, revenue and margins, changes in competition, operating costs, working capital requirements, and new product introductions. Fair value measurements of the reporting units associated with the Company’s goodwill balances are estimated at least annually at the beginning of the fourth quarter of each fiscal year for purposes of impairment testing. Fair value measurements associated with the Company’s intangible assets and other long-lived assets are estimated when events or changes in circumstances such as market value, asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable.

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 IV 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 Company (Level 3). The fair value of the bifurcated conversion feature represented by the warrant derivative liability which is measured at fair value on a recurring basis is based on a Black Scholes option pricing model with assumptions for stock price, exercise price, volatility, expected term, risk free interest rate and dividend yield similar to those described for share-based compensation which were generally observable (Level 2).

Financial liabilities measured at fair value on a reoccurring basis are summarized below (in thousands):
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Derivative liability
 
$

 
$
3

 
$

 
$
3

 
 
$

 
$
3

 
$

 
$
3

September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Derivative liability
 
$

 
$
12

 
$

 
$
12

 
 
$

 
$
12

 
$

 
$
12


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

11


 
 
PFG IV Debt, net of discount
 
Warrant Debt
Balance at September 30, 2017
 
$
491

 
$
123

Activity during the current period:
 
 
 
 
   Payments to PFG IV
 
(403
)
 

   Change in fair value
 
37

 
12

Balance at March 31, 2018
 
$
125

 
$
135

 





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, accounts payable and debt instruments, excluding the PFG IV debt. The book values of cash and cash equivalents, accounts receivable, debt (excluding the PFG IV debt) and accounts payable are considered to be representative of their respective fair values. The carrying value of capital lease obligations and debt (excluding the PFG IV debt), including the current portion, approximates fair market value as the variable and fixed rate approximates the current market rate of interest available to the Company.
Legal Contingencies
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 six months ended March 31, 2018 or 2017 , respectively.
Stock Based Compensation
The Company uses a lattice valuation model to account for all employee stock options granted. The lattice valuation model is a more flexible analysis to value options because of its ability to incorporate inputs that change over time, such as actual exercise behavior of option holders. The Company uses historical data to estimate the option exercise and employee departure behavior in the lattice valuation model. Expected volatility is based on historical volatility of the Company’s stock. The Company considers all employees to have similar exercise behavior and therefore has not identified separate homogeneous groups for valuation. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is based on the U.S. Treasury yields in effect at the time of grant. Forfeitures are based on actual behavior patterns.
The fair value of each option grant is estimated using the assumptions in the following table:
 
Six Months Ended
March 31,
 
2018
 
2017
Expected life
4.3-4.4 years
 
4.9 years
Risk-free interest rate
1.79%-2.40%
 
1.08%-1.44%
Expected volatility
62.45%-63.49%
 
56.98%-59.84%
Expected forfeiture rate
12.53%-13.53%
 
10.17%-10.22%
Expected exercise factor
1.16-1.17
 
1.32-1.35
Expected dividend yield
0%
 
0%
A summary of option activity at March 31, 2018 and changes during the six months then ended is presented below:

12


 
Options
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Period in
Years
Outstanding at October 1, 2017
1,805,443

 
$
8.33

 
5.0
Granted
396,499

 
2.50

 
9.8
Exercised

 

 
0.0
Forfeited
(94,475
)
 
11.41

 
2.7
Outstanding at March 31, 2018
2,107,467

 
7.10

 
6.4
Exercisable at March 31, 2018
1,430,280

 
8.61

 
5.1
A summary of the status of the Company’s non-vested shares and changes during the six month period ended March 31, 2018 is presented below:
 
2018
Non-vested Shares
Shares
 
Weighted-Average
Grant Date Fair
Value
Non-vested at October 1, 2017
544,834

 
$
2.42

Granted
396,499

 
0.96

Vested
(254,342
)
 
2.48

Forfeited
(9,804
)
 
1.87

Non-vested at March 31, 2018
677,187

 
$
1.48


The weighted average grant date fair value of options granted during the six months ended March 31, 2018 was $0.96 . As of March 31, 2018 , there was $631 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $476 thousand . The cost is expected to be recognized over a weighted-average remaining life of 2.4 years.
Stock-based compensation recorded in the three and six months ended March 31, 2018 was $72 thousand and $316 thousand , respectively. Stock-based compensation recorded in the three and six months ended March 31, 2017 was $127 thousand and $378 thousand , respectively. There was no cash received from exercises under all stock option plans and warrants in either of the three and six months ended March 31, 2018 or 2017 . There were no tax benefits realized for tax deductions from option exercises in either of the three and six month periods ended March 31, 2018 or 2017 , respectively. 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 57,391 shares are available to be issued under the plan. The Company recorded stock compensation expense under this plan of $3 thousand and $4 thousand for the three and six months ended March 31, 2018 , respectively. The Company recorded stock compensation expense of $5 thousand and $8 thousand for the three and six months ended March 31, 2017 , respectively.
Preferred stock and dividends
In May 2017, the Company created a new series of preferred stock entitled "9% Cumulative Voting Convertible Preferred Stock, Series A" (the "Preferred Stock, Series A"). One thousand shares were authorized with a stated value and liquidation preference of $1,000 per share. In August 2017, 1,500 additional shares were authorized for an aggregated total of 2,500 shares. 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. There were 2,259 and 1,510 shares of Preferred Stock, Series A issued and are outstanding as of March 31, 2018 and September 30, 2017 , respectively.


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On November 7, 2017, the Company entered into an Agreement in which a single holder's right to convert shares of Series A Preferred Stock into common stock is waived until shareholder approval has been obtained. The agreement not to convert applies to 2,022 shares outstanding as of March 31, 2018. 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.

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.
Per share computation
Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income (loss) 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,
 
2018
 
2017
2018
 
2017
Denominator for basic net income (loss) per share - weighted average common shares
4,461,310

 
4,425,720

4,459,675

 
4,418,562

Effect of dilutive options (treasury method)

 


 

Denominator for diluted net income (loss) per share - adjusted weighted average common shares
4,461,310

 
4,425,720

4,459,675

 
4,418,562

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 antidilutive
2,242,269

 
2,008,347

2,242,269

 
2,008,347


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The FASB subsequently issued a one-year deferral of the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, the guidance is effective for annual reporting periods beginning after December 15, 2017. Subsequently, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations" ("ASU 2016-08"); ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10"); ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"); and ASU 2014-17, "Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)" ("ASU 2017-14"). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2017-14 with ASU 2014-09.

We anticipate that adoption of FASB Topic 606 will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, particularly regarding expenses, the Company believes the most significant impact will relate to accounting for software license revenue for on-premises customers. We expect revenue related to recorders, customer support, hosting services, and events services to remain largely unchanged. Specifically, under the new standard we expect to recognize revenue for annual or multi-year software licenses for on-premises customers predominantly at the time of billing rather than ratably over the license term as is current practice. Due to the complexity of certain of our customer contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms, and may vary in some instances from recognition at the time of billing.


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In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10)", ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist at the date of the adoption. The Company is currently evaluating this guidance and its impact to the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", ("ASU 2016-02"). ASU 2016-02 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public entities. Early application of the amendment is permitted. The Company is currently reviewing this guidance and its impact to the consolidated financial statements.
In May 2016, the FASB issued ASU 2016-11, "Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)", ("ASU 2016-11"). ASU 2016-11 rescinds SEC paragraphs pursuant to the SEC Staff Announcement, "Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606", and the SEC Staff Announcement, "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity", announced at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. The effective dates in ASU 2016-11 coincide with the effective dates of Topic 606 (ASU 2014-09) and ASU 2014-16. The Company is currently evaluating the impact of adopting ASU 2014-09 and related amendments, such as ASU 2016-11, to determine the impact, if any, it may have on the consolidated financial statements. The Company previously reviewed ASU 2014-16 and determined that is it not applicable.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)", ("ASU 2016-15"). ASU 2016-15 addresses classification of certain cash receipts and cash payments within the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods with those fiscal years. The Company is currently evaluating this guidance and its impact to the consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740)", ("ASU 2016-16"). ASU 2016-16 prohibits the recognition of current and deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. The amendment in ASU 2016-16 are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating this guidance and its impact to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01 "(ASC Topic 805), Business Combination: Clarifying the Definition of a Business", ("ASU 2017-01"). The amendments in this ASU change the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. The Company is required to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets", ("ASU 2017-05"). ASU 2017-05 clarifies the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments in ASU 2017-05 are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, " Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", ("ASU 2017-07"). ASU 2017-07 was issued to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost within an entity's financial statements. The amendments in ASU 2017-07 are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating this guidance and its impact to the consolidated financial statements.

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

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

In February 2018, the FASB issued ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10); Recognition and Measurement of Financial Assets and Financial Liabilities", ("ASU 2018-03"). The standard was issued to address certain unintended impacts related to changes outlined in ASU 2016-01. ASU 2018-03 is effective for fiscal years beginning after December 31, 2017. The Company does not expect the ASU to have a material impact on the consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, "Income Taxes (Topic 740); Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118", ("ASU 2018-05"). The standard clarifies certain SEC positions on accounting for the impacts of the Tax Cuts and Jobs Act; specifically regarding the use of estimates when an entity is still assessing the full impact of the tax act. The Company does not believe the standard will have a significant impact on its financial statements, as no estimates related to the Tax Cuts and Jobs Act have been utilized.
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 consolidated financial statements upon adoption.

2. Related Party Transactions

During the three and six months ended March 31, 2018 , the Company incurred fees of $61 thousand and $112 thousand , respectively, to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $30 thousand and $62 thousand , respectively, during the three and six months ended March 31, 2017 . The Company had accrued liabilities for unbilled services of $60 thousand and $55 thousand at March 31, 2018 and September 30, 2017 , respectively, to the same law firm.
At March 31, 2018 and September 30, 2017 , the Company had a loan outstanding to an executive totaling $26 thousand . The loan is collateralized by Company stock.

On January 19, 2018, the Company and Mark Burish entered into a Subscription Agreement (the “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, Mr. Burish purchased an additional 10.75% Convertible Secured Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the “Notes”).

No later than the third business day following the approval by the stockholders of the Company of the conversion of the Notes sufficient to comply with rules and regulations of Nasdaq and the Securities and Exchange Commission, the Notes will be automatically convertible into that number of shares of Series A Preferred Stock determined by dividing the total principal and accrued interest due on each Note by $542.13 (the “Conversion Rate”). Principal and accrued and unpaid interest on each Note, if not converted, will be due and payable on September 30, 2019. Interest will accrue at the rate of 10.75% per annum. The Notes are secured by all assets of the Company, and are subordinated to all senior indebtedness.

Mark Burish is a director of the Company and beneficially owns more than 5% of the Company’s common stock.

3. Commitments
Inventory Purchase Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At March 31, 2018 , the Company has an obligation to purchase $821 thousand of Mediasite product, which is not recorded on the Company’s Condensed Consolidated Balance Sheet.

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Operating Leases
In November 2011, the Company occupied office space related to a lease agreement entered into on June 28, 2011. The lease term is from November 2011 through December 2018 . The lease includes a tenant improvement allowance of $613 thousand that was recorded as a leasehold improvement liability and is being amortized as a credit to rent expense on a straight-line basis over the lease term. At March 31, 2018 and September 30, 2017 , the unamortized balance was $51 thousand and $95 thousand , respectively.
In October 2016, the Company also occupied office space related to a lease agreement entered into on August 1, 2016. The lease term is from October 2016 through December 2020 . The lease includes five months of free rent of $130 thousand that was recorded as a deferred rent liability and is being amortized as a credit to rent expense on a straight-line basis over the lease term. At March 31, 2018 and September 30, 2017 , the unamortized balance was $98 thousand and $110 thousand , respectively.

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 accrues on the revolving line of credit at the variable per annum rate equal to the Prime Rate (as defined) plus two percent ( 2.00% ), which currently equates to 6.75% . The Second Amended and Restated Loan Agreement provides for an advance rate on domestic receivables of 80% , and an advance rate on foreign receivables of 75% of the lesser of (x) Foreign Eligible Accounts (as defined) or (y) $1,000,000 . The maturity date of the revolving credit facility is January 31, 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 accrues interest at the variable per annum rate equal to the Prime Rate (as defined) plus two and three-quarters percent (which currently equates to an interest rate of 7.50% ), and is 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) 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.
At March 31, 2018 , there was no balance outstanding on the term loan with Silicon Valley Bank. There was a balance of $1.7 million outstanding on the revolving line of credit, with an effective interest rate of six-and-three-quarters percent ( 6.75% ). At September 30, 2017 , a balance of $278 thousand was outstanding on the term loans with Silicon Valley Bank and a balance of $1.6 million was outstanding on the revolving line of credit. At March 31, 2018 , there was a remaining amount of $1.5 million available under the line of credit facility for advances. The Second Amended Agreement, as amended, contains events of default that include, among others, non-payment of principal or interest, inaccuracy of any representation or warranty, violation of covenants, bankruptcy and insolvency events, material judgments, cross defaults to certain other indebtedness, and material adverse changes. The occurrence of an event of default could result in the acceleration of the Companies’ obligations under the Second Amended Agreement, as amended. At March 31, 2018 , the Company was not in compliance with the minimum EBITDA covenant as defined in the Second Amended and Restated Loan Agreement, as amended.


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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 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 ( $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 ( $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.

Pursuant to the Second Amended Agreement, as amended, the Companies pledged as collateral to Silicon Valley Bank substantially all non-intellectual property business assets. The Companies also entered into an Intellectual Property Security Agreement with respect to intellectual property assets.

Historically, the Company has relied on the ability to draw proceeds as needed from its revolving line of credit with Silicon Valley Bank to fund operations, and plans to do so for at least the next 12 months. At March 31, 2018, we had a balance of $1.7 million outstanding on this line of credit, which matures January 31, 2019. The Company may not have sufficient liquidity available to repay the line of credit at the time of maturity. The Company expects to renew the line of credit prior to the due date, however, the decision to renew is solely at the discretion of Silicon Valley Bank.

While the Company expects the line of credit will be renewed at terms similar to those that are currently in place, management’s analysis of the Company's ability to continue as a going concern must consider the possibility that SVB will not consent to renew the agreement. The Company believes it has access to other sources of capital, but has no plans, nor taken any action to refinance the Silicon Valley Bank debt.
 
To evaluate the Company’s likelihood that the line of credit agreement would be renewed on or before January 31, 2019, the Company considered its long-term relationship with the lender, consistent payment history on both the line of credit and term loans held by Silicon Valley Bank, and the fact that the line is secured by the Company’s accounts receivable, which was $4.9 million at March 31, 2018.   

Accordingly, the Company believes that it is probable that management’s plans to renew the line of credit agreement will fully mitigate the conditions identified.

Partners for Growth
On May 13, 2015, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Partners for Growth IV, L.P. (“PFG IV”), (the “Loan and Security Agreement”).
The Loan and Security Agreement provided for a Term Loan in the amount of $2,000,000 , which was disbursed in two (2)Tranches as follows: Tranche 1 was drawn in the amount of $1,500,000 shortly after execution thereof; and Tranche 2 in the amount of $500,000 , was drawn on December 15, 2015.
Each tranche of the Term Loan bore interest at 10.75%  per annum. Tranche 1 of the Term Loan was payable interest only until November 30, 2015. Beginning on December 1, 2015, principal was due in 30 equal monthly principal installments, plus accrued interest, continuing until May 1, 2018 , when the principal balance was paid in full. Tranche 2 of the Term Loan was payable in 29 equal monthly principal installments, plus accrued interest, beginning January 1, 2015 and continuing until May 1, 2018.
The principal of the Term Loan could have been prepaid at any time, without a prepayment fee.
Coincident with execution of the Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”) with PFG IV. Pursuant to the terms of the Warrant, the Company issued to PFG IV a warrant to purchase up to 50,000 shares of common stock of the Company at an exercise price of $9.66 per share, subject to certain adjustments, of which 37,500 were exercisable with the disbursement of Tranche 1 and 12,500 became exercisable with the disbursement under Tranche 2. Pursuant to the Warrant, PFG IV is also entitled, under certain conditions, to require the Company to exchange the Warrant for the sum of $200,000 . Each warrant issued has an exercise term of 5 years from the date of issuance. On August 12, 2015, the Company and PFG IV entered into a waiver agreement to waive a then existing covenant default and to change the exercise price of the aforementioned warrants from $9.66 per share to $6.80 per share.

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The warrants can be settled for cash in the event of acquisition of the company, any liquidation of the company, or expiration of the warrant. The Company has determined the cash payment date to be the expiration date ( May 14, 2020 ). Due to the fixed payment amount on the expiration date, the warrant structure is in substance a debt arrangement (the “Warrant Debt”) with a zero interest rate, a fixed maturity date and a feature that makes the debt convertible to common stock. The Warrant Debt had a fair value of $80 thousand at the time of issuance. The derivative had a fair value of $136 thousand . The conversion feature is an embedded derivative; thus, for accounting purposes, the conversion feature is bifurcated and accounted for separately from the PFG IV Debt and Warrant Debt as a derivative liability measured at fair value at each reporting period.

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

At March 31, 2018 , the estimated fair value of the derivative liability associated with the warrants issued in connection with the Loan and Security Agreement, was $3 thousand compared to $12 thousand at September 30, 2017. The change in the fair value of the derivative liability for the three and six months ended March 31, 2018 , was recorded as a gain of $6 thousand and $9 thousand , respectively, included in the other income (expense).
The proceeds from the Loan and Security Agreement were allocated between the PFG IV Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair value on the date of issuance which resulted in carrying values of $1.8 million and $216 thousand , respectively. The conversion feature of $216 thousand is treated together as a debt discount on the PFG IV Debt and will be accreted to interest expense under the effective interest method over the three -year term of the PFG IV Debt and the five -year term of the Warrant Debt. For the three and six months ended March 31, 2018 , the Company recorded accretion of discount expense associated with the warrants issued with the PFG IV loan of $6 thousand and $12 thousand , respectively, as well as $18 thousand and $37 thousand related to amortization of the debt discount. The Company recorded accretion of discount expense of $ 5 thousand and $10 thousand , as well as $18 thousand and $37 thousand related to amortization of the debt discount in the three and six months ended March 31, 2017 . At March 31, 2018 , the fair values of the PFG IV Debt and the Warrant Debt (inclusive of its conversion feature) were $125 thousand and $138 thousand , respectively.

The fair values of term debt and warrant debt are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). At December 14, 2015, the carrying amounts of the Company’s term debt and warrant debt totaled $1.8 million and $216 thousand , respectively. At December 14, 2015, the Company’s term debt and warrant debt were recorded at fair value. At March 31, 2018 , the derivative liability was remeasured at fair value. The fair value of the bifurcated conversion feature represented by the warrant derivative liability is based on a Black Scholes option pricing model with assumptions for stock price, exercise price, volatility, expected term, risk free interest rate and dividend yield similar to those described previously for share-based compensation which were generally observable (Level 2).

At March 31, 2018 , a balance of $125 thousand was outstanding on the term debt with PFG IV, net of discount, with an effective interest rate of ten-and-three-quarters percent ( 10.75% ). At September 30, 2017 , a balance of $491 thousand was outstanding with PFG IV.
The Term Loan was collateralized by substantially all the Company’s assets, including intellectual property, subject to a first lien held by Silicon Valley Bank. The Term Loan required compliance with the same financial covenants as set forth in the loan from Silicon Valley Bank. At March 31, 2018 , the Company was not in compliance with the minimum EBITDA covenant as defined in the Loan and Security Agreement, however the note was paid in full as of May 1, 2018.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”), (the “Loan and Security Agreement”).
The Loan and Security Agreement provides for a Term Loan in the amount of $2,500,000 , which will be disbursed in two (2) Tranches as follows: Tranche 1 will be in the amount of $2,000,000 , and is expected to be disbursed, upon satisfaction of certain conditions, shortly after execution thereof; and Tranche 2 will be in the amount of $500,000 , and can be disbursed at any time, at Sonic Foundry’s discretion, following disbursement of Tranche 1 and on or before December 31, 2018, so long as at no Default or Event of Default (as defined) shall have occurred and be continuing.
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

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December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000 .
The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal to 1% of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.
The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property, subject to a first lien held by Silicon Valley Bank, The Term Loan requires compliance with the same financial covenants as set forth in the loan from Silicon Valley Bank.
Coincident with execution of the 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 (or $200,000 , if the Company does not draw on Tranche 2 of the Term Loan).
Other Indebtedness
At March 31, 2018 , a balance of $507 thousand was outstanding on the line of credit with Mitsui Sumitomo Bank. At September 30, 2017 , a balance of $417 thousand was outstanding on the line of credit. The credit facility is related to Mediasite K.K., and accrues interest at an annual rate of approximately one-and-one half percent ( 1.5% ).
At both March 31, 2018 and September 30, 2017 , there was no outstanding balance on the subordinated note payable related to the acquisition of Sonic Foundry International (formerly MediaMission).
In the three and six months ended March 31, 2018 , no foreign currency gain or loss was realized related to re-measurement of the subordinated notes payable related to the Company’s foreign subsidiaries. In the three and six months ended March 31, 2017 , a foreign currency gain of $0 thousand and $6 thousand , respectively, was recorded related to the remeasurement of the subordinated notes payable.
On January 19, 2018, the Company and Mark Burish entered into a Subscription Agreement (the “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, Mr. Burish purchased an additional 10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the “Notes”). At March 31, 2018, a balance of $1.0 million was outstanding on the Notes.

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, 2018 or September 30, 2017 , and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2018 or 2017 , respectively.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes provisions that affect our business. The TCJA reduces the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. The TCJA is effective in the second quarter of fiscal year 2018 and the effective tax rate for the quarter ended December 31, 2017 is a blended rate reflecting the anticipated benefit of the three quarters of federal tax rate reductions for fiscal 2018. During the three and six months ended March 31, 2018 , we recorded an income tax benefit of zero and  $1.3 million , respectively, resulting from the application of TCJA to existing deferred tax balances based on reasonable estimates for those tax effects. The deemed repatriation of undistributed foreign earnings is not expected to result in a material change to our financial results. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date. The final impact of the TCJA may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions the Company may take as a result.
6. Goodwill and Other Intangible Assets

20


The changes in the carrying amount of goodwill for the six months ended March 31, 2018 are as follows:
Balance at September 30, 2017
$
10,455

Foreign currency translation adjustment
162

Balance at March 31, 2018
$
10,617


7. Subsequent Events

On April 16, 2018, Sonic Foundry, Inc. issued 232,558 shares of common stock to Andrew D. Burish. 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. Mr. Burish also received warrants to purchase 232,558 shares of common stock at an exercise price of $2.50 per share, which expire on April 16, 2025.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”), (the “Loan and Security Agreement”).
The Loan and Security Agreement provides for a Term Loan in the amount of $2,500,000 , which will be disbursed in two (2) Tranches as follows: Tranche 1 will be in the amount of $2,000,000 , and is expected to be disbursed, upon satisfaction of certain conditions, shortly after execution thereof; and Tranche 2 will be in the amount of $500,000 , and can be disbursed at any time, at Sonic Foundry’s discretion, following disbursement of Tranche 1 and on or before December 31, 2018, so long as at no Default or Event of Default (as defined) shall have occurred and be continuing.
Each tranche of the Term Loan bears interest at 10.75%  per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000 .
The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal to 1% of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.
The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property, subject to a first lien held by Silicon Valley Bank, The Term Loan requires compliance with the same financial covenants as set forth in the loan from Silicon Valley Bank.
Coincident with execution of the 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 (or $200,000 , if the Company does not draw on Tranche 2 of the Term Loan).

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 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 ( $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 ( $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.

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

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of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis,” and “Risk Factors.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part I, Item 1A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2017 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, 2017 ), 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 the trusted global leader for video capture, management and streaming solutions. Trusted by educational institutions, corporations and government entities, Mediasite Video Platform quickly and cost-effectively automates the capture, management, delivery and search of live and on-demand streaming video and rich media. Mediasite transforms communications, training, education and events for our customers.
RESULTS OF OPERATIONS
Revenue
Revenue from our business includes the sale of Mediasite recorders and server software products and related services contracts, such as customer support, installation, customization services, training, content hosting and event services. We market our products to educational institutions, corporations and government agencies that need to deploy, manage, index and distribute video content on Internet-based networks. We reach both our domestic and international markets through reseller networks, a direct sales effort and partnerships with system integrators.
Q2-2018 compared to Q2-2017
Revenue in Q2-2018 decreased $100 thousand , or 1% to $8.5 million , from Q2-2017 revenue of $8.6 million . Revenue consisted of the following:

Product and other revenue from sales of Mediasite recorder units and server software was $2.7 million in Q2-2018 and $3.3 million in Q2-2017 .
 
Q2-2018
 
Q2-2017
Recorders sold
282

 
302

Rack units to mobile units ratio
34.3 to 1

 
13.2 to 1

Average sales price, excluding service (000’s)
$
6.3

 
$
6.7

Refresh Units
61

 
75


Services revenue represents the portion of fees charged for Mediasite customer support contracts amortized over the length of the contract, typically 12 months, as well as training, installation, event and content hosting services. Services revenue increased $515 thousand or 10% from $5.3 million in Q2-2017 to $5.8 million in Q2-2018 primarily due to an increase in events and hosting services. At March 31, 2018 , $11.6 million of revenue was deferred, of which we expect to recognize $9.4 million in the next twelve months, including approximately $4.1 million in the quarter ending June 30, 2018. At September 30, 2017 , $14.3 million of revenue was deferred. The decrease is primarily due to $1.5 million of deferred revenue being written off at March 31, 2018, as a result of continued delayed payment and slower than anticipated growth in sales from an international distributor.

Other revenue relates to freight charges billed separately to our customers.
YTD-2018 (six months) compared to YTD-2017 (six months)


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Revenues for YTD-2018 totaled $17.4 million compared to YTD-2017 revenues of $17.9 million . Revenues included the following:

$5.7 million product and other revenue from the sale of 633 Mediasite recorders and software during YTD-2018 versus $7.0 million from the delivery of 766 Mediasite recorders and software in YTD-2017 . Revenue of 208 recorders billed in Q4-2015 and shipped in Q1-2017 for an international customer was recognized during Q1-2017, and the units are included in the units sold figures.

$11.6 million  from Mediasite customer support contracts, installation, training, event and hosting services versus  $10.8 million  in 2017. Services revenue increased primarily due to an increase in hosting contract billings.
Gross Margin
Q2-2018 compared to Q2-2017
Gross margin for Q2-2018 was $5.9 million or 70% of revenue compared to Q2-2017 gross margin of $6.1 million or 71% . The significant components of cost of revenue include:

Material and freight costs for the Mediasite recorders. Costs for Q2-2018 Mediasite recorder hardware and other costs totaled $588 thousand , along with $59 thousand of freight costs, and $385 thousand of labor and allocated costs, compared to Q2-2017 Mediasite recorder costs of $643 thousand for hardware and other costs, $67 thousand for freight and $460 thousand of labor and allocated costs. This resulted in gross margin on products of 55% in Q2-2018 and 57% in Q2-2017 .

Services costs. Staff wages and other costs allocated to cost of service revenue were $1.3 million in Q2-2018 and $1.1 million in Q2-2017 , resulting in gross margin on services of 77% in Q2-2018 and 80% in Q2-2017 .

YTD-2018 (six months) compared to YTD-2017 (six months)
Gross margin for YTD-2018 was $12.4 million or 71% of revenue compared to YTD-2017 gross margin of $12.8 million or 71% . The significant components of cost of revenue include:

Material and freight costs for the Mediasite recorders. Costs for YTD-2018 Mediasite recorder hardware and other costs totaled $1.3 million , along with $125 thousand of freight costs, and $770 thousand of labor and allocated costs, compared to YTD-2017 Mediasite recorder costs of $1.8 million for hardware and other costs, $139 thousand for freight and $888 thousand of labor and allocated costs. This resulted in gross margin on products of 58% in YTD-2018 and 56% in YTD-2017 .  

Services costs. Staff wages and other costs allocated to cost of service revenue were $2.5 million in YTD-2018 and $2.0 million in YTD-2017 , resulting in gross margin on services of 78% in YTD-2018 and 81% in YTD-2017 .
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.
Q2-2018 compared to Q2-2017
Selling and marketing expenses decreased $141 thousand or 4% from $4.0 million in Q2-2017 to $3.9 million in Q2-2018 . Differences in the major categories include:

Salary, commissions, and benefits expense decreased by $201 thousand as a result of reduced headcount.

Travel expenses increased by $52 thousand related to more frequent traveling by the international sales team.


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Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $104 thousand and $679 thousand respectively, an aggregate increase of $32 thousand from Q2-2017 .
YTD-2018 (six months) compared to YTD-2017 (six months)
Selling and marketing expenses decreased $841 thousand or 10% from $8.8 million in YTD-2017 to $8.0 million in YTD-2018 . Differences in the major categories include:

Salary, commissions, and benefits expense decreased by $658 thousand as a result of reduced headcount.

Advertising & tradeshow expenses decreased by $42 thousand .

Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $217 thousand and $1.3 million respectively, an aggregate decrease of $126 thousand from YTD-2017 .
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.

Q2-2018 compared to Q2-2017

G&A expenses increased $41 thousand or 3% from $1.47 million in Q2-2017 to $1.51 million in Q2-2018 . Differences in the major categories include:

Increase in bad debt expense of $70 thousand due to increasing allowance for doubtful accounts.

Decrease in printing and reporting costs of $20 thousand due to timing of annual report issuance.

G&A expenses for Sonic Foundry International and Mediasite KK accounted for $46 thousand and $235 thousand respectively, an aggregate increase of $16 thousand compared to Q2-2017 .

YTD-2018 (six months) compared to YTD-2017 (six months)

G&A expenses increased $164 thousand or 6% from $2.9 million in YTD-2017 to $3.1 million in YTD-2018 . Differences in the major categories include:

Increase in bad debt expense of $125 thousand due to increasing allowance for doubtful accounts.

Decrease in compensation and benefits of $29 thousand .

Increase in professional services of $143 thousand , primarily due to an increase in bank fees, investor relations, and audit related expenses.

G&A expenses for Sonic Foundry International and Mediasite KK accounted for $83 thousand and $447 thousand respectively, an aggregate decrease of $35 thousand compared to YTD-2017 .
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.

Q2-2018 compared to Q2-2017

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Product development expenses decreased by $50 thousand , or 3% from $1.9 million in Q2-2017 to $1.8 million in Q2-2018 . Differences in the major categories include:

Decrease in professional services of $35 thousand , mainly due to decreased use of outsourced development.

Decrease in maintenance expense of $25 thousand due to expiration of a software maintenance plan in Q2-2017.

Product development expense for Sonic Foundry International and Mediasite KK accounted for $97 thousand and $75 thousand respectively, an aggregate increase of $17 thousand compared to Q2-2017 .
YTD-2018 (six months) compared to YTD-2017 (six months)
Product development expenses decreased by $248 thousand , or 7% from $3.8 million in YTD-2017 to $3.6 million in YTD-2018 . Differences in the major categories include:

Decrease in professional services of $212 thousand , due to decreased use of outsourced development.

Decrease in recruiting costs of $45 thousand related primarily to our international quality assurance team, which incurred recruiting costs during Q1 2017 upon establishment of the team.

Product development expense for Sonic Foundry International and Mediasite KK accounted for $159 thousand and $697 thousand respectively, an aggregate increase of $19 thousand compared to YTD-2017 .
We anticipate product development headcount to remain consistent throughout the remainder of the fiscal year. We do not anticipate that any fiscal 2018 software development efforts will qualify for capitalization.

Other Income and Expense, Net
Interest expense for the three and six months ended March 31, 2018 decreased $13 thousand and $71 thousand compared to the same periods last year. The Company also recorded $6 thousand and $12 thousand of interest expense for the three and six months ended March 31, 2018 , respectively, related to the accretion of discounts on the PFG IV Loan and Warrant Debt. The Company recorded accretion of discount expense of $5 thousand and $10 thousand for the three and six months ended March 31, 2017 , respectively.
During the three and six months ended March 31, 2018 , gains of $6 thousand and $9 thousand , respectively, were recorded related to the fair value remeasurement on the derivative liability associated with the Loan and Security Agreement and Warrant Debt with PFG IV. Gains of zero and $21 thousand were recorded related to the fair value remeasurement for the three and six months ended March 31, 2017 , respectively.

Benefit for Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes provisions that affect our business. The TCJA reduces the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. The TCJA is effective in the second quarter of fiscal year 2018 and the effective tax rate for the quarter ended December 31, 2017 is a blended rate reflecting the anticipated benefit of the three quarters of federal tax rate reductions for fiscal 2018. During the three and six months ended March 31, 2018, we recorded an income tax benefit of zero and $1.3 million, respectively, resulting from the application of TCJA to existing deferred tax balances based on reasonable estimates for those tax effects. The deemed repatriation of undistributed foreign earnings is not expected to result in a material change to our financial results. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date. The final impact of the TCJA may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions the Company may take as a result.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are its cash and revolving line of credit. During the first six months of fiscal 2018 , the Company used $548 thousand of cash from operating activities compared with $1.6 million of cash used in operating activities in the same period of fiscal 2017 . The decrease in cash used in operating activities was primarily due to the decrease in the

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Company's net loss and cash generated from reduced working capital in fiscal 2018 as compared to fiscal 2017 , which is partially offset by the change in deferred tax liability.
Capital expenditures were $238 thousand in the first six months of fiscal 2018 compared to $586 thousand in the same period in fiscal 2017 . A majority of the expenditures for fiscal 2017 relate to costs associated with the leasehold improvements and office furniture and equipment purchases for the new Mediasite KK office.
The Company generated $727 thousand of cash from financing activities during the first six months of fiscal 2018 , primarily due to proceeds from its line of credit and partially offset by payments on term debt facilities. The Company also received $500 thousand as a result of issuing preferred stock in Q1 2018, and received an additional $1.0 million upon issuing two convertible notes payable in Q2 2018. For the same period in fiscal 2018 , the Company generated $1.2 million of cash from financing activities, mainly due to line of credit proceeds, partially offset by debt payments.
At March 31, 2018 , the Company had a $4.0 million revolving line of credit with Silicon Valley Bank. The line of credit bears interest at prime rate plus 2.00% . Collections from accounts receivable are directly applied to the outstanding obligations under the revolving line of credit. The Company reduced borrowing by a net of $15 thousand during the first six months of fiscal 2018 . At March 31, 2018 , the outstanding balance was $1.7 million . The highest balance on the line of credit during the quarter was $2.6 million . At March 31, 2018 , there was a remaining amount of $1.5 million available under the line of credit for advances.

Historically, the Company has relied on the ability to draw proceeds as needed from its revolving line of credit with Silicon Valley Bank to fund operations, and plans to do so for at least the next 12 months. At March 31, 2018 we had a balance of $1.6 million outstanding on this line of credit, which matures January 31, 2019. The Company may not have sufficient liquidity available to repay the line of credit at the time of maturity. The Company expects to renew the line of credit prior to the due date, however, the decision to renew is solely at the discretion of Silicon Valley Bank.

While the Company expects the line of credit will be renewed at terms similar to those that are currently in place, management’s analysis of the Company's ability to continue as a going concern must consider the possibility that Silicon Valley Bank will not consent to renew the agreement. The Company believes it has access to other sources of capital, but has no plans, nor taken any action to refinance the Silicon Valley Bank debt.
 
To evaluate the likelihood that the line of credit agreement would be renewed on or before January 31, 2019, the Company considered its long-term relationship with the lender, consistent payment history on both the line of credit and term loans held by Silicon Valley Bank, and the fact that the line is secured by the Company’s accounts receivable, which was $4.9 million at March 31, 2018 .   

Accordingly, the Company believes that it is probable that management’s plans to renew the line of credit agreement will fully mitigate the conditions identified. The Company expects that it will have sufficient liquidity to fund operations for at least the next twelve months from the date of financial statement issuance.
At March 31, 2018 , a balance of $507 thousand was outstanding on the line of credit with Mitsui Sumitomo Bank. At September 30, 2017 , a balance of $417 thousand was outstanding on the line of credit. The notes and credit facility are both related to Mediasite K.K., and both accrue interest at an annual rate of approximately one-and-one half percent ( 1.5% ).
At March 31, 2018 , the Company had $1.3 million outstanding, net of warrant debt and debt discounts, related to notes payable with PFG IV and Mark D. Burish. The Company received proceeds of $1.0 million and made payments of $681 thousand , resulting in net proceeds of $319 thousand from notes during the six months ended March 31, 2018 compared to net payments of $907 thousand on notes in the same period of fiscal 2017 .
At March 31, 2018 , approximately $1.1 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.

On April 16, 2018, Sonic Foundry, Inc. issued 232,558 shares of common stock to Andrew D. Burish. 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. Mr. Burish 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. The Company may consider further transactions involving debt or equity in the future although no definitive agreements have been made.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”), (the “Loan and Security Agreement”).

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The Loan and Security Agreement provides for a Term Loan in the amount of $2,500,000, which will be disbursed in two (2) Tranches as follows: Tranche 1 will be in the amount of $2,000,000, and is expected to be disbursed, upon satisfaction of certain conditions, shortly after execution thereof; and Tranche 2 will be in the amount of $500,000, and can be disbursed at any time, at Sonic Foundry’s discretion, following disbursement of Tranche 1 and on or before December 31, 2018, so long as at no Default or Event of Default (as defined) shall have occurred and be continuing.
Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000.
The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal to 1% of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.
The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property, subject to a first lien held by Silicon Valley Bank, The Term Loan requires compliance with the same financial covenants as set forth in the loan from Silicon Valley Bank.
Coincident with execution of the 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 (or $200,000, if the Company does not draw on Tranche 2 of the Term Loan).

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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, 2017 . At March 31, 2018 , $1.8 million of the Company’s $3.4 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, 2018 , our principal executive officer and principal financial officer, with the participation of our management team, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act) 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, our principal executive officer and principal financial officer concluded that our internal controls over financial reporting were not effective as of September 30, 2017 due to an identified material weakness in internal control. The material weakness related 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, which was remediated as of Q1 2018.

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 was engaging with outside valuation experts to assist with the application of best practices in determining fair values used for purposes of testing goodwill and other long-lived and intangible assets, as required by ASC topics 350 and 360, respectively. In future periods, we will continue to utilize outside experts for the determination of fair values when applicable, including measuring the fair value of reporting units during the annual test for goodwill impairment when quantitative analysis is performed. There can be no assurances that we have fully remediated the weakness in controls over financial reporting. However, we feel that our remediation efforts to strengthen processes and controls in place related to measurement of goodwill have adequately addressed the aforementioned material weakness.
Changes in Internal Controls
During the period covered by the quarterly report on Form 10-Q, the Company has not made any 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.

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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, 2017 filed with the SEC.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 19, 2018, the Company and Mark Burish entered into a Subscription Agreement (the “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, Mr. Burish purchased an additional 10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the “Notes”). Each Note will be converted, immediately following the 2018 Annual Meeting of Stockholders approving the issuance of shares of common stock underlying the shares of Series A Preferred Stock into which the Notes may be converted, into that number of shares of Series A Preferred Stock determined by dividing the principal and accrued and unpaid interest on each Note through the date of conversion by $542.13 (the “Conversion Rate”). Assuming the 2018 Annual Meeting of Stockholders is held on May 17, 2018, the combined Notes will have a total of $30,962 interest accrued thereon, which, along with the principal of $1,000,000 will therefore be convertible into approximately 1,902 shares of Series A Preferred Stock price of the Series A Common Stock. Assuming the Notes purchased by Mr. Burish on January 19, 2018 and February 16, 2018, were immediately converted into shares of Series A Preferred Stock, and such shares were immediately converted into shares of Common Stock, each Note would be convertible into 218,035 shares of Common Stock. The Notes purchased by Mr. Burish in these transactions, with interest accruing on such Notes through May 17, 2018, and, assuming that this tranche of Series A Preferred Stock is converted into shares of Common Stock on May 17, 2019, will be convertible into 2080.62 shares of Series A Preferred Stock, which will be, subject to shareholder approval of the issuance of common stock, convertible into 491,872 shares of Common Stock.

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

ITEM 5. OTHER INFORMATION
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”), (the “Loan and Security Agreement”).
The Loan and Security Agreement provides for a Term Loan in the amount of $2,500,000, which will be disbursed in two (2) Tranches as follows: Tranche 1 will be in the amount of $2,000,000, and is expected to be disbursed, upon satisfaction of certain conditions, shortly after execution thereof; and Tranche 2 will be in the amount of $500,000, and can be disbursed at any time, at Sonic Foundry’s discretion, following disbursement of Tranche 1 and on or before December 31, 2018, so long as at no Default or Event of Default (as defined) shall have occurred and be continuing.
Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000.
The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal to 1% of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.
The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property, subject to a first lien held by Silicon Valley Bank, The Term Loan requires compliance with the same financial covenants as set forth in the loan from Silicon Valley Bank.

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Coincident with execution of the 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 (or $200,000, if the Company does not draw on Tranche 2 of the Term Loan).

ITEM 6. EXHIBITS
NUMBER
 
DESCRIPTION
3.1

 
 
 
 
3.2

 
 
 
 
3.3

 
 
 
 
3.4

 

 
 
 
3.5

 

 
 
 
10.1*

 
 
 
 
10.2*

 
 
 
 
10.3*

 
 
 
 
10.4*

 
 
 
 
10.5

 
 
 
 
10.6

 
 
 
 
10.7

 
 
 
 
10.8

 
 
 
 
10.9*

 
10.10*

 
 
 
 
10.11

 
 
 
 
10.12

 
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.
 
 
 

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10.13

 
 
 
 
10.14

 
 
 
 
10.15

 
 
 
 
10.16

 
 
 
 
10.17

 
 
 
 
10.18

 
 
 
 
10.19

 
 
 
 
10.20

 
 
 
 
10.21

 
 
 
 
10.22

 
10.23

 
 
 
 
10.24

 
 
 
 
10.25

 
 
 
 
10.26

 
 
 
 
10.27

 

 
 
 
10.28

 
 
 
 
10.29

 
 
 
 
10.30

 
 
 
 
10.31

 
 
 
 
10.32

 
 
 
 

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10.33

 
 
 
 
10.34

 

 
 
 
10.35

 
 
 
 
10.36

 

 
 
 
10.37

 

 
 
 
10.38

 
 
 
 
10.39

 
 
 
 
10.40

 
 
 
 
10.41

 
 
 
 
10.42

 
 
 
 
10.43

 
 
 
 
31.1

 
 
 
 
31.2

 
 
 
 
32

 
 
 
 
101

 
The following materials from the Sonic Foundry, Inc. Form 10-Q for the quarter ended March 31, 2018 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 Loss, (iv) the Condensed Consolidated Statements of Cash Flows and (v) 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


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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 15, 2018
 
By:
 
/s/ Gary R. Weis
 
 
 
 
Gary R. Weis
 
 
 
 
Chief Executive Officer
 
 
 
 
 
May 15, 2018
 
By:
 
/s/ Kenneth A. Minor
 
 
 
 
Kenneth A. Minor
 
 
 
 
Chief Financial Officer and Secretary

33


 
 
Partners for Growth

Loan and Security Agreement

Borrower: Sonic Foundry, Inc., a Maryland corporation
Address: 222 West Washington Avenue, Madison, WI 53703
Date: May 11, 2018

THIS LOAN AND SECURITY AGREEMENT (Agreement) is entered into on the above date (the Effective Date) between PARTNERS FOR GROWTH V, L.P. (PFG), whose address is 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 and Borrower(s) named above (Borrower), whose chief executive office is located at the above address (Borrower’s Address). The Schedule to this Agreement (the Schedule) being signed by the parties concurrently with the execution and delivery of this Agreement is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 7 below.)

1. LOANS.

1.1 Loans. PFG will make loans to Borrower (the Loan or Loans) in the amount (s) shown in the Schedule subject at all times to, and notwithstanding any other provision of this Agreement, no Default or Event of Default having occurred and being continuing at any time a Loan is requested or made.

1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the rate(s) shown in the Schedule, except where otherwise expressly set forth in this Agreement. Interest shall be due and payable monthly on the first day of each calendar month for interest accrued during the prior calendar month (or such other Billing Period) and on the Maturity Date (or immediately upon acceleration of the Loan, if earlier). Interest payable from time to time on Loan principal will be determined by multiplying outstanding Loan principal by the per annum interest rate set forth in Section 2 of the Schedule and dividing such product by 360 to render a daily interest amount, which daily interest amount will be multiplied by the actual number of days elapsed in each month (or other Billing Period) to derive the amount of interest due in such month (or other Billing Period). In computing interest, (i) all payments received after 12:00 p.m. U.S. Pacific time on any day shall be deemed received at the opening of business on the next Business Day, and (ii) the date of the making of any Loan shall be included and the date of payment shall be excluded; provided, however, that if any Loan is repaid on the same day on which it is made, such day shall be included in computing interest on such Loan.

1.3 Fees. Borrower shall pay PFG the fees shown in the Schedule, which are in addition to all interest Lender Expenses and other fees and expenses payable to PFG under this Agreement and any other Loan Documents, all of which are not refundable.

1.4 Loan Requests. To obtain a Loan, Borrower shall make a Qualifying Request to PFG compliant with Section 8.5. Loan Requests are not deemed made until PFG acknowledges receipt of the same by electronic mail or otherwise in writing. Borrower appoints the Responsible Officer(s) as its authorized agent to make Loan Requests and any Loan Request made by such Responsible Officer(s) shall be binding on Borrower as if made by its own officers who are duly authorized to bind Borrower in respect of this Agreement. PFG’s obligation to fund a Loan Request shall be subject to its receipt of such reports, certificates and other information as may be set forth in the Schedule. Loan Requests received after 12:00 Noon Pacific time will not be deemed to have been received by PFG until the next Business Day. PFG may rely on any Loan Request given by a person whom PFG believes in good faith is a Responsible Officer, and Borrower will indemnify PFG for any loss PFG suffers as a result of that reliance.

1.5 Late Fee. If any payment of interest or any other monetary Obligation is not received by PFG by the end of the third Business Day after the later of (i) the date for such payment to be received by PFG as reflected in any PFG invoice that may be sent from time to time to Borrower and (ii) such Obligation’s Due Date, then upon each such failure to timely pay Borrower shall pay PFG a late payment fee equal to 5% of the amount of the payment due and not timely paid. Notwithstanding anything to the contrary set forth in this Agreement, the imposition of any late payment fee and Borrower’s payment thereof shall not be construed as PFG’s consent to Borrower’s failure to pay any amounts when due, and PFG’s acceptance of any late payment shall not restrict PFG’s exercise of any remedies arising out of any such failure, such as under Section 6 of this Agreement. Unless expressly waived in writing by PFG in its





sole discretion, interest at the Default Rate shall commence to apply to all monetary Obligations not timely paid from and including the date when Borrower’s obligation to pay the aforementioned late payment fee arises until the Business Day PFG’s receipt of payment.

1.6 Invoicing. PFG will endeavor to send invoices to Borrower (i) prior to the end of each month reflecting amounts due from time to time under or in connection with this Agreement, including for interest that will fall due through the end of each such month and (as applicable) recurring or scheduled principal payments, and (ii) from time to time not less than three Business Days before the Due Date for other non-recurring monetary Obligations and monetary Obligations not having a specified date for payment; provided, however, the failure of PFG to send or Borrower to receive an invoice for payment Obligations falling due shall in no event excuse Borrower from its obligation to timely make such payments. The responsibility to make payments so that they are received by PFG on or prior to the Due Date rests solely with Borrower.

2. SECURITY INTEREST.

2.1 Grant of Security Interest. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to PFG a continuing security interest in and Lien upon all of Borrower’s right, title and interest in and pledges to PFG all of the following assets, whether now owned or hereafter arising or acquired and wherever located (collectively, the Collateral): all Accounts; all Inventory; all Equipment; all Collateral Accounts (including Deposit Accounts); all General Intangibles (including all Intellectual Property); all Investment Property; all Other Property (including all equity interests owned in US domestic Subsidiaries and 65% of all equity interests in all non-U.S. domiciled Subsidiaries); and together with any and all claims, rights and interests in any of the above, together with all guaranties and security for any of the above, together with all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, together with all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of any and all of the above and all Borrower’s books relating to any and all of the above.

3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

In order to induce PFG to enter into this Agreement and to make Loans, Borrower represents and warrants to PFG as follows, and Borrower covenants that the following representations will continue to be true (except for representations expressly specified to be made as of a particular date, in which case such representations will continue to be true as of said date), and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement and thereafter until all Obligations (other than inchoate indemnity obligations) have been paid and performed in full:

3.1 Corporate Existence, Authority and Consents. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and has in full force and effect all Governmental Authorizations required for Borrower to lawfully conduct its business as conducted on the Effective Date. Borrower shall give PFG 30 days’ prior written notice before changing its jurisdiction or form of organization. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so could result in an adverse effect on Borrower or its business or result in a monetary or non-monetary obligation with a value in excess of $100,000. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar Legal Requirements relating to creditors' rights generally), and (iii) do not violate Borrower’s Constitutional Documents, or any Legal Requirement or any material agreement or instrument of Borrower or relating to its property, (iv) does not require any action by, filing, registration or qualification with, or Governmental Authorization from, any Governmental Body (except such Governmental Authorizations which have already been obtained and are in full force and effect), and (v) do not constitute grounds for acceleration of any material Indebtedness or obligation under any agreement or instrument of Borrower or relating to its property. Without limiting the foregoing: (A) the Board has the authority under Borrower’s Constitutional Documents to enter into and cause Borrower to perform, or to delegate such authority to a Responsible Officer to enter into and cause Borrower to perform, its Obligations, and (B) other than the approval of the requisite members of the Board, no consent is required of any Person to make the representation set forth in clause (A) absolutely true in all respects.

3.2 Name; Trade Names and Styles. As of the Effective Date, the name of Borrower set forth in the heading to this Agreement is its correct name, as set forth in its Constitutional Documents. Listed in the Representations are all prior names of Borrower and all of Borrower’s present and prior trade names as of the Effective Date. Borrower shall give





PFG 30 days’ prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, in all material respects, with all laws relating to the conduct of business under a fictitious business name, if applicable to Borrower.

3.3 Place of Business; Location of Collateral. As of the Effective Date, the address set forth in the heading to this Agreement is Borrower’s chief executive office. In addition, as of the Effective Date, Borrower has places of business and Collateral is located only at the locations set forth in the Representations. Borrower will give PFG at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral valued at greater than $100,000 to a location other than Borrower’s Address or one of the locations set forth in the Representations, except that Borrower may maintain sales offices in the ordinary course of business at which not more than a total of $10,000 fair market value of Equipment is located.

3.4 Title to Collateral; Perfection; Permitted Liens.

(a) Borrower is as of the Effective Date, and will at all times in the future be, the sole owner of all the Collateral, except for Collateral which is leased or licensed to Borrower. The Collateral is as of the Effective Date and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. As of the Effective Date, PFG will have, and will continue to have, a First-Priority perfected and enforceable security interest in all of the Collateral, subject only to Permitted Liens, and Borrower will at all times defend PFG and the Collateral against all claims of others.

(b) Borrower has set forth in the Representations all of Borrower’s Collateral Accounts as of the Effective Date, and Borrower shall (i) give PFG five Business Days advance written notice before establishing any new Collateral Accounts or (ii) depositing any Cash or Cash Equivalents or Investment Property into any new Collateral Account and (iii) shall cause the institution where any such new Collateral Account is maintained to execute and deliver to PFG a Control Agreement in form sufficient to perfect PFG’s security interest in the Collateral Account and otherwise satisfactory to PFG in its good faith business judgment.

(c) In the event that Borrower shall at any time after the Effective Date have any commercial tort claims against others, which it is asserting, and in which the potential recovery exceeds $100,000, Borrower shall promptly notify PFG thereof in writing and provide PFG with such information regarding the same as PFG shall request (unless providing such information would waive Borrower’s attorney-client privilege). Such notification to PFG shall constitute a grant of a security interest in the commercial tort claim and all proceeds thereof to PFG, and Borrower shall execute and deliver all such documents and take all such actions as PFG shall request in connection therewith.

(d) No Collateral with a value in excess of $100,000 is affixed to any real property in such a manner or with such intent as to become a fixture, except as disclosed in detail in Exhibit A. From and after the Effective Date, without PFG’s consent in each instance, no material part of the Collateral will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not, except as set forth in Exhibit A, and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower’s right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest, Borrower shall, whenever requested by PFG, use commercially reasonable efforts to cause such third party to execute and deliver to PFG, in form acceptable to PFG, such waivers and subordinations as PFG shall specify in its good faith business judgment. Borrower will keep in full force and effect, and will comply with all material terms of, any lease of real property where any of the Collateral now or in the future may be located.

(e) Except as specified in the Representations, Borrower is not party to, nor is it bound by, any Restricted License.
    
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise PFG in writing of any material loss or damage to the Collateral.

3.6 Books and Records. Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records, comprising an accounting system in accordance with GAAP.

3.7 Financial Condition, Statements and Reports. All Financial Statements now or in the future delivered to PFG have been, and will be, prepared in conformity with GAAP and now and in the future will fairly present the results of operations and financial condition of Borrower in all material respects, in accordance with GAAP, at the times and for





the periods therein stated. Between the last date covered by any such statement provided to PFG and the Effective Date, there has been no Material Adverse Change.

3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all required Tax Returns, and Borrower has timely paid, and will timely pay, all Taxes now or in the future owed by Borrower. Borrower may, however, defer payment of any of the foregoing which are contested by Borrower in good faith, provided that Borrower (i) contests the same by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies PFG in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the same from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional Taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other Governmental Body.

3.9 Compliance with Law. Borrower has, to the best of its knowledge, complied, and will comply, in all material respects, with all provisions of all Legal Requirements applicable to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower’s business, and all environmental matters.

3.10 Litigation. There is no claim, suit, litigation, proceeding or investigation pending or (to the best of Borrower’s Knowledge) threatened against or affecting Borrower in any court or before any Governmental Body (or any basis therefor known to Borrower) (i) involving individually or in the aggregate more than $50,000, or (ii) which could reasonably be expected to result, either separately or in the aggregate, in any Material Adverse Change. Borrower will promptly inform PFG in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted against Borrower involving any single claim of $50,000 or more, or involving $100,000 or more in the aggregate.

3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes, including any purposes detailed in the Schedule. Borrower is not purchasing or carrying any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock.

3.12 No Default. At the Effective Date, no Default or Event of Default has occurred, and no Default or Event of Default will have occurred after giving effect to any Loans being made concurrently herewith.

3.13 Protection and Registration of Intellectual Property Rights. Borrower owns or otherwise holds the right to use all Intellectual Property rights material to Borrower’s business or necessary for the conduct of its business as currently conducted and reflected in any Borrower’s financial plans covering future periods. Borrower shall: (a) protect, defend and maintain the validity and enforceability of its Intellectual Property, other than Intellectual Property that is not material to Borrower’s business, has a fair value of less than $25,000 and that Borrower has affirmatively determined not to maintain or to abandon; (b) promptly advise PFG in writing of infringements of its Intellectual Property material to its business; (c) not allow any Intellectual Property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without PFG’s written consent, (d) provide (i) written notice to PFG at least ten (10) days prior to entering into or becoming bound by any Restricted License (other than over-the-counter software that is commercially available to the public and licenses or agreements of Borrower with customers in which Borrower is an original equipment manufacturer), and (ii) the consent or waiver of any Person whose consent or waiver is necessary for (A) any Restricted License to be deemed Collateral and for PFG to have a Lien in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (B) PFG to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with PFG’s rights and remedies under this Agreement and the other Loan Documents, and (e) while any Obligations are Outstanding, shall not Transfer any Intellectual Property without PFG’s consent, which consent shall not be unreasonably withheld if no Default or Event of Default has occurred and is then continuing, the Transfer of such Intellectual Property would not give rise to such a Default or Event of Default, and if such Intellectual Property meets the three criteria set forth as the exceptions to Borrower’s duties to protect, defend and maintain under clause (a), above. If, before the Obligations have been paid and/or performed in full, Borrower shall (i) adopt, use,





acquire or apply for registration of any trademark, service mark or trade name, (ii) apply for registration of any patent or obtain any patent or patent application; (iii) create or acquire any published or material unpublished works of authorship material to the business that is or is to be registered with the U.S. Copyright Office or any non-U.S. equivalent; or (iv) register or acquire any domain name or domain name rights, then the provisions of Section 2.1 shall automatically apply thereto, and Borrower shall use all commercially reasonable efforts to give PFG advance written notice thereof and in any event shall thereafter give PFG prompt written notice thereof (which for purposes hereof shall be deemed to be not more than five (5) Business Days from the occurrence of each and any of the foregoing). Borrower shall further provide PFG with all information and details relating to the foregoing and take such further actions as PFG may reasonably request from time to time to enable PFG to perfect or continue the perfection of PFG’s interest in such Collateral.

3.14 Domain Rights and Related Matters. Borrower (a) is the sole record, legal and beneficial owner of all domain names and domain name rights used in connection with its business and that of its Subsidiaries, free and clear of any rights or claims of any third party; (b) has set forth in the Representations with respect to domain names and ownership thereof, domain registry, domain servers, location and administrative contact information, web hosting and related services and facilities (collectively, Domain Rights) is true, accurate and complete and Borrower shall promptly notify PFG of any material changes to such information; (c) shall maintain all Domain Rights that Borrower has not affirmatively determined to abandon in full force and effect so long as any Obligations remain outstanding; (d) shall, upon request of PFG, notify such third parties (including domain registrars, hosting companies and internet service providers) of PFG’s security interest in Borrower’s Domain Rights; and (e) shall promptly advise PFG in writing of any material disputes or infringements of its Domain Rights. The obligations of Borrower under this Section shall not be limited by any Borrower obligations under the IP Security Agreement and related Collateral Agreements and Notices executed in connection with this Agreement.

3.15 Dormant Subsidiary. The Dormant Subsidiary (a) does not own assets or property of any kind (including any assets or property that would constitute Collateral if the Dormant Subsidiary were a Borrower) with an aggregate value among all such assets and property greater than $10,000; (b) does not actively conduct any business; (c) has no Collateral Accounts in its name; and (d) has no outstanding business obligations to any Person (including any Indebtedness).

4. ADDITIONAL DUTIES OF BORROWER.
Borrower will at all times comply with all of the following covenants throughout the term of this Agreement:

4.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

4.2. Remittance of Proceeds. Subject to the rights of the Senior Lender, all proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to PFG in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as PFG shall determine; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to PFG (i) the proceeds of Accounts arising in the ordinary course of business, or (ii) the proceeds of the sale of surplus, worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $25,000 or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral (other than those described in subclauses (i) and (ii) above) with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for PFG, except as set forth above, and subject to the rights of the Senior Lender. PFG may, in its good faith business judgment, require that all proceeds of Collateral be deposited by Borrower into a Lock-Box account, or such other blocked account as PFG may specify, pursuant to a blocked account agreement in such form as PFG may specify in its good faith business judgment. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

4.3 Insurance. Borrower shall at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to PFG, in such form and amounts as PFG may reasonably require and as are customary and in accordance with standard practices for Borrower’s industry and locations, and Borrower shall provide evidence of such insurance to PFG. All such insurance policies shall have a lender’s loss payable endorsement showing PFG as the lender loss payee, and all liability policies shall show, or have endorsements showing, PFG as an additional insured. PFG shall be named as lender loss payee and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral, in each case in form and substance reasonably acceptable to PFG. Upon receipt of the proceeds of any such insurance, subject to the rights of the Senior





Lender, PFG shall apply such proceeds in reduction of the Obligations as PFG shall determine in its good faith business judgment, except that, provided no Default or Event of Default has occurred and is continuing, PFG shall release to Borrower insurance proceeds with respect to Collateral totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Collateral with respect to which the insurance proceeds were paid. PFG may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, PFG may, but is not obligated to, obtain the same at Borrower’s expense. Borrower shall promptly deliver to PFG copies of all material reports made to insurance companies.

4.4 Reports. Borrower, at its expense, shall provide PFG with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, projections, operating plans and other financial documentation), as PFG shall from time to time specify in its good faith business judgment.

4.5 Access to Collateral, Books and Records; Additional Reporting and Notices. At reasonable times, and on three (3) Business Days’ notice, PFG, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $850 per person per day (or such higher amount as shall represent PFG’s then current standard charge for the same), plus Lender Expenses, provided that so long as no Default or Event of Default has occurred and is then continuing and no prior inspection or audit has revealed material deficiencies or inaccuracies in Borrower’s books and records, only one such inspection and audit shall be at Borrower’s expense during any calendar year. Notwithstanding the foregoing, Borrower shall not be required to disclose to PFG any document or information (i) where disclosure is prohibited by applicable law, or (ii) is subject to attorney-client or similar privilege or constitutes attorney work product. If Borrower is withholding any information under the preceding sentence, it shall so advise PFG in writing, giving PFG a general description of the nature of the information withheld. Without limiting the scope of reporting under Section 6 of the Schedule, Borrower shall promptly disclose to PFG any efforts to sell Borrower, its business or assets or any material part thereof or to refinance the Loan and shall disclose the salient details of any offers received from time to time in respect of the foregoing. At any time when a Default or Event of Default has occurred and is continuing (whether or not PFG has agreed to forbear), PFG shall be entitled (i) to be briefed as to such matters as PFG may require in its business discretion, (ii) to receive advance notice of any and all Board meetings or written consents, together with the agendas for the foregoing, and (iii) to observe any such Board meetings, other than any executive session thereof, whether or not formally constituted as such.

4.6 Negative Covenants. Except as may be permitted in the Schedule, Borrower shall not, without PFG's prior written consent (which shall be a matter of its good faith business judgment and shall be conditioned on Borrower then being in compliance with the terms of this Agreement), do any of the following:

(i) permit or suffer any Change in Control;

(ii) acquire any assets, except in the ordinary course of business, or make any Investments other than Permitted Investments;

(iii) enter into any transaction outside the ordinary course of business with a value in excess of $50,000 (which non-ordinary course transactions shall include mergers, amalgamations, consolidations in respect of any Borrower or other Group Member), provided that with not less than thirty (30) days’ notice to PFG, one Borrower may merge with another Borrower and a Non-Borrower Subsidiary may merge with a Borrower or another Non-Borrower Subsidiary;

(iii) Transfer any part of its business or property, except for (A) the sale of finished Inventory in the ordinary course of Borrower’s business, (B) the sale of obsolete or unneeded Equipment in the ordinary course of business and otherwise in compliance with the terms of this Agreement, (C) the making of Permitted Investments, and (D) the granting of Permitted Liens; and, for the avoidance of any doubt, a Transfer of business or property, as contemplated above, would include (1) Borrower or any Subsidiary making or causing any payment to be made on Subordinated Debt unless expressly permitted under the terms of the subordination, intercreditor or other agreement to which the Subordinated Debt is subject (and, if permitted in this Agreement, only to the extent permitted), and (2) other than with the express consent of PFG in its sole business discretion, the amendment or modification of any such subordination, intercreditor or other agreement to provide for earlier or greater principal, interest or other payments thereon or adversely affect the subordination thereof to Obligations owed to PFG;






(iv) store any Inventory or other Collateral with any warehouseman or other third party with an aggregate value (per location) of $100,000 or greater, unless there is in place a bailee agreement in such form as PFG shall specify in its good faith business judgment between PFG and such warehouseman or other third party;

(v) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis;

(vi) make any loans of any money or other assets, other than Permitted Investments (which, for the avoidance of doubt, excludes any Investment in the Dormant Subsidiary);

(vi) incur or permit to exist any Indebtedness, other than Permitted Indebtedness;

(viii) guarantee or otherwise become liable with respect to the obligations of another party or entity;

(ix) pay or declare any Dividends (except for dividends payable solely in stock of Borrower);

(x) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's equity, except (A) as required in the ordinary course of business and consistent with past practice in connection with redeeming or purchasing equity of departing employees, up to a maximum aggregate of $100,000 in any fiscal year, and (B) cashless acquisitions of stock in connection with exercise of employee stock options in the ordinary course of Borrower’s business consistent with past practice;

(xi) engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related thereto;

(xii) after the date hereof cause or permit any Non-Borrower Subsidiary to hold an average monthly balance of Cash and Cash Equivalents with institutions or otherwise of more than 125% of the amounts held, respectively, on the Effective Date, without providing prompt notice to PFG;

(xiii) make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof, provide for earlier or greater principal, interest, or other payments thereon, or adversely affect the subordination thereof to Obligations owed to PFG;

(xiv) (A) without at least thirty (30) days prior written notice to PFG: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than $10,000 in Borrower’s assets or property), (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, (5) change any organizational number (if any) assigned by its jurisdiction of organization; or (6) form any new Subsidiaries, and in each case, subject to (x) Borrower’s and such Subsidiary(ies) compliance with Section 4.9 hereof, (y) such Subsidiary(ies) compliance with Section 3.4(b), and (z) such Subsidiary(ies) compliance with Section 8(b) of the Schedule; or (B) fail to provide notice to PFG of any Key Person departing from or ceasing to be actively in the employ of Borrower within the earlier to occur of Knowledge thereof and five (5) days after such Key Person’s departure from Borrower;

(xv) cause or permit aggregate Subsidiary Indebtedness (which for the avoidance of doubt is inclusive of the Subsidiary Indebtedness incurred by the Japanese Subsidiary) to exceed $1,200,000 at any time;

(xvi) liquidate or dissolve, or elect or resolve to liquidate or dissolve;

(xvii) cause or permit any of the actions or events described in clauses (i), (ii), (iii), (iv), (vi), (viii) (xi) or (xvi) in respect of its Subsidiaries (on an as if applied to Subsidiary basis); or

(xviii) the Board shall permit or shall resolve to or approve, or Borrower shall otherwise take any steps to effect, any of the foregoing actions in clauses (i) through (xvii), inclusive, which are not otherwise expressly permitted herein.
Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction.







4.7 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or instituted or threatened in writing against PFG with respect to any Collateral or relating to Borrower, Borrower shall, without expense to PFG, make available Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that PFG may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding.

4.8 Changes. Borrower agrees to promptly notify PFG in writing of any changes in the information set forth in the Representations.

4.9 Further Assurances. Borrower agrees, at its expense, on reasonable request by PFG, to execute all documents and take all actions, as PFG, may, in its good faith business judgment, deem necessary or useful in order to perfect and maintain PFG’s perfected First-Priority security interest in the Collateral (subject to Permitted Liens), and in order to fully consummate the transactions contemplated by this Agreement, including the joinder of any New Subsidiaries to this Agreement and execution of such other agreements and instruments as PFG reasonably request, including execution of a cross-corporate continuing guaranty among Borrowers and Non-Borrower Subsidiaries. In addition, Borrower shall Deliver to PFG, within five (5) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Body regarding compliance with or maintenance of Governmental Authorizations or Legal Requirements or that could reasonably be expected to have a material effect on any of the Governmental Authorizations or otherwise on the operations of Borrower or any of its Subsidiaries.

4.10 Collateral Accounts. Subject to Section 8(b) of the Schedule: (a) At all times thereafter, maintain all of its Collateral Accounts depositary institutions in respect of which a Control Agreement in favor of PFG is at all times in effect; and (b) provide PFG five (5) days prior written notice before establishing any new Collateral Accounts (whether with a bank or financial at which such Collateral Accounts are maintained on the Effective Date or otherwise).

4.11 Authorization to File Security Instruments. By executing and delivering a term sheet in respect of the Loans, Borrower shall be deemed to have authorized PFG to file Security Instruments on or prior to the Effective Date, without notice to Borrower, with all appropriate jurisdictions to perfect or protect PFG’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of PFG under the Code. Such Security Instruments may indicate the Collateral as all assets of the Debtor or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in PFG’s discretion.

4.12 Burdensome Agreements. Directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any of its Subsidiaries to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by Borrower or any of its other Subsidiaries, or pay any Indebtedness owed to Borrower or any of its Subsidiaries, (b) make loans or advances to Borrower or any of its Subsidiaries or (c) transfer any of its properties to Borrower or any of its Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (i) applicable Legal Requirements; (ii) this Agreement and the other Loan Documents; (iii) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of any of its Subsidiaries; (iv) customary provisions restricting assignment of any agreement entered into by a Subsidiary in the ordinary course of business; or (v) any holder of a Permitted Lien restricting the transfer of the property subject thereto.

4.13 Full Disclosure. No written representation, warranty or other statement of Borrower in any certificate or written statement given to PFG, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to PFG, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by PFG that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

5. TERM.

5.1 Maturity Date. This Agreement shall continue in effect until the Maturity Date, subject to Sections 5.2, 5.3 and 5.4, below.

5.2 Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (i) if expressly permitted in the Schedule, by Borrower, effective three Business Days after written notice of termination is given to PFG and payment in full in cash of all Obligations (other than inchoate indemnity obligations); or (ii) by PFG at any





time after the occurrence and during the continuance of an Event of Default, without notice, effective immediately. If a Borrower right to prepay Obligations is provided in the Schedule and the exercise of such right is subject to payment of any consideration to PFG as a condition to such exercise, a Borrower Default or Event of Default that results in an acceleration of Obligations and/or termination of this Agreement shall not relieve Borrower of the obligation to pay such consideration, which shall be included in the Obligations required to be paid or performed by Borrower.

5.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, (i) all of PFG’s security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full, and (ii) no further Loans will be made to Borrower unless PFG otherwise agrees in its sole and absolute discretion. No termination shall in any way affect or impair any right or remedy of PFG, nor shall any such termination relieve Borrower of any Obligation to PFG, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, PFG shall, at its option, promptly terminate its financing statements with respect to Borrower or deliver to Borrower such other documents as may be required to fully terminate PFG’s Liens.

5.4 Survival of Certain Obligations. Without limiting the survival of obligations addressed otherwise in this Agreement and notwithstanding any other provision of this Agreement, all covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been paid in full and satisfied. The obligation of Borrower in Section 8.9 to indemnify PFG shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

6. EVENTS OF DEFAULT AND REMEDIES.

6.1 Events of Default. The occurrence of any of the following events shall constitute an Event of Default under this Agreement regardless of whether notice thereof is given by PFG, and Borrower shall give PFG immediate written notice thereof:

(a) Any warranty, representation, covenant, statement, report or certificate made or delivered to PFG by Borrower or any of Borrower’s officers, employees or agents, now or in the future shall be untrue or misleading in any material respect when made or deemed to be made; or

(b) Borrower shall fail to pay any Loan or any interest thereon or any other monetary Obligation within three Business Days after the date due, provided that in the case of charges other than principal and interest on Obligations and fees and costs due on the date hereof, at least five Business Days prior notice has been given to Borrower; or

(c) Borrower (i) shall fail to comply with any of the financial covenants set forth in the Schedule, or (ii) shall breach any of the provisions of Section 4.6 hereof that by its nature is not reasonably capable of cure or which is not cured within five Business Days, or (iii) shall fail to perform any other non-monetary Obligation which by its nature cannot be cured, or (iv) shall fail to permit PFG to conduct an inspection or audit as provided in Section 4.5 hereof or shall fail to provide the notices, information, briefing and other rights set forth in Section 4.5, or (v) shall fail to provide PFG with a Report under Section 6 of the Schedule within three (3) Business Days after the date due; or

(d) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within ten (10) Business Days after the date due; provided, however, if such failure results from a Default or an Event of Default for which there is a shorter cure period set forth in this Section 6.1, then the applicable cure period shall be such shorter period; or

(e) any levy, assessment, attachment or seizure is made on all or any part of the Collateral which is not cured within five (5) Business Days after the occurrence of the same, or any Lien (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) Business Days after the occurrence of the same; or






(f) any default or event of default occurs under any obligation secured by a Permitted Lien (which for the avoidance of doubt would include the Liens of the Senior Lender), which is not cured within any applicable cure period or unconditionally waived in writing by the holder of the Permitted Lien (and for purposes of the foregoing, a waiver does not include a forbearance); or

(g) there is, under any agreement to which Borrower or any Guarantor is a party with a third party or parties, (i) any default resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount individually or in the aggregate in excess of $100,000; or (ii) any breach or default by Borrower or any Guarantor, the result of which could result in a Material Adverse Change or have a material adverse effect on Borrower, any Guarantor or its business or prospects; or

(h) (i) Dissolution, termination of existence, insolvency or business failure of Borrower or any Guarantor; or (ii) appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any Insolvency Proceeding by, against or in respect of Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, in each above case that is not dismissed or stayed within 45 days (and for the avoidance of doubt, PFG shall have no obligation to advance any Loan while any of the foregoing conditions or those set forth in clauses (iii) and (iv), below, exist); or (iii) Borrower or any Guarantor shall generally not pay its debts as they become due; or (iv) Borrower or any Guarantor shall conceal, remove or Transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any Transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or

(i) Borrower, any Guarantor or any Person acting for Borrower makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to PFG or to induce PFG to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made; or

(j) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or

(k) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or

(l) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations (other than as permitted in the applicable subordination agreement), or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or); or

(l) one or more final judgments, orders, or decrees for the payment of money in an amount, individually or in the aggregate, of at least $100,000 (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower and the same are not, within ten (10) days after the entry thereof, discharged or execution thereof stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay (provided that no Loans will be made prior to the discharge, stay, or bonding of such judgment, order, or decree);

(m) Borrower shall (i) enter into any agreement, binding or non-binding, that would result in a Change in Control, or (ii) effect or suffer a Change in Control; or

(n) a default or breach shall occur under any other Loan Document, which default or breach shall be continuing after the later of cure period expressly specified in such Loan Document or five (5) Business Days; or

(o) a Material Adverse Change shall occur.
PFG may cease making any Loans hereunder during any of the cure periods provided above, and thereafter if an Event of Default has occurred and is continuing.






6.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, PFG, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may, subject to the rights of the Senior Lender, do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other Loan Document; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes PFG without judicial process to enter onto any of Borrower’s premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as PFG deems it necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should PFG seek to take possession of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that PFG retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to PFG at places designated by PFG which are reasonably convenient to PFG and Borrower, and to remove the Collateral to such locations as PFG may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, PFG shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, and other Equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time PFG obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. PFG shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as PFG deems reasonable, or on PFG's premises, or elsewhere and the Collateral need not be located at the place of disposition. PFG may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes PFG to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in PFG's good faith business judgment, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Exercise any and all rights under any present or future Control Agreements relating to Deposit Accounts or Investment Property; and (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All Lender Expenses, liabilities and obligations incurred by PFG with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of PFG's rights and remedies, from and after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be the Default Rate.

6.3 Standards for Determining Commercial Reasonableness. Borrower and PFG agree that a sale or other disposition (collectively, sale) of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least ten days prior to the sale, and, in the case of a
public sale, notice of the sale is published at least five days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by PFG, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash or by cashier’s check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, PFG may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. PFG shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. Without limiting the foregoing, if Exigent Circumstances exist, Borrower and PFG agree that notice periods may be shorter than as set forth above and such shorter notice periods are commercially reasonable in Exigent Circumstances. Borrower further acknowledges and agrees that if PFG’s or third parties’ access to Collateral is inhibited, restricted or denied, it shall be commercially reasonable for PFG to conduct a sale of Collateral





under such circumstances even though the lack of access to Collateral would likely give rise to a sale price less than if parties had unfettered access to Collateral for purposes of conducting a sale.

6.4 Power of Attorney. Upon the occurrence and during the continuance of any Event of Default, without limiting PFG’s other rights and remedies, Borrower grants to PFG an irrevocable power of attorney coupled with an interest, authorizing and permitting PFG (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower’s expense, to do any or all of the following, in Borrower’s name or otherwise, but PFG agrees that if it exercises any right hereunder, it will do so in good faith and in a commercially reasonable manner and the exercise of any rights will be subject to the rights of the Senior Lender: (a) Execute on behalf of Borrower any documents that PFG may, in its good faith business judgment, deem advisable in order to perfect and maintain PFG’s security interest in the Collateral, or in order to exercise a right of Borrower or PFG, or in order to fully consummate all the transactions contemplated under this Agreement, and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or assignment or satisfaction of mechanic’s, materialman’s or other lien; (c) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into PFG’s possession; (d) Endorse all checks and other forms of remittances received by PFG; (e) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums required on account of Borrower’s taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give PFG the same rights of access and other rights with respect thereto as PFG has under this Agreement; (j) Execute on behalf of Borrower and file in Borrower’s name such documents and instruments as may be necessary or appropriate to effect the Transfer of Domain Rights, domain names, domain registry administrative contacts and domain and website hosting services into the name of PFG or its designees, and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other Loan Documents. Any and all Lender Expenses incurred by PFG with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall PFG’s rights under the foregoing power of attorney or any of PFG’s other rights under this Agreement be deemed to indicate that PFG is in control of the business, management or properties of Borrower.

6.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by PFG first to Lender Expenses incurred in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as PFG shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to PFG for any deficiency. If, PFG, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, PFG shall have the option, exercisable at any time, in its good faith business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by PFG of the cash therefor.

6.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, PFG shall have all the other rights and remedies accorded a secured party under the Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between PFG and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by PFG of one or more of its rights or remedies shall not be deemed an election, nor bar PFG from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of PFG to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed.

7. DEFINITIONS. As used in this Agreement, the following terms have the following meanings:

“Account Debtor” means the obligor on an Account.





“Accounts” means all present and future “accounts” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable, healthcare receivables and other sums owing to Borrower.

“Affiliate” means, with respect to any Person, a relative, partner, shareholder or other equityholder, director, officer, or employee of such Person, or any parent or Subsidiary of such Person, or any Person directly or indirectly through any other Person controlling, controlled by or under common control with such Person.

“Billing Period” means monthly, unless another period or date for payment is specified under this Agreement (such as the Maturity Date), or (ii) such other period as PFG as may result from monetary Obligations not being outstanding during the entire period for which interest is being calculated (such as partial months if the Effective Date is not the first day of a calendar month), or (iii) such other period as PFG may notify in writing to Borrower. For the avoidance of doubt, under this Agreement, a “month” consists of 31 days in each January, March, May, July, August, October and December, 30 days in each other month except February, which consists of 28 days or, in a leap year, 29 days.

“Board” means the Board of Directors or other governing authority of Borrower as authorized in its Constitutional Documents (which for the avoidance of doubt, includes a member or manager of a limited liability company). “Business Day” or “business day” means a day on which PFG is open for business.

“Cash” means unrestricted and unencumbered (except for the Liens of PFG and the Senior Lender) cash or cash equivalents in Deposit Accounts or other Collateral Accounts for which there is in effect a Control Agreement among Borrower, PFG and the depositary institution in respect of such accounts, unless the requirement for a Control Agreement has been waived by PFG.

“Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having a rating of at least A-1 or the equivalent thereof by Standard & Poor’s Ratings Group or a rating of P-1 or the equivalent thereof by Moody’s Investors Service, Inc.; (c) certificates of deposit held with the Senior Lender, time deposits and bankers’ acceptances maturing no more than one (1) year after the date of acquisition, and overnight bank deposits, in each case which are issued by a commercial bank organized under the laws of the United States or any state thereof, having capital and surplus in excess of $500,000,000; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition and (e) Investments pursuant to Borrower’s Investment Policy, provided that such investment policy (and any such amendment thereto) has been provided by Borrower to PFG and approved in writing by
PFG.

“Change in Control” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is
defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing thirty-five percent (35%) or more of the combined voting power of Borrower’s then outstanding securities in a single transaction or a series of related transactions (other than by the sale of Borrower’s equity securities in a public offering or to venture capital or private equity investors so long as Borrower identifies to PFG the venture capital or private equity investors at least seven (7) Business Days prior to the initial closing of the transaction and provides to PFG a description of the material terms of the transaction and such other information as PFG may reasonably request); or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Borrower (together with any new directors whose election by the Board of Borrower was approved by a vote of at least two- thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office (other than as a result of the above-referenced venture capital / private equity
exception, subject to the same notice and information requirements as specified above).

“Code” means the Uniform Commercial Code as adopted and in effect in the State of California from time to time.

“Collateral” has the meaning set forth in Section 2 above.

“Collateral Account” is any Deposit Account, Securities Account or Commodity Account.






“Commodity Account” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

“Compliance Certificate” means Borrower’s certification of its compliance with the terms and conditions of this Agreement and such other matters as PFG may require to be addressed in such certificate, in the form as initially set forth as Exhibit B hereto, as such form may be amended from time to time upon advance notice from PFG.

“Constitutional Document” means for any Person, such Person’s formation documents, as last certified by the Secretary of State (or equivalent Governmental Body) of such Person’s jurisdiction of organization, together with, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or operating or similar agreement), (c) if such Person is a partnership, its partnership agreement (or similar agreement), and (d) if such Person is a statutory joint venture company or similar entity, its joint venture (or similar) agreement, each of the foregoing with all current amendments or modifications thereto.

“Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, Dividend, letter of credit or other obligation of another such as an obligation, in each case directly or indirectly guaranteed, endorsed, co made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

“continuing” and “during the continuance of” when used with reference to a Default or Event of Default means that the Default or Event of Default has occurred and has not been either waived in writing by PFG or cured within any applicable cure period.

“Control Agreement” means a written agreement among PFG, Borrower and a depositary bank or other custodian in respect of Borrower’s Collateral Accounts by which the depositary bank or other custodian, as appropriate, agrees to comply with instructions given from time to time by PFG directing the disposition of the funds, investments and securities in Borrower’s Collateral Accounts without further consent of Borrower, which instructions may include not complying with instructions (which term may include the honoring of checks written by Borrower against funds in said accounts) given by Borrower, and containing other terms acceptable to PFG.

“Current Depositary(ies)” means the banking and / or other financial institutions at which Borrower maintains Collateral Accounts on the Effective Date.

“Default” means any event which with notice or passage of time or both, would constitute an Event of Default.

“Default Rate” means the lesser of (i) the applicable rate(s) set forth in the Schedule, plus six percent (6%) per annum, and (ii) the maximum rate of interest that may lawfully be charged to a commercial borrower under applicable usury laws.

“Deferred Revenue” means all amounts received or invoiced in advance of performance under contracts and not yet recognized as revenue.

“Deposit Accounts” means all present and future “deposit accounts” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit, and as used in this Agreement, the term “Deposit Accounts” shall be construed to also include securities, commodities and other Investment Property accounts.

“EBITDA” shall mean (a) Net Income, plus (b) Interest Expense, plus (c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) non-cash stock compensation expense, plus (f) other non-cash and non-recurring expenses acceptable to PFG, in its reasonable discretion, and “Adjusted EBITDA” means EBITDA (negative EBITDA) plus the net change in Deferred Revenue during each corresponding
measurement period.






“Dividend” means a payment or other distribution in respect to equity to an owner thereof, (A) whether or not (i) in respect of net profits or otherwise, (ii) declared by Borrower’s (or other relevant party’s) (iii) Board, previously paid, or (iv) authorized in its Constitutional Documents or otherwise, and (B) for the avoidance of doubt, includes distributions to members of a limited liability company.

“Dormant Subsidiary” means Sonic Foundry Media Systems, Inc., a Maryland corporation.

“Dutch Subsidiary” means Borrower’s Netherlands Subsidiary, Sonic Foundry International BV, a Dutch B.V. (formerly
“Media Mission B.V.”).

“Due Date” in relation to monetary Obligations payable from time to time by Borrower means (i) the date for payment specified in this Agreement (such as, on the first day of each calendar month for interest accrued during the prior month, as contemplated in Section 1.2) or in any other writing executed and delivered by PFG and Borrower from time to time, whether such payment is recurring, one-time or otherwise, or (ii) in the case of Obligations for which no date for payment is specified in this Agreement and which cannot be reasonably ascertained without an invoice from PFG, such as reimbursement of Lender Expenses, the date for payment specified in an invoice sent by or on behalf of PFG to Borrower.

“Equipment” means all present and future “equipment” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

“Event of Default” means any of the events set forth in Section 6.1 of this Agreement.

“Exigent Circumstances” means circumstances that substantially inhibit an orderly sale process or that imply urgency due to rapid erosion of value or opportunity, including Borrower closing its business or “going dark”, inability or refusal (express or implied by non-response) to provide for the security of Collateral.

“Financial Statements” means consolidated financial statements of Borrower, including a balance sheet, income statement and cash flow and, in the case of monthly-required financial statements, showing data for the month being reported and a history showing each month from the beginning of the relevant fiscal year.

“First-Priority” means, in relation to PFG’s Lien in Collateral, a security interest that is prior to any other security interest, with the exception of the Liens of the Senior Lender and other Permitted Liens, which other Permitted Liens may only have superior priority to PFG’s Lien as expressly specified herein or pursuant to the terms of a subordination agreement between PFG and the holder of such other Permitted Lien.

“Foreign Subsidiaries” means, as of the Effective Date, the Dutch Subsidiary and the Japanese Subsidiary, and shall include any non-U.S. persons becoming a Subsidiary of Borrower after the Effective Date.

“GAAP” means generally accepted accounting principles consistently applied.

“General Intangibles” means all present and future “general intangibles” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all Intellectual Property, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

“good faith business judgment” means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of PFG’s business judgment.

“Governmental Authorization” means any: (a) permit, license, certificate, franchise, concession, approval, consent, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization that is, has been issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body.

“Governmental Body” means any: (a) nation, principality, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) local, municipal, foreign or other government; (c) governmental or quasi-





governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or entity and any court or other tribunal); (d) multi-national organization or body; or (e) individual, entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any
nature.

“Group” means Borrower and all direct and indirect Subsidiaries and affiliated Persons under the direct or indirect control of Borrower, and “Group Member” means any of such foregoing Persons.
“Guarantor” means any Person guaranteeing the Obligations. “including” means including (but not limited to).
“Indebtedness” means (a) indebtedness for borrowed money or the deferred purchase price of property or services (other than trade payables arising in the ordinary course of business), (b) obligations evidenced by bonds, notes, debentures or other similar instruments, (c) reimbursement obligations in connection with letters of credit, (d) capital lease obligations and (e) Contingent Obligations.

“Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law in any jurisdiction, including assignments for the benefit of creditors, compositions, receiverships, administrations, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

“Intellectual Property” means all present and future: (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) Domain Rights as described in Section 3.14 hereof, (g) computer software and computer software products; (h) designs and design rights; (i) technology; (j) all claims for damages by way of past, present and future infringement of any of the rights included above; and (k) all licenses or other rights to use any property or rights of a type described above.

“Interest Expense” means for any fiscal period, interest expense (whether cash or non-cash) determined in accordance with GAAP for the relevant period ending on such date, including, in any event, interest expense with respect to any Indebtedness of Borrower and its Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related amortization and other fees and charges with respect to letters of credit and bankers' acceptance financing and the net costs associated with interest rate swap, cap, and similar arrangements, and the Interest portion of any deferred payment obligation (including leases of all types).

“Inventory” means all present and future “inventory” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

“Investment” means any beneficial ownership interest in any Person (including any stock, partnership interest or other equity or debt securities issued by any Person), and any loan, advance or capital contribution to any Person.

“Investment Property” means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated.

“Japanese Subsidiary” means Borrower’s Japanese Subsidiary, Mediasite K.K., a Japanese kabushiki kaisha.






“Key Person(s)” means Borrower’s Chief Executive Officer, Chief Technology Officer and Chief Financial Officer, each as disclosed as of the Effective Date in the Representations.

“Knowledge” or “best of knowledge” and words of similar import mean either (i) the actual knowledge of any of Borrower’s officers, including, any Chief Executive Officer, President, designated legal representative under the Legal Requirements of any non-U.S. jurisdiction, Chief Information Officer (if any), Chief Technology Officer (or equivalent), Chief Financial Officer and Corporate Controller, or Borrower's Vice Presidents or General Managers supervising a business
unit or division, or any persons succeeding or performing the responsibilities of such identified positions including Directors with executive authority, or (ii) such knowledge as the persons in such identified positions would have assuming (A) Borrower policies in accordance with generally-accepted norms of corporate governance and (B) the actual exercise of reasonable diligence and prudence by such persons in accordance with such policies.

“Legal Requirement” means any written local, municipal, foreign or other law, statute, legislation, constitution, principle of
common law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement, requirement, specification, determination, decision, opinion or interpretation that is, has been issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Body.

“Lender Expenses” means, in each case without limitation as to type and kind: (a) reasonable Professional Costs, and all fil- ing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by PFG, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, Professional Costs PFG pays or incurs in order to do the following: (i) prepare and negotiate this Agreement and all present and future documents relating to this Agreement; (ii) obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights or retain the services of consultants to do so; (iii) prosecute actions against, or defend actions by, Account Debtors; (iv) commence, intervene in, or defend any action or proceeding; (v) initiate any complaint to be relieved of the automatic stay in bankruptcy; (vi) file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; (vii) examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; (viii) protect, obtain possession of, lease, dispose of, or otherwise enforce PFG’s security interest in, the Collateral; and (ix) otherwise represent PFG in any litigation relating to Borrower; (b) without limiting the generality of the foregoing, all costs and expenses (including Professional Costs).

“Lien” or “lien” is a security interest, claim, mortgage, deed of trust, levy, charge, pledge or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

“Loan Documents” means, collectively, this Agreement, the Representations, and all other present and future documents, instruments and agreements between PFG and Borrower, including, but not limited to those relating to this Agreement, and all amendments and modifications thereto and replacements therefor.

“Loan Request” means any request that may be made by a Borrower in connection with this Agreement, including a borrowing request, consent request, a waiver request and any other accommodation that may be given by PFG under or relating to the Loan Agreement.

“Material Adverse Change” means any of the following: (i) a material adverse change in the business, operations, or financial or other condition of Borrower or any Guarantor, or (ii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) a material impairment of the value or priority of PFG’s security interests in the Collateral, or (iv) PFG’s determination, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 5 of the Schedule during the next succeeding financial reporting period.

“Maturity” means the Maturity Date(s) set forth in Section 4 of the Schedule, or such earlier date at which Obligations become due by acceleration or otherwise

“New Subsidiary(ies)” means any person that becomes a Subsidiary of Borrower after the date hereof.

“Non-Borrower Subsidiary(ies)” means any direct or indirect Subsidiary of Borrower not joined as a co-Borrower hereunder or otherwise joined to the Loan Documents.






“Non-Overdue Senior Monetary Obligations” means, at any time, the amount of monetary Obligations other than principal Indebtedness owed by Borrower to the Senior Lender but not then due, such as accrued and unpaid interest not yet due.

“Obligations” means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to PFG, including obligations and covenants intended to survive the termination of this Agreement, whether evidenced by this Agreement or any note or other instrument or document, or otherwise, including indebtedness under any obligation to purchase equity derivatives (including stock warrants) purchased or otherwise issued to PFG from time to time, whether arising from an extension of credit, opening of a letter of credit, banker’s acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by PFG in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, collateral monitoring fees, closing fees, facility fees, commitment fees, contingent fees, back-end and performance-based fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other Loan Documents.

“Ordinary (or “ordinary”) course of business” and derivatives shall apply to an action taken or an action required to be taken and not taken by or on behalf of a Borrower. An action will not be deemed to have been taken in the “ordinary course of business” unless: (a) such action is consistent with its past practices (if such type of action has been taken in the past and, if not, such action shall be deemed not in the ordinary course of business) and is similar in nature and magnitude to actions customarily taken by it; (b) such action is taken in accordance with sound and prudent business practices in its jurisdiction of organization; and (c) such action is not required to be authorized by its shareholders and does not require any other separate or special authorization of any nature.

“Other Property” means the following as defined in the Code in effect on the Effective Date with such additions to such terms as may hereafter be made, and all rights relating thereto: all present and future “commercial tort claims” (including any commercial tort claims identified in the Representations), “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and all other goods and personal property of every kind, tangible and intangible, whether or not governed by the Code.

“Payment” means all checks, wire transfers and other items of payment received by PFG for credit to Borrower’s outstanding Obligations.

“Permitted Indebtedness” means:

(i) the Loans and other Obligations;
(ii) Indebtedness existing on the Effective Date and disclosed in the Representations or shown in Exhibit A hereto; (iii) Subordinated Debt;
(iv) Indebtedness owing to Senior Lender not to exceed the Senior Debt Limit specified in the Schedule; (v) other Indebtedness secured by Permitted Liens described in clauses (iii) and (iv) of that definition; (vi) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;
    
(vii) Liens of carriers, warehouseman, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory, securing liabilities in the aggregate amount not to exceed Fifty Thousand Dollars ($50,000) and which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

(viii) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (i) through (vii) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose materially more burdensome terms upon Borrower; and

(ix) reimbursement obligations in respect of letters of credit in an aggregate face amount outstanding not to exceed $300,000 at any time outstanding, which have been reported to PFG in writing, and, in the case of reimbursement obligations to the





Senior Lender in respect of letters of credit which do not exceed the Senior Debt Limit (taking into account all other Indebtedness to Senior Lender).

“Permitted Investments” are:
(i) Investments (if any) shown in Exhibit A and existing on the Effective Date; (ii) Investments consisting of Cash Equivalents;

(iii) Investments consisting of (i) travel advances and employee relocation loans, and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower's Board of Directors; and

(iii) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower;

(iv) Investments in Subsidiaries existing on the Effective Date;

(v) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers that are not Affiliates, in the ordinary course of business; provided that this clause shall not apply to Investments of Borrower in any Subsidiary;

(vi) Investments in the Dutch Subsidiary and the Japanese Subsidiary of not more than $200,000 each in any calendar year; provided, however, with respect to each such Foreign Subsidiary, if its balance of Cash and Cash Equivalents with institutions or otherwise at any time exceeds its six (6) month average balance of such Cash and Cash Equivalents by more than $200,000, then no further Investments may be made by Borrower in such Foreign Subsidiary for the balance of such calendar year;

(vii) Deposit Accounts in which PFG has a perfected security interest;

(viii) Investments received in connection with the bankruptcy or reorganization of customers or suppliers, and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; and
(ix) bank certificates of deposit issued maturing no more than 1 year after issue. “Permitted Liens” means the following:
(i) Liens existing on the Effective Date which are disclosed in the Representations or arise under this Agreement;

(ii) Liens for Taxes not yet payable or being contested in good faith and for which Borrower maintains adequate reserves on its Books, provided that no notice of any such lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;

(iii) purchase money Liens and leases (including Liens arising under any retention of title, hire purchase or conditional sales arrangement or arrangements having similar effect) (A) on Equipment acquired or held by Borrower incurred for financing the acquisition of the Equipment securing no more than $800,000 in the aggregate amount outstanding, or (B) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment, subject to the same aggregate dollar cap set forth in clause (A);

(iv) additional Liens consented to in writing by PFG, which consent may be withheld in its good faith business judgment. PFG shall have the right to require, as a condition to its consent under this subparagraph (iv), that the holder of the additional Lien sign a subordination agreement in PFG’s then standard form, acknowledge that its Lien is subordinate to the Lien of PFG, agree that payment of its underlying obligation is subject to the prior payment of Obligations owing to PFG (subject to any permitted payments specified in such subordination agreement) and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agrees that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement;

(v) Liens being terminated substantially concurrently with this Agreement;






(vi) Liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent;

(vii) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);
type described above in clauses (i), (iii), (iv) and (xiii), provided that any extension, renewal or replacement lien is limited to
the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase and other terms are not less favorable to Borrower;

(ix) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods;

(x) statutory, common law or contractual Liens of depository institutions or institutions holding securities account (including rights of set-off) securing only customary charges and fees in connection with such accounts;

(xi) other Liens included as Permitted Liens in Exhibit A;

(xii) non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business;

(xiii) Liens arising under Section 6.1(e) cured as provided therein; and
(xiv) Liens in favor of the Senior Lender securing an amount not in excess of the Senior Debt Limit.

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity.

“Plan” means Borrower’s financial plan as presented to PFG on May 1, 2018, in the file in Excel format (or as PDF’d for convenience) entitled “Sonic Foundry model 2017_2018_2019”, for its 2018 fiscal year, as such financial plan is delivered in subsequent years for future periods.

“Professional Costs” means all reasonable fees and expenses of auditors, accountants, valuation experts, Collateral disposition service providers, restructuring and other advisory services in connection with restructurings, workouts and Insolvency Proceedings, and fees and costs of attorneys.

“Qualifying Request” means a request made by a Responsible Officer of Borrower under Section 1.4 for (i) a Loan (A) that is within Borrower’s borrowing availability under this Agreement, (B) that satisfies the relevant conditions set forth in Section 9 of the Schedule, (C) that is accompanied by such certificates, documents and instruments as may be required under this Agreement or otherwise reasonably required by PFG to confirm Borrower’s compliance with the Loan Documents at the time of such request, and (D) that is made within 30 days of the date the Reporting package is required to be delivered (as specified in Section 6 of the Schedule) showing satisfaction of the relevant borrowing conditions, or (ii) any other matter for which PFG’s consent is required under the Loan Documents.

“Representations” means the written Representations and Warranties provided by Borrower to PFG referred to in the
Schedule.

“Responsible Officer(s)” means the Key Persons and any other person authorized to bind Borrower and notified to PFG in writing by a Responsible Officer as a new Responsible Officer.

“Restricted License” means any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with PFG’s right to sell any Collateral.

“Revenue(s)” means revenues required to be recognized as such under GAAP.
“Revolving Line” means the revolving line of credit facility of Borrower with the Senor Lender from time to time in effect. “Securities Account” is any “securities account” as defined in the Code with such additions to such term as may hereafter
be made.

“Security Instruments” means financing statements and similar notices filed under the Code or other relevant local law (U.S. or non-U.S.) in any jurisdiction in which such financing statements may be filed, fixed and floating charges, share





charges, mortgage debentures, and any other notices, instruments and filings that reflect the “all assets” security granted to PFG by Borrower in this Agreement and the other Loan Documents.

“Senior Debt” has the meaning set forth in Section 8 of the Schedule.
“Senior Lender” has the meaning set forth in Section 8 of the Schedule.

“Subordinated Debt” means Indebtedness incurred by Borrower that is subordinated to Borrower’s debt to PFG pursuant to
a subordination agreement entered into between PFG, Borrower and the subordinated creditor(s) upon terms acceptable to PFG in its sole business discretion, but which may at PFG’s option include: (i) subordination of subordinated creditor Liens, (ii) restrictions or prohibitions on payment of subordinated debt until all Obligations to PFG are fully repaid and performed, and (iii) a prohibition on the exercise of remedies by a subordinated creditor until all Obligations to PFG are fully repaid and performed.

“Subordination Agreement” means a subordination agreement between PFG and any holders of Borrower Indebtedness, pursuant to which the Liens securing and repayment of such Indebtedness are expressly subordinated to the Liens and prior repayment of PFG.

“Subsidiary” means, with respect to any Person, (i) any Person of which more than 50% of the voting stock or other equity interests is owned or (ii) a Person controlled, directly or indirectly, by such Person or one or more Affiliates of such Person
and which, for the avoidance of doubt, shall include a “sister” company to a Person under common direct or indirect
ownership meeting the above specified percentage for being considered a “Subsidiary”.

“Ta x” means any tax (including any income tax, franchise tax, capital gains tax, estimated tax, gross receipts tax, value- added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, occupation tax, inventory tax, occupancy tax, withholding tax or payroll tax), levy, assessment, tariff, impost, imposition, toll, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), that is, has been or may in the future be (a) imposed, assessed or collected by or under the authority of any Governmental Body, or (b) payable pursuant to any tax-sharing agreement or similar contract.

“Tax Return” means any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information that is, has been or may in the future be filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax.

“Transfer” or “transfer” shall include any sale, assignment with or without consideration, encumbrance, hypothecation, pledge, or other transfer or disposition of any kind, including, but not limited to, transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by
operation of law, directly or indirectly.

Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

8. GENERAL PROVISIONS.

8.1 Confidentiality. PFG agrees to use the same degree of care that it exercises with respect to its own proprietary information, to maintain the confidentiality of any and all proprietary, trade secret or confidential information provided to or received by PFG from Borrower, which indicates that it is confidential, including business plans and forecasts, non-public financial information, confidential or secret processes, formulae, devices and contractual information, customer lists, and employee relation matters, provided that PFG may disclose such information (i) to its officers, directors, employees, attorneys, accountants, affiliates, advisory boards, participants, prospective participants, assignees and prospective assignees, and such other Persons to whom PFG shall at any time be required to make such disclosure in accordance with applicable law or legal process, and (ii) in its good faith business judgment in connection with the enforcement of its rights or remedies after an Event of Default, or in connection with any dispute with Borrower or any other Person relating to Borrower. The confidentiality agreement in this Section supersedes any prior confidentiality agreement of PFG relating to Borrower.






8.2 Interest Computation. In computing interest on the Obligations, all Payments received after 12:00 Noon, Pacific Time, on any day shall be deemed received on the next Business Day.

8.3 Payments. All Payments may be applied, and in PFG's good faith business judgment reversed and re-applied, to the Obligations, in such order and manner as PFG shall determine in its good faith business judgment.

8.4 Monthly Accountings. PFG may provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by PFG), unless Borrower notifies PFG in writing to the contrary within 60 days after such account is rendered, describing the nature of any alleged errors or omissions.

8.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally, or by reputable private delivery service, or by regular first-class mail, or certified mail return receipt requested, or by fax to the most recent fax number a party has for the other party (and if by fax, sent concurrently by one of the other methods provided herein), or by electronic mail to the most recent electronic mail address for Borrower provided for the chief financial officer or financial controller executing the Representations (and if by electronic mail, with an electronic delivery and/or read receipt), addressed to PFG or Borrower at the addresses shown in the heading to this Agreement, in the Representations or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid, or on the first business day of receipt during business hours in the case of notices sent by fax or electronic mail, as provided herein.

8.6 Authorization to Use Borrower Name, Etc. Borrower irrevocably authorizes PFG to: (i) use Borrower’s logo on PFG’s website and in its marketing materials to denote the lending relationship between PFG and Borrower; (ii) use a tombstone to highlight the transaction(s) from time to time between PFG and Borrower; and (iii) to issue press releases in a form reasonable acceptable to Borrower and PFG highlighting and summarizing the credit facilities extended by PFG to Borrower from time to time under this Agreement, as amended from time to time, all of the above (i) through (iii), for marketing purposes.

8.7 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

8.8 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and PFG and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

8.9 Waivers; Indemnity. The failure of PFG at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other Loan Document shall not waive or diminish any right of PFG later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of PFG or its agents or employees, but only by a specific written waiver signed by an authorized officer of PFG and delivered to Borrower. Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document, and Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by PFG on which Borrower is or may in any way be liable, and notice of any action taken by PFG, unless expressly required by this Agreement. Borrower hereby agrees to indemnify PFG and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties and Lender Expenses of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between PFG and Borrower, or any other matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to damages determined by a court of competent jurisdiction in a final judgment to have been proximately caused by the indemnitee’s own willful misconduct.





Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect.

8.10 No Liability for Ordinary Negligence. Borrower agrees that any and all claims it may have under this Agreement shall be limited to claims against PFG and not its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG. Neither PFG, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the negligence of PFG, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG, but nothing herein shall relieve PFG from liability for its own gross negligence or willful misconduct.

8.11 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of PFG. No purported amendment or modification of any Loan Document, or waiver, discharge or termination of any obligation under any Loan Document, shall be enforceable or admissible unless, and only to the extent, expressly set forth in a writing signed by the party against which enforcement or admission is sought. Without limiting the generality of the foregoing, no oral promise or statement, nor any action, inaction, delay, failure to require performance or course of conduct shall operate as, or evidence, an amendment, supplement or waiver or have any other effect on any Loan Document. Any waiver granted shall be limited to the specific circumstance expressly described in it, and shall not apply to any subsequent or other circumstance, whether similar or dissimilar, or give rise to, or evidence, any obligation or commitment to grant any further waiver.

8.12 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

8.13 Lender Expenses. Borrower shall reimburse PFG for all Lender Expenses. All Lender Expenses to which PFG may be entitled pursuant to this Paragraph shall immediately become part of Borrower’s Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

8.14 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and PFG; provided, however, that Borrower may not assign or Transfer any of its rights under this Agreement without the prior written consent of PFG, and any prohibited assignment shall be void. No consent by PFG to any assignment shall release Borrower from its liability for the Obligations.

8.15 Joint and Several Liability. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

8.16 Limitation of Actions. Any claim or cause of action by Borrower against PFG, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, incurred, done, omitted or suffered to be done by PFG, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by (a) the filing of a complaint within one year after the earlier to occur of (i) the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, or (ii) the date this Agreement is terminated, and (b) the service of a summons and complaint on an officer of PFG, or on any other person authorized to accept service on behalf of PFG, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of PFG in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other Loan Document.

8.17 Loan Monitoring. At reasonable times and upon reasonable advance notice to Borrower, PFG shall have the right to visit personally with Borrower up to two times per calendar year at its principal place of business or such other location as the parties may mutually agree, for the purpose of meeting with Borrower’s management in order to remain as up-to-date with Borrower’s business as is practicable and to maintain best practices in terms of lender loan monitoring and diligence. Lender Expenses incurred for reasonable travel, lodging and similar expenses for up to three





PFG staff for such visits shall be at Borrower’s expense and reimbursed in the same manner as other PFG expenses under this Agreement.

8.18 Paragraph Headings; Construction; Counterparts. Paragraph headings are only used in this Agreement for convenience. Borrower and PFG acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties with the benefit of independent counsel and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against PFG or Borrower under any rule of construction or otherwise. References to Borrower are construed to mean each Borrower, unless otherwise expressly specified. Amounts set off in brackets or parentheses are negative. The word shall is mandatory, the word may is permissive, and the word or is not exclusive. The term including is to be construed in all cases without limitation. The term Agreement includes the Schedule and (if not otherwise specified) any amendment, modification, restatement or other writing amending the terms of this Agreement. Obligations of a similar nature addressed in different sections of this Agreement shall be deemed supplemental to one another and not exclusive unless expressly set forth as such. Words and phrases expressing examples, including for example and such as are non-exclusive. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Agreement.

8.19 Correction of Loan Documents. PFG may correct patent errors and fill in any blanks in the Loan Documents consistent with the agreement of the parties so long as PFG provides Borrowers with written notice of such correction and allows Borrower at least ten (10) days to object to such correction. In the event of such objection, such correction shall not be made except by an amendment signed by both PFG and Borrower.

8.20 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of PFG and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to PFG to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall be litigated in courts located within California and that the exclusive venue therefor shall, at PFG’s option, be Santa Clara County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or by internationally-recognized commercial courier or overnight delivery service or by certified mail, return receipt requested, to the last known address for Borrower; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. Notwithstanding the foregoing, PFG, in pursuit of collection and Collateral or rights therein, may pursue remedies in any jurisdiction in which Borrower or any Collateral resides or is deemed to reside.

8.21 Withholding. Payments received by PFG from Borrower under this Agreement will be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Body (including any interest, additions to tax or penalties applicable thereto). Specifically, however, if at any time any Governmental Body, applicable law, regulation or international agreement requires Borrower to make any withholding or deduction from any such payment or other sum payable hereunder to PFG, Borrower hereby covenants and agrees that the amount due from Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that, after the making of such required withholding or deduction, PFG receives a net sum equal to the sum which it would have received had no withholding or deduction been required, and Borrower shall pay the full amount withheld or deducted to the relevant Governmental Body. Borrower will, upon request, furnish PFG with proof reasonably satisfactory to PFG indicating that Borrower has made such withholding payment; provided, however, that Borrower need not make any withholding payment if the amount or validity of such withholding payment is contested in good faith by appropriate and timely proceedings and as to which payment in full is bonded or reserved against by Borrower. The agreements and obligations of Borrower contained in this Section 8.21 shall survive the termination of this Agreement.

8.22 Multiple Borrowers; Suretyship Waivers. If there is at any time after the Effective Date more than one Borrower:

(a) Borrowers' Agent. Each Borrower hereby irrevocably appoints Sonic Foundry, Inc. as the agent, attorney-in-fact and legal representative of all Borrowers for all purposes, including requesting disbursement of the Loan and receiving account statements and other notices and communications to Borrowers (or any of them) from PFG. PFG may rely, and shall be fully protected in relying, on any request for a Loan, disbursement instruction, report, information or any other notice or communication made or given by any Borrower, whether in its own name, as Borrowers' agent, or on behalf of one or more Borrowers, and PFG shall not have any obligation to make any inquiry





or request any confirmation from or on behalf of any other Borrower as to the binding effect on it of any such request, instruction, report, information, other notice or communication, nor shall the joint and several character of Borrowers' obligations hereunder be affected thereby.

(b) Waivers. Each Borrower hereby waives: (i) any right to require PFG to institute suit against, or to exhaust its rights and remedies against, any other Borrower or any other Person, or to proceed against any property of any kind which secures all or any part of the Obligations, or to exercise any right of offset or other right with respect to any reserves, credits or deposit accounts held by or maintained with PFG or any indebtedness of PFG to any other Borrower, or to exercise any other right or power, or pursue any other remedy PFG may have; (ii) any defense arising by reason of any disability or other defense of any other Borrower or any guarantor or any endorser, co-maker or other Person, or by reason of the cessation from any cause whatsoever of any liability of any other Borrower or any guarantor or any endorser, co-maker or other Person, with respect to all or any part of the Obligations, or by reason of any act or omission of PFG or others which directly or indirectly results in the discharge or release of any other Borrower or any guarantor or any other Person or any Obligations or any se-curity therefor, whether by operation of law or otherwise; (iii) any defense arising by reason of any failure of PFG to obtain, perfect, maintain or keep in force any Lien on, any property of any Borrower or any other Person; (iv) any defense based upon or arising out of any Insolvency Proceeding, liquidation or dissolution proceeding commenced by or against or in respect of any Borrower or any guarantor or any endorser, co-maker or other Person, including any discharge of, or bar against collecting, any of the Obligations (including any interest thereon), in or as a result of any such proceeding. Until all of the Obligations have been paid, performed, and discharged in full, nothing shall discharge or satisfy the liability of Borrower hereunder except the full performance and payment of all of the Obligations. If any claim is ever made upon PFG for repayment or recovery of any amount or amounts received by PFG in payment of or on account of any of the Obligations, because of any claim that any such payment constituted a preferential Transfer or fraudulent conveyance, or for any other reason whatsoever, and PFG repays all or part of said amount by reason of any judgment, decree or order of any court or administrative body having jurisdiction over PFG or any of its property, or by reason of any settlement or compromise of any such claim effected by PFG with any such claimant (including any other Borrower), then and in any such event, Borrower agrees that any such judgment, decree, order, settlement and compromise shall be binding upon Borrower, notwithstanding any revocation or release of this Agreement or the cancellation of any note or other instrument evidencing any of the Obligations, or any release of any of the Obligations, and Borrower shall be and remain liable to PFG under this Agreement for the amount so repaid or recovered, to the same extent as if such amount had never originally been received by PFG, and the provisions of this sentence shall survive, and continue in effect, notwithstanding any revocation or release of this Agreement. Each Borrower hereby expressly and unconditionally waives all rights of subrogation, reimbursement and indemnity of every kind against any other Borrower, and all rights of recourse to any assets or property of any other Borrower, and all rights to any collateral or security held for the payment and performance of any Obligations, including (but not limited to) any of the foregoing rights which Borrower may have under any present or future document or agreement with any other Borrower or other Person, and including (but not limited to) any of the foregoing rights which Borrower may have under any equitable doctrine of subrogation, implied contract, or unjust enrichment, or any other equitable or legal doctrine. Each Borrower further hereby waives any other rights and defenses that are or may become available to Borrower by reason of California Civil Code Sections 2787 to 2855 (inclusive), 2899, and 3433, as now in effect or hereafter amended, and under all other similar statutes and rules now or hereafter in effect.

(c) Consents. Each Borrower hereby consents and agrees that, without notice to or by Borrower and without affecting or impairing in any way the obligations or liability of Borrower hereunder, PFG may, from time to time before or after revocation of this Agreement, do any one or more of the following in PFG's sole and absolute discretion: (i) accept partial payments of, compromise or settle, renew, extend the time for the payment, discharge, or performance of, refuse to enforce, and release all or any parties to, any or all of the Obligations; (ii) grant any other indulgence to any Borrower or any other Person in respect of any or all of the Obligations or any other matter; (iii) accept, release, waive, surrender, enforce, exchange, modify, impair, or extend the time for the performance, discharge, or payment of, any and all property of any kind securing any or all of the Obligations or any guaranty of any or all of the Obligations, or on which PFG at any time may have a Lien, or refuse to enforce its rights or make any compromise or settlement or agreement therefor in respect of any or all of such property; (iv) substitute or add, or take any action or omit to take any action which results in the release of, any one or more other Borrowers or any endorsers or guarantors of all or any part of the Obligations, including, without limitation one or more parties to this Agreement, regardless of any destruction or impairment of any right of contribution or other right of Borrower; (v) apply any sums received from any other Borrower, any guarantor, endorser, or co-signer, or from the disposition of any Collateral or security, to any indebtedness whatsoever owing from such Person or secured by such Collateral or security, in such manner and order as PFG determines in its sole discretion, and regardless of whether such indebtedness is part of the Obligations, is secured, or is due and payable. Borrower consents and agrees that PFG shall be under no obligation to





marshal any assets in favor of Borrower, or against or in payment of any or all of the Obligations. Borrower further consents and agrees that PFG shall have no duties or responsibilities whatsoever with respect to any property securing any or all of the Obligations. Without limiting the generality of the foregoing, PFG shall have no obligation to monitor, verify, audit, examine, or obtain or maintain any insurance with respect to, any property securing any or all of the Obligations.

(d) Foreclosure of Trust Deeds. Each Borrower waives all rights and defenses that Borrower may have because any other Borrower's Obligations are secured by real property. This means, among other things: (1) PFG may collect from Borrower without first foreclosing on any real or personal property collateral pledged by the other Borrower; and (2) If PFG forecloses on any real property collateral pledged by another Borrower: (A) The amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price; and (B) PFG may collect from Borrower even if PFG, by foreclosing on the real property collateral, has destroyed any right Borrower may have to collect from the other Borrower. This is an unconditional and irrevocable waiver of any rights and defenses Borrower may have because any other Borrower's Obligations are secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. Each Borrower waives all rights and defenses arising out of an election of remedies by PFG, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Borrower's rights of subrogation and reimbursement against another Borrower or any other Person by the operation of Section 580d of the California Code of Civil Procedure or otherwise.

(e) Independent Liability. Each Borrower hereby agrees that one or more successive or concurrent actions may be brought hereon against Borrower, in the same action in which any other Borrower may be sued or in separate actions, as often as deemed advisable by PFG. Each Borrower is fully aware of the financial condition of each other Borrower and is executing and delivering this Agreement based solely upon its own independent investigation of all matters pertinent hereto, and Borrower is not relying in any manner upon any representation or statement of PFG with respect thereto. Each Borrower represents and warrants that it is in a position to obtain, and each Borrower hereby assumes full responsibility for obtaining, any additional information concerning any other Borrower's financial condition and any other matter pertinent hereto as Borrower may desire, and Borrower is not relying upon or expecting PFG to furnish to it any information now or hereafter in PFG's possession concerning the same or any other matter.

(f) Subordination. All indebtedness of a Borrower now or hereafter arising held by another Borrower is subordinated to the Obligations and Borrower holding the indebtedness shall take all actions reasonably requested by PFG to effect, to enforce and to give notice of such subordination.

8.23 Electronic Execution of Documents. The words execution, signed, signature and words of like import in any Loan Document shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity and enforceability as a manually executed signature or the use of a paper-based recordkeeping systems, as the case may be, to the extent and as provided for in any applicable law, including, without limitation, any state law based on the Uniform Electronic Transactions Act.

8.24 Relationship. The relationship of the parties to this Agreement is determined solely by the provisions of this Agreement. The parties do not intend to create any agency, partnership, joint venture, trust, fiduciary or other relationship with duties or incidents different from those of parties to an arm’s-length contract.

8.25 Third Parties. Nothing in this Agreement, whether express or implied, is intended to: (a) confer any benefits, rights or remedies under or by reason of this Agreement on any persons other than the express parties to it and their respective permitted successors and assigns; (b) relieve or discharge the obligation or liability of any person not an express party to this Agreement; or (c) give any person not an express party to this Agreement any right of subrogation or action against any party to this Agreement.

8.26 Mutual Waiver of Jury Trial. BORROWER AND PFG EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN PFG AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF PFG OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH PFG OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’





AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, PFG desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then PFG may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and order applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of PFG at any time to exercise self-help remedies, foreclose against Collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.






[SIGNATURE PAGE FOLLOWS]










































 
 
 
 
 
 
 
 
 
 
 
Borrower:
 
 
 
PFG:
 
 
 
 
 
 
SONIC FOUNDRY, INC.
 
 
 
PARTNERS FOR GROWTH V, L.P.
 
 
 
 
 
 
 
 
By
 
/s/ Ken Minor
 
 
 
By
 
/s/ Geoffrey Allan
 
 
 
 
President or Vice President
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By
 
/s/ Ken Minor
 
 
 
Name:
 
Geoffrey Allan
 
 
 
 
Secretary or Ass’t Secretary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Title:
 
Manager, Partners for Growth V, LLC
 
 
 
 
 
 
 
 
 
 
Its General Partner
 
- Signature Page Loan and Security Agreement -














































Partners For Growth
Schedule to
Loan and Security Agreement

Borrower: Sonic Foundry, Inc., a Maryland corporation
Address: 222 West Washington Avenue, Madison, WI 53703

Date: May 11, 2018
This Schedule forms an integral part of the Loan and Security Agreement between PARTNERS FOR GROWTH V, L.P. and the above-referenced Borrower dated the Effective Date.

1. LOAN (Section 1.1):

The Loan:
The Loan shall consist of a term loan in the maximum aggregate amount of $2,500,000, which shall be disbursed in two (2) Tranches as follows:

Tranche 1 : $2,000,000, which shall be disbursed within one (1) Business Day following the Business Day during which satisfaction (or in PFG’s discretion, waiver) of the conditions set forth in Section 9 of this Schedule has occurred; and

Tranche 2 : $500,000, which shall be disbursed within (1) Business Day following the Business Day during which Borrower has made a Qualifying Request for the Tranche 2 Loan at any time between the Effective Date and 5:00 p.m. Pacific Time on December 31, 2018, so long as at the time of such Qualifying Request, no Default or Event of Default shall have occurred and be continuing.

Repayment:
Tranche 1 : Borrower shall pay interest only on the Tranche 1 Loan from the Effective Date to the date that is six (6) months from the end of the first full month after the Effective Date. Thereafter, commencing with a principal payment due December 1, 2018 (the “Tranche 1 Principal Repayment Commencement Date”) the principal amount of the Loan Tranche 1 Loan shall be repaid equal monthly principal payments of $66,666.67 each, plus interest accrued on principal during the prior month, and continuing on the same day of each month thereafter until the earlier of (i) the date on which the





unpaid principal balance of all Loans and any and all accrued and unpaid interest and other monetary Obligations thereon has been paid
and (ii) the Maturity Date.

Tranche 2: Borrower shall pay interest only on the Tranche 2 Loan from the date the Tranche 2 Loan is disbursed to Borrower to the Tranche 1 Principal Repayment Commencement Date. Thereafter, commencing with a principal payment due on the Tranche 1 Principal Repayment Commencement Date, the principal amount of the Loan Tranche 2 Loan shall be repaid equal monthly principal payments of
$16,666.67 each, plus interest accrued on principal during the prior month, and continuing on the same day of each month thereafter until the until the earlier of (i) the date on which the unpaid principal balance of all Loans and any and all accrued and unpaid interest and other monetary Obligations thereon has been paid and (ii) the Maturity Date. For the avoidance of doubt, if Borrower were to draw the Tranche 2 Loan on September 30, 2018, the first principal payment on Tranche 2 would be due on December 1, 2018, the monthly principal amount would be $16,666.67 and all principal and interest under Tranche 2 would be due coterminous with Tranche 1 Obligations, on the stated Maturity Date.

Prepayment:
The principal of the Loans may be prepaid at any time, in whole or in part, provided that, concurrently with the prepayment, Borrower pays to PFG a prepayment fee equal to 1% of the principal amount prepaid in the first year from the Effective Date.

2. INTEREST.
Interest Rate (Section 1.2):

The Loan shall bear interest at a per annum rate equal to 10.75%, fixed.

Interest shall be calculated on the basis of a 360-day year and a year of twelve months of 30 days each for the actual number of days elapsed. Accrued interest for each month shall be payable monthly, on the first day of each month for interest accrued during the prior month.

3. FEES (Section 1.3):

Loan Commitment Fee: $40,000, fully earned and payable promptly upon PFG invoice following the Effective Date, and $10,000, fully earned and payable promptly upon PFG invoice following Tranche 2 being drawn by Borrower.

Back-End Fee: Due and payable upon Maturity, Borrower shall pay PFG a cash fee in the amount of $150,000.

4. MATURITY DATE
(Section 5.1): May 11, 2021






5. FINANCIAL COVENANTS
(Section 4.1):
Borrower shall comply with the following covenant. Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:

(a) Minimum Liquidity: Liquidity, at all times, tested with respect to Borrower only on a monthly basis, of at least (i) 1.60:1.00 for the first and second month of each quarterly fiscal period; and (ii) 1.75:1.00 for the third month of each quarterly fiscal period.

For purposes of the Minimum Liquidity covenant, the term “Liquidity” means the (A) the sum of (i) Borrower’s unrestricted Cash and Cash Equivalents deposited with the Senior Lender, plus (ii) Borrower’s net billed accounts receivable as reported to the Senior Lender, divided by (B) all monetary obligations owing to the Senior Lender as at any date of measurement.

(b) Minimum Adjusted EBITDA:
On a trailing six-month (“T6M”) or trailing three-month (“T3M”) basis, measured and reported monthly, but tested quarterly, Borrower shall meet or exceed Adjusted EBITDA of not less than the T6M or, as applicable, T3M, thresholds set forth below for the applicable periods (with numbers enclosed in parentheses denoting a negative number / Adjusted EBITDA loss):

                    
Period
Adjusted EBITDA
T6M ending 6/30/2018
(1,100,000)
T6M ending 9/30/2018
500,000
T6M ending 12/31/2018
(250,000)
T6M ending 3/31/2019
(250,000)
 
 
Thereafter
TBD based on Plan but not below prior year levels
 
 

(c) Japanese Subsidiary Debt:
At all times, but tested monthly, the Japanese Subsidiary shall have less than $1,000,000 outstanding under its revolving credit facility.

(d) Future Periods:
For periods prior to the Maturity Date not addressed by the covenant
thresholds set forth above, PFG will set thresholds substantially consistently with the Senior Lender. If at any time there is no Senior Lender or a senior lender other than Silicon Valley Bank, PFG shall set





thresholds of like tenor based on Borrower’s Plan for periods for which covenant thresholds have not then been set.

6. REPORTING.
(Section 4.4):

Borrower shall provide PFG with the following:

(a) Monthly accounts payable, accounts receivable and deferred Revenue schedules, aged by invoice date, and outstanding or held check registers, if any, within 30 days after the end of each month.

(b) Monthly unaudited consolidated and consolidating Financial Statements, as soon as available, and in any event within 30 days after the end of each month.

(c) Monthly Compliance Certificates within 30 days after the end of each month and at each Loan request, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month or as at such date of Loan request Borrower was in full compliance with all of the terms and conditions of this Agreement and setting forth calculations showing compliance with the financial covenants set forth in this Schedule and such other information as PFG shall reasonably request.

(d) Updates to the Representations, as and when required to render the information therein true, correct, accurate and complete as of the date of such date: (i) in all respects as to matters addressed in Part A of the Representations (except for the Collateral values set forth in Part A, Section 3(g), which must be true and correct in all material respects) and Part B, Section 11, and (ii) in all material respects with respect to all other sections of the Representations Letter.

(e) Annual Borrower Board-approved Budgets and Forecasts, within the earlier of 30 days of approval by Borrower’s Board or when available.

(f) Annual consolidated and consolidating Financial Statements, as soon as available, and in any event within 120 days following the end of Borrower's fiscal year, certified by, and with an unqualified opinion of, independent certified public accountants acceptable to PFG. Borrowers current independent certified public accountants, Baker Tilly Virchow Krause is acceptable to PFG. If Borrower is required to file and is current in its filings of Form 10-K with the Securities and Exchange Commission and the same is available within said period through EDGAR, this requirement will be deemed satisfied.

(g) Upon PFG request, copies of all reports and statements provided by Borrower to the Senior Lender.






7. BORROWER INFORMATION:
Borrower represents and warrants that the information set forth in the Representations and Warranties of Borrower dated May 10, 2018, previously submitted to PFG (the “Representations”) is true, correct and complete as of the Effective Date.

8. ADDITIONAL PROVISIONS

(a) Senior Lender.

(1) Senior Lender. As used herein, “Senior Lender” means Silicon Valley Bank, and “Senior Loan Documents” means all present and future documents instruments and agreements entered into between Borrower and Senior Lender or by third parties relating to Borrower and Senior Lender.

(2) Senior Debt Limit. Borrower shall not permit the total Indebtedness of Borrower to Senior Lender, other than Non-Overdue Senior Monetary Obligations at any time to exceed the sum of $4,000,000 under the Revolving Line plus $500,000 in “Bank Services” and $200,000 in overdraft protection (as defined in the Senior Loan Documents, collectively, the “Senior Debt Limit”), including, but not limited to, monies borrowed by Borrower, interest on loans due from Borrower, Lender Expenses for which Borrower is obligated, sums due from Borrower in connection with issuance of commercial letters of credit, issuance of forward contracts for foreign exchange reserve, and any other direct or indirect financial accommodation Senior Lender may provide to Borrower. Principal under the SVB Term Loan may not be reborrowed by Borrower
without PFG’s consent, in its business discretion.

(3) Senior Loan Documents. Borrower represents and warrants that it has provided PFG with true and complete copies of all existing Senior Loan Documents, and Borrower covenants that it will, in the future, provide PFG with true and complete copies of any future Senior Loan Documents, including any amendments to any existing Senior Loan Documents.

(b) Collateral Accounts. Concurrently, Borrower shall cause the banks and other institutions where its Collateral Accounts are maintained to enter into Control Agreements with PFG, in form and substance legally sufficient and otherwise satisfactory to PFG in its good faith business judgment and sufficient to perfect PFG’s security interest in said Collateral Accounts, subject to the security interest of the Senior Lender. Said Control Agreements shall permit PFG, upon a Default, to exercise exclusive control over said Collateral





Accounts and proceeds thereof (subject to the rights of the Senior Lender). As a continuing obligation, all primary operating accounts and excess Cash of Borrower shall be maintained with the Senior Lender and its affiliates.

(c) Subordination of Inside Debt. All present and future indebtedness of Borrower to its officers, directors and shareholders (“Inside Debt”) shall, at all times, be subordinated to the Lien of PFG in respect of and prior payment of Obligations. Borrower represents and warrants that there is no Inside Debt presently outstanding, except as set forth in Exhibit A. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to PFG a subordination agreement on PFG’s standard form.

9. CONDITIONS
In addition to any other conditions to the Loan set out in this
Agreement, PFG will not make any Loan until PFG shall have received from Borrower, in form and substance satisfactory to PFG, such documents, and completion of such other matters, as PFG may reasonably deem necessary or appropriate, including that there shall be no discovery of any facts or circumstances which would, as determined by PFG in its sole discretion, negatively affect or be reasonably expected to negatively affect the collectability of the Obligations, PFG’s security interest in Borrower’s Collateral or the value thereof. Notwithstanding the foregoing, Borrower agrees to deliver to PFG each item required to be delivered to PFG under this Agreement as a condition precedent to any Loan. Borrower expressly agrees that a Loan made prior to the receipt by PFG of any such item shall not constitute a waiver by PFG of Borrower’s obligation to deliver such item, and the making of any Loan in the absence of a required item shall be in PFG’s sole discretion. Without limiting the foregoing, as conditions precedent to the Loan, Borrower shall provide:

(i) duly executed original signatures of Borrower to the Loan Documents to which Borrower is a party, including, this Agreement, the Intellectual Property Security Agreement and related Collateral Agreements and Notices, landlord consents and bailee waivers, and subordination agreements among PFG, Borrower and holders of Subordinated Debt;

(ii) Borrower’s Constitutional Documents and, where applicable, a good standing certificate of Borrower certified by the Secretary of State or other Governmental Body of the jurisdiction of formation of Borrower, as of a date no earlier than thirty (30) days prior to the date hereof, together with a foreign qualification certificate from the States





of Wisconsin, Massachusetts, California, Connecticut, Minnesota, Alabama, Pennsylvania and Texas;

(iii) A Certificate of Incumbency and a Secretary’s Certificate certifying the Constitutional Documents of Borrower and resolutions of the Board of Borrower authorizing the execution, delivery and performance of the Loan Documents to which such Borrower is a party, including in the PFG Warrant;

(iv) Control Agreements as required by Section 8(b) of this Schedule, duly executed by Borrower and each relevant depositary institution in favor of PFG, including from Silicon Valley Bank;

(v) certified copies, dated as of a recent date, of Security Instrument
searches, as PFG shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such Security Instruments either constitute Permitted Liens or have been or, in connection with the Loan, will be terminated or released;

(vi) the Representations, duly executed by Borrower,

(vii) landlord consents executed in favor of PFG by Borrower’s principal office lessor in respect of its premises in Madison, Wisconsin and, if required by PFG, each other premises where Borrower holds
Collateral with a fair value in excess of $10,000, and warehouseman’s/bailee waivers in respect of third party premises where Collateral with a fair value in excess of $10,000 is stored or housed, including Borrower’s facilities at Embedtek (Hartland, WI),
5Nines (Madison, WI) and TDS (Madison, WI);

(viii) duly executed Warrants in favor of PFG (the “PFG Warrant”) to purchase up to 66,000 Common Shares of Borrower, in agreed form;

(ix) the insurance policies and/or endorsements required pursuant to Section 4.3;

(x) payment of the Fees specified in Section 3 of this Schedule and Lender Expenses incurred in connection with the Loan;

(xi) any third party consents required in order for Borrower to enter into and perform the Loan Documents;






(xii) execution and delivery of a subordination agreement between PFG and the Senior Lender, in agreed form;

(xiii) execution and delivery of a subordination Agreement between PFG and Mark Burish, in agreed form;

(xiv) PFG shall have received true, correct and current copies of the Senior Loan Documents;

(xv) Borrower shall have paid the $200,000 (aggregate) “put” amount to Partners for Growth IV, L.P., SVB Financial Group and PFG Equity Investors, LLC under (and in cancelation of) the warrants to purchase Borrower’s common stock, each dated May 14, 2015;

(xvi) during the period between April 18, 2018 and the Effective Date, Borrower shall have received not less than $500,000 in Cash proceeds of the sale of its equity or Subordinated Debt;

(xvii) Execution, delivery and (as necessary or appropriate) filing of all Security Instruments; and

(xviii) to the extent that the conditions to this Agreement have not been completed as of the Effective Date, a post-closing obligations letter in PFG’s customary form by which PFG waives or defers performance of such conditions as PFG is willing to defer in its sole business discretion.


[Signature Page Follows]

























 
 
 
 
 
 
 
 
 
 
 
Borrower:
 
 
 
PFG:
 
 
 
 
 
 
SONIC FOUNDRY, INC.
 
 
 
PARTNERS FOR GROWTH V, L.P.
 
 
 
 
 
 
 
 
By
 
/s/ Ken Minor
 
 
 
By
 
/s/ Geoffrey Allan
 
 
 
 
President or Vice President
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By
 
/s/ Ken Minor
 
 
 
Name:
 
Geoffrey Allan
 
 
 
 
Secretary or Ass’t Secretary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Title:
 
Manager, Partners for Growth V, LLC
 
 
 
 
 
 
 
 
 
 
Its General Partner
 
- Signature Page Loan and Security Agreement -































Exhibit A to Loan and Security Agreement

Section 3.4(d) – Fixtures, Etc.

Section 7—“Permitted Indebtedness”—Other Existing Permitted Indebtedness:

Section 7—“Permitted Investments”—Other Existing Permitted Investments:

Section 8 – “Permitted Liens” – Other Permitted Liens:

Schedule Section 8 - “Inside Debt”:




































Exhibit B to Loan and Security Agreement – Compliance Certificate












































Compliance Certificate
===========================================================================
Borrower: Sonic foundry, inc.
222 West Washington Avenue
 Madison, WI 53703
Lender: Partners for Growth V, L.P. (“PFG”)
1660 Tiburon Blvd., Suite D
Tiburon, CA 94920
   
The undersigned authorized officer of Borrower hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and PFG dated as of May 11, 2018 (the "Agreement"), (i) Borrower (on a consolidated basis) is in complete compliance for the period ending __________________ with all required covenants except as detailed below, (ii) all representations and warranties of Borrower stated in the Agreement, including the Representation Letter, as defined in the Agreement, are true, complete, correct and accurate on this date except those representations and warranties expressly referring to a specific date shall be true, complete, correct and accurate as of such date, and except as noted below or on any disclosure letter attached to this Certificate, (iii) each Borrower and each of its Subsidiaries has timely filed all required tax returns and reports, and each Borrower has timely paid all foreign, federal state and local taxes, assessments, deposits and contributions owed by Borrower(s) except as otherwise permitted pursuant to the Loan Agreement, (iv) no Liens have been levied or claims made against any Borrower or any of its Subsidiaries relating to unpaid employee payroll or benefits of which such Borrower has not previously provided written notification to PFG, and (v) there are no Defaults or Events of Default. Attached herewith are the required documents supporting the above certification. The undersigned further certifies that the financial statements, information and schedules referred to below have been prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistent from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under "Complies" column.

Reporting Covenants
Required
Complies

Compliance Certificates
Monthly within 30 Days
Yes
No
Unaudited Financial Statements
Monthly within 30 Days
Yes
No
AR and AP Agings
Monthly within 30 Days
Yes
No
Annual Budgets/Projections
As soon as available / 30 days of FYE
Yes
No
Audited Financial Statements
Annually within 120 Days of FYE
Yes
No
Other Reports
When Requested by PFG
Yes
No
Representations Letter Update
When Required (1) or each Q-End
Yes
No

Financial Covenants (2)     Required      Actual              Complies

Minimum Adjusted EBITDA
 
 
 
 
Minimum Liquidity
 
 
 
 
Japanese Subsidiary Debt
 
 
 
 

Sincerely,

            
SIGNATURE

TITLE

DATE







(1) To be updated as and when necessary to keep the information current, accurate and complete.
(2) See page 2




Financial Covenants (Section 5 of Schedule to Loan and Security Agreement)

5. Financial Covenants
(Section 4.1):      Borrower shall comply with the following covenant. Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:
(a) Minimum Liquidity :
Liquidity, at all times, tested with respect to Borrower only on a monthly basis, of at least (i) 1.60:1.00 for the first and second month of each quarterly fiscal period; and (ii) 1.75:1.00 for the third month of each quarterly fiscal period.
For purposes of the Minimum Liquidity covenant, the term “ Liquidity ” means the (A) the sum of (i) Borrower’s unrestricted Cash and Cash Equivalents deposited with the Senior Lender, plus (ii) Borrower’s net billed accounts receivable as reported to the Senior Lender, divided by (B) all monetary obligations owing to the Senior Lender as at any date of measurement.
(b) Minimum Adjusted
EBITDA
On a trailing six-month (“T6M”) or trailing three-month (“T3M”) basis, measured and reported monthly, but tested quarterly, Borrower shall meet or exceed Adjusted EBITDA of not less than the T6M or, as applicable, T3M, thresholds set forth below for the applicable periods (with numbers enclosed in parentheses denoting a negative number / Adjusted EBITDA loss):

Period
Adjusted EBITDA
T6M ending 6/30/2018
              (1,100,000)
T6M ending 9/30/2018
                   500,000
T6M ending 12/31/2018
                 (250,000)
T3M ending 3/31/2019
                 (250,000)
Thereafter
TBD based on Plan but not below prior year levels

(c) Japanese Subsidiary Debt :
At all times, but tested monthly, the Japanese Subsidiary shall have less than $1,000,000 outstanding under its revolving credit facility.
(d) Future Periods :
For periods prior to the Maturity Date not addressed by the covenant thresholds set forth above, PFG will set thresholds substantially consistently with the Senior Lender. If at any time there is no Senior Lender or a senior lender other than Silicon Valley Bank, PFG shall set thresholds of like tenor based on Borrower’s Plan for periods for which covenant thresholds have not then been set.











WARRANT


THIS WARRANT (“WARRANT”) TO PURCHASE STOCK IN THE CAPITAL OF SONIC FOUNDRY, INC., A MARYLAND CORPORATION (THE “COMPANY”) IS ISSUED ON THE ISSUE DATE PURSUANT TO THE TERMS OF THAT CERTAIN LOAN AND SECURITY AGREEMENT BETWEEN THE COMPANY AND PARTNERS FOR GROWTH V, L.P. (THE “LOAN AGREEMENT”). THIS WARRANT IS SOLD IN A PRIVATE TRANSACTION, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGULATIONS PROMULGATED THEREUNDER (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT AND SUCH LAWS OR IF AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH LAWS IS AVAILABLE.

 Company:
Sonic Foundry, Inc., a Maryland corporation
Warrant Stock:
Common Stock, par value $0.01 per share
Number of Shares:
Up to 66,000, subject to adjustment
Exchange Price:
$2.57 per Share, subject to adjustment
Issue Date:
May 11, 2018
Expiration Date:
May 11, 2023

The term “Holder” shall initially refer to Partners for Growth V, L.P., a Delaware
limited partnership, which is the initial holder of this Warrant and shall further refer to any subsequent permitted holder of this Warrant from time to time.

The Company does hereby certify and agree that in consideration of Holder’s payment of $498 for this Warrant on the Issue Date (such dollar amount, exclusive of the Exchange Price payable or creditable upon Exercise or Exchange of this Warrant), Holder, or its permitted successors and assigns, hereby is entitled, subject to Sections 1.8 and 1.9 hereof, to Exchange or Exercise this Warrant in the Company for up to Sixty-Six Thousand (66,000) shares of the Company’s Common Stock, par value $0.01 per share (the “Warrant Stock”). This Warrant is subject to adjustment as set forth in this Warrant. Capitalized terms used but not defined in this Warrant have their meanings as set forth in the Loan Agreement defined in the heading between the Company and Partners for Growth V, L.P. (“PFG”), whether or not the Loan Agreement is then in effect. When the term “convert” or “conversion” in relation to the Warrant is used herein, it includes an Exchange and an Exercise, each as defined in Section 1.3(a), below, as applicable.

Section 1. Term, Price and Exchange of Warrant.

1.1 Term of Warrant. This Warrant shall be convertible for a period of five (5)
years after the Issue Date (hereinafter referred to as the "Expiration Date").

1.2 Exchange Price. The price per Share at which the shares of Warrant Stock are issuable upon conversion of this Warrant shall be $2.57 per share of Warrant Stock, subject to adjustment under Section 4 (the “Exchange Price”).

1.3 Conversion of Warrant.






(a) This Warrant may be exercised, in whole or in part, upon surrender of this Warrant to the Company, together with the Election to Exchange or Exercise attached hereto as Exhibit A (the “Election”) duly completed and executed with “Exercise” selected as the mode of conversion, and upon payment to the Company of the Exercise Price for the number of shares of Warrant Stock in respect of which this Warrant is then being exercised (an “Exercise”). In whole or in part in lieu of an Exercise, Holder may convert this Warrant on a cashless basis by so indicating in the Election and proceeding in accordance with the remainder of this Section 1.3 (an “Exchange”). In each above case, Holder shall surrender this Warrant to the Company at its then principal offices, together with the Election duly completed and executed.

(b) Upon an Exchange, the Holder shall receive shares of Warrant Stock such that, without the payment of any funds, the Holder shall surrender this Warrant in exchange for the number of shares of Warrant Stock equal to “X” (as defined below), computed using the following formula:

Y * (A-B)
X = _______________
A
Where
X
=
the number of shares of Warrant Stock to be issued to Holder
Y
=
the number of shares of Warrant Stock to be converted
 
 
under this Warrant
A
=
the Fair Market Value of one share of Warrant Stock
B
=
the Exchange Price (as adjusted to the date of such
 
 
calculations)
*
=
multiplied by

(c) For purposes of calculating Fair Market Value under this Warrant, the “Fair Market Value” of one share of Warrant Stock shall be (i) if the Company’s securities become listed on a national or international stock exchange, the average closing sale price reported on such exchange for such listed securities during the 90-trading day period immediately prior to the date Holder delivers its Election to the Company, or (ii) if the Company’s securities are traded over-the-counter, the average of bid and ask price for such securities over the 90-trading day period immediately prior to the day Holder delivers its Election to the Company, in each case of (i) and (ii), above, if the shares of Warrant Stock are convertible into such listed or over-the-counter traded securities other than on a one-to-one basis, multiplied by the ratio at which one share of Warrant Stock converts into such other security. If the Company’s securities are not listed or traded as contemplated in clauses (i) or (ii), above, the Fair Market Value of the Warrant Stock shall be the price per share of Warrant Stock which the Company could obtain from a willing buyer of shares of Warrant Stock sold by the Company from its authorized but unissued Shares, initially as the Board of Directors of the Company (“Board”) shall determine in its reasonable good faith judgment, subject to Holder’s valuation rights below, but in no event less than the price to which a holder of Warrant Stock would be entitled based on an enterprise valuation of the Company (including its Subsidiaries) as a going concern and the application of the rights, preferences and privileges of the Company’s outstanding securities as set forth in the Company’s Constitutional Documents, without discount for minority, control or lack of marketability. For the avoidance of doubt, if the Board relies on an appraisal (including a “409A” valuation) to determine the Fair Market Value of the Warrant Stock, such determined Fair Market Value from such appraisal may not assume the automatic conversion of all convertible securities in deriving such Fair Market Value but, instead, shall be based on enterprise value and application of the rights, preferences and privileges of the Company’s outstanding securities as set forth in the Company’s





Constitutional Documents as if the Company (or Group) were being sold in an Acquisition for cash to determine what dollar value each class of security would receive upon such Acquisition. If the Warrant is to be converted in connection with an Acquisition (in fact), the Fair Market Value of a share of Warrant Stock shall be based on the enterprise value specified or implied in such Acquisition and shall be the greater of (A) the value attributable to the Warrant Stock and (B) the value attributable to the Company securities into which the shares of Warrant Stock are (or may be) convertible (but subject to Holder’s conversion directly into such other Company securities).

(b) In the event that Holder converts this Warrant in connection with a transaction in which shares of the same class and series as the Warrant Stock are converted into another security, Holder may effect a conversion directly into such other security.

(c) Subject to Section 2 hereof, upon delivery of the duly completed and executed Election, the Company shall issue and deliver within four (4) business days to Holder or such other person as Holder may designate in writing a certificate or certificates or other legal evidence of Holder’s ownership of the number of shares of Warrant Stock so acquired upon the conversion of this Warrant. Such certificate(s) or other legal evidence shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a stockholder of the Company and a holder of record of such shares of Warrant Stock as of the date the Election is delivered to the Company, provided, however, Holder’s admission as a stockholder shall be subject to Holder’s execution and delivery of such agreements as may be required of all stockholders or of an accession or similar agreement by which Holder agrees to be bound by such agreements. If this Warrant is converted in part, a new warrant substantially identical to this Warrant for the number of Shares not converted shall be promptly executed and delivered to Holder by the Company.

1.4 Fractional Interests. The Company shall not be required to issue fractions of shares of Warrant Stock upon the conversion of this Warrant. If any fraction of a share of Warrant Stock would be issuable upon the conversion of this Warrant (or any portion thereof), the Company shall purchase such fraction for an amount in cash equal to the fair market value of a share of Warrant Stock as determined by the Board in its reasonable judgment.

1.5 Certain Definitions. For purposes of this Warrant:

“Acquisition” means, in any single transaction or series of related transactions: (i) any sale or other disposition (including exclusive license) of all or substantially all of the assets of the Company in whatever form and however consummated, or (ii) any reorganization, consolidation, merger or acquisition of the Company or a Controlling interest in the Company, or (iii) any liquidation or deemed liquidation under the Company’s Constitutional Documents.

An “Affiliate” of, or person “affiliated” with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, beneficially owns or is beneficially owned, controls or is controlled by, or is under common control with, the Person specified, and any person or entity that owns or controls directly or indirectly ten percent (10%) or more of the Shares of Company shall be deemed to be an Affiliate of the Company.

“Constitutional Documents” means the Company’s Articles of Incorporation (as amended and restated, as applicable), Bylaws and agreements between or among the Company and holders of any class or series of its stock.






“Control” (including the terms “controlling”, “controlled by” and “under common control with”) means the possession, direct or indirect through one or more Affiliates, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership or voting of voting securities, by contract, or otherwise.

“Person” or “person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity of any kind.

1.6 Automatic Put upon Expiration. Upon the Expiration Date, this Warrant shall automatically be deemed on and as of such date to be put for the cash sum set forth in Section 1.8 as to all shares of Warrant Stock (or such other securities) for which this Warrant has become convertible and for which it shall not previously have been converted for Warrant Stock, and the Company shall promptly pay the Exchange Put Price as set forth in such Section.

1.7 Treatment of Warrant Upon Acquisition of Company. Upon the closing of any Acquisition, without limiting or prejudicing Holder’s right to convert this Warrant under Section 1.3 or exercise its “put” rights under Section 1.8 (in each case with respect to the Warrant Stock that may then be converted or put) the surviving entity shall, as a condition to the Acquisition, either (i) assume the obligations under this Warrant, then this Warrant shall be convertible into the same securities as would be payable for the shares of Warrant Stock issuable upon conversion of the unconverted portion of this Warrant as if such shares of Warrant Stock were outstanding on the record date for the Acquisition (and the Exchange Price and/or number of shares of Warrant Stock shall be adjusted accordingly); or (ii) the Company or other surviving entity in such Acquisition shall, upon initial closing of such Acquisition purchase this Warrant at its “Fair Value” (the “Purchase Price”). For purposes hereof, “Fair Value” means that value determined by the parties using a Black-Scholes Option-Pricing Model (the “Black-Scholes Calculation”) with the following assumptions: (A) a risk-free interest rate equal to the risk-free interest rate at the time of the closing of the Acquisition (or as close thereto as practicable), (B) a contractual life of the Warrant equal to the remaining term of this Warrant as of the date of the announcement of the Acquisition, (C) an annual dividend yield equal to dividends payable or declared on the underlying shares of Warrant Stock (including securities into which the shares of Warrant Stock may be convertible) during the term of this Warrant (calculated on an annual basis), and (D) a volatility factor of the expected market price of the Company’s Shares comprised of: (1) if the Company is publicly traded on a national securities exchange, its volatility over the one year period ending on the day prior to the announcement of the Acquisition, (2) if the Shares are traded over-the-counter, its volatility over the one year period ending on the day prior to the announcement of the Acquisition, or (3) if the Company is a non-public company, the volatility, over the one year period prior to the Acquisition, of an average of publicly-traded companies in the same or similar industry to the Company with such companies having similar revenues. The Purchase Price determined in accordance with the above shall be paid upon the initial closing of the Acquisition and shall not be subject to any post-Acquisition closing contingencies or adjustments; provided, however, the parties may take such post-Acquisition closing contingencies or adjustments into account in determining the Purchase Price, and if the parties take any post-Acquisition closing contingencies or adjustments into account, then upon the partial or complete removal of those post-Acquisition closing contingencies or adjustments, a new Black-Scholes Calculation would be made using all of the same inputs except for the value of the Company’s Shares (as determined under subclause (D)), and any increase in Fair Value (and, correspondingly, Purchase Price), including, without limitation, as a result of any earn-out or escrowed consideration, would be paid in full to Holder immediately after those post-Acquisition closing contingencies or adjustments can be determined or achieved.






1.8 Warrant Put. Notwithstanding anything to the contrary set forth in this Warrant, in the event of (i) any Acquisition of the Company, (ii) maturity of the Loan, (iii) change of Control, or (iv) the expiry of this Warrant, Holder shall have the right (but not the obligation) to exchange this Warrant (the “Put Right”) for the cash sum of $250,000 (the “Exchange Put Price”); provided, however, if the Company does not draw Tranche 2 under the Loan Agreement, the Exchange Put Price shall be $200,000. The Exchange Put Price shall be adjusted on a relative percentage basis to the extent that Holder has converted any part of this Warrant and later exercises its Put Right. Except as to a put effected under Section 1.6, Holder shall exercise such Put Right by written notice as provided in this Warrant and, upon receipt by the Company of such notice, the Expiration Date of this Warrant shall be deemed extended until such time as the Company has paid the Exchange Put Price to Holder. The Company shall promptly (and in no event later than (five) 5 business days of Holder’s notice to the Company) pay the Exchange Put Price to Holder.

1.9 Reduction in Number of Shares. The parties acknowledge that the loans under the Loan Agreement are to be disbursed in two tranches (“Tranche 1” and “Tranche 2” as defined in the Loan Agreement). 52,800 shares of Warrant Stock are immediately convertible on the Issue Date. 13,200 shares of Warrant Stock automatically become convertible if and when the Company draws Tranche 2 under the Loan Agreement.

Section 2. Exchange and Transfer of Warrant.

(a) This Warrant may be transferred, in whole or in part, without restriction, subject only to (i) Holder’s compliance with applicable securities laws (which, in the case of Affiliates, shall be deemed satisfied by Holder (and transferee) certification of Affiliate status), and (ii) the transferee holder of the new Warrant assuming the obligations of Holder set forth in this Warrant. A transfer may be registered with the Company by submission to it of the annexed Assignment Form attached hereto as Exhibit B duly completed and executed. After the Company’s registration of a transfer of this Warrant, the Company will issue and deliver to the transferee a new warrant (representing the portion of this Warrant so transferred) upon the same terms and conditions as this Warrant and in substantially identical form, which the Company will register in the new holder’s name. In the event of registration of a partial transfer of this Warrant, the Company shall concurrently issue and deliver to the transferring holder a new warrant that entitles the transferring holder to the balance of this Warrant not so transferred and that otherwise is upon the same terms and conditions as this Warrant. Upon the delivery of this Warrant for transfer, the transferee holder shall for all purposes become the holder of the new warrant issued for the portion of this Warrant so transferred, irrespective of the date of actual delivery of the new warrant representing the portion of this Warrant so transferred.

(b) In the event of the loss, theft or destruction of this Warrant, the Company shall execute and deliver an identical new warrant to Holder in substitution therefor upon the Company's receipt of (i) evidence reasonably satisfactory to the Company of such event, and (ii) if requested by the Company, an indemnity agreement in reasonable and customary form.

(c) The Company shall pay its own and all Holder’s reasonable costs and expenses incurred in connection with the conversion, transfer or replacement of this Warrant, including, without limitation, securities compliance, the costs of preparation, execution and delivery of a new warrant and of certificates or other legal evidence of all Warrant Stock.

Section 3. Certain Covenants.






(a) The Company shall ensure that any approval of its stockholders required for issuance of this Warrant and of the shares of Warrant Stock issuable upon conversion hereof (which shall, for the avoidance of doubt, include any securities into which shares of Warrant Stock are or become convertible) remains in full force and effect until the earlier of conversion or the Expiration Date.

(b) The Company will not, by amendment of its Constitutional Documents or through reorganization, consolidation, merger, amalgamation, sale of assets or otherwise, avoid or seek to avoid the observance or performance of any of the terms of this Warrant. Without limiting the foregoing, the Company will from time to time take all such action as may be necessary or appropriate in order that the Company may validly and legally issue shares of Warrant Stock upon the conversion of this Warrant.

(c) So long as Holder or any of its Affiliates holds this Warrant and/or the Warrant Stock, the Company shall deliver to Holder such reports as it provides to any holders of securities of the same class and series as the Warrant Stock, as and when delivered to such holders. Notwithstanding the foregoing, the Company will provide quarterly and annual financial statements and such other information as such Holder may reasonably request and that the Company may lawfully provide at such time under applicable securities laws so long as such statements are not publicly available.

(d) The Company shall not treat the Warrant or the shares of Warrant Stock as being granted or issued as property transferred in connection with the performance of services or otherwise as compensation for services rendered.

(e) The Company shall not characterize the Warrant as an ownership interest in the Company or Holder as a stockholder of the Company until such time as Holder converts the Warrant for shares of Warrant Stock.

Section 4. Adjustments to Number of Shares of Warrant Stock, Etc.

4.1 Adjustments. In order to prevent dilution of the rights granted hereunder, the Number of Shares and Exchange Price shall be subject to adjustment from time to time in accordance with this Section 4. Upon each adjustment of the Exchange Price pursuant to this Section 4, Holder shall thereafter be entitled to acquire upon conversion, at the Exchange Price resulting from such adjustment, the number of shares of Warrant Stock obtainable by multiplying the Exchange Price in effect immediately prior to such adjustment by the number of shares of Warrant Stock acquirable immediately prior to such adjustment and dividing the product thereof by the new Exchange Price resulting from such adjustment.

4.2 Subdivisions, Combinations and Stock Dividends. If the Company shall at any time subdivide by split-up or otherwise, the class and series of Company securities into which the Warrant could then be converted into a greater number of shares, or issue additional securities as a dividend, bonus issue or otherwise with respect to such securities into which the Warrant could be converted, then the Exchange Price in effect immediately prior to such subdivision or share dividend or bonus issue shall be proportionately reduced and the number of shares acquirable upon exchange hereunder shall be proportionately increased. Conversely, if the class and series of Company securities into which the Warrant could then be converted are combined into a smaller number of shares, the Exchange Price in effect immediately prior to such combination shall be proportionately increased.

4.3 Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exchange or exercise of this Warrant, Holder shall be entitled to receive, upon conversion of this





Warrant, the number and kind of securities and property that Holder would have received for the Warrant Stock if this Warrant had been converted immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Warrant Stock to Common Stock pursuant to the Company’s Constitutional Documents upon the closing of a public offering of the Company's Common Stock. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exchange or exercise of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exchange or exercise of this Warrant. The amendment to this Warrant shall provide for adjustments (as determined in good faith by the Company’s Board of Directors) which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 4 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exchange of the new Warrant. The provisions of Sections 4.2 and 4.3 shall similarly apply to successive subdivisions, combinations, Share dividends, distributions, reclassifications, exchanges, substitutions, and dilutive events.

4.4 Notices of Record Date, Etc. In the event that the Company shall:

(1) declare or propose to declare any dividend upon Company securities, whether payable in cash, property, shares or other securities and whether or not a regular cash dividend, or

(2) offer for sale any additional shares of any class or series of the Company’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of waivers thereof) to pre-emptive rights of any class or series of stockholders, or

(3) effect or approve any reclassification, exchange, substitution or recapitalization of the capital shares of the Company, including any subdivision or combination of its outstanding stock, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an assignment for the benefit of creditors) or a reorganization of the Company, or

(4) offer holders of registration rights the opportunity to participate in registration of the Company’s securities, or

(5) offer stockholders the opportunity to participate in any further public offering of the Company’s securities,

then , in connection with such event, the Company shall give to Holder:

(i) at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such a distribution or offer in respect of the matters referred to in (1) or (2) above, or for determining rights to vote in respect of the matters referred to in (3) above; and

(ii) in the case of the matters referred to in (4) and (5) above, the greater of (A) ten (10) days prior written notice of the date when the same shall take place and (B) the date that notice is or is required to be given to any stockholder.

Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such distribution, the date on which the holders of Company securities shall be entitled thereto and the terms





of such distribution, and such notice in accordance with clause (2) shall also specify the date on which the holders of Company securities shall be entitled to convert their stock for securities or other property deliverable upon such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of Holder.

4.6 Adjustment for Capitalization Table Errors. The parties acknowledge their mutual agreement that the initial Number of Shares is based on the capitalization of the Company being in all material respects as represented to Holder and appended hereto as Exhibit C. If the fully-diluted equity of the Company is not, as of the Issue Date, in fact as represented in Exhibit C, the Number of Shares and / or Exchange Price shall be equitably adjusted under Section 4.7.

4.7 Equitable Adjustments by Board. If any event occurs that does not fall within the generic terms used in this Section 4 (such as merger or reorganization) but is within the rationale of adjustment provisions generally in warrants as maintaining the economic value of the warrant and underlying equity shares relative to other holders of equity, then the Board shall make an adjustment in the application of such provisions, so that the effect of such event on the rights and economics of Holder are not disadvantaged relative to the rights and economics of equity holders generally.

4.8 Officer’s Statement as to Adjustments. Whenever the Number of Shares subject to this Warrant is required to be or is adjusted as provided in Section 4, the Company shall forthwith file at the office designated for the conversion of this Warrant a statement, signed by the chief financial officer of the Company, showing in reasonable detail the facts requiring such adjustment and the number of issuable shares of Warrant Stock that will be effective after such adjustment. If such notice relates to an adjustment resulting from an event referred to in Section 4.3, such notice shall be included as part of the notice required to be mailed or published under the provisions of Section 4.4.

4.9 Issue of Securities other than Warrant Stock. In the event that at any time, as a result of any adjustment made pursuant to Section 4, Holder thereafter shall become entitled to receive any securities of the Company, other than Warrant Stock, thereafter the number of such other securities so receivable upon conversion of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Stock contained in Section 4.

Section 5. Rights of the Warrant Holder.

This Warrant shall entitle Holder, upon Conversion, to the benefit of all rights as are applicable to any stockholder of the Company holding shares that are the same class and series as the Warrant Stock.

Section 6. Representations, Warranties and Covenants of the Company. The
Company represents and warrants to, and covenants with, Holder that:

6.1 Corporate Power; Authorization. The Company has all requisite corporate power and has taken all requisite corporate action to execute and deliver this Warrant, to issue the Warrant and Warrant Stock and to carry out and perform all of its obligations hereunder. This Warrant has been duly authorized, executed and delivered on behalf of the Company and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) as limited by equitable principles generally. Any person executing this Warrant on behalf of the Company is a duly authorized officer of the Company with all necessary





legal authority to bind the Company generally and with the specific legal authority to cause the Company to execute and deliver this Warrant.

6.2 Validity of Securities. This Warrant, when sold by the Company against the consideration therefor as provided herein, will be validly authorized, issued and fully paid. The issuance and delivery of the Warrant is not subject to any consent, approval, preemptive or any similar rights of the stockholders of the Company (which has not been duly secured or waived), including without limitation any pre-emptive rights, or any liens or encumbrances except for restrictions on transfer provided for herein or under applicable securities laws; and when and if shares of Warrant Stock are issued upon conversion and in accordance with the terms hereof and this Warrant is converted for such Warrant Stock, such securities will be, at each such issuance, validly issued shares of Warrant Stock in the Company’s capital, in compliance with all applicable securities laws and free of any liens or encumbrances except for restrictions on transfer provided for herein, in the Constitutional Documents or under such applicable securities laws.

6.3 A true, correct and current copy of the Company’s current Articles of Incorporation is appended as Exhibit D hereto. Except as specified in Exhibit C, there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities. Assuming the issuance of all Warrants issuable hereunder, Holder would own as of the Issue Date __% of the fully-diluted equity of the Company (after giving effect to the issuance of equity or subordinated debt that is a requirement of the Loan).

6.4 No Conflict. The execution and delivery of this Warrant do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Company’s Constitutional Documents, as amended, or any mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, the effect of which would have a material adverse effect on the Company or materially impair or restrict its power to perform its obligations as contemplated hereby.

6.5 Governmental and other Consents. As at the Issue Date, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority or other person or entity is required on the part of the Company in connection with the issuance, sale and delivery of the Warrant and the Warrant Stock, except such filings as shall have been made prior to and shall be effective on and as of the date hereof. All Company and stockholder consents required in connection with issuance of the Warrant and Warrant Stock have either been obtained by the Company or no such consents are required.

6.6 Exempt from Registration. As at the Issue Date, assuming the accuracy of the representations and warranties of Holder in Section 7 hereof, the offer, sale and issuance of the Warrant and the Warrant Stock will be exempt from any registration requirements of the Securities Act, the registration and qualification requirements of applicable state securities laws.

6.7 Delivery of Information; Accuracy. The Company acknowledges its delivery of certain Representations and Warranties in connection with the Loan Agreement and this Warrant (the “Representation Letter”) to PFG, which Representations and Warranties form the basis for Holder





purchasing this Warrant. As at the Issue Date, the information contained in the Representation Letter and all documents, instruments and other information delivered to Holder in connection therewith are true, correct, accurate and complete in all material respects.

Section 7. Representations and Warranties of Holder. Holder hereby represents and warrants to the Company as of the Issue Date as follows:

7.1 Investment Experience. Holder is an “accredited investor” within the meaning of Rule 501 under the Securities Act, and was not organized for the specific purpose of acquiring the Securities. Holder is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Warrant and the Warrant Stock.

7.2 Investment Intent. Holder is purchasing the Warrant for investment for its own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act. Holder understands that the Warrant has not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Holder’s investment intent as expressed herein.

7.3 Authorization. Holder has all requisite power and has taken all requisite action required of it to carry out and perform all of its obligations hereunder. The execution and delivery of this Warrant has been duly authorized, executed and delivered on behalf of Holder and constitutes the valid and binding agreement of Holder, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally and (ii) as limited by equitable principles generally. The consummation of the transactions contemplated herein and the fulfillment of the terms herein will not result in a breach of any of the terms or provisions of Holder’s constitutional documents or instruments. Any person executing this Warrant on behalf of Holder is a duly authorized officer of Holder with all necessary legal authority to bind Holder generally and with the specific legal authority to cause Holder to execute and deliver this Warrant.

Section 8. Restrictive Securities Legend.

This Warrant and the Warrant Stock have not been registered under any securities laws. Accordingly, any Share certificates issued pursuant to the conversion of this Warrant shall (until receipt of an opinion of counsel in customary form that such legend is no longer necessary) bear the following legend:

THIS WARRANT AND THE SHARES OF WARRANT STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OF DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN CUSTOMARY FORM THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.

Section 9. Notices.






All notices to be given under this Warrant shall be in writing and shall be given: (i) personally, or (ii) by reputable private delivery service, (iii) by regular first-class mail, or certified mail return receipt requested, or (iv) by fax, or (v) by electronic mail. If sent by fax or electronic mail, such notice shall also be sent concurrently by one of the other methods provided herein. Notices may be sent to the parties in accordance with their contact details specified below or to any other address, fax number or electronic mail address later designated in writing by a party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid, or upon receipt during the Business Day where received in the case of notices sent by fax or electronic mail, but subject to reasonably concurrent transmission by another method, as specified above. The addresses for such communications shall be:

if to Holder, at

Partners for Growth V, L.P.
1660 Tiburon Blvd., Suite D Tiburon, CA 94920
Attention: Chief Financial Officer
Fax: (415) 781-0510
Email: Notices@pfgrowth.com
with a copy (not constituting notice) to

Greenspan Law Office
Attn: Benjamin Greenspan, Esq.
620 Laguna Road
Mill Valley, CA 94941
Fax: (415) 738-5371
Email: ben@greenspan-law.com

with the original of this Warrant and any replacement, restatement or reissue of this
Warrant to be delivered to:

Robert W. Baird & Co., Inc. Two Belvedere Place, Ste. 330
Mill Valley, CA 94941
ATTN: Nicolle Hudachek
Phone # 415-627-3208
Email: JFitzgibbons@rwbaird.com

or

if to the Company, at

Sonic Foundry, Inc.
222 W. Washington Avenue
Madison, WI 53703
Fax: (608) 443-1609





Email: kenm@sonicfoundry.com
Attn: Ken Minor

with a copy (not constituting notice) to:

McBreen and Kopko
20 North Wacker Dr., Suite 2520
Chicago, IL 60606
Fax: (312)332-2657
Email: jstern@mmklaw.com

Each party hereto may from time to time change its address for notices under this Section
7 by giving at least 10 calendar days' notice of such changes address to the other party hereto.

Section 8. Amendments and Waivers.

This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

Section 9. Applicable Law; Severability.

This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of California. If any one or more of the provisions contained in this Warrant, or any application of any provision thereof, shall be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications of any provision thereof shall not in any way be affected or impaired thereby.

Section 10. Construction.

Section headings are only used in this Agreement for convenience. The Company and Holder each acknowledge that the headings may not describe completely the subject matter of the applicable Section, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against either party under any rule of construction or otherwise.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


















IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on the day and year first above written.

 
 
 
 
 
 
 
 
 
 
 
COMPANY:
 
 
 
ACKNOWLEDGED AND AGREED:
 
 
 
 
 
 
 
 
 
 
 
 
 
SONIC FOUNDRY, INC.
 
 
 
HOLDER:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partners for Growth V, L.P.
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Ken Minor
 
 
 
By:
 
/s/ Geoffrey Allan
 
 
 
 
 
 
 
 
 
 
 
 
 
Name:
 
Ken Minor
 
 
 
Name:
 
Geoffrey Allan
 
 
 
 
 
 
 
 
 
 
 
 
 
Title:
 
CFO
 
 
 
Title:
 
Manager, Partners for Growth V, LLC,
 
 
 
 
 
 
 
 
 
 
Its General Partner
 
 
 
 
 
 
 
 
 
 
 



PFG- Sonic Foundry Warrant Signature Page





































Exhibit A

To: SONIC FOUNDRY, INC.



ELECTION TO EXCHANGE OR EXERCISE

The undersigned hereby exercises its right to Exchange its Warrant for
fully paid, validly issued and nonassessable:

o Shares of Common Stock

The undersigned hereby exercises its right to Exercise its Warrant for
fully paid, validly issued and nonassessable:

o Shares of Common Stock


[check one box]

covered by the attached Warrant in accordance with the terms thereof.

and requests that certificates or other legal evidence of ownership of such Shares be issued in the name of, and delivered to:

Date: [Holder]



By
Name:
Title:












Exhibit B ASSIGNMENT FORM

To: SONIC FOUNDRY, INC.

The undersigned hereby assigns and transfers this Warrant to

_________________________________________________
(Insert assignee’s social security or tax identification number)

__________________________________________________
(Print or type assignee’s name, address and postal code)

______________________________________________________________

______________________________________________________________

and irrevocably appoints _______________________________ to transfer this
Warrant on the books of the Company.

Date: ________________ Partners For Growth V, L.P.

By ________________
Name: ________________ , Manager of
Partners for Growth V, LLC, Its General Partner



























Exhibit C - Capitalization Table

Shares Outstanding
4,942,906
 
 
Options and warrants
2,242,269
 
 
Instruments
Convertible Into Stock
449,574
 
 
Fully Diluted
7,634,750
 
 
Warrants issued to PFG
66,000










































Exhibit D – Articles of Incorporation






WAIVER AND TWELFTH Amendment
to
SECOND AMENDED AND RESTATED
Loan and security agreement

This Waiver and Twelfth Amendment to Second Amended and Restated Loan and Security Agreement (this Amendment ”) is entered into this 11th day of May, 2018 (the “ Twelfth Amendment Effective Date ”), by and between (i) SILICON VALLEY BANK a California corporation (“ Bank ”), and (ii) SONIC FOUNDRY, INC. , a Maryland corporation (“ Sonic Foundry ”), and SONIC FOUNDRY MEDIA SYSTEMS, INC., a Maryland corporation (“ Sonic Systems ” and together with Sonic Foundry, jointly and severally, individually and collectively, the “ Borrower ”).
Recitals
A.      Bank and Borrower have entered into that certain Second Amended and Restated Loan and Security Agreement, dated as of June 27, 2011, as amended by that certain First Amendment, dated as of May 31, 2013, as further amended by that certain Second Amendment, dated as of January 10, 2014, as further amended by that certain Third Amendment, dated as of March 24, 2014, as further amended by that certain Fourth Amendment, dated as of January 27, 2015, as further amended by that certain Fifth Amendment, dated as of May 13, 2015, as further amended by that certain Sixth Amendment, dated as of October 5, 2015, as further amended by that certain Seventh Amendment, dated as of February 8, 2016, as further amended by that certain Eighth Amendment, dated as of December 9, 2016, as further amended by that certain Ninth Amendment, dated as of March 16, 2017, as further amended by that certain Waiver and Tenth Amendment, dated as of May 10, 2017 and as further amended by that certain Eleventh Amendment to Second Amended and Restated Loan and Security Agreement, dated as of December 22, 2017 (as the same may from time to time be further amended, modified, supplemented or restated, the “ Loan Agreement ”).
B.      Bank has extended credit to Borrower for the purposes permitted in the Loan Agreement.
C.      Borrower has requested that Bank amend the Loan Agreement to: (i) modify the Minimum EBITDA financial covenant; (ii) waive a certain existing Event of Default; (iii) add certain new milestone equity covenant requirements; and (iv) make certain other revisions to the Loan Agreement as more fully set forth herein.
D.      Bank has agreed to so amend certain provisions of the Loan Agreement, but only to the extent, in accordance with the terms, subject to the conditions and in reliance upon the representations and warranties set forth below.
Agreement
Now, Therefore, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Loan Agreement.

2. Amendments to Loan Agreement.
        





2.1     Section 6.2 (Financial Statements, Reports, Certificates) . Subsection (a)(i) of Section 6.2 is amended in its entirety and replaced with the following:

“(i)      a Borrowing Base Report (and any schedules related thereto and including detailed electronic accounts receivable ledger reports and any other information requested by Bank with respect to Borrower’s Accounts), no later than Friday of each week;”

2.2    Section 6.2 (Financial Statements, Reports, Certificates) . Subsection (a) of Section 6.2 is amended by inserting the following new subsection (a)(ix) immediately following subsection (a)(viii) thereof:

“(ix)      Prompt written notice of any changes to the beneficial ownership information set forth in items 2(d) and 2(e) of the Perfection Certificate. Borrower understands and acknowledges that Bank relies on true, accurate and up-to-date beneficial ownership information to meet Bank’s regulatory obligations to obtain, verify and record information about the beneficial owners of its legal entity customers.”

2.3    Section 6.3 (Accounts Receivable) . Subsection (c) of Section 6.3 is amended in its entirety and replaced with the following:

“(c)      Collection of Accounts . Borrower shall direct Account Debtors to deliver or transmit all proceeds of Accounts into a lockbox account, or such other “blocked account” as specified by Bank (either such account, the “ Cash Collateral Account ”). Whether or not an Event of Default has occurred and is continuing, Borrower shall immediately deliver all payments on and proceeds of Accounts to the Cash Collateral Account. Subject to Bank’s right to maintain a reserve pursuant to Section 6.3(g), all amounts received in the Cash Collateral Account shall be applied to immediately reduce the Obligations (unless Bank, in its sole discretion, at times when an Event of Default exists, elects not to so apply such amounts). Borrower hereby authorizes Bank to transfer to the Cash Collateral Account any amounts that Bank reasonably determines are proceeds of the Accounts (provided that Bank is under no obligation to do so and this allowance shall in no event relieve Borrower of its obligations hereunder).”

2.4    Section 6.3 (Accounts Receivable) . Subsection (g) of Section 6.3 is amended in its entirety and replaced with the following:

“(g)      Reserves . Notwithstanding any terms in this Agreement to the contrary, at times when an Event of Default exists, Bank may hold any proceeds of the Accounts and any amounts in the Cash Collateral Account that are not applied to the Obligations pursuant to Section 6.3(c) above as a reserve to be applied to any Obligations, regardless of whether such Obligations are then due and payable.”

2.5    Section 6.9(b) (Financial Covenants) . Section 6.9(b) is deleted in its entirety and replaced with the following:

     (b)      Minimum EBITDA . Achieve (i) EBITDA (negative EBITDA) plus (ii) the net change in Deferred Revenue during each measurement period, of at least (x) (i) for the quarterly period ending June 30, 2018, measured on a trailing six (6) month basis, no worse than negative One Million One Hundred Thousand Dollars (-$1,100,000.00); (ii) for the quarterly period ending September 30, 2018, measured on a trailing six month basis, no less than Five Hundred Thousand Dollars ($500,000.00); (iii) for the quarterly period ending





December 31, 2018, measured on a trailing six (6) month basis, no worse than negative Two Hundred Fifty Thousand Dollars (-$250,000.00); and (y) for the quarterly period ending March 31, 2019, measured on a trailing three (3) month basis, no worse than negative Two Hundred Fifty Thousand Dollars (-$250,000.00); ”

2.6    Section 6.9(d) (Financial Covenants) . The following new Section 6.9(d) is hereby inserted immediately following Section 6.9(c) thereof:

     (d)      Equity Event 2018 . (i) During the period commencing on the Twelfth Amendment Effective Date and ending on June 30, 2018, Borrower shall have received net proceeds of not less than Two Million Dollars ($2,000,000.00) (the “ Initial 2018 Equity Proceeds ”) from the issuance and sale of additional equity (which can be in the form of convertible indebtedness) or Subordinated Debt (subject to a Subordination Agreement in form and substance acceptable to Bank, in Bank’s reasonable discretion) of Borrower, to be issued to investors of similar character and quality as the investors in Borrower as of the Effective Date; and (ii) in addition to and supplemental to the Initial 2018 Equity Proceeds, in connection with or after receipt of the Initial 2018 Equity Proceeds, but in any event on or before December 31, 2018, Borrower shall have received additional net proceeds of not less than Five Hundred Thousand Dollars ($500,000.00) (the “ Subsequent 2018 Equity Proceeds ”, and together with the Initial 2018 Equity Proceeds, the “ Equity Event 2018 ”), from the issuance and sale of additional equity (which can be in the form of convertible indebtedness) or Subordinated Debt (subject to a Subordination Agreement in form and substance acceptable to Bank, in Bank’s reasonable discretion) of Borrower, to be issued to investors of similar character and quality as the investors in Borrower as of the Effective Date. For the avoidance of doubt, proceeds of PFG Subordinated Debt may be deemed to satisfy all or a portion of the requirements of the Equity Event 2018.”     

2.7 Section 13 ( Definitions ). The following new defined terms are hereby inserted alphabetically in Section 13.1:

     Equity Event 2018 ” is defined in Section 6.9(d).”

     Initial 2018 Equity Proceeds ” is defined in Section 6.9(d).”

     Subsequent 2018 Equity Proceeds ” is defined in Section 6.9(d).”
    
     Twelfth Amendment Effective Date ” is May 11, 2018.”

2.8    Section 13 ( Definitions ). The following defined term appearing in Section 13.1 is hereby deleted in its entirety and replaced with the following:

     PFG Subordinated Debt ” is all Indebtedness of Borrower owed to Partners for Growth IV, L.P., Partners for Growth V, L.P., and/or any Affiliate fund of the foregoing, which shall at all times be subject to a subordination agreement or subordination agreements in favor of Bank, in form and substance reasonably acceptable to Bank, in its reasonable discretion.”

2.9    Section 13 ( Definitions ). The following defined terms appearing in Section 13.1 are hereby deleted in their entirety:






     Streamline Period ” is, on and after the Ninth Amendment Effective Date, provided no Event of Default has occurred and is continuing, the period (a) commencing on the first day of the month following the day that Borrower provides to Bank a written report that Borrower has, for each consecutive day in the immediately preceding fiscal quarter (in each case as determined by Bank in its reasonable discretion), maintained (i) the sum of (a) Borrower’s unrestricted cash at Bank plus (b) the unused Availability Amount divided by (b) the outstanding principal balance of the Term Loan 2015, in an amount at all times greater than 1.75:1.00 (the “ Streamline Threshold ”); and (b) terminating on the earlier to occur of (i) the occurrence of an Event of Default, and (ii) the first day thereafter in which Borrower fails to maintain the Streamline Threshold, as determined by Bank in its discretion. Upon the termination of a Streamline Period, Borrower must maintain the Streamline Threshold each consecutive day for one (1) fiscal quarter as determined by Bank in its discretion, prior to entering into a subsequent Streamline Period. Borrower shall give Bank prior written notice of Borrower’s election to enter into any such Streamline Period, and each such Streamline Period shall commence on the first day of the monthly period following the date Bank determines, in its reasonable discretion, that the Streamline Threshold has been achieved.”

     Subject Month ” and “ Subject Months ” is the latest calendar month or months for which Borrower has timely delivered the reports and schedules required pursuant to Section 6.2(a) hereof.”


2.10    Exhibit C (Compliance Certificate) . The Compliance Certificate appearing as Exhibit C to the Loan Agreement is deleted in its entirety and replaced with the Compliance Certificate attached as Schedule 1 attached hereto.

3. Limitation of Amendments.

3.1     The amendments set forth in Section 2 , above, are effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed to (a) be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (b) otherwise prejudice any right or remedy which Bank may now have or may have in the future under or in connection with any Loan Document.

3.2     This Amendment shall be construed in connection with and as part of the Loan Documents and all terms, conditions, representations, warranties, covenants and agreements set forth in the Loan Documents, except as herein amended, are hereby ratified and confirmed and shall remain in full force and effect.

4. Waiver. Bank hereby waives Borrower’s existing default under the Loan Agreement by virtue of Borrower’s failure to comply with the minimum EBITDA financial covenant contained in Section 6.9(b) thereof for the compliance period ended March 31, 2018. Bank’s waiver of Borrower’s non-compliance of said financial covenant shall apply only to such date of non-compliance which occurred prior to the date hereof. Borrower hereby acknowledges and agrees that except as specifically provided herein, nothing in this Section or anywhere in this Amendment shall be deemed or otherwise construed as a waiver by Bank of any of its rights and remedies pursuant to the Loan Documents, applicable law or otherwise.

5. Representations and Warranties. To induce Bank to enter into this Amendment, Borrower





hereby represents and warrants to Bank as follows:

5.1     Immediately after giving effect to this Amendment (a) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (b) no Event of Default has occurred and is continuing;

5.2     Borrower has the power and authority to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment;

5.3     The organizational documents of Borrower previously delivered to Bank remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect, or updated copies have otherwise been delivered to Bank in connection with the execution of this Amendment;

5.4     The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, have been duly authorized;

5.5     The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not and will not contravene (a) any law or regulation binding on or affecting Borrower, (b) any contractual restriction with a Person binding on Borrower, (c) any order, judgment or decree of any court or other governmental or public body or authority, or subdivision thereof, binding on Borrower, or (d) the organizational documents of Borrower;

5.6     The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not require any order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by any governmental or public body or authority, or subdivision thereof, binding on either Borrower, except as already has been obtained or made; and

5.7     This Amendment has been duly executed and delivered by Borrower and is the binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights.

6. Ratification of Intellectual Property Security Agreement . Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Amended and Restated Intellectual Property Security Agreement dated as of May 13, 2015 between Borrower and Bank, and acknowledges, confirms and agrees that said Intellectual Property Security Agreement (a) contains an accurate and complete listing of all Intellectual Property Collateral, as defined in said Intellectual Property Security Agreement, and (b) shall remain in full force and effect.

7. Perfection Certificate . Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated on or about December 9, 2016, as amended as set forth on Schedule 2 attached hereto (the “ Perfection Certificate ”) and acknowledges, confirms and agrees the disclosures and information Borrower provided to Bank in the Perfection Certificate have not changed, as of the date hereof. Borrower hereby agrees that all





references to the “Perfection Certificate” in any Loan Document shall be deemed to be a reference to the Perfection Certificate as defined herein.

8. No Defenses of Borrower . Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.

9. Integration . This Amendment and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Amendment and the Loan Documents merge into this Amendment and the Loan Documents.

10. Counterparts . This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.

11. Effectiveness . This Amendment shall be deemed effective upon due execution and/or delivery of the following, as applicable:

11.1     This Amendment and each other Loan Document, by each applicable party hereto (other than Bank);

11.2     (i) Borrower’s payment of an amendment fee in an amount equal to Twenty Five Thousand Dollars ($25,000.00); and (ii) Borrower’s payment of Bank’s legal fees and expenses incurred in connection with this Amendment and the other Loan Documents;

11.3     The Operating Documents (to the extent amended, amended and restated, modified or otherwise supplemented since last delivered to Bank) and long-form good standing certificates of Borrower certified by the Secretary of State (or equivalent agency) of Borrower’s jurisdiction of organization or formation and each jurisdiction in which Borrower is qualified to conduct business, each as of a date no earlier than thirty (30) days prior to the Twelfth Amendment Effective Date;

11.4     A secretary’s certificate of Borrower with respect to Borrower’s Operating Documents, incumbency, specimen signatures and resolutions authorizing the execution and delivery of this Amendment and the other Loan Documents to which it is a party;

11.5     A consent of directors and/or stockholders of Borrower, as applicable, authorizing the execution and delivery of this Amendment and the other Loan Documents to which it is a party, but only to the extent required by Borrower’s Operating Documents; and

11.6     Certified copies, dated as of a recent date, of financing statement searches, as Bank may request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been terminated or released.
[Signature page follows.]









In Witness Whereof, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above.


BANK

SILICON VALLEY BANK


By: /s/ Bryce Gerber
Name: Bryce Gerber
Title: Vice President

BORROWER

SONIC FOUNDRY, INC.

By: /s/ Ken Minor
Name: Ken Minor
Title: Chief Financial Officer

SONIC FOUNDRY MEDIA SYSTEMS, INC.

By: /s/ Ken Minor
Name: Ken Minor
Title: Chief Financial Officer































Schedule 1 to Twelfth Amendment
EXHIBIT C


COMPLIANCE CERTIFICATE

TO:        SILICON VALLEY BANK                    Date:                 
FROM:      SONIC FOUNDRY, INC.
SONIC FOUNDRY MEDIA SYSTEMS, INC.                 

The undersigned authorized officer of SONIC FOUNDRY, INC. and SONIC FOUNDRY MEDIA SYSTEMS, INC. (“ Borrower ”) certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (as amended, the “ Agreement ”), (1) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below, (2) there are no Events of Default, (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided , further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement, and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries, if any, relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank. Attached are the required documents supporting the certification. The undersigned certifies that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
 
Reporting Covenant
Required
Complies
 
 
 
Monthly financial statements with
Compliance Certificate
Monthly within 30 days (60 days for last month of each fiscal year)
Yes No
Annual financial statement (CPA Audited) + CC
FYE within 120 days
Yes No
10‑Q, 10‑K and 8-K
Within 5 days after filing with
SEC
Yes No
A/R & A/P Agings
Monthly within 15 days
Yes No
Borrowing Base Reports
no later than Friday of each week
Yes No
Projections
Within fifteen (15) following
approval by the Borrower’s
board of directors, and in any
event within fifteen (15) days
after the end of each fiscal year of Borrower, and as amended and/or updated
Yes No
 

The following Intellectual Property was registered after the Effective Date (if no registrations, state “None”)
____________________________________________________________________________






Financial Covenant
Required
Actual
Complies
 
 
 
 
Maintain as indicated:
 
 
 
Minimum Liquidity (monthly)
[1.60] [1.75]:1.00
:1.00
Yes No
Minimum EBITDA (quarterly, on a [T6M]
[T5M] basis)
*
$
Yes No
Maximum Subsidiary Indebtedness (at all times)
<$1,000,000
$______
Yes No
EQUITY EVENT 2018
**
$______
Yes No
*See Section 6.9(b)
**See Section 6.9(d)
 
 
 

The following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.

The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)


---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SONIC FOUNDRY, INC.
SONIC FOUNDRY MEDIA SYSTEMS, INC.


By:
Name:
Title:
BANK USE ONLY

Received by: _ ___________________ _
authorized signer
Date: _________________________

Verified: ____ ____________________
authorized signer
Date: _________________________

Compliance Status:Yes No

















Schedule 1 to Compliance Certificate

Financial Covenants of Borrower


In the event of a conflict between this Schedule and the Loan Agreement, the terms of the Loan Agreement shall govern.

Dated:      ____________________
I.      Liquidity (Section 6.9(a))
Required:      Liquidity, at all times, tested with respect to Borrower only on a monthly basis, of at least (i) 1.60:1.00 for the first and second month of each quarterly fiscal period; and (ii) 1.75:1.00 for the third month of each quarterly fiscal period.
Actual:

A.
Aggregate value of Borrower’s unrestricted cash at Bank
$
B.
Aggregate value of the net billed accounts receivable of Borrower
$
C.
Quick Assets (the sum of lines A plus  B)
$
D.
Aggregate value of Obligations to Bank
$
E.
LIQUIDITY (line C divided by line D), expressed as a ratio
:1.00

Is line E equal to or greater than [1.60] [1.75] :1.00?

  No, not in compliance                        Yes, in compliance

II.      Minimum EBITDA (Section 6.9(b))

Required:      Achieve (i) EBITDA (negative EBITDA) plus (ii) the net change in Deferred Revenue during each measurement period, of at least (x) (i) for the quarterly period ending June 30, 2018, measured on a trailing six (6) month basis, no worse than negative One Million One Hundred Thousand Dollars (-$1,100,000.00); (ii) for the quarterly period ending September 30, 2018, measured on a trailing six month basis, no less than Five Hundred Thousand Dollars ($500,000.00); (iii) for the quarterly period ending December 31, 2018, measured on a trailing six (6) month basis, no worse than negative Two Hundred Fifty Thousand Dollars
(-$250,000.00); and (y) for the quarterly period ending March 31, 2019, measured on a trailing three (3) month basis, no worse than negative Two Hundred Fifty Thousand Dollars
(-$250,000.00).
Actual: All amounts measured as indicated above

A.
EBITDA
$
B.
The net change in Deferred Revenue
$
Is line A plus line B equal to or greater than (loss no worse than) $[ ] ?

  No, not in compliance.                        Yes, in compliance.








Schedule 2 to Twelfth Amendment
Schedule 2

Amendments to Perfection Certificate

1.
Section 2 of the Perfection Certificate is amended by inserting the following text to appear as new subsections (d) and (e) thereof, immediately following subsection (c) thereof:
     d.      Does any individual , directly or indirectly (for example, if applicable, through such individual’s equity interests in the Company’s parent entity), through any contract, arrangement, understanding, relationship or otherwise, own 25% or more of the equity interests of the Company:
Yes           No     
If yes, complete the following information:
 
Name
Date of birth
Residential address
For US Persons, Social Security Number:
(non-US persons should provide SSN if available)
For Non-US Persons: Type of ID, ID number, country of issuance, expiration date
Percentage of ownership
(if indirect ownership, explain structure)
1
 
 
 
 
 
 
2
 
 
 
 
 
 
3
 
 
 
 
 
 
4
 
 
 
 
 
 

e.      Identify one individual with significant responsibility for managing the Company, i.e., an executive officer or senior manager (e.g., Chief Executive Officer, President, Vice President, Chief Financial Officer, Treasurer, Chief Operating Officer, Managing Member or General Partner) or any other individual who regularly performs similar functions. If appropriate, an individual listed in Section 2(d) above may also be listed here.
 
Name
Date of birth
Residential address
For US Persons, Social Security Number:
(non-US persons should provide SSN if available)
For Non-US Persons: Type of ID, ID number, country of issuance, expiration date
1
 
 
 
 
 








Exhibit 31.1
CERTIFICATIONS
 
I, Gary R. Weis, the CEO of Sonic Foundry, Inc., certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Sonic Foundry, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 15, 2018

 
 
 
By:
 
/s/ Gary R. Weis
By:
 
Gary R. Weis
Title:
 
Chief Executive Officer
 
 
 





Exhibit 31.2

I, Kenneth A. Minor, the CFO and Secretary of Sonic Foundry, Inc., certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Sonic Foundry, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 15, 2018

 
 
 
By:
 
/s/ Kenneth A. Minor
By:
 
Kenneth A. Minor
Title:
 
Chief Financial Officer and Secretary
 
 
 





SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Exhibit 32
 
Statement
 
Solely for the purposes of complying with 18 U.S.C.§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and the Chief Financial Officer of Sonic Foundry, Inc. (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
Dated: May 15, 2018

 
 
 
By:
 
/s/ Gary R. Weis
By:
 
Gary R. Weis
Title:
 
Chief Executive Officer
 
 
 
By:
 
/s/ Kenneth A. Minor
By:
 
Kenneth A. Minor
Title:
 
Chief Financial Officer and Secretary