Company Quick10K Filing
Quick10K
Qumu
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$2.18 10 $21
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-10-25 Enter Agreement, Officers, Exhibits
8-K 2018-10-24 Officers
8-K 2018-07-31 Earnings, Exhibits
8-K 2018-07-19 Regulation FD
8-K 2018-07-18 Regulation FD, Exhibits
8-K 2018-07-06 Regulation FD
8-K 2018-05-10 Shareholder Vote
8-K 2018-05-07 Regulation FD, Exhibits
8-K 2018-05-01 Earnings, Exhibits
8-K 2018-03-06 Earnings, Exhibits
8-K 2018-02-28 Enter Agreement, Exhibits
8-K 2018-02-09 Earnings, Exhibits
8-K 2018-01-12 Enter Agreement, Off-BS Arrangement, Leave Agreement, Sale of Shares, Exhibits
VMW Vmware
CDNS Cadence Design Systems
DBX Dropbox
PAYC Paycom
OKTA Okta
SMAR Smartsheet
BOX Box
ELLI Ellie Mae
AVID Avid Technology
RDVT Red Violet
QUMU 2018-09-30
Part 1 - Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 qumuexhibit311q32018.htm
EX-31.2 qumuexhibit312q32018.htm
EX-32 qumuexhibit32q32018.htm

Qumu Earnings 2018-09-30

QUMU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 qumu10qq32018.htm FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 SEPTEMBER 30, 2018; OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________TO ________.
Commission File Number: 000-20728
 
QUMU CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
41-1577970
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
510 1st Avenue North, Suite 305, Minneapolis, MN 55403
(Address of principal executive offices)

(612) 638-9100
(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 o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company x
Emerging growth company o
 
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
Common Stock outstanding at November 2, 20189,528,403 shares of $.01 par value Common Stock.
 

1


QUMU CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2018
 
Description
Page
 
 
 
 
 
 
 
 
 
 
 


2


PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
 
September 30,
2018
 
December 31,
2017
Assets
(unaudited)
 
 
Current assets:
 
 

Cash and cash equivalents
$
8,499

 
$
7,690

Receivables, net of allowance for doubtful accounts of $81 and $21, respectively
4,150

 
5,529

Contract assets
156

 

Income tax receivable
319

 
156

Prepaid expenses and other current assets
1,932

 
1,830

Total current assets
15,056

 
15,205

Property and equipment, net of accumulated depreciation of $2,730 and $4,678, respectively
512

 
911

Intangible assets, net
4,661

 
6,295

Goodwill
7,132

 
7,390

Deferred income taxes, non-current
60

 
77

Other assets, non-current
925

 
4,398

Total assets
$
28,346

 
$
34,276

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and other accrued liabilities
$
1,841

 
$
3,878

Accrued compensation
959

 
1,824

Deferred revenue
9,114

 
8,923

Deferred rent
47

 
181

Financing obligations
144

 
1,047

Warrant liability
3,458

 
819

Total current liabilities
15,563

 
16,672

Long-term liabilities:
 

 
 

Deferred revenue, non-current
1,483

 
141

Income taxes payable, non-current
531

 
3

Deferred tax liability, non-current
40

 
153

Deferred rent, non-current
322

 
507

Financing obligations, non-current

 
3

Term loan, non-current
3,304

 
7,605

Other non-current liabilities
146

 

Total long-term liabilities
5,826

 
8,412

Total liabilities
21,389

 
25,084

Commitments and contingencies (Note 4)


 


Stockholders’ equity:
 

 
 

Preferred stock, $0.01 par value, authorized 250,000 shares, no shares issued and outstanding

 

Common stock, $0.01 par value, authorized 29,750,000 shares, issued and outstanding 9,528,403
 and 9,364,804, respectively
95

 
94

Additional paid-in capital
68,763

 
68,035

Accumulated deficit
(58,923
)
 
(56,197
)
Accumulated other comprehensive loss
(2,978
)
 
(2,740
)
Total stockholders’ equity
6,957

 
9,192

Total liabilities and stockholders’ equity
$
28,346

 
$
34,276


See accompanying notes to unaudited condensed consolidated financial statements.

3


QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited - in thousands, except per share data)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 

 
 

 
 

 
 

Software licenses and appliances
$
985

 
$
1,822

 
$
4,303

 
$
3,971

Service
4,668

 
5,751

 
13,807

 
16,967

Total revenues
5,653

 
7,573

 
18,110

 
20,938

Cost of revenues:
 

 
 

 
 

 
 

Software licenses and appliances
504

 
916

 
1,643

 
1,778

Service
1,611

 
1,995

 
4,990

 
6,003

 Total cost of revenues
2,115

 
2,911

 
6,633

 
7,781

Gross profit
3,538

 
4,662

 
11,477

 
13,157

Operating expenses:
 

 
 

 
 

 
 

Research and development
1,617

 
1,769

 
5,159

 
5,676

Sales and marketing
1,796

 
2,509

 
6,388

 
7,484

General and administrative
1,608

 
2,083

 
5,536

 
6,552

Amortization of purchased intangibles
224

 
226

 
680

 
675

Total operating expenses
5,245

 
6,587

 
17,763

 
20,387

Operating loss
(1,707
)
 
(1,925
)
 
(6,286
)
 
(7,230
)
Other income (expense):
 

 
 

 
 

 
 

Gain on sale of BriefCam, Ltd.
6,502

 

 
6,502

 

Loss on extinguishment of debt
(1,189
)
 

 
(1,189
)
 

Interest expense, net
(262
)
 
(343
)
 
(1,616
)
 
(994
)
Decrease (increase) in fair value of warrant liability
(401
)
 
15

 
(292
)
 
(52
)
Other, net
(78
)
 
(166
)
 
(481
)
 
(345
)
Total other income (expense), net
4,572

 
(494
)
 
2,924

 
(1,391
)
Income (loss) before income taxes
2,865

 
(2,419
)
 
(3,362
)
 
(8,621
)
Income tax expense (benefit)
469

 
(110
)
 
303

 
(139
)
Net income (loss)
$
2,396

 
$
(2,309
)
 
$
(3,665
)
 
$
(8,482
)
 
 
 
 
 
 
 
 
Net income (loss) per share – basic:
 
 
 
 
 
 
 
Net income (loss) per share – basic
$
0.25

 
$
(0.25
)
 
$
(0.39
)
 
$
(0.91
)
Weighted average shares outstanding – basic
9,559

 
9,404

 
9,472

 
9,335

Net income (loss) per share – diluted:
 
 
 
 
 
 
 
Income (loss) attributable to common shareholders
$
2,396

 
$
(2,309
)
 
$
(3,665
)
 
$
(8,482
)
Net income (loss) per share – diluted
$
0.25

 
$
(0.25
)
 
$
(0.39
)
 
$
(0.91
)
Weighted average shares outstanding – diluted
9,709

 
9,404

 
9,472

 
9,335

See accompanying notes to unaudited condensed consolidated financial statements.


4


QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited - in thousands)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
2,396

 
$
(2,309
)
 
$
(3,665
)
 
$
(8,482
)
Other comprehensive income (loss):
 

 
 

 
 

 
 
Net change in foreign currency translation adjustments
(87
)
 
405

 
(233
)
 
1,101

Total other comprehensive income (loss)
(87
)
 
405

 
(233
)
 
1,101

Total comprehensive income (loss)
$
2,309

 
$
(1,904
)
 
$
(3,898
)
 
$
(7,381
)

See accompanying notes to unaudited condensed consolidated financial statements.


5


QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Operating activities:
 

 
 

Net loss
$
(3,665
)
 
$
(8,482
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,924

 
2,309

Stock-based compensation
767

 
1,090

Accretion of debt discount and issuance costs
1,194

 
364

Gain on sale of BriefCam, Ltd.
(6,502
)
 

Loss on debt extinguishment
1,189

 

Loss on lease contract termination
177

 

Change in fair value of warrant liability
292

 
52

Deferred income taxes
(99
)
 
(112
)
Changes in operating assets and liabilities:
 
 
 
Receivables
1,363

 
1,204

Contract assets
394

 

Income taxes receivable / payable
357

 
142

Prepaid expenses and other assets
291

 
1,070

Accounts payable and other accrued liabilities
(2,082
)
 
563

Accrued compensation
(857
)
 
(405
)
Deferred revenue
2,283

 
151

Deferred rent
(121
)
 
(132
)
Other non-current liabilities
98

 

Net cash used in operating activities
(2,997
)
 
(2,186
)
Investing activities:
 

 
 

Proceeds from sale of BriefCam, Ltd.
9,678

 

Purchases of property and equipment
(116
)
 
(22
)
Net cash provided by (used in) investing activities
9,562

 
(22
)
Financing activities:
 

 
 

Proceeds from term loan and warrant issuance
10,000

 

Principal payments on term loans
(14,000
)
 

Payments for term loan issuance costs
(1,308
)
 
(125
)
Principal payments on financing obligations
(329
)
 
(383
)
Common stock repurchases to settle employee withholding liability
(28
)
 
(11
)
Net cash used in financing activities
(5,665
)
 
(519
)
Effect of exchange rate changes on cash
(91
)
 
101

Net increase (decrease) in cash and cash equivalents
809

 
(2,626
)
Cash and cash equivalents, beginning of period
7,690

 
10,364

Cash and cash equivalents, end of period
$
8,499

 
$
7,738

Supplemental disclosures of net cash paid (received) during the period:
 

 
 

Income taxes, net
$
52

 
$
(176
)
Interest, net
$
502

 
$
627


See accompanying notes to unaudited condensed consolidated financial statements.

6


QUMU CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1)
Nature of Business and Basis of Presentation
Qumu Corporation (the "Company") provides the software applications businesses use to create, manage, secure, deliver and measure the success of their videos. The Company's innovative solutions release the power of video to engage and empower employees, partners and clients, allowing organizations around the world to realize the greatest possible value from video they create and publish. Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does video.
The Company views its operations and manages its business as one segment and one reporting unit. Factors used to identify the Company's single operating segment and reporting unit include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The Company manages the marketing of its products and services through regional sales representatives and independent distributors in the United States and international markets.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in a complete set of financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations and cash flows of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2017.
The Company has continued to experience recurring operating losses and negative cash flows from operating activities. The ability of the Company to continue as a going concern is dependent upon the Company maintaining compliance with its term loan covenants. The Company's credit agreement is described in Note 4–"Commitments and Contingencies." If an event of default occurs due to the Company not maintaining compliance with its covenants, the lender may accelerate the repayment of outstanding principal, which could negatively impact the Company’s ability to fund its working capital requirements, capital expenditures and general corporate expenses. The Company is projecting future compliance with its covenants under its current operating plan.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and the related amendments ("Topic 606") using the modified retrospective transition method. Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606. The Company did not evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting. A cumulative catch up adjustment was recorded to beginning accumulated deficit to reflect the impact of all existing arrangements under Topic 606.
At the adoption date, the Company adjusted accumulated deficit by $939,000, primarily driven by uncompleted contracts for which revenue will not be recognized in future periods under Topic 606, partially offset by the incremental originating costs

7


associated with those contracts. The cumulative effect of the changes made to our January 1, 2018 condensed consolidated balance sheet from the modified retrospective adoption of Topic 606 is as follows (in thousands):
 
December 31,
2017
 
Adjustments
 
January 1,
2018
Assets:
 
 
 
 
 
Contract assets
$

 
$
550

 
$
550

Prepaid expenses and other current assets
1,830

 
(99
)
 
1,731

Other assets, non-current
4,398

 
(10
)
 
4,388

Liabilities:
 

 
 

 
 
Deferred revenue
8,923

 
(493
)
 
8,430

Deferred revenue, non-current
141

 

 
141

Stockholders’ equity:
 

 
 

 
 
Accumulated deficit
(56,197
)
 
939

 
(55,258
)
Accumulated other comprehensive loss
(2,740
)
 
(5
)
 
(2,745
)
The most significant impact of the adoption of Topic 606 was on the Company's term software licenses that, under the Company's previous revenue accounting ("Topic 605"), would have continued to be recognized into revenue ratably in 2018 and beyond. However, under Topic 606 the standalone selling price attributable to the license is recognized upon transfer of control resulting in up-front recognition, typically upon fulfillment. The timing of revenue recognition for perpetual software licenses, hardware, and professional services is expected to remain substantially unchanged. See Note 2–"Revenue" for the Company's revenue recognition policy after the adoption of Topic 606.
Revenue generated under Topic 606 is expected to be approximately $1.1 million lower than revenue would have been under Topic 605 for the year ending December 31, 2018. The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2018:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As reported under Topic 606
 
Adjustments
 
Balances without adoption of Topic 606
 
As reported under Topic 606
 
Adjustments
 
Balances without adoption of Topic 606
Revenues
$
5,653

 
$
153

 
$
5,806

 
$
18,110

 
$
577

 
$
18,687

Cost of revenues
2,115

 
6

 
2,121

 
6,633

 
24

 
6,657

Sales and marketing
1,796

 
12

 
1,808

 
6,388

 
50

 
6,438

Net income (loss)
2,396

 
135

 
2,531

 
(3,665
)
 
503

 
(3,162
)
Net change in foreign currency translation adjustments
(87
)
 
2

 
(85
)
 
(233
)
 
12

 
(221
)
Total comprehensive income (loss)
2,309

 
137

 
2,446

 
(3,898
)
 
515

 
(3,383
)
The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of September 30, 2018:
 
September 30, 2018
 
As reported under Topic 606
 
Adjustments
 
Balances without adoption of Topic 606
Assets:
 
 
 
 
 
Contract assets
156

 
(156
)
 

Prepaid expenses and other current assets
1,932

 
33

 
1,965

Other assets, non-current
925

 
2

 
927

Liabilities:
 

 
 
 
 
Deferred revenue
9,114

 
299

 
9,413

Deferred revenue, non-current
1,483

 
(1
)
 
1,482

Stockholders’ equity:
 

 
 

 
 
Accumulated deficit
(58,923
)
 
(436
)
 
(59,359
)
Accumulated other comprehensive loss
(2,978
)
 
17

 
(2,961
)

8


The Company’s net cash used in operating activities for the nine months ended September 30, 2018 did not change due to the adoption of Topic 606. The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2018:
 
Nine Months Ended September 30, 2018
 
As reported under Topic 606
 
Adjustments
 
Balances without adoption of Topic 606
Operating activities:
 

 
 
 
 
Net loss
$
(3,665
)
 
$
503

 
$
(3,162
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 


Changes in operating assets and liabilities:
 
 
 
 


Contract assets
394

 
(394
)
 

Prepaid expenses and other assets
291

 
74

 
365

Deferred revenue
2,283

 
(183
)
 
2,100

Financial Instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall, which the Company adopted on January 1, 2018, modifying its accounting and required disclosures for its equity investment previously accounted for under the cost basis method of accounting.
The Company’s equity investment consisted of its investment totaling $3.1 million in convertible preferred stock of privately-held BriefCam, Ltd. (“BriefCam”), as described in Note 9–"Investment in Software Company," which is included in other assets in the condensed consolidated balance sheets as of December 31, 2017. The new standard eliminated the cost method of accounting for investments in equity securities that do not have readily determinable fair values and permits the election of a measurement alternative that allows such securities to be recorded at cost, less impairment, if any, plus or minus changes resulting from observable price changes in market-based transactions for an identical or similar investment of the same issuer. The Company adopted the provisions of the new standard applicable to its investment in BriefCam on a prospective basis and elected the measurement alternative for non-marketable investments previously accounted for under the cost method of accounting.
On July 6, 2018, the Company sold its investment in BriefCam, which had a carrying value of $3.1 million as of December 31, 2017, resulting in a gain on sale of $6.5 million during the three and nine months ended September 30, 2018. From the date of adoption of the new accounting standard on January 1, 2018 to the sale of BriefCam, there were no observable price changes or impairments related to the Company’s non-marketable investment in the equity security.
Income Taxes
In March 2018, the Company adopted ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act of 2017 was signed into law. Additional information regarding the adoption of this standard is contained in Note 7–"Income Taxes."
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which changes the fair value measurement disclosure requirements of ASC 820. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings (accumulated deficit) for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 and requires certain disclosures regarding stranded tax effects in accumulated other comprehensive income (loss). This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted during interim or annual periods. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements.

9


In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company plans to use a modified retrospective approach and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company developed a project plan to guide the implementation of ASU 2016-02 and has made progress on this plan, including assessing the Company’s portfolio of leases and compiling information on active leases. The Company is currently evaluating the impact on its consolidated financial statements of adopting this standard, which will require right-of-use assets and lease liabilities be recorded in the consolidated balance sheet for operating leases, which may be material.
(2)
Revenue
The Company generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services. An individual sale can range from single year agreements for thousands of dollars to multi-year agreements for over a million dollars.
The Company follows a five-step model to assess each contract of a sale or service to a customer: identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time basis.
Revenue is recognized upon transfer of control of promised products or services (i.e., performance obligations) to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time (for cloud-hosted software as a service, maintenance and support, and other services) or at a point in time (for software licenses and hardware).
The Company enters into contracts that can include various combinations of software licenses, appliances, maintenance and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each distinct performance obligation, on a relative basis using its standalone selling price.
The Company determines the standalone selling price for software-related elements, including professional services and software maintenance and support contracts, based on the price charged for the deliverable when sold separately.
With the adoption of Topic 606 beginning January 1, 2018, the Company had a change in the accounting for revenue of its on-premise term software license arrangements. Under Topic 605, the term software license and technical support elements of the combined bundle were recognized over time. In contrast, Topic 606 requires the Company to identify the performance obligations in the contract – that is, those promised goods and services (or bundles of promised goods or services) that are distinct – and allocate the transaction price of the contract to those performance obligations on the basis of standalone selling prices. The transaction price allocated to each performance obligation is then recognized either at a point in time or over time using an appropriate measure of progress. Under Topic 606, the Company has concluded that its on-premise term software licenses and technical support for its on-premise term software licenses are distinct from each other. As a result, the software license is now recognized upon transfer of control, which is at fulfillment, resulting in earlier revenue recognition. The revenue allocable to technical support continues to be recognized ratably over the non-cancellable committed term of the agreement.
Other items relating to charges collected from customers include shipping and handling charges and sales taxes charges. Shipping and handling charges collected from customers as part of the Company's sales transactions are included in revenues and the associated costs are included in cost of revenues. Sales taxes charged to and collected from customers as part of the Company’s sales transactions are excluded from revenues and recorded as a liability to the applicable governmental taxing authority.

10


Nature of Products and Services
Perpetual software licenses
The Company’s perpetual software license arrangements grant customers the right to use the software indefinitely as it exists at the time of purchase. The Company recognizes revenue for distinct software licenses once the license period has begun and the software has been made available to the customer. Payments for perpetual software license contracts are generally received upon fulfillment of the software product.
Term software licenses
The Company's term software licenses differ from perpetual software licenses in that the customer's right to use the licensed product has a termination date. Prior to the adoption of Topic 606, these licenses were recognized ratably over the contractual term, beginning on the commencement date of each contract, which is typically the date the Company’s product has been fulfilled. Under the provisions of Topic 606, term software licenses are now recognized upon transfer of control, which is typically at fulfillment, resulting in up-front revenue recognition. The Company categorizes revenue from term software licenses as subscription, maintenance and support revenue in service revenues. Payments are generally received quarterly or annually in equal or near equal installments over the term of the agreement.
Cloud-hosted software as a service
Cloud-hosted software as a service (SaaS) arrangements grant customers the right to access and use the licensed products at the outset of an arrangement via third-party cloud providers. Updates are generally made available throughout the entire term of the arrangement, which is generally one to three years. The Company provides an online library and technical support resources in these cloud-hosted SaaS arrangements, which in conjunction with the SaaS license constitute a single, combined performance obligation, and revenue is recognized over the term of the license. Payments are generally received annually in advance of the service period.
Hardware
The Company sells appliances that are typically drop shipped from third-party suppliers selected by the Company. The transaction price allocated to the appliance is generally recognized as revenue at fulfillment when the customer obtains control of the product. Payments for appliances are generally received upon delivery of the hardware product.
Maintenance and support
Maintenance and support arrangements grant customers the right to software updates and technical support over the term of the maintenance and support contract. Revenue from maintenance and support is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is upon fulfillment of the software obligation. Payments are generally received annually in advance of the service period.
Professional services and training
Professional services and training generally consist of software implementation, on-boarding services and best practices consulting. Revenue from professional services contracts is typically recognized as performed, generally using hours expended to measure progress. Services are generally invoiced monthly for work performed.
Revenues by product category and geography
The Company combines its products and services into three product categories and three geographic regions, based on customer location, as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Software licenses and appliances
$
985

 
$
1,822

 
$
4,303

 
$
3,971

Service
 
 
 
 
 
 
 
Subscription, maintenance and support
4,091

 
5,113

 
12,251

 
15,061

Professional services and other
577

 
638

 
1,556

 
1,906

Total service
4,668

 
5,751

 
13,807

 
16,967

Total revenues
$
5,653

 
$
7,573

 
$
18,110

 
$
20,938


11


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
North America
$
3,766

 
$
5,771

 
$
11,593

 
$
15,194

Europe
1,618

 
1,566

 
4,693

 
5,174

Asia
269

 
236

 
1,824

 
570

Total
$
5,653

 
$
7,573

 
$
18,110

 
$
20,938

Significant Judgments
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
Our contracts with customers typically contain promises to transfer multiple products and services to a customer. Judgment is required to determine whether each product and/or service is considered to be a distinct performance obligation that should be accounted for separately under the contract. We allocate the transaction price to the distinct performance obligations based on relative standalone selling price (“SSP”). We estimate SSP by maximizing use of observable prices such as the prices charged to customers on a standalone basis, established prices lists, contractually stated prices, profit margins and other entity-specific factors, or by using information such as market conditions and other observable inputs. However, the selling prices of the Company's software licenses and cloud-hosted SaaS arrangements are highly variable. Thus, we estimate SSP for software licenses and cloud-hosted SaaS arrangements using the residual approach, determined based on total transaction price less the SSP of other goods and services promised in the contract.
Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of the Company’s license arrangements, the Company has concluded that the licenses and associated services are distinct from each other. In others, like the Company’s cloud-hosted SaaS arrangements, the license and certain services are not distinct from each other and therefore the Company has concluded that these promised goods and services are a single, combined performance obligation.
If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
The Company is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on the Company’s expectations of the term of the contract. Generally, the Company has not experienced significant returns from or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on its results of operations during the periods involved.
Contract Balances  
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables or contract liabilities (deferred revenue) on the Company’s condensed consolidated balance sheet. The Company records deferred revenue when revenue is recognized subsequent to invoicing.
The Company’s balances for contract assets totaled $550,000 and $156,000 as of January 1, 2018 and September 30, 2018, respectively. The Company’s balances for contract liabilities, which are included in deferred revenue, totaled $8.6 million and $10.6 million as of January 1, 2018 and September 30, 2018, respectively.
During the three and nine months ended September 30, 2018, the Company recognized $3.8 million and $7.3 million of revenue that was included in the deferred revenue balance, as adjusted for Topic 606, at the beginning of the period. All other activity in deferred revenue is due to the timing of invoices in relation to the timing of revenue as described above.
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $17.3

12


million as of September 30, 2018, of which the Company expects to recognize $11.0 million of revenue over the next 12 months and the remainder thereafter.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.
Deferred Sales Commissions
Sales commissions represent the direct incremental costs related to the acquisition of customer contracts. The Company recognizes commissions as sales and marketing expense at the time the associated product revenue is recognized, requiring establishment of a deferred cost in the event a commission is paid prior to recognition of revenue. The deferred commission amounts are recoverable through the related future revenue streams under non-cancellable customer contracts and commission clawback provisions in the Company's sales compensation plans. Deferred commission costs included in prepaid expenses and other assets were $366,000 and $308,000 at September 30, 2018 and December 31, 2017, respectively. Deferred commission costs in other assets, non-current were $36,000 and $47,000 at September 30, 2018 and December 31, 2017, respectively. The Company recognized commissions expense of $212,000 and $479,000 during the three months ended September 30, 2018 and 2017, respectively, and $943,000 and $1.3 million during the nine months ended September 30, 2018 and 2017, respectively.
(3)
Intangible Assets and Goodwill
Intangible Assets
The Company’s amortizable intangible assets consisted of the following (in thousands):
 
September 30, 2018
 
Customer Relationships
 
Developed Technology
 
Trademarks / Trade-Names
 
Total
Original cost
$
4,860

 
$
8,100

 
$
2,181

 
$
15,141

Accumulated amortization
(2,598
)
 
(6,974
)
 
(908
)
 
(10,480
)
Net identifiable intangible assets
$
2,262

 
$
1,126

 
$
1,273

 
$
4,661

 
December 31, 2017
 
Customer Relationships
 
Developed Technology
 
Trademarks / Trade-Names
 
Total
Original cost
$
4,928

 
$
8,225

 
$
2,184

 
$
15,337

Accumulated amortization
(2,194
)
 
(6,043
)
 
(805
)
 
(9,042
)
Net identifiable intangible assets
$
2,734

 
$
2,182

 
$
1,379

 
$
6,295

Changes to the carrying amount of net amortizable intangible assets for the nine months ended September 30, 2018 consisted of the following (in thousands):
 
Nine Months Ended 
 September 30, 2018
Balance, beginning of period
$
6,295

Amortization expense
(1,559
)
Currency translation
(75
)
Balance, end of period
$
4,661

Amortization expense of intangible assets consisted of the following (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Amortization expense associated with the developed technology included in cost of revenues
$
288

 
$
302

 
$
879

 
$
893

Amortization expense associated with other acquired intangible assets included in operating expenses
224

 
226

 
680

 
675

Total amortization expense
$
512

 
$
528

 
$
1,559

 
$
1,568


13


Goodwill
On October 3, 2014, the Company completed the acquisition of Kulu Valley, Ltd., subsequently renamed Qumu Ltd., and recognized $8.8 million of goodwill and $6.7 million of intangible assets. The goodwill balance of $7.1 million at September 30, 2018 reflects the impact of foreign currency exchange rate fluctuations since the acquisition date.
As of September 30, 2018, the Company’s market capitalization, without a control premium, was greater than its book value and, as a result, the Company concluded there was no goodwill impairment. Declines in the Company’s market capitalization or a downturn in its future financial performance and/or future outlook could require the Company to record goodwill and other impairment charges. While a goodwill impairment charge is a non-cash charge, it would have a negative impact on the Company's results of operations.
(4)
Commitments and Contingencies
Leases and Other Financing Obligations
Balances for assets acquired under capital lease obligations and included in property and equipment were as follows (in thousands):
 
September 30,
2018
 
December 31,
2017
Computer and network equipment
$
511

 
$
511

Furniture
287

 
287

Assets acquired under capital lease obligations
798

 
798

Accumulated depreciation
(728
)
 
(613
)
Assets acquired under capital lease obligations, net
$
70

 
$
185

The current and long-term portions of capital leases and other financing obligations were as follows (in thousands):
 
September 30,
2018
 
December 31,
2017
Capital leases and other financing obligations, current
$
144

 
$
1,047

Capital leases and other financing obligations, non-current

 
3

Total capital leases and other financing obligations
$
144

 
$
1,050

The Company leases certain of its facilities and some of its equipment under non-cancelable operating lease arrangements. The rental payments under these leases are charged to expense on a straight-line basis over the non-cancelable term of the lease. Future minimum payments under capital lease obligations, other financing obligations, and non-cancelable operating leases, excluding property taxes and other operating expenses, as of September 30, 2018 are as follows (in thousands):
 
Capital leases and other financing obligations
 
Operating leases
 
Total
Remainder of 2018
$
62

 
$
150

 
$
212

2019
86

 
585

 
671

2020

 
458

 
458

2021

 
466

 
466

2022

 
425

 
425

Thereafter

 
23

 
23

Total minimum lease payments
148

 
$
2,107

 
$
2,255

Less amount representing interest
(4
)
 
 
 
 
Present value of net minimum lease payments
$
144

 
 
 
 

14


Lease Contract Termination
The Company determined that it had excess capacity at its Minneapolis, Minnesota headquarters and effective May 1, 2018 ceased using a portion of its leased space, subsequently making it available for sublessee occupancy. The Company entered into a sublease agreement having a term beginning May 1, 2018 and extending through January 2023. Accordingly, the Company recorded a liability at fair value of $224,000 for the future contractual lease payments, net of expected sublease receipts. Included in other income (expenses) for the nine months ended September 30, 2018 is the loss related to the leasing-related exit activity of $177,000, which is net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity. A reconciliation of the beginning and ending contract termination obligation balances, including the obligation for exit activities related to a portion of the Company's London, England leased office facilities in December 2017, is as follows (in thousands):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
London, England
 
Minneapolis, Minnesota
 
Total
 
London, England
 
Minneapolis, Minnesota
 
Total
Contract termination obligation, beginning of period
 
$
103

 
$
214

 
$
317

 
$
194

 
$

 
$
194

Lease termination costs incurred
 

 

 

 

 
224

 
224

Accretion expense
 
3

 
6

 
9

 
12

 
10

 
22

Payments on obligations
 
(50
)
 
(12
)
 
(62
)
 
(150
)
 
(26
)
 
(176
)
Change in currency exchange rate
 
(2
)
 

 
(2
)
 
(2
)
 

 
(2
)
Contract termination obligation, end of period
 
$
54

 
$
208

 
$
262

 
$
54

 
$
208

 
$
262

The contract termination obligation is included in other accrued liabilities in the Company's consolidated balance sheets.
Term Loans
The Company's term loans are reported in the consolidated balance sheets as follows (in thousands):
 
September 30,
2018
 
December 31,
2017
Term loan, at face value
$
4,000

 
$
8,000

Unamortized original issue discount
(589
)
 
(121
)
Unamortized debt issuance costs
(107
)
 
(274
)
Term loan
$
3,304

 
$
7,605

Credit Agreement – ESW Holdings, Inc.
On January 12, 2018, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into a term loan credit agreement (the “ESW credit agreement”) with ESW Holdings, Inc. as lender and administrative agent pursuant to which the Company borrowed $10.0 million in the form of a term loan. Proceeds from the ESW credit agreement were used to pay the remaining outstanding balance of $8.0 million on the Hale term note plus a 10% prepayment penalty of $800,000 on January 12, 2018.
On July 19, 2018, the Company paid $6.5 million on its outstanding term loan from ESW Holdings, Inc. under its term loan credit agreement dated January 12, 2018. The payment was comprised of principal of $6.0 million and accrued interest of $463,000 for the period January 12, 2018 to the payment date of July 19, 2018. The Company used a portion of the $9.6 million in net proceeds from the sale of its investment in BriefCam to fund the prepayment. Under the term loan credit agreement, any voluntary prepayment by the Company from the net proceeds received from the disposition of the Company’s investment in BriefCam will not trigger a prepayment fee. The Company determined that the prepayment of principal constituted a partial extinguishment of debt and, as such, recognized a $1.2 million loss related to the write down of unamortized debt discount and issuance costs.
The term loan is scheduled to mature on January 10, 2020. Interest accrues and compounds monthly at a variable rate per annum equal to the prime rate plus 4.0%. The Company may prepay the term loan at any time with the payment of a prepayment fee of 10% of the amount prepaid. However, no prepayment fee will be incurred for any prepayment made from the proceeds of the Company’s sale of its investment in BriefCam.
The term loan had an estimated fair value of $3.4 million as of September 30, 2018. The fair value of the term loan is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate. As the contractual terms of the loan provide all the necessary inputs for this calculation, the term loan is classified as Level 2 within the fair value

15


hierarchy. The estimated fair value is not necessarily indicative of the amount that would be realized in a current market exchange.
Credit Agreement – Hale Capital Partners, LP
The term loan balance as of December 31, 2017 consisted of a term loan credit agreement (the “Hale credit agreement”) with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent, under which the Company borrowed $8.0 million as a term loan on October 21, 2016. The term loan was scheduled to mature on October 21, 2019 and required payment of interest monthly at the prime rate plus 6.0%. The term loan required a prepayment fee of 10% of the amount prepaid.
On January 12, 2018, the Company repaid all outstanding obligations under the Hale credit agreement using $8.8 million of the $10.0 million term loan proceeds provided through the ESW credit agreement. Concurrently with such repayment, the Hale credit agreement terminated by its terms effective January 12, 2018.
Covenant Compliance
The ESW credit agreement contains affirmative and negative covenants and requirements relating to the Company and its operations. The negative covenants of the ESW credit agreement require the Company to meet financial covenants beginning with the quarter ended September 30, 2018 relating to minimum core bookings, maximum deferred revenue non-current, minimum subscription, and maintenance and support revenue, and minimum subscription and maintenance and support dollar renewal rates. The Company was in compliance with all financial covenants for the quarter ended September 30, 2018.
The Company’s monthly, quarterly and annual results of operations are subject to significant fluctuations due to a variety of factors, many of which are outside of the Company’s control. These factors include the number and mix of products and solutions sold in the period, timing of customer purchase commitments, including the impact of long sales cycles and seasonal buying patterns, and variability in the size of customer purchases and the impact of large customer orders on a particular period. The foregoing factors are difficult to forecast, and these, as well as other factors, could adversely affect the Company’s monthly, quarterly and annual results of operations. Failure to achieve its monthly, quarterly or annual forecasts may result in the Company being out of compliance with covenants or projecting noncompliance in the future. Management actively monitors its opportunity pipeline, forecast, and projected covenant compliance on an ongoing basis.
Contingencies
The Company is exposed to a number of asserted and unasserted claims encountered in the normal course of business. Legal costs related to loss contingencies are expensed as incurred. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.
The Company’s standard arrangements include provisions indemnifying customers against liabilities if the Company's products infringe a third-party’s intellectual property rights. The Company has not incurred any costs in its continuing operations as a result of such indemnifications and has not accrued any liabilities related to such contingent obligations in the accompanying condensed consolidated financial statements.
(5)
Fair Value Measurements
A hierarchy for inputs used in measuring fair value is in place that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. The hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. Three levels within the hierarchy may be used to measure fair value:
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect an entity’s own estimates of assumptions that market participants would use in pricing the asset or liability.
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued two warrants for the purchase of up to an aggregate of 1,239,286 shares of the Company's common stock, which remained unexercised and outstanding at September 30, 2018. The warrant issued in conjunction with the October 21, 2016 debt financing (Hale warrant)

16


for the purchase of up to 314,286 shares of the Company's common stock expires on October 21, 2026, has an exercise price of $2.80 per share and is transferable. The warrant issued in conjunction with the January 12, 2018 debt financing (ESW warrant) for the purchase of up to 925,000 shares of the Company's common stock expires on January 12, 2028, has an exercise price of $1.96 per share and is transferable. Additionally, the Company issued a warrant to a sales partner, iStudy Co., Ltd., for the purchase of up to 100,000 shares of the Company's common stock; the warrant expires on August 31, 2028, has an exercise price of $2.43 per share and is transferable. The Hale warrant and ESW warrant contain a cash settlement feature upon the occurrence of a certain events, essentially the sale of the Company as defined in the warrant agreements. Upon a sale of the Company, the holder of the iStudy warrant may exercise the warrant or may elect to receive the same consideration as it would have been entitled to receive upon the occurrence of such transaction if it had been the holder of the shares then issuable upon such exercise of the warrant. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the dates of issuance were recorded in the Company’s consolidated balance sheets as a liability.
The warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the respective dates of issuance and is revalued on each subsequent balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded as other income or expense. The Company recorded a non-cash gain (loss) of $(401,000) and $15,000 during the three months ended September 30, 2018 and 2017, respectively, and a non-cash loss of $(292,000) and $(52,000) during the nine months ended September 30, 2018 and 2017, respectively, from the change in fair value of the warrant liability. The increase in fair value for the three and nine months ended September 30, 2018 was primarily driven by a corresponding increase in the Company’s stock price. The decrease in fair value during the three months ended September 30, 2017 was primarily driven by decreased volatility in the Company’s stock price and the increase in fair value during the nine months ended September 30, 2017 was primarily driven by an increase in the Company’s stock price.
The Company estimates the fair value of this liability using option pricing models that are based on the individual characteristics of the warrants on the valuation date, which includes assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the Hale and ESW warrants. Changes in the assumptions used could have a material impact on the resulting fair value. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.
The Company’s liabilities measured at fair value on a recurring basis and the fair value hierarchy utilized to determine such fair values is as follows at September 30, 2018 and December 31, 2017 (in thousands):
 
 
 
Fair Value Measurements Using
 
Total Fair
Value at
September 30, 2018
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative warrant liability - ESW warrant
$
2,572

 
$

 
$

 
$
2,572

Derivative warrant liability - Hale warrant
691

 

 

 
691

Derivative warrant liability - iStudy
195

 

 

 
195

Derivative warrant liabilities
$
3,458

 
$

 
$

 
$
3,458

 
 
 
Fair Value Measurements Using
 
Total Fair
Value at
December 31, 2017
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Derivative warrant liability - Hale warrant
$
819

 
$

 
$

 
$
819


17


The Company classified the warrant liabilities as Level 3 due to the lack of relevant observable market data over fair value inputs such as the probability-weighting of the various scenarios in the arrangements. The following table represents a rollforward of the fair value of the Level 3 instruments (significant unobservable inputs):
Balance at December 31, 2017
 
$
819

Additions to warrant liability
 
2,347

Change in fair value
 
292

Balance at September 30, 2018
 
$
3,458

(6)
Stock-Based Compensation
The Company granted the following stock-based awards:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
3,500

 
30,000

 
544,000

 
165,000

Restricted stock awards and restricted stock units

 

 
180,000

 
212,500

Performance stock units

 

 
168,500

 
166,149

The stock options, restricted stock awards and performance stock units granted during the three and nine months ended September 30, 2018 and 2017 were granted under the Company's Second Amended and Restated 2007 Stock Incentive Plan (the "2007 Plan"), a shareholder approved plan. Of the 166,149 performance stock units granted in connection with the Company's 2017 short-term incentive plan ("2017 Incentive Plan"), 116,168 vested during the three months ended March 31, 2018. In settlement of the performance stock units, during the three months ended March 31, 2018, the Company issued 25,726 shares, which is equal to the number of performance stock units vested multiplied by the weighted percentage achievement of the performance goals for the 2017 Incentive Plan of approximately 22.1%.
During the nine months ended September 30, 2018, the Company’s shareholders approved an amendment to the 2007 Plan to increase the number of shares authorized under the plan by 500,000 to a total of 3,230,320 shares.
The Company recognized the following expense related to its share-based payment arrangements (in thousands):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
Stock-based compensation cost, before income tax benefit:
 
 

 
 

 
 

 
 

Stock options
 
$
105

 
$
121

 
$
225

 
$
365

Restricted stock awards and restricted stock units
 
140

 
186

 
458

 
605

Performance stock units
 
84

 

 
84

 
120

Total stock-based compensation
 
$
329

 
$
307

 
$
767

 
$
1,090

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
Stock-based compensation cost included in:
 
 

 
 

 
 

 
 

Cost of revenues
 
$
8

 
$
(3
)
 
$
26

 
$
29

Operating expenses
 
321

 
310

 
741

 
1,061

Total stock-based compensation
 
$
329

 
$
307

 
$
767

 
$
1,090

(7)
Income Taxes
As of September 30, 2018 and December 31, 2017, the Company’s liability for gross unrecognized tax benefits totaled $1.7 million and $1.1 million, respectively (excluding interest and penalties). The Company had accrued interest and penalties relating to unrecognized tax benefits of $5,300 and $1,400 on a gross basis at September 30, 2018 and December 31, 2017, respectively. The change in the liability for gross unrecognized tax benefits reflects an increase in reserves established for federal and state uncertain tax positions. The Company does not currently expect significant changes in the amount of unrecognized tax benefits during the next twelve months. Additionally, during the three months ended September 30, 2018, the Company finalized the provisional estimates recorded at December 31, 2017, in connection with the Tax Cuts and Jobs Act of 2017. The estimates were finalized due to the completion of the 2017 federal income tax return. No tax impact was recorded as a result of the finalization of the provisional estimates.

18


(8)
Computation of Net Income (Loss) Per Share of Common Stock
The following table identifies the components of net loss per basic and diluted share (in thousands, except for per share data):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) per share – basic
 
 
 
 
 
 
 
Net income (loss)
$
2,396

 
$
(2,309
)
 
$
(3,665
)
 
$
(8,482
)
Weighted average shares outstanding – basic
9,559

 
9,404

 
9,472

 
9,335

Net income (loss) per share – basic
$
0.25

 
$
(0.25
)
 
$
(0.39
)
 
$
(0.91
)
 
 
 
 
 
 
 
 
Net income (loss) per share – diluted
 
 
 
 
 
 
 
Income (loss) attributable to common shareholders
$
2,396

 
$
(2,309
)
 
$
(3,665
)
 
$
(8,482
)
Weighted average shares outstanding – diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
9,559

 
9,404

 
9,472

 
9,335

Denominator effect of dilutive securities
 
 
 
 
 
 
 
Unvested restricted stock units
150

 

 

 

Diluted potential common shares
150

 

 

 

Weighted average shares outstanding – diluted
9,709

 
9,404

 
9,472

 
9,335

Net income (loss) per share – diluted
$
0.25

 
$
(0.25
)
 
$
(0.39
)
 
$
(0.91
)
Stock options, warrants and restricted stock units to acquire common shares excluded from the computation of diluted weighted-average common shares as their effect is anti-dilutive were as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
1,334

 
1,540

 
1,261

 
1,544

Warrants
1,273

 
314

 
1,213

 
314

Restricted stock units

 
150

 
150

 
135

Total anti-dilutive
2,607

 
2,004

 
2,624

 
1,993

(9)
Investment in Software Company
As of December 31, 2017, the Company held an investment totaling $3.1 million in convertible preferred stock of BriefCam, Ltd., a privately-held Israeli company that develops video synopsis technology to augment security and surveillance systems to facilitate review of surveillance video. On May 7, 2018, BriefCam, Canon Inc. (“Canon”), and the shareholders of BriefCam, including the Company, entered into a stock purchase agreement by which Canon would acquire all of the outstanding shares of BriefCam. On July 3, 2018, BriefCam announced that Canon had completed its acquisition of BriefCam and, on July 6, 2018, the Company received $9,678,000 from the closing proceeds for its shares of BriefCam, resulting in a gain on sale of $6.5 million during the three and nine months ended September 30, 2018.
Prior to its sale, the investment did not have a readily determinable fair value and was recorded at cost, less impairment, if any, plus or minus changes resulting from observable price changes in market-based transactions for an identical or similar investment of the same issuer and is included in other non-current assets. The Company's ownership interest was less than 20%. From the date of the Company's adoption of ASU 2016-01, Financial Instruments – Overall, on January 1, 2018 to the sale of BriefCam, there were no observable price changes or impairments related to the Company’s non-marketable investment in the equity security. The gain on sale is taxable in the U.S. and is offset for federal income tax purposes by current or prior-year tax losses but is subject to applicable state income taxes. The gain on sale is not taxable in Israel.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with the section titled “Financial Information” and our audited financial statements and related notes which are included in our most recent Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in “Risk Factors” included our most recent Annual Report on Form 10-K.
Overview
Qumu Corporation ("Qumu" or the "Company") provides the software applications businesses use to create, manage, secure, distribute and measure the success of live and on-demand video for the enterprise. The Company's platform enables global organizations to drive employee engagement, increase access to video, and modernize the workplace by providing a more efficient and effective way to share knowledge.
For the three months ended September 30, 2018 and 2017, the Company recognized revenues of $5.7 million and $7.6 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company generated revenues of $18.1 million and $20.9 million, respectively. For the years ended December 31, 2017 and 2016, the Company generated revenues of $28.2 million and $31.7 million, respectively.
Critical Accounting Policies
The discussion of the Company's financial condition and results of operations is based upon its financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of the Company's financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that management believes to be reasonable. The Company's actual results may differ from these estimates under different assumptions or conditions.
Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting policies. The accounting policies considered by management to be the most critical to the presentation of the condensed consolidated financial statements because they require the most difficult, subjective and complex judgments include revenue recognition, derivative liabilities for outstanding warrants, and royalties for third party technology. Except for the accounting policies for revenue recognition that were updated as a result of adopting Topic 606 effective January 1, 2018 and accounting policies for our investment in BriefCam that were adopted effective January 1, 2018, our significant accounting policies applicable to the nine months ended September 30, 2018 are discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
See Note 1–"Nature of Business and Basis of Presentation" of the accompanying condensed consolidated financial statements for a description of the Company’s change in critical accounting policies with respect to revenue recognition during the nine months ended September 30, 2018.

20


Results of Operations
The percentage relationships to revenues of certain income and expense items for the three and nine months ended September 30, 2018 and 2017, and the percentage changes in these income and expense items relative to the prior year periods, are contained in the following table:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Percentage of Revenues
 
Percent Increase (Decrease)
 
Percentage of Revenues
 
Percent Increase (Decrease)
 
2018
 
2017
 
2017 to 2018
 
2018
 
2017
 
2017 to 2018
Revenues
100.0
 %
 
100.0
 %
 
(25
)%
 
100.0
 %
 
100.0
 %
 
(14
)%
Cost of revenues
(37.4
)
 
(38.4
)
 
(27
)
 
(36.6
)
 
(37.2
)
 
(15
)
Gross profit
62.6

 
61.6

 
(24
)
 
63.4

 
62.8

 
(13
)
Operating expenses:
 

 
 

 
 
 
 

 
 

 
 
Research and development
28.6

 
23.4

 
(9
)
 
28.4

 
27.1

 
(9
)
Sales and marketing
31.8

 
33.1

 
(28
)
 
35.3

 
35.7

 
(15
)
General and administrative
28.4

 
27.5

 
(23
)
 
30.6

 
31.3

 
(16
)
Amortization of purchased intangibles
4.0

 
3.0

 
(1
)
 
3.8

 
3.2

 
1

Total operating expenses
92.8

 
87.0

 
(20
)
 
98.1

 
97.3

 
(13
)
Operating loss
(30.2
)
 
(25.4
)
 
(11
)
 
(34.7
)
 
(34.5
)
 
(13
)
Other income (expense), net
80.9

 
(6.5
)
 
(1,026
)
 
16.1

 
(6.7
)
 
(310
)
Income (loss) before income taxes
50.7

 
(31.9
)
 
(218
)
 
(18.6
)
 
(41.2
)
 
(61
)
Income tax expense (benefit)
8.3

 
(1.4
)
 
(526
)
 
1.6

 
(0.7
)
 
(318
)
Net income (loss)
42.4
 %
 
(30.5
)%
 
(204
)%
 
(20.2
)%
 
(40.5
)%
 
(57
)%
Revenues
The Company generates revenue through the sale of enterprise video content management software solutions, appliances, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support, and professional and other services.
The table below describes the Company's revenues by product category (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
Software licenses and appliances
$
985

 
$
1,822

 
$
(837
)
 
(46
)%
 
$
4,303

 
$
3,971

 
$
332

 
8
 %
Service
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription, maintenance and support
4,091

 
5,113

 
(1,022
)
 
(20
)
 
12,251

 
15,061

 
(2,810
)
 
(19
)
Professional services and other
577

 
638

 
(61
)
 
(10
)
 
1,556

 
1,906

 
(350
)
 
(18
)
Total service
4,668

 
5,751

 
(1,083
)
 
(19
)
 
13,807

 
16,967

 
(3,160
)
 
(19
)
Total revenues
$
5,653

 
$
7,573

 
$
(1,920
)
 
(25
)%
 
$
18,110

 
$
20,938

 
$
(2,828
)
 
(14
)%
Revenues can vary period to period based on the type and size of contract into which the Company enters with each customer. The quarterly software licenses and appliances revenues are also subject to the timing of fulfillment of products, which can result in large fluctuations when compared to the prior quarters. The increase in software licenses and appliances revenues in the nine months ended September 30, 2018 compared to the same period in 2017 was driven by increases in perpetual software license and appliance sales to both new and existing customers.
The decreases in subscription, maintenance and support revenues in the three and nine months ended September 30, 2018 compared to the corresponding 2017 periods primary resulted from the loss of a large customer in the fourth quarter of 2017, representing $858,000 and $2.4 million of the three- and nine-month variance, respectively. Additionally, revenues decreased

21


$297,000 and $740,000 in the three and nine months ended September 30, 2018 due to the Company's retrospective adoption of ASC 606 effective January 1, 2018.
Professional services revenues, which generally move directionally with changes in perpetual license sales and are impacted by custom work and the timing customer acceptance, decreased in the three and nine months ended September 30, 2018, compared to the corresponding 2017 periods, due primarily to the inclusion of a large former customer in the three and nine months ended September 30, 2017 and to lower utilization and reduced size of the Company's global professional services team in 2018.
Future consolidated revenues will be dependent upon many factors, including the rate of adoption of the Company's software solutions in its targeted markets and whether arrangements with customers are structured as a software license or a SaaS, which impacts the timing of revenue recognition. Other factors that will influence future consolidated revenues include the timing of customer orders and renewals, the product and service mix of customer orders, the impact of changes in economic conditions and the impact of foreign currency exchange rate fluctuations.
Cost of Revenues and Gross Profit
A comparison of gross profit and gross margin by revenue category is as follows (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
$
481

 
$
906

 
$
(425
)
 
(47
)%
 
$
2,660

 
$
2,193

 
$
467

 
21
 %
Service
3,057

 
3,756

 
(699
)
 
(19
)
 
8,817

 
10,964

 
(2,147
)
 
(20
)
Total gross profit
$
3,538

 
$
4,662

 
$
(1,124
)
 
(24
)%
 
$
11,477

 
$
13,157

 
$
(1,680
)
 
(13
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
48.8
%
 
49.7
%
 
(0.9
)%
 
 
 
61.8
%
 
55.2
%
 
6.6
 %
 
 
Service
65.5
%
 
65.3
%
 
0.2
 %
 
 
 
63.9
%
 
64.6
%
 
(0.7
)%
 
 
Total gross margin
62.6
%
 
61.6
%
 
1.0
 %
 
 
 
63.4
%
 
62.8
%
 
0.6
 %
 
 
Gross profit includes $288,000 and $302,000 for the three months ended September 30, 2018 and 2017, respectively, and $879,000 and $893,000 for the nine months ended September 30, 2018 and 2017, respectively, for the amortization of intangible assets acquired as a result of the acquisition of Qumu, Inc. in the fourth quarter of 2011 and Kulu Valley in the fourth quarter of 2014. Cost of revenues for the full year 2018 is expected to include approximately $1.2 million of amortization expense for purchased intangibles. The Company had 19 and 22 service personnel at September 30, 2018 and 2017, respectively.
The total gross margin percentages in the three and nine months ended September 30, 2018 were generally consistent with the corresponding 2017 periods. The 6.6% increase in software licenses and appliances gross margin in the nine months ended September 30, 2018, compared to the corresponding 2017 period, was driven primarily by strong sales, including large perpetual license sales in the 2018 period, while costs of sales consist generally of fixed amortized prepaid royalties for embedded OEM licenses. Additionally, the software licenses and appliance gross margin in nine months ended September 30, 2017 was unfavorably impacted by a higher mix of sales of third-party extensions which carry lower margins.
Future gross profit margins will fluctuate quarter to quarter and will be impacted by the rate of growth and mix of the Company's product and service offerings, utilization, and foreign currency exchange rate fluctuations.

22


Operating Expenses
The following is a summary of operating expenses (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
1,617

 
$
1,769

 
$
(152
)
 
(9
)%
 
$
5,159

 
$
5,676

 
$
(517
)
 
(9
)%
Sales and marketing
1,796

 
2,509

 
(713
)
 
(28
)
 
6,388

 
7,484

 
(1,096
)
 
(15
)
General and administrative
1,608

 
2,083

 
(475
)
 
(23
)
 
5,536

 
6,552

 
(1,016
)
 
(16
)
Amortization of purchased intangibles
224

 
226

 
(2
)
 
(1
)
 
680

 
675

 
5

 
1

Total operating expenses
$
5,245

 
$
6,587

 
$
(1,342
)
 
(20
)%
 
$
17,763

 
$
20,387

 
$
(2,624
)
 
(13
)%
Operating expenses for the three and nine months ended September 30, 2018 compared to the corresponding 2017 periods reflected lower employee costs due to fewer personnel and continued improvement in the Company's operational efficiency. The Company had 80 and 98 personnel in operating activities at September 30, 2018 and 2017, respectively. The Company incurred severance expense relating to cost reduction initiatives of $177,000 and $123,000 in the nine months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018, the Company executed on its cost reduction initiatives by reducing it facility costs, including the sublet of portions of its London and Minneapolis facilities and the reduction in the size of its California office from 14,000 square feet to 3,800 square feet.
Research and development
Research and development expenses were as follows (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
 
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
 
2018
 
2017
 
2017 to 2018
 
2017 to 2018
Compensation and employee-related
$
1,159

 
$
1,311

 
$
(152
)
 
(12
)%
 
$
3,829

 
$
4,297

 
$
(468
)
 
(11
)%
Overhead and other expenses
295

 
249

 
46

 
18

 
906

 
813

 
93