UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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(Mark One) |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 20182019; OR |
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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)
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| |
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 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 xNo 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):
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| | |
Large accelerated filer o | | Accelerated filer o |
Non-accelerated filer ox | (Do no check if a smaller reporting company) | 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
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common stock, par value $0.01 | | QUMU | | The NASDAQ Stock Market LLC
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Common Stock outstanding at August 2, 20182019 – 9,529,1539,906,800 shares of $.01 par value Common Stock.
QUMU CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 20182019
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data) | | | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
Assets | (unaudited) | | | (unaudited) | | |
Current assets: | | |
| | |
|
Cash and cash equivalents | $ | 5,202 |
| | $ | 7,690 |
| $ | 7,349 |
| | $ | 8,636 |
|
Receivables, net of allowance for doubtful accounts of $81 and $21, respectively | 4,954 |
| | 5,529 |
| |
Receivables, net of allowance for doubtful accounts of $49 and $61, respectively | | 2,969 |
| | 6,278 |
|
Contract assets | 339 |
| | — |
| 1,495 |
| | 485 |
|
Income tax receivable | 277 |
| | 156 |
| 352 |
| | 327 |
|
Prepaid expenses and other current assets | 1,934 |
| | 1,830 |
| 1,909 |
| | 2,192 |
|
Total current assets | 12,706 |
| | 15,205 |
| 14,074 |
| | 17,918 |
|
Property and equipment, net of accumulated depreciation of $2,697 and $4,678, respectively | 533 |
| | 911 |
| |
Property and equipment, net of accumulated depreciation of $2,961 and $2,809, respectively | | 623 |
| | 545 |
|
Right of use assets – operating leases | | 1,060 |
| | — |
|
Intangible assets, net | 5,202 |
| | 6,295 |
| 3,599 |
| | 4,247 |
|
Goodwill | 7,224 |
| | 7,390 |
| 6,949 |
| | 6,971 |
|
Deferred income taxes, non-current | 69 |
| | 77 |
| 46 |
| | 55 |
|
Other assets, non-current | 4,200 |
| | 4,398 |
| 442 |
| | 544 |
|
Total assets | $ | 29,934 |
| | $ | 34,276 |
| $ | 26,793 |
| | $ | 30,280 |
|
Liabilities and Stockholders’ Equity | |
| | |
| |
| | |
|
Current liabilities: | |
| | |
| |
| | |
|
Accounts payable and other accrued liabilities | $ | 2,961 |
| | $ | 3,878 |
| $ | 2,375 |
| | $ | 2,838 |
|
Accrued compensation | 1,216 |
| | 1,824 |
| 842 |
| | 1,548 |
|
Deferred revenue | 8,514 |
| | 8,923 |
| 8,592 |
| | 9,672 |
|
Operating lease liabilities | | 435 |
| | — |
|
Deferred rent | 49 |
| | 181 |
| — |
| | 45 |
|
Financing obligations | 226 |
| | 1,047 |
| 277 |
| | 152 |
|
Term loan | | 3,693 |
| | — |
|
Warrant liability | 2,886 |
| | 819 |
| 4,523 |
| | 2,798 |
|
Total current liabilities | 15,852 |
| | 16,672 |
| 20,737 |
| | 17,053 |
|
Long-term liabilities: | |
| | |
| |
| | |
|
Deferred revenue, non-current | 947 |
| | 141 |
| 1,295 |
| | 1,672 |
|
Income taxes payable, non-current | — |
| | 3 |
| 574 |
| | 563 |
|
Deferred tax liability, non-current | 76 |
| | 153 |
| — |
| | 2 |
|
Operating lease liabilities, non-current | | 1,038 |
| | — |
|
Deferred rent, non-current | 298 |
| | 507 |
| — |
| | 302 |
|
Financing obligations, non-current | — |
| | 3 |
| 125 |
| | 57 |
|
Term loan, non-current | 7,956 |
| | 7,605 |
| — |
| | 3,431 |
|
Other non-current liabilities | 485 |
| | — |
| — |
| | 195 |
|
Total long-term liabilities | 9,762 |
| | 8,412 |
| 3,032 |
| | 6,222 |
|
Total liabilities | 25,614 |
| | 25,084 |
| 23,769 |
| | 23,275 |
|
Commitments and contingencies (Note 4) |
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| |
|
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Commitments and contingencies (Note 3) | |
|
| |
|
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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 9,529,153 and 9,364,804, respectively | 95 |
| | 94 |
| |
Common stock, $0.01 par value, authorized 29,750,000 shares, issued and outstanding 9,906,800 and 9,624,060, respectively | | 99 |
| | 96 |
|
Additional paid-in capital | 68,435 |
| | 68,035 |
| 69,484 |
| | 69,072 |
|
Accumulated deficit | (61,319 | ) | | (56,197 | ) | (63,236 | ) | | (58,875 | ) |
Accumulated other comprehensive loss | (2,891 | ) | | (2,740 | ) | (3,323 | ) | | (3,288 | ) |
Total stockholders’ equity | 4,320 |
| | 9,192 |
| 3,024 |
| | 7,005 |
|
Total liabilities and stockholders’ equity | $ | 29,934 |
| | $ | 34,276 |
| $ | 26,793 |
| | $ | 30,280 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited - in thousands, except per share data)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Software licenses and appliances | $ | 2,867 |
| | $ | 929 |
| | $ | 3,318 |
| | $ | 2,149 |
| $ | 689 |
| | $ | 2,867 |
| | $ | 1,694 |
| | $ | 3,318 |
|
Service | 4,759 |
| | 5,725 |
| | 9,139 |
| | 11,216 |
| 4,676 |
| | 4,759 |
| | 10,769 |
| | 9,139 |
|
Total revenues | 7,626 |
| | 6,654 |
| | 12,457 |
| | 13,365 |
| 5,365 |
| | 7,626 |
| | 12,463 |
| | 12,457 |
|
Cost of revenues: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
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Software licenses and appliances | 804 |
| | 368 |
| | 1,139 |
| | 862 |
| 336 |
| | 804 |
| | 647 |
| | 1,139 |
|
Service | 1,602 |
| | 1,918 |
| | 3,379 |
| | 4,008 |
| 1,227 |
| | 1,602 |
| | 2,453 |
| | 3,379 |
|
Total cost of revenues | 2,406 |
| | 2,286 |
| | 4,518 |
| | 4,870 |
| 1,563 |
| | 2,406 |
| | 3,100 |
| | 4,518 |
|
Gross profit | 5,220 |
| | 4,368 |
| | 7,939 |
| | 8,495 |
| 3,802 |
| | 5,220 |
| | 9,363 |
| | 7,939 |
|
Operating expenses: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Research and development | 1,639 |
| | 1,798 |
| | 3,542 |
| | 3,907 |
| 1,838 |
| | 1,639 |
| | 3,512 |
| | 3,542 |
|
Sales and marketing | 2,412 |
| | 2,524 |
| | 4,592 |
| | 4,975 |
| 2,212 |
| | 2,412 |
| | 4,564 |
| | 4,592 |
|
General and administrative | 1,747 |
| | 2,009 |
| | 3,928 |
| | 4,469 |
| 1,579 |
| | 1,747 |
| | 3,325 |
| | 3,928 |
|
Amortization of purchased intangibles | 227 |
| | 226 |
| | 456 |
| | 449 |
| 201 |
| | 227 |
| | 419 |
| | 456 |
|
Total operating expenses | 6,025 |
| | 6,557 |
| | 12,518 |
| | 13,800 |
| 5,830 |
| | 6,025 |
| | 11,820 |
| | 12,518 |
|
Operating loss | (805 | ) | | (2,189 | ) | | (4,579 | ) | | (5,305 | ) | (2,028 | ) | | (805 | ) | | (2,457 | ) | | (4,579 | ) |
Other income (expense): | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Interest expense, net | (510 | ) | | (334 | ) | | (1,354 | ) | | (651 | ) | (214 | ) | | (510 | ) | | (419 | ) | | (1,354 | ) |
Decrease (increase) in fair value of warrant liability | (278 | ) | | 11 |
| | 109 |
| | (67 | ) | (1,436 | ) | | (278 | ) | | (1,725 | ) | | 109 |
|
Other, net | (16 | ) | | (124 | ) | | (403 | ) | | (179 | ) | 66 |
| | (16 | ) | | 35 |
| | (403 | ) |
Total other expense, net | (804 | ) | | (447 | ) | | (1,648 | ) | | (897 | ) | (1,584 | ) | | (804 | ) | | (2,109 | ) | | (1,648 | ) |
Loss before income taxes | (1,609 | ) | | (2,636 | ) | | (6,227 | ) | | (6,202 | ) | (3,612 | ) | | (1,609 | ) | | (4,566 | ) | | (6,227 | ) |
Income tax benefit | (78 | ) | | (25 | ) | | (166 | ) | | (29 | ) | (11 | ) | | (78 | ) | | (15 | ) | | (166 | ) |
Net loss | $ | (1,531 | ) | | $ | (2,611 | ) | | $ | (6,061 | ) | | $ | (6,173 | ) | $ | (3,601 | ) | | $ | (1,531 | ) | | $ | (4,551 | ) | | $ | (6,061 | ) |
| | | | | | | | | | | | | | |
Net loss per share – basic: | | | | | | | | |
Net loss per share – basic | $ | (0.16 | ) | | $ | (0.28 | ) | | $ | (0.64 | ) | | $ | (0.66 | ) | |
Weighted average shares outstanding – basic | 9,484 |
| | 9,356 |
| | 9,427 |
| | 9,301 |
| |
Net loss per share – diluted: | | | | | | | | |
Loss attributable to common shareholders | $ | (1,531 | ) | | $ | (2,622 | ) | | $ | (6,061 | ) | | $ | (6,173 | ) | |
Net loss per share – diluted | $ | (0.16 | ) | | $ | (0.28 | ) | | $ | (0.64 | ) | | $ | (0.66 | ) | |
Weighted average shares outstanding – diluted | 9,484 |
| | 9,357 |
| | 9,427 |
| | 9,301 |
| |
Net loss per share – basic and diluted: | | | | | | | | |
Net loss per share | | $ | (0.37 | ) | | $ | (0.16 | ) | | $ | (0.47 | ) | | $ | (0.64 | ) |
Weighted average shares outstanding | | 9,861 |
| | 9,484 |
| | 9,775 |
| | 9,427 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)Loss
(unaudited - in thousands)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net loss | $ | (1,531 | ) | | $ | (2,611 | ) | | $ | (6,061 | ) | | $ | (6,173 | ) | $ | (3,601 | ) | | $ | (1,531 | ) | | $ | (4,551 | ) | �� | $ | (6,061 | ) |
Other comprehensive income (loss): | |
| | |
| | |
| | | |
Other comprehensive income loss: | | |
| | |
| | |
| | |
Net change in foreign currency translation adjustments | (769 | ) | | 559 |
| | (146 | ) | | 696 |
| (278 | ) | | (769 | ) | | (35 | ) | | (146 | ) |
Total other comprehensive income (loss) | (769 | ) | | 559 |
| | (146 | ) | | 696 |
| |
Total other comprehensive loss | | (278 | ) | | (769 | ) | | (35 | ) | | (146 | ) |
Total comprehensive loss | $ | (2,300 | ) | | $ | (2,052 | ) | | $ | (6,207 | ) | | $ | (5,477 | ) | $ | (3,879 | ) | | $ | (2,300 | ) | | $ | (4,586 | ) | | $ | (6,207 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited - in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | | | | |
Balance at December 31, 2018 | 9,624 |
| | $ | 96 |
| | $ | 69,072 |
| | $ | (58,875 | ) | | $ | (3,288 | ) | | $ | 7,005 |
|
Adoption of ASC Topic 842 | — |
| | — |
| | — |
| | 190 |
| | — |
| | 190 |
|
Net loss | — |
| | — |
| | — |
| | (950 | ) | | — |
| | (950 | ) |
Other comprehensive income, net of taxes | — |
| | — |
| | — |
| | — |
| | 243 |
| | 243 |
|
Issuance of stock under employee stock plan, net of forfeitures | 156 |
| | 2 |
| | (1 | ) | | — |
| | — |
| | 1 |
|
Redemption of stock to cover tax withholding for employee stock plan | (15 | ) | | — |
| | (36 | ) | | — |
| | — |
| | (36 | ) |
Stock-based compensation | — |
| | — |
| | 231 |
| | — |
| | — |
| | 231 |
|
Balance at March 31, 2019 | 9,765 |
| | $ | 98 |
| | $ | 69,266 |
| | $ | (59,635 | ) | | $ | (3,045 | ) | | $ | 6,684 |
|
Net loss | — |
| | — |
| | — |
| | (3,601 | ) | | — |
| | (3,601 | ) |
Other comprehensive loss, net of taxes | — |
| | — |
| | — |
| | — |
| | (278 | ) | | (278 | ) |
Issuance of stock under employee stock plan, net of forfeitures | 159 |
| | 1 |
| | 96 |
| | — |
| | — |
| | 97 |
|
Redemption of stock to cover tax withholding for employee stock plan | (17 | ) | | — |
| | (72 | ) | | — |
| | — |
| | (72 | ) |
Stock-based compensation | — |
| | — |
| | 194 |
| | — |
| | — |
| | 194 |
|
Balance at June 30, 2019 | 9,907 |
| | $ | 99 |
| | $ | 69,484 |
| | $ | (63,236 | ) | | $ | (3,323 | ) | | $ | 3,024 |
|
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| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | | | | |
Balance at December 31, 2017 | 9,365 |
| | $ | 94 |
| | $ | 68,035 |
| | $ | (56,197 | ) | | $ | (2,740 | ) | | $ | 9,192 |
|
Adoption of ASC Topic 606 | — |
| | — |
| | — |
| | 939 |
| | (5 | ) | | 934 |
|
Net loss | — |
| | — |
| | — |
| | (4,530 | ) | | — |
| | (4,530 | ) |
Other comprehensive income, net of taxes | — |
| | — |
| | — |
| | — |
| | 623 |
| | 623 |
|
Issuance of stock under employee stock plan, net of forfeitures | 24 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Redemption of stock to cover tax withholding for employee stock plan | (11 | ) | | — |
| | (19 | ) | | — |
| | — |
| | (19 | ) |
Stock-based compensation | — |
| | — |
| | 210 |
| | — |
| | — |
| | 210 |
|
Balance at March 31, 2018 | 9,378 |
| | $ | 94 |
| | $ | 68,226 |
| | $ | (59,788 | ) | | $ | (2,122 | ) | | $ | 6,410 |
|
Net loss | — |
| | — |
| | — |
| | (1,531 | ) | | — |
| | (1,531 | ) |
Other comprehensive loss, net of taxes | — |
| | — |
| | — |
| | — |
| | (769 | ) | | (769 | ) |
Issuance of stock under employee stock plan, net of forfeitures | 155 |
| | 1 |
| | (11 | ) | | — |
| | — |
| | (10 | ) |
Redemption of stock to cover tax withholding for employee stock plan | (4 | ) | | — |
| | (8 | ) | | — |
| | — |
| | (8 | ) |
Stock-based compensation | — |
| | — |
| | 228 |
| | — |
| | — |
| | 228 |
|
Balance at June 30, 2018 | 9,529 |
| | $ | 95 |
| | $ | 68,435 |
| | $ | (61,319 | ) | | $ | (2,891 | ) | | $ | 4,320 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
QUMU CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
Operating activities: | |
| | |
| |
| | |
|
Net loss | $ | (6,061 | ) | | $ | (6,173 | ) | $ | (4,551 | ) | | $ | (6,061 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
Depreciation and amortization | 1,347 |
| | 1,548 |
| 809 |
| | 1,347 |
|
Stock-based compensation | 438 |
| | 783 |
| 425 |
| | 438 |
|
Accretion of debt discount and issuance costs | 1,035 |
| | 236 |
| 263 |
| | 1,035 |
|
Gain on lease modification | | (21 | ) | | — |
|
Loss on lease contract termination | 177 |
| | — |
| — |
| | 177 |
|
Change in fair value of warrant liability | (109 | ) | | 67 |
| 1,725 |
| | (109 | ) |
Deferred income taxes | (72 | ) | | (71 | ) | 7 |
| | (72 | ) |
Changes in operating assets and liabilities: | | | | | | |
Receivables | 588 |
| | 2,425 |
| 3,290 |
| | 588 |
|
Contract assets | 211 |
| | — |
| (1,010 | ) | | 211 |
|
Income taxes receivable / payable | (130 | ) | | 135 |
| (15 | ) | | (130 | ) |
Prepaid expenses and other assets | 197 |
| | 710 |
| 586 |
| | 197 |
|
Accounts payable and other accrued liabilities | (1,019 | ) | | 315 |
| (397 | ) | | (1,019 | ) |
Accrued compensation | (604 | ) | | (522 | ) | (711 | ) | | (604 | ) |
Deferred revenue | 938 |
| | (368 | ) | (1,445 | ) | | 938 |
|
Deferred rent | (144 | ) | | (150 | ) | — |
| | (144 | ) |
Other non-current liabilities | 436 |
| | — |
| (24 | ) | | 436 |
|
Net cash used in operating activities | (2,772 | ) | | (1,065 | ) | (1,069 | ) | | (2,772 | ) |
Investing activities: | |
| | |
| |
| | |
|
Purchases of property and equipment | (73 | ) | | (20 | ) | (43 | ) | | (73 | ) |
Net cash used in investing activities | (73 | ) | | (20 | ) | (43 | ) | | (73 | ) |
Financing activities: | |
| | |
| |
| | |
|
Proceeds from term loan and warrant issuance | 10,000 |
| | — |
| — |
| | 10,000 |
|
Principal payments on term loan | (8,000 | ) | | — |
| |
Principal payments on term loans | | — |
| | (8,000 | ) |
Payments for term loan issuance costs | (1,308 | ) | | (125 | ) | — |
| | (1,308 | ) |
Principal payments on financing obligations | (247 | ) | | (255 | ) | (158 | ) | | (247 | ) |
Proceeds from employee stock plans | | 42 |
| | — |
|
Common stock repurchases to settle employee withholding liability | (27 | ) | | (11 | ) | (53 | ) | | (27 | ) |
Net cash provided by (used in) financing activities | 418 |
| | (391 | ) | (169 | ) | | 418 |
|
Effect of exchange rate changes on cash | (61 | ) | | 94 |
| (6 | ) | | (61 | ) |
Net decrease in cash and cash equivalents | (2,488 | ) | | (1,382 | ) | (1,287 | ) | | (2,488 | ) |
Cash and cash equivalents, beginning of period | 7,690 |
| | 10,364 |
| 8,636 |
| | 7,690 |
|
Cash and cash equivalents, end of period | $ | 5,202 |
| | $ | 8,982 |
| $ | 7,349 |
| | $ | 5,202 |
|
Supplemental disclosures of net cash paid (received) during the period: | |
| | |
| |
| | |
|
Income taxes, net | $ | 37 |
| | $ | (106 | ) | $ | (12 | ) | | $ | 37 |
|
Interest, net | $ | 35 |
| | $ | 420 |
| $ | 8 |
| | $ | 35 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
QUMU CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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(1) | Nature of Business and Basis of Presentation |
Qumu Corporation (the("Qumu" or the "Company") provides the software applications businesses usesolutions to create, manage, secure, deliverdistribute and measure the success of their videos.live and on-demand video for enterprises. The Company's innovative solutions releaseQumu platform enables global organizations to drive employee engagement, increase access to video, and modernize the powerworkplace by providing a more efficient and effective way to share knowledge. The world’s largest organizations leverage the Qumu platform for a variety of videocloud, on-premise and hybrid deployments. Use cases including self-service webcasting, sales enablement, internal communications, product training, regulatory compliance and customer engagement. The Company markets its products to engagecustomers primarily in North America, Europe 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.Asia.
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, 2017.2018.
Leases
The Company is a lessee in several non-cancellable (1) operating leases, primarily for office space, and (2) finance leases, for certain IT equipment. Beginning January 1, 2019, the Company accounts for leases in accordance with ASU 2016-02, Leases, and the related amendments (collectively, "Topic 842"). The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right of use (ROU) asset and a lease liability at the lease commencement date.
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and at the same date as for operating leases, and is subsequently measured at amortized cost using the effective interest method.
Key estimates and judgments in accounting for leases under Topic 842 include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.
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– | ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s information. Therefore, the Company uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. |
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– | The lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor. |
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– | Lease payments included in the measurement of the lease liability include the fixed payments owed over the lease term, termination penalties, amounts expected to be payable under a residual-value guarantee, and the exercise price of an option to purchase the asset if the Company is reasonably certain to exercise the option. |
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.
For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus any prepaid lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For finance leases, the ROU asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term.
The Company has continuedelected not to experience recurring operating lossesrecognize ROU assets and negative cash flows from operating activities.lease liabilities for short-term leases that have a lease term of 12 months or less. The ability ofCompany recognizes the Company to continue as a going concern is dependent upon the Company maintaining compliancelease payments associated with its term loan covenants beginning September 30, 2018. The Company's credit agreement is described in Note 4–"Commitments and Contingencies." Ifshort-term leases as an event of default occurs due toexpense on a straight-line basis over 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 and, as described in Note 10–"Subsequent Events," the sale of BriefCam and partial prepayment of the term loan.lease term.
Recently Adopted Accounting Standards
Revenue from Contracts with CustomersLeases (Topic 842)
On January 1, 2018,2019, the Company adopted ASU No. 2014-09,2016-02, Revenue from Contracts with Customers (Topic 606)Leases, and the related amendments ("Topic 606"(collectively, "Topic 842"), using the modified retrospective transition method. Under this method,approach as of the effective date. The comparative information in the condensed consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance.
In addition, the Company evaluated contracts that were in effect atelected the beginningpackage of fiscal 2018 as if those contracts had been accounted forpractical expedients, which permits the Company not to reassess under Topic 606. Thethe new standard its prior conclusions about lease identification, lease classification and initial direct costs. However, the Company did not evaluate individual modifications for those periods prioradopt the hindsight practical expedient, and therefore continues to utilize lease terms determined under pre-Topic 842 lease guidance.
As a result of adopting ASU 2016-02, the adoption date, but the aggregate effectCompany recognized additional operating lease liabilities of all modifications$1.9 million (of which $759,000 was current and $1.1 million was non-current) and corresponding ROU assets of $1.4 million as of January 1, 2019. Additionally, upon adoption of this standard, the adoption date and such effects are provided below. Under the modified retrospective transition approach, periods priorCompany recognized a cumulative-effect adjustment 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 reflectof $190,000, net of taxes, as of January 1, 2019. The new lease guidance did not have a material impact on the impactCompany's condensed consolidated statements of all existing arrangements under Topic 606.operations or cash flows or compliance with debt covenants. For additional information regarding the Company's leases, see Note 3–"Commitments and Contingencies."
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
associated with those contracts. The cumulative effect of the changes made to our January 1, 20182019 condensed consolidated balance sheet from the modified retrospective adoption of Topic 606 was842 is as follows (in thousands):
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| | | | | | | | | | | |
| December 31, 2017 | | Adjustments | | January 1, 2018 |
Assets: | | | | | |
Contract assets | $ | — |
| | $ | 550 |
| | $ | 550 |
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Prepaid expenses and other current assets | 1,830 |
| | (99 | ) | | 1,731 |
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Other assets, non-current | 4,398 |
| | (10 | ) | | 4,388 |
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Liabilities: | |
| | |
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Deferred revenue | 8,923 |
| | (493 | ) | | 8,430 |
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Deferred revenue, non-current | 141 |
| | — |
| | 141 |
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Stockholders’ equity: | |
| | |
| | |
Accumulated deficit | (56,197 | ) | | 939 |
| | (55,258 | ) |
Accumulated other comprehensive loss | (2,740 | ) | | (5 | ) | | (2,745 | ) |
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| | | | | | | | | | | |
| December 31, 2018 | | Adjustments | | January 1, 2019 |
Assets: | | | | |
|
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Property and equipment | $ | 545 |
| | $ | 124 |
| | $ | 669 |
|
Operating lease assets | — |
| | 1,367 |
| | 1,367 |
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Liabilities: | |
| | |
| |
|
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Accounts payable and other accrued liabilities | $ | 2,838 |
| | $ | (211 | ) | | $ | 2,627 |
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Operating lease liabilities | — |
| | 759 |
| | 759 |
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Deferred rent | 45 |
| | (45 | ) | | — |
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Operating lease liabilities, non-current | — |
| | 1,100 |
| | 1,100 |
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Deferred rent, non-current | 302 |
| | (302 | ) | | — |
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Stockholders’ equity: | |
| | |
| |
|
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Accumulated deficit | $ | (58,875 | ) | | $ | 190 |
| | $ | (58,685 | ) |
The most significant impact
Adjustments to accounts payable and other accrued liabilities include the derecognition of thea contract termination obligation of $218,000 upon 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.842. See Note 2–3–"Revenue"Commitments and Contingencies" for the Company's revenue recognition policy after the adoption of Topic 606.additional information.
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 six months ended June 30, 2018:
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| Three Months Ended June 30, 2018 | | Six Months Ended June 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 | $ | 7,626 |
| | $ | 240 |
| | $ | 7,866 |
| | $ | 12,457 |
| | $ | 424 |
| | $ | 12,881 |
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Cost of revenues | 2,406 |
| | 10 |
| | 2,416 |
| | 4,518 |
| | 18 |
| | 4,536 |
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Sales and marketing | 2,412 |
| | 14 |
| | 2,426 |
| | 4,592 |
| | 38 |
| | 4,630 |
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Net loss | (1,531 | ) | | 216 |
| | (1,315 | ) | | (6,061 | ) | | 368 |
| | (5,693 | ) |
Net change in foreign currency translation adjustments | (769 | ) | | 14 |
| | (755 | ) | | (146 | ) | | 10 |
| | (136 | ) |
Total comprehensive loss | (2,300 | ) | | 230 |
| | (2,070 | ) | | (6,207 | ) | | 378 |
| | (5,829 | ) |
Income Statement – Reporting Comprehensive Income (Topic 220)The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of June 30, 2018: |
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| June 30, 2018 |
| As reported under Topic 606 | | Adjustments | | Balances without adoption of Topic 606 |
Assets: | | | | | |
Contract assets | 339 |
| | (339 | ) | | — |
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Prepaid expenses and other current assets | 1,934 |
| | 50 |
| | 1,984 |
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Other assets, non-current | 4,200 |
| | 3 |
| | 4,203 |
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Liabilities: | |
| | | | |
Deferred revenue | 8,514 |
| | 275 |
| | 8,789 |
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Deferred revenue, non-current | 947 |
| | (5 | ) | | 942 |
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Stockholders’ equity: | |
| | |
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Accumulated deficit | (61,319 | ) | | (571 | ) | | (61,890 | ) |
Accumulated other comprehensive loss | (2,891 | ) | | 15 |
| | (2,876 | ) |
The Company’s net cash used in operating activities for the six months ended June 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 six months ended June 30, 2018:
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| | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| As reported under Topic 606 | | Adjustments | | Balances without adoption of Topic 606 |
Operating activities: | |
| | | | |
Net loss | $ | (6,061 | ) | | $ | 368 |
| | $ | (5,693 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
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Changes in operating assets and liabilities: | | | | |
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Contract assets | 211 |
| | (211 | ) | | — |
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Prepaid expenses and other assets | 197 |
| | 56 |
| | 253 |
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Deferred revenue | 938 |
| | (213 | ) | | 725 |
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Financial Instruments
InOn January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall, which1, 2019, 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 consists 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. 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. Gains and losses resulting from observable price changes in market-based transactions for an identical or similar investment of the same issuer or impairment will be recorded through net income (loss) in the period incurred.
The Company’s investment in BriefCam had a carrying value of $3.1 million as of June 30, 2018 and December 31, 2017. During the six months ended June 30, 2018, there were no observable price changes or impairments related to the Company’s non-marketable investment in the equity security. See Note 10–"Subsequent Events" for information relating to the sale of the Company’s investment in BriefCam subsequent to June 30, 2018.
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 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 guidanceThe Company did not reclassify any income tax effects of the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive loss to accumulated deficit as a result of the adoption
of this standard.
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 fiscal years, and interim periods within thoseall entities for fiscal years beginning after December 15, 2018, with early2019, including interim periods therein. Early adoption is permitted during interimfor any eliminated or annual periods.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.statements disclosures.
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 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.
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.
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):
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Software licenses and appliances | $ | 2,867 |
| | $ | 929 |
| | $ | 3,318 |
| | $ | 2,149 |
|
Service | | | | | | | |
Subscription, maintenance and support | 4,122 |
| | 5,110 |
| | 8,160 |
| | 9,948 |
|
Professional services and other | 637 |
| | 615 |
| | 979 |
| | 1,268 |
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Total service | 4,759 |
| | 5,725 |
| | 9,139 |
| | 11,216 |
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Total revenues | $ | 7,626 |
| | $ | 6,654 |
| | $ | 12,457 |
| | $ | 13,365 |
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
North America | $ | 5,017 |
| | $ | 4,606 |
| | $ | 7,827 |
| | $ | 9,423 |
|
Europe | 1,465 |
| | 1,863 |
| | 3,075 |
| | 3,608 |
|
Asia | 1,144 |
| | 185 |
| | 1,555 |
| | 334 |
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Total | $ | 7,626 |
| | $ | 6,654 |
| | $ | 12,457 |
| | $ | 13,365 |
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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 $339,000 as of January 1, 2018 and June 30, 2018, respectively. The Company’s balances for contract liabilities, which are included in deferred revenue, totaled $8.6 million and $9.5 million as of January 1, 2018 and June 30, 2018, respectively.
During the three and six months ended June 30, 2018, the Company recognized $3.7 million and $5.5 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. The Company has elected to exclude the future billable professional services from the remaining performance obligations. Contracted but unsatisfied performance obligations were approximately $18.6 million as of June 30, 2018, of which the Company expects to recognize $10.9 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 $326,000 and $308,000 at June 30, 2018 and December 31, 2017, respectively. Deferred commission costs in other assets, non-current were $46,000 and $47,000 at June 30, 2018 and December 31, 2017, respectively. The Company recognized commissions expense of $505,000 and $387,000 during the three months ended June 30, 2018 and 2017, respectively, and $731,000 and $788,000 during the six months ended June 30, 2018 and 2017, respectively.
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(3) | Intangible Assets and Goodwill |
Intangible Assets
The Company’s amortizable intangible assets consisted of the following (in thousands):
| | | June 30, 2018 | June 30, 2019 |
| Customer Relationships | | Developed Technology | | Trademarks / Trade-Names | | Total | Customer Relationships | | Developed Technology | | Trademarks / Trade-Names | | Total |
Original cost | $ | 4,883 |
| | $ | 8,145 |
| | $ | 2,182 |
| | $ | 15,210 |
| $ | 4,811 |
| | $ | 8,013 |
| | $ | 2,180 |
| | $ | 15,004 |
|
Accumulated amortization | (2,465 | ) | | (6,669 | ) | | (874 | ) | | (10,008 | ) | (2,986 | ) | | (7,406 | ) | | (1,013 | ) | | (11,405 | ) |
Net identifiable intangible assets | $ | 2,418 |
| | $ | 1,476 |
| | $ | 1,308 |
| | $ | 5,202 |
| $ | 1,825 |
| | $ | 607 |
| | $ | 1,167 |
| | $ | 3,599 |
|
| | | December 31, 2017 | December 31, 2018 |
| Customer Relationships | | Developed Technology | | Trademarks / Trade-Names | | Total | Customer Relationships | | Developed Technology | | Trademarks / Trade-Names | | Total |
Original cost | $ | 4,928 |
| | $ | 8,225 |
| | $ | 2,184 |
| | $ | 15,337 |
| $ | 4,818 |
| | $ | 8,023 |
| | $ | 2,180 |
| | $ | 15,021 |
|
Accumulated amortization | (2,194 | ) | | (6,043 | ) | | (805 | ) | | (9,042 | ) | (2,721 | ) | | (7,110 | ) | | (943 | ) | | (10,774 | ) |
Net identifiable intangible assets | $ | 2,734 |
| | $ | 2,182 |
| | $ | 1,379 |
| | $ | 6,295 |
| $ | 2,097 |
| | $ | 913 |
| | $ | 1,237 |
| | $ | 4,247 |
|
Changes to the carrying amount of net amortizable intangible assets for the six months ended June 30, 2018 consisted of the following (in thousands):
| | | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2019 |
Balance, beginning of period | $ | 6,295 |
| $ | 4,247 |
|
Amortization expense | (1,047 | ) | (650 | ) |
Currency translation | (46 | ) | 2 |
|
Balance, end of period | $ | 5,202 |
| $ | 3,599 |
|
Amortization expense of intangible assets consisted of the following (in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Amortization expense associated with the developed technology included in cost of revenues | $ | 293 |
| | $ | 298 |
| | $ | 591 |
| | $ | 591 |
| $ | 114 |
| | $ | 293 |
| | $ | 231 |
| | $ | 591 |
|
Amortization expense associated with other acquired intangible assets included in operating expenses | 227 |
| | 226 |
| | 456 |
| | 449 |
| 201 |
| | 227 |
| | 419 |
| | 456 |
|
Total amortization expense | $ | 520 |
| | $ | 524 |
| | $ | 1,047 |
| | $ | 1,040 |
| $ | 315 |
| | $ | 520 |
| | $ | 650 |
| | $ | 1,047 |
|
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 $7.2$6.9 million at June 30, 20182019 reflects the impact of foreign currency exchange rate fluctuations since the acquisition date.
As of June 30, 2018,2019, 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)(3) | Commitments and Contingencies |
Leases
The Company is obligated under finance leases covering certain IT equipment that expire at various dates over the next three years. The Company also has several non-cancellable operating leases, primarily for office space, that expire over the next four years. The Company has one lease that contains a renewal option for a period of five years. Because the Company is not reasonably certain to exercise this option, the option is not considered in determining the lease term under Topic 842, which was adopted January 1, 2019.
Many of the Company's leases include escalation clauses, renewal options and/or termination options that are factored into its determination of lease payments under Topic 842 when reasonably certain. These options to extend or terminate a lease are at the Company's discretion. The Company has elected to take the practical expedient and Other Financing Obligationsnot separate lease and non-lease components of contracts. The Company estimates its incremental borrowing rate to discount the lease payments based on information available at lease commencement under Topic 842. The Company's lease agreements do not contain any material residual value guarantees.
Balances for assets acquired under capitalThe components of lease obligations and included in property and equipmentcost were as follows (in thousands):
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Computer and network equipment | $ | 511 |
| | $ | 511 |
|
Furniture | 287 |
| | 287 |
|
Assets acquired under capital lease obligations | 798 |
| | 798 |
|
Accumulated depreciation | (705 | ) | | (613 | ) |
Assets acquired under capital lease obligations, net | $ | 93 |
| | $ | 185 |
|
|
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Operating lease cost | $ | 85 |
| | $ | 278 |
|
Finance lease cost: | | | |
Amortization of right of use assets | 31 |
| | 44 |
|
Interest on lease liabilities | 3 |
| | 5 |
|
Total finance cost | 34 |
| | 49 |
|
Total lease cost | $ | 119 |
| | $ | 327 |
|
The currentCompany's ROU assets and long-term portions of capital leases and other financing obligationslease liabilities were reported in the condensed consolidated balance sheet as follows (in thousands):
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Capital leases and other financing obligations, current | $ | 226 |
| | $ | 1,047 |
|
Capital leases and other financing obligations, non-current | — |
| | 3 |
|
Total capital leases and other financing obligations | $ | 226 |
| | $ | 1,050 |
|
|
| | | | |
Leases | Classification on Balance Sheet | June 30, 2019 |
Assets | | |
Operating | Right of use assets – operating leases | $ | 1,060 |
|
Finance | Property and equipment | 192 |
|
Total lease assets | | $ | 1,252 |
|
Liabilities | | |
Current | | |
Operating | Operating lease liabilities | $ | 435 |
|
Finance | Financing obligations | 81 |
|
Non-current | | |
Operating | Operating lease liabilities, non-current | 1,038 |
|
Finance | Financing obligations, non-current | 125 |
|
Total lease liabilities | | $ | 1,679 |
|
The Company
Other information related to leases certainis as follows (in thousands):
|
| | | |
| Six Months Ended June 30, |
Supplemental cash flow information: | |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flow from operating leases | $ | 288 |
|
Financing cash flow from finance leases | 37 |
|
ROU assets obtained in exchange for new lease obligations | |
Finance leases | $ | 148 |
|
Weighted-average remaining lease term: | |
Operating leases | 3.4 years |
|
Finance leases | 2.5 years |
|
Weighted-average discount rate: | |
Operating leases | 10.0 | % |
Finance leases | 6.2 | % |
Future payments used in the measurement of its facilities and some of its equipment under non-cancelable operating lease arrangements. The rental payments under these leases are charged to expenseliabilities 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,condensed consolidated balance sheet as of June 30, 20182019 are as follows (in thousands):
| | | Capital leases and other financing obligations | | Operating leases | | Total | Operating leases | | Finance leases |
Remainder of 2018 | $ | 230 |
| | $ | 310 |
| | $ | 540 |
| |
2019 | 3 |
| | 500 |
| | 503 |
| |
Remainder of 2019 | | $ | 333 |
| | $ | 45 |
|
2020 | — |
| | 266 |
| | 266 |
| 455 |
| | 91 |
|
2021 | — |
| | 268 |
| | 268 |
| 463 |
| | 80 |
|
2022 | — |
| | 273 |
| | 273 |
| 423 |
| | 5 |
|
2023 | | 51 |
| | — |
|
Thereafter | — |
| | 23 |
| | 23 |
| 18 |
| | — |
|
Total minimum lease payments | 233 |
| | $ | 1,640 |
| | $ | 1,873 |
| |
Total undiscounted lease payments | | 1,743 |
| | 221 |
|
Less amount representing interest | (7 | ) | | | | | (270 | ) | | (15 | ) |
Present value of net minimum lease payments | $ | 226 |
| | | | | |
Present value of lease liabilities | | $ | 1,473 |
| | $ | 206 |
|
As of June 30, 2019, the Company had an additional operating lease for office space that has not yet commenced with future rent payments of $115,000. This operating lease will commence during the third quarter of fiscal year 2019 with a lease term of five years.
Lease Contract TerminationSubleases
The Company determined that it had excess capacity at its Minneapolis, Minnesota headquarters and its London, United Kingdom office and effective May 1, 2018 and December 31, 2017, respectively, ceased using a portionportions of its leased space,spaces, subsequently making itthem available for sublessee occupancy. During the three months ended June 30, 2018, the Company entered into aoccupancy by sublessees. The Minneapolis sublease agreement havinghad a term beginning May 1, 2018 and extending through January 2023. Accordingly,On January 17, 2019, the Company recordedterminated the Minneapolis sublease agreement, effective February 15, 2019, and contemporaneously modified the Company's primary lease agreement to relinquish the sublet space to the lessor, and be relieved of future lease payments for the previously sublet space, effective March 1, 2019. Upon modification of the Minneapolis lease agreement, the Company recognized a gain of $21,000, which is reported in other income (expense) in the Company's condensed consolidated statement of operations. Sublease income from the Company's subleases was $35,000 and $73,000 for the three and six months ended June 30, 2019, respectively, which is reported in other income (expense) in the Company's condensed consolidated statement of operations.
Prior to the adoption of Topic 842 on January 1, 2019, the Company accounted for the above subleases under guidance for exit and disposal activities (ASC 420). As such, the Company carried a lease contract termination liability of $218,000 as of December 31, 2018, representing the liability at fair value of $224,000 for the future contractual lease payments, net of expected sublease receipts. Included in other income (expenses) for three and six months ended June 30, 2018 is the loss related to the 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 June 30, 2018 | | Six Months Ended June 30, 2018 |
| | London, England | | Minneapolis, Minnesota | | Total | | London, England | | Minneapolis, Minnesota | | Total |
Contract termination obligation, beginning of period | | $ | 149 |
| | $ | — |
| | $ | 149 |
| | $ | 194 |
| | $ | — |
| | $ | 194 |
|
Lease termination costs incurred | | — |
| | 224 |
| | 224 |
| | — |
| | 224 |
| | 224 |
|
Accretion expense | | 4 |
| | 4 |
| | 8 |
| | 9 |
| | 4 |
| | 13 |
|
Payments on obligations | | (50 | ) | | (14 | ) | | (64 | ) | | (100 | ) | | (14 | ) | | (114 | ) |
Contract termination obligation, end of period | | $ | 103 |
| | $ | 214 |
| | $ | 317 |
| | $ | 103 |
| | $ | 214 |
| | $ | 317 |
|
The contract termination obligation is included in other accrued liabilities in the Company's consolidated balance sheets.
Term LoansLoan
The Company's term loans areloan is reported in the condensed consolidated balance sheets as follows (in thousands):
| | | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
Term loan, at face value | $ | 10,000 |
| | $ | 8,000 |
| |
Term loan, remaining principal balance | | $ | 4,000 |
| | $ | 4,000 |
|
Unamortized original issue discount | (1,729 | ) | | (121 | ) | (260 | ) | | (481 | ) |
Unamortized debt issuance costs | (315 | ) | | (274 | ) | (47 | ) | | (88 | ) |
Term loan | $ | 7,956 |
| | $ | 7,605 |
| $ | 3,693 |
| | $ | 3,431 |
|
Credit Agreement – ESW Holdings, Inc.
On January 12, 2018, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into a $10.0 million term loan credit agreement (the “ESW credit agreement”) with ESW Holdings, Inc. as lender and administrative agent pursuant to which the Company borrowed $10.0replace its previous $8.0 million in the form of a term loan. Proceeds from the ESWloan credit agreement were used to paywith HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent. Following the remainingCompany's $6.0 million principal payment on July 19, 2018, the term loan with ESW Holdings, Inc. has an outstanding principal balance of $8.0 million on the Hale term note plus a 10% prepayment penalty of $800,000 on January 12, 2018.$4.0 million.
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%. As of both June 30, 2019 and December 31, 2018, interest was payable at 9.50%. The Company may prepay the term loan at any time with the payment of a pre-paymentprepayment fee of 10% of the amount prepaid. However, no pre-paymentprepayment fee will be incurreddue for any pre-paymentprepayment made from the proceeds of the Company’s sale of its investment in BriefCam, Ltd.BriefCam.
The term loan had an estimated fair value of $8.0$3.7 million as of June 30, 2018.2019. 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 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%.
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 meetwas in compliance with all financial covenants beginning withduring the quarterthree and six months ended SeptemberJune 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.2019.
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)(4) | 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 June 30, 2018.2019. The warrant issued in conjunction with the October 21, 2016 debt financing (Hale warrant) 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, on August 31, 2018, the Company issued a warrant to a sales partner, iStudy Co., Ltd., (iStudy warrant) 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 warrantsHale 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 this feature,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 werewas recorded in the Company’s condensed consolidated balance sheets as a liability.
The warrant liability was recorded in the Company's condensed 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)losses of $(278,000)$1.4 million and $11,000$278,000 during the three months ended June 30, 2019 and 2018, and 2017, respectively, and a non-cash gain (loss)loss of $109,000 and $(67,000)$1.7 million during the six months ended June 30, 2019, and a non-cash gain $109,000 for the six months ended June 30, 2018 and 2017, respectively,resulting from the change in fair value of the warrant liability. The increase in fair value for the three months ended June 30, 2019, the three months ended June 30, 2018 and the six months ended June 30, 2019 was primarily driven by corresponding increases in the Company’s stock price of 69%, 25% and 118% for the respective periods. The decrease in fair value forduring the six
months ended June 30, 2018 was primarily driven by a corresponding increase and decrease respectively, in the Company’s stock price. The decrease in fair value during the three months ended June 30, 2017 was primarily driven by decreased volatility in the Company’s stock price and the increase in fair valueof 7% during the six months ended June 30, 2017 was primarily driven by an increase in the Company’s stock price impacting the Hale warrant, which was the only warrant outstanding as of such date.period.
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 includesinclude 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 instrument.instrument for the warrants, when applicable. 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 June 30, 20182019 and December 31, 20172018 (in thousands):
| | | | | Fair Value Measurements Using | | | Fair Value Measurements Using |
| Total Fair Value at June 30, 2018 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Total Fair Value at June 30, 2019 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Liabilities: | | | | | | | | | | | | | | |
Derivative warrant liability - ESW warrant | $ | 2,202 |
| | $ | — |
| | $ | — |
| | $ | 2,202 |
| $ | 3,391 |
| | $ | — |
| | $ | — |
| | $ | 3,391 |
|
Derivative warrant liability - Hale warrant | 684 |
| | — |
| | — |
| | 684 |
| 936 |
| | — |
| | — |
| | 936 |
|
Derivative warrant liabilities | $ | 2,886 |
| | $ | — |
| | $ | — |
| | $ | 2,886 |
| |
Derivative warrant liability - iStudy | | 196 |
| | — |
| | — |
| | 196 |
|
Derivative warrant liability | | $ | 4,523 |
| | $ | — |
| | $ | — |
| | $ | 4,523 |
|
| | | | | Fair Value Measurements Using | | | 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) | Total Fair Value at December 31, 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 | | $ | 2,015 |
| | $ | — |
| | $ | — |
| | $ | 2,015 |
|
Derivative warrant liability - Hale warrant | $ | 819 |
| | $ | — |
| | $ | — |
| | $ | 819 |
| 750 |
| | — |
| | — |
| | 750 |
|
Derivative warrant liability - iStudy | | 33 |
| | — |
| | — |
| | 33 |
|
Derivative warrant liability | | $ | 2,798 |
| | $ | — |
| | $ | — |
| | $ | 2,798 |
|
The Company classified the warrant liability 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 arrangement.arrangements. The following table represents a rollforward of the fair value of the Level 3 instrumentinstruments (significant unobservable inputs):
|
| | | | |
Balance at December 31, 2017 | | $ | 819 |
|
Addition of warrant liability | | 2,176 |
|
Change in fair value | | (109 | ) |
Balance at June 30, 2018 | | $ | 2,886 |
|
|
| | | | |
Balance at December 31, 2018 | | $ | 2,798 |
|
Change in fair value | | 1,725 |
|
Balance at June 30, 2019 | | $ | 4,523 |
|
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.
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 June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Software licenses and appliances | $ | 689 |
| | $ | 2,867 |
| | $ | 1,694 |
| | $ | 3,318 |
|
Service | | | | | | | |
Subscription, maintenance and support | 4,154 |
| | 4,122 |
| | 9,717 |
| | 8,160 |
|
Professional services and other | 522 |
| | 637 |
| | 1,052 |
| | 979 |
|
Total service | 4,676 |
| | 4,759 |
| | 10,769 |
| | 9,139 |
|
Total revenues | $ | 5,365 |
| | $ | 7,626 |
| | $ | 12,463 |
| | $ | 12,457 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
North America | $ | 3,192 |
| | $ | 5,017 |
| | $ | 7,500 |
| | $ | 7,827 |
|
Europe | 1,904 |
| | 1,465 |
| | 4,145 |
| | 3,075 |
|
Asia | 269 |
| | 1,144 |
| | 818 |
| | 1,555 |
|
Total | $ | 5,365 |
| | $ | 7,626 |
| | $ | 12,463 |
| | $ | 12,457 |
|
Contract Balances
The Company’s balances for contract assets totaled $1.5 million and $485,000 as of June 30, 2019 and December 31, 2018, respectively. The Company’s balances for contract liabilities, which are included in deferred revenue, totaled $9.9 million and $11.3 million as of June 30, 2019 and December 31, 2018, respectively.
During the three and six months ended June 30, 2019, the Company recognized $3.7 million and $6.3 million, respectively, of revenue that was included in the deferred revenue balance at the beginning of the period. During the three and six months ended June 30, 2018, the Company recognized $3.7 million and $5.5 million, respectively, of revenue that was included in the deferred revenue balance 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 recognizable 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 $18.9 million as of June 30, 2019, of which the Company expects to recognize $11.0 million of revenue over the next 12 months and the remainder thereafter. During the three and six months ended June 30, 2019 and 2018, no revenue was recognized from performance obligations satisfied in previous periods.
| |
(6) | Stock-Based Compensation |
The Company granted the following stock-based awards:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Stock options | 540,500 |
| | 10,000 |
| | 540,500 |
| | 135,000 |
| 8,000 |
| | 540,500 |
| | 25,000 |
| | 540,500 |
|
Restricted stock awards and restricted stock units | 180,000 |
| | 150,000 |
| | 180,000 |
| | 212,500 |
| 98,196 |
| | 180,000 |
| | 196,688 |
| | 180,000 |
|
Performance stock units | — |
| | — |
| | — |
| | 166,149 |
| — |
| | 168,500 |
| | — |
| | 168,500 |
|
The stock options and restricted stock awards and performance stock units granted during the three and six months ended June 30, 20182019 and 20172018 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
The Company granted performance stock units granted in connection withduring 2018 ("2018 Performance Stock Units") and 2017 ("2017 Performance Stock Units"). The 2018 Performance Stock Units consisted of 147,741 units outstanding as of December 31, 2018, of which 98,492 vested during the Company'sthree months ended March 31, 2019. In settlement of the vested 2018 Performance Stock Units, during the three months ended March 31, 2019, the Company issued 98,492 shares of restricted stock upon vesting, which is equal to the number of 2018 Performance Stock Units vested multiplied by the percentage achievement of the performance goals of 100.0%.
The 2017 short-term incentive plan ("Performance Stock Units consisted of 140,493 units outstanding as of December 31, 2017, Incentive Plan"),of which 116,168 vested during the three months ended March 31, 2018. In settlement of
the performance stock units,vested 2017 Performance Stock Units, during the three months ended March 31, 2018, the Company issued 25,726 shares upon vesting, which is equal to the number of performance stock units2017 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 three months ended June 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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Stock-based compensation cost, before income tax benefit: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Stock options | | $ | 73 |
| | $ | 118 |
| | $ | 120 |
| | $ | 244 |
| | $ | 76 |
| | $ | 73 |
| | $ | 170 |
| | $ | 120 |
|
Restricted stock awards and restricted stock units | | 155 |
| | 210 |
| | 318 |
| | 419 |
| | 118 |
| | 155 |
| | 250 |
| | 318 |
|
Performance stock units | | — |
| | 42 |
| | — |
| | 120 |
| | — |
| | — |
| | 5 |
| | — |
|
Total stock-based compensation | | $ | 228 |
| | $ | 370 |
| | $ | 438 |
| | $ | 783 |
| | $ | 194 |
| | $ | 228 |
| | $ | 425 |
| | $ | 438 |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Stock-based compensation cost included in: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Cost of revenues | | $ | 8 |
| | $ | 18 |
| | $ | 18 |
| | $ | 32 |
| | $ | 6 |
| | $ | 8 |
| | $ | 14 |
| | $ | 18 |
|
Operating expenses | | 220 |
| | 352 |
| | 420 |
| | 751 |
| | 188 |
| | 220 |
| | 411 |
| | 420 |
|
Total stock-based compensation | | $ | 228 |
| | $ | 370 |
| | $ | 438 |
| | $ | 783 |
| | $ | 194 |
| | $ | 228 |
| | $ | 425 |
| | $ | 438 |
|
As of both June 30, 20182019 and December 31, 2017,2018, the Company’s liability for gross unrecognized tax benefits totaled $1.2$1.7 million and $1.1 million, respectively (excluding interest and penalties). The Company had no accrued interest and penalties relating to unrecognized tax benefits at June 30, 2018of $16,700 and had $1,400 of accrued interest and penalties relating to unrecognized tax benefits$5,600 on a gross basis at June 30, 2019 and December 31, 2017.2018, respectively. The change in the liability for gross unrecognized tax benefits reflects an increase in interest and penalty reserves established for federal and state research and development credits. Additionally, the Company continues to analyze the different aspects of the Tax Cuts and Jobs Act of 2017 which could potentially affect the provisional estimates that were recorded at December 31, 2017. During the six months ended June 30, 2018, there were no changes made to the provisional amounts recognized in 2017.uncertain tax positions. The Company does not currently expect significant changes in the amount of unrecognized tax benefits during the next twelve months.
| |
(8) | Computation of Net 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 June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net loss per share – basic | | | | | | | |
Net loss | $ | (1,531 | ) | | $ | (2,611 | ) | | $ | (6,061 | ) | | $ | (6,173 | ) |
Weighted average shares outstanding – basic | 9,484 |
| | 9,356 |
| | 9,427 |
| | 9,301 |
|
Net loss per share – basic | $ | (0.16 | ) | | $ | (0.28 | ) | | $ | (0.64 | ) | | $ | (0.66 | ) |
| | | | | | | |
Net loss per share – diluted | | | | | | | |
Loss attributable to common shareholders: | | | | | | | |
Net loss | $ | (1,531 | ) | | $ | (2,611 | ) | | $ | (6,061 | ) | | $ | (6,173 | ) |
Numerator effect of dilutive securities | | | | | | | |
Warrant | — |
| | (11 | ) | | — |
| | — |
|
Loss from attributable to common shareholders | $ | (1,531 | ) | | $ | (2,622 | ) | | $ | (6,061 | ) | | $ | (6,173 | ) |
Weighted average shares outstanding – diluted: | | | | | | | |
Weighted average shares outstanding – basic | 9,484 |
| | 9,356 |
| | 9,427 |
| | 9,301 |
|
Denominator effect of dilutive securities | | | | | | | |
Warrant | — |
| | 1 |
| | — |
| | — |
|
Diluted potential common shares | — |
| | 1 |
| | — |
| | — |
|
Weighted average shares outstanding – diluted | 9,484 |
| | 9,357 |
| | 9,427 |
| | 9,301 |
|
Net loss per share – diluted | $ | (0.16 | ) | | $ | (0.28 | ) | | $ | (0.64 | ) | | $ | (0.66 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net loss per share – basic and diluted | | | | | | | |
Net loss | $ | (3,601 | ) | | $ | (1,531 | ) | | $ | (4,551 | ) | | $ | (6,061 | ) |
Weighted average shares outstanding | 9,861 |
| | 9,484 |
| | 9,775 |
| | 9,427 |
|
Net loss per share | $ | (0.37 | ) | | $ | (0.16 | ) | | $ | (0.47 | ) | | $ | (0.64 | ) |
Stock options, warrants and restricted stock units to acquire common shares that were excluded from the computation of diluted weighted-average common shares as their effect is anti-dilutive were as follows (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Stock options | 1,283 |
| | 1,562 |
| | 1,225 |
| | 1,545 |
|
Warrants | 1,239 |
| | — |
| | 1,183 |
| | 314 |
|
Restricted stock units | 120 |
| | 135 |
| | 135 |
| | 128 |
|
Total anti-dilutive | 2,642 |
| | 1,697 |
| | 2,543 |
| | 1,987 |
|
| |
(9) | Investment in Software Company |
As of June 30, 2018 and December 31, 2017, the Company held an investment totaling $3.1 million in convertible preferred stock of BriefCam, Ltd. (“BriefCam”), a privately-held Israeli company that develops video synopsis technology to augment security and surveillance systems to facilitate review of surveillance video. The investment does not have a readily determinable fair value and is 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 is less than 20%. The security is reviewed quarterly for observable price changes in market-based transactions for an identical or similar investment of the same issuer, as well as for changes in circumstances or the occurrence of events that suggest the Company’s investment may not be fully recoverable. If the fair value of the investment is determined to be less than its carrying amount, the Company writes down the investment to its fair value and recognizes the write-down in net income. The Company monitors BriefCam's results of operations, business plan and capital raising activities and is not aware of any events or circumstances that would indicate a decline in the fair value below the carrying value of its investment. During the six months ended June 30, 2018, there were no observable price changes in market-based transactions for an identical or similar investment of the same issuer or impairments related to the Company’s non-marketable investment in the equity security.
See Note 10–"Subsequent Events” for information relating to the sale of the Company’s investment in BriefCam subsequent to June 30, 2018. |
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Stock options | 1,328 |
| | 1,283 |
| | 1,372 |
| | 1,225 |
|
Warrants | 1,339 |
| | 1,239 |
| | 1,339 |
| | 1,183 |
|
Restricted stock units | 115 |
| | 120 |
| | 132 |
| | 135 |
|
Total anti-dilutive | 2,782 |
| | 2,642 |
| | 2,843 |
| | 2,543 |
|
Sale of BriefCam
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. On July 6, 2018, the Company received approximately $9,678,000 from the closing proceeds for its shares of BriefCam Ltd.
Partial Prepayment of ESW Term Loan
On July 19, 2018, the Company paid $6,463,000 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 $9,638,000 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.
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 usesolutions to create, manage, secure, distribute and measure the success of live and on-demand video for the enterprise. The Company'senterprises. Qumu'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 June 30, 20182019 and 2017,2018, the Company recognizedgenerated revenues of $7.6$5.4 million and $6.7$7.6 million, respectively. For both of the six monthssix-month periods ended June 30, 20182019 and 2017,2018, the Company generated revenues of $12.5 million and $13.4 million, respectively.million. For the yearsyear ended December 31, 2017 and 2016,2018, the Company generated revenues of $28.2 million and $31.7 million, respectively.$25.0 million.
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, investment in nonconsolidated company,accounting for leases, derivative liabilities for outstanding warrants, and royalties for third party technology. Except for the accounting policies for revenue recognitionlease accounting that were updated as a result of adopting Topic 606842 effective January 1, 2018,2019, our significant accounting policies applicable to the six months ended June 30, 20182019 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, 2017.2018.
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 recognitionlease accounting during the six months ended June 30, 2018.2019.
Results of Operations
The percentage relationships to revenues of certain income and expense items for the three and six months ended June 30, 20182019 and 2017,2018, 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 June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| Percentage of Revenues | | Percent Increase (Decrease) | | Percentage of Revenues | | Percent Increase (Decrease) | Percentage of Revenues | | Percent Increase (Decrease) | | Percentage of Revenues | | Percent Increase (Decrease) |
| 2018 | | 2017 | | 2017 to 2018 | | 2018 | | 2017 | | 2017 to 2018 | 2019 | | 2018 | | 2017 to 2018 | | 2019 | | 2018 | | 2018 to 2019 |
Revenues | 100.0 | % | | 100.0 | % | | 15 | % | | 100.0 | % | | 100.0 | % | | (7 | )% | 100.0 | % | | 100.0 | % | | (30 | )% | | 100.0 | % | | 100.0 | % | | — | % |
Cost of revenues | (31.5 | ) | | (34.4 | ) | | 5 |
| | (36.3 | ) | | (36.4 | ) | | (7 | ) | (29.1 | ) | | (31.5 | ) | | (35 | ) | | (24.9 | ) | | (36.3 | ) | | (31 | ) |
Gross profit | 68.5 |
| | 65.6 |
| | 20 |
| | 63.7 |
| | 63.6 |
| | (7 | ) | 70.9 |
| | 68.5 |
| | (27 | ) | | 75.1 |
| | 63.7 |
| | 18 |
|
Operating expenses: | |
| | |
| | | | |
| | |
| | | |
| | |
| | | | |
| | |
| | |
Research and development | 21.5 |
| | 27.0 |
| | (9 | ) | | 28.4 |
| | 29.2 |
| | (9 | ) | 34.3 |
| | 21.5 |
| | 12 |
| | 28.2 |
| | 28.4 |
| | (1 | ) |
Sales and marketing | 31.7 |
| | 37.9 |
| | (4 | ) | | 36.9 |
| | 37.2 |
| | (8 | ) | 41.2 |
| | 31.7 |
| | (8 | ) | | 36.6 |
| | 36.9 |
| | (1 | ) |
General and administrative | 22.9 |
| | 30.2 |
| | (13 | ) | | 31.5 |
| | 33.5 |
| | (12 | ) | 29.5 |
| | 22.9 |
| | (10 | ) | | 26.7 |
| | 31.5 |
| | (15 | ) |
Amortization of purchased intangibles | 3.0 |
| | 3.4 |
| | — |
| | 3.7 |
| | 3.4 |
| | 2 |
| 3.7 |
| | 3.0 |
| | (11 | ) | | 3.3 |
| | 3.7 |
| | (8 | ) |
Total operating expenses | 79.1 |
| | 98.5 |
| | (8 | ) | | 100.5 |
| | 103.3 |
| | (9 | ) | 108.7 |
| | 79.1 |
| | (3 | ) | | 94.8 |
| | 100.5 |
| | (6 | ) |
Operating loss | (10.6 | ) | | (32.9 | ) | | (63 | ) | | (36.8 | ) | | (39.7 | ) | | (14 | ) | (37.8 | ) | | (10.6 | ) | | 152 |
| | (19.7 | ) | | (36.8 | ) | | (46 | ) |
Other expense, net | (10.5 | ) | | (6.7 | ) | | 80 |
| | (13.2 | ) | | (6.7 | ) | | 84 |
| (29.5 | ) | | (10.5 | ) | | 97 |
| | (16.9 | ) | | (13.2 | ) | | 28 |
|
Loss before income taxes | (21.1 | ) | | (39.6 | ) | | (39 | ) | | (50.0 | ) | | (46.4 | ) | | — |
| (67.3 | ) | | (21.1 | ) | | 124 |
| | (36.6 | ) | | (50.0 | ) | | (27 | ) |
Income tax benefit | (1.0 | ) | | (0.4 | ) | | 212 |
| | (1.3 | ) | | (0.2 | ) | | 472 |
| (0.2 | ) | | (1.0 | ) | | (86 | ) | | (0.1 | ) | | (1.3 | ) | | (91 | ) |
Net loss | (20.1 | )% | | (39.2 | )% | | (41 | )% | | (48.7 | )% | | (46.2 | )% | | (2 | )% | (67.1 | )% | | (20.1 | )% | | 135 | % | | (36.5 | )% | | (48.7 | )% | | (25 | )% |
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). or a term software license. 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 June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Increase (Decrease) | | Percent Increase (Decrease) | | | 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 | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 | | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 |
Software licenses and appliances | $ | 2,867 |
| | $ | 929 |
| | $ | 1,938 |
| | 209 | % | | $ | 3,318 |
| | $ | 2,149 |
| | $ | 1,169 |
| | 54 | % | $ | 689 |
| | $ | 2,867 |
| | $ | (2,178 | ) | | (76 | )% | | $ | 1,694 |
| | $ | 3,318 |
| | $ | (1,624 | ) | | (49 | )% |
Service | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subscription, maintenance and support | 4,122 |
| | 5,110 |
| | (988 | ) | | (19 | ) | | 8,160 |
| | 9,948 |
| | (1,788 | ) | | (18 | ) | 4,154 |
| | 4,122 |
| | 32 |
| | 1 |
| | 9,717 |
| | 8,160 |
| | 1,557 |
| | 19 |
|
Professional services and other | 637 |
| | 615 |
| | 22 |
| | 4 |
| | 979 |
| | 1,268 |
| | (289 | ) | | (23 | ) | 522 |
| | 637 |
| | (115 | ) | | (18 | ) | | 1,052 |
| | 979 |
| | 73 |
| | 7 |
|
Total service | 4,759 |
| | 5,725 |
| | (966 | ) | | (17 | ) | | 9,139 |
| | 11,216 |
| | (2,077 | ) | | (19 | ) | 4,676 |
| | 4,759 |
| | (83 | ) | | (2 | ) | | 10,769 |
| | 9,139 |
| | 1,630 |
| | 18 |
|
Total revenues | $ | 7,626 |
| | $ | 6,654 |
| | $ | 972 |
| | 15 | % | | $ | 12,457 |
| | $ | 13,365 |
| | $ | (908 | ) | | (7 | )% | $ | 5,365 |
| | $ | 7,626 |
| | $ | (2,261 | ) | | (30 | )% | | $ | 12,463 |
| | $ | 12,457 |
| | $ | 6 |
| | — | % |
Revenues can vary period to period based on the type and size of contract into which the Company enters with each customer. The increasesquarterly 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 decrease in software licenses and appliances revenues in the three and six months ended June 30, 20182019 compared to the same periods in 2017 were2018 was driven by increasesa decrease in perpetual software license and appliance sales to both new and existing customers.
The decreasesincrease in subscription, maintenance and support revenues in the three and six months ended June 30, 20182019 compared to the corresponding 2017 periods2018 period primary resulted from significant first quarter 2019 term software license sales for which revenue is recognized up front, as well as the loss of a large customerrevenue attributable to maintenance contracts entered into in the fourth quarter of 2017, representing approximately $800,000late 2018. Subscription, maintenance and $1.6 million ofsupport revenues for the three and six month variance, respectively. Additionally, revenues decreased $240,000 and $424,000 in the three and six months ended June 30, 2018 due2019 increased slightly compared to the Company's retrospective adoption of ASC 606 effective January 1, 2018.corresponding 2018 period.
Professional services revenues, which generally move directionally with changes in perpetual license sales increased slightly inand are impacted by custom work, personnel utilization rates and the timing of customer acceptance, decreased for the three months ended June 30, 20182019 compared to the corresponding 20172018 period due to a large professional services project in the prior year quarter, and decreasedincreased in the six months ended June 30, 20182019 compared to the corresponding 20172018 period due primarily to the inclusion of a large former customer in the six months ended June 30, 2017 and to lowerhigher utilization and reduced size of the Company's global professional services team in the first quarter of 2018.2019.
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 June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Increase (Decrease) | | Percent Increase (Decrease) | | | 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 | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 | | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 |
Gross profit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software licenses and appliances | $ | 2,063 |
| | $ | 561 |
| | $ | 1,502 |
| | 268 | % | | $ | 2,179 |
| | $ | 1,287 |
| | $ | 892 |
| | 69 | % | $ | 353 |
| | $ | 2,063 |
| | $ | (1,710 | ) | | (83 | )% | | $ | 1,047 |
| | $ | 2,179 |
| | $ | (1,132 | ) | | (52 | )% |
Service | 3,157 |
| | 3,807 |
| | (650 | ) | | (17 | ) | | 5,760 |
| | 7,208 |
| | (1,448 | ) | | (20 | ) | 3,449 |
| | 3,157 |
| | 292 |
| | 9 |
| | 8,316 |
| | 5,760 |
| | 2,556 |
| | 44 |
|
Total gross profit | $ | 5,220 |
| | $ | 4,368 |
| | $ | 852 |
| | 20 | % | | $ | 7,939 |
| | $ | 8,495 |
| | $ | (556 | ) | | (7 | )% | $ | 3,802 |
| | $ | 5,220 |
| | $ | (1,418 | ) | | (27 | )% | | $ | 9,363 |
| | $ | 7,939 |
| | $ | 1,424 |
| | 18 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross margin: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software licenses and appliances | 72.0 | % | | 60.4 | % | | 11.6 | % | | | | 65.7 | % | | 59.9 | % | | 5.8 | % | | | 51.2 | % | | 72.0 | % | | (20.8 | )% | | | | 61.8 | % | | 65.7 | % | | (3.9 | )% | | |
Service | 66.3 | % | | 66.5 | % | | (0.2 | )% | | | | 63.0 | % | | 64.3 | % | | (1.3 | )% | | | 73.8 | % | | 66.3 | % | | 7.5 | % | | | | 77.2 | % | | 63.0 | % | | 14.2 | % | | |
Total gross margin | 68.5 | % | | 65.6 | % | | 2.9 | % | | | | 63.7 | % | | 63.6 | % | | 0.1 | % | | | 70.9 | % | | 68.5 | % | | 2.4 | % | | | | 75.1 | % | | 63.7 | % | | 11.4 | % | | |
Gross margins includeprofit includes $114,000 and $293,000 and $298,000 for the three months ended June 30, 2019 and 2018, respectively, and 2017, respectively,$231,000 and $591,000 for each six-month periodthe six months ended June 30, 2019 and 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 20182019 is expected to include approximately $1.2$0.5 million of amortization expense for purchased intangibles. The Company had 19 and 21Included in cost of revenues are the costs related to the Company's service personnel, of which there were 19 at both June 30, 20182019 and 2017, respectively.2018.
The 2.9% and 0.1% increases in total gross margin percentagepercentages improved 2.4% and 11.4% in the three and six months ended June 30, 2018,2019, respectively, compared to the corresponding 2017 periods resulted from the increase in both2018, as increased service gross margins were somewhat offset by decreased software licenseslicense and applianceappliances gross margin. The 11.6%7.5% and 5.8% increases in software licenses and appliance gross margin in the three and six months ended June 30, 2018, respectively, compared to the corresponding 2017 periods, was driven primarily by strong sales, including a few large perpetual license sales, in the three months ended June 30, 2018, while costs of sales consist generally of fixed amortized prepaid royalties for embedded OEM licenses. The 0.2% and 1.3% decreases14.2% improvement in service gross margin in the three and six months ended June 30, 2019, respectively, compared to the corresponding periods in 2018, was primarily driven by higherdue to an increase in term software license revenue, decreased amortization expense as certain purchased intangible assets became fully amortized during 2018 and lower royalty expense associated with third-party software licenses. The 20.8% and 3.9% decrease in software licenses and appliances gross margin attributable to services to a large former customer in the three and six months ended June 30, 2017 and2019, respectively, compared to lower utilization and reduced sizethe corresponding 2018 periods, was driven primarily by decreased revenue in 2019 while cost of the Company's global professional services team in the first quarterrevenues generally consists of 2018.fixed amortized prepaid royalties for embedded OEM licenses.
Future gross profit margins willare expected fluctuate quarter to quarter and will be impacted by the rate of growth and mix of the Company's product and service offerings, utilization of service personnel, fixed and variable royalty expense, and foreign currency exchange rate fluctuations.
Operating Expenses
The following is a summary of operating expenses (dollars in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Increase (Decrease) | | Percent Increase (Decrease) | | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Decrease | | Percent Decrease |
| 2018 | | 2017 | | 2017 to 2018 | | 2017 to 2018 | | 2018 | | 2017 | | 2017 to 2018 | | 2017 to 2018 | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 | | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development | $ | 1,639 |
| | $ | 1,798 |
| | $ | (159 | ) | | (9 | )% | | $ | 3,542 |
| | $ | 3,907 |
| | $ | (365 | ) | | (9 | )% | $ | 1,838 |
| | $ | 1,639 |
| | $ | 199 |
| | 12 | % | | $ | 3,512 |
| | $ | 3,542 |
| | $ | (30 | ) | | (1 | )% |
Sales and marketing | 2,412 |
| | 2,524 |
| | (112 | ) | | (4 | ) | | 4,592 |
| | 4,975 |
| | (383 | ) | | (8 | ) | 2,212 |
| | 2,412 |
| | (200 | ) | | (8 | ) | | 4,564 |
| | 4,592 |
| | (28 | ) | | (1 | ) |
General and administrative | 1,747 |
| | 2,009 |
| | (262 | ) | | (13 | ) | | 3,928 |
| | 4,469 |
| | (541 | ) | | (12 | ) | 1,579 |
| | 1,747 |
| | (168 | ) | | (10 | ) | | 3,325 |
| | 3,928 |
| | (603 | ) | | (15 | ) |
Amortization of purchased intangibles | 227 |
| | 226 |
| | 1 |
| | — |
| | 456 |
| | 449 |
| | 7 |
| | 2 |
| 201 |
| | 227 |
| | (26 | ) | | (11 | ) | | 419 |
| | 456 |
| | (37 | ) | | (8 | ) |
Total operating expenses | $ | 6,025 |
| | $ | 6,557 |
| | $ | (532 | ) | | (8 | )% | | $ | 12,518 |
| | $ | 13,800 |
| | $ | (1,282 | ) | | (9 | )% | $ | 5,830 |
| | $ | 6,025 |
| | $ | (195 | ) | | (3 | )% | | $ | 11,820 |
| | $ | 12,518 |
| | $ | (698 | ) | | (6 | )% |
Operating expenses for the three and six months ended June 30, 20182019 compared to the corresponding 20172018 periods reflected lower employee costs due to fewer personnel and continued improvement in the Company's operational efficiency. The Company had 7980 and 9879 personnel in operating activities at June 30, 20182019 and 2017,2018, respectively. The Company incurred severance expense relating to cost reduction initiativeswithin operating expense of $6,000$125,000 and $17,000$6,000 in the three months ended June 30, 20182019 and 2017,2018, respectively, and $177,000$134,000 and $119,000$177,000 in the six months ended June 30, 2019 and 2018, and 2017, respectively. During the six months ended June 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 June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Increase (Decrease) | | Percent Increase (Decrease) | | | 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 | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 | | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 |
Compensation and employee-related | $ | 1,197 |
| | $ | 1,351 |
| | $ | (154 | ) | | (11 | )% | | $ | 2,670 |
| | $ | 2,986 |
| | $ | (316 | ) | | (11 | )% | $ | 1,217 |
| | $ | 1,197 |
| | $ | 20 |
| | 2 | % | | $ | 2,414 |
| | $ | 2,670 |
| | $ | (256 | ) | | (10 | )% |
Overhead and other expenses | 310 |
| | 269 |
| | 41 |
| | 15 |
| | 611 |
| | 564 |
| | 47 |
| | 8 |
| 385 |
| | 310 |
| | 75 |
| | 24 |
| | 720 |
| | 611 |
| | 109 |
| | 18 |
|
Outside services and consulting | 91 |
| | 98 |
| | (7 | ) | | (7 | ) | | 176 |
| | 191 |
| | (15 | ) | | (8 | ) | 202 |
| | 91 |
| | 111 |
| | 122 |
| | 310 |
| | 176 |
| | 134 |
| | 76 |
|
Depreciation and amortization | 6 |
| | 36 |
| | (30 | ) | | (83 | ) | | 23 |
| | 74 |
| | (51 | ) | | (69 | ) | 1 |
| | 6 |
| | (5 | ) | | (83 | ) | | 2 |
| | 23 |
| | (21 | ) | | (91 | ) |
Equity-based compensation | 35 |
| | 44 |
| | (9 | ) | | (20 | ) | | 62 |
| | 92 |
| | (30 | ) | | (33 | ) | 33 |
| | 35 |
| | (2 | ) | | (6 | ) | | 66 |
| | 62 |
| | 4 |
| | 6 |
|
Total research and development expenses | $ | 1,639 |
| | $ | 1,798 |
| | $ | (159 | ) | | (9 | )% | | $ | 3,542 |
| | $ | 3,907 |
| | $ | (365 | ) | | (9 | )% | $ | 1,838 |
| | $ | 1,639 |
| | $ | 199 |
| | 12 | % | | $ | 3,512 |
| | $ | 3,542 |
| | $ | (30 | ) | | (1 | )% |
Total research and development expenses as a percent of revenues were 22%34% and 27%22% for the three months ended June 30, 20182019 and 2017,2018, respectively, and 28% for both of the six-month periods ended June 30, 2019 and 29% for2018. The Company had 34 research and development personnel at both June 30, 2019 and June 30, 2018.
The increase in expenses of $199,000 in the three months ended June 30, 2019 compared to the corresponding 2018 period was primarily due to transition costs related to the Company's in-process migration and consolidation of cloud hosting providers during 2019, impacting both outside services and consulting expenses and overhead and other expenses.
The decrease in expenses of $30,000 in the six months ended June 30, 2018 and 2017, respectively. The Company had 34 and 40 research and development personnel at June 30, 2018 and 2017, respectively.
The decreases in expenses of $159,000 and $365,000 in the three and six months ended June 30, 2018, respectively,2019 compared to the corresponding 2017 periods, were2018 period was driven primarily by lower employee costs due to fewerthe mix of research and development personnel and continued improvementlower severance expense, as no severance expense within research and development expense was incurred in the Company's operational efficiency in the three and six months ended June 30, 2018 compared to the corresponding 2017 periods.2019.
Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Increase (Decrease) | | Percent Increase (Decrease) | | | 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 | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 | | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 |
Compensation and employee-related | $ | 1,779 |
| | $ | 1,960 |
| | $ | (181 | ) | | (9 | )% | | $ | 3,432 |
| | $ | 3,859 |
| | $ | (427 | ) | | (11 | )% | $ | 1,695 |
| | $ | 1,779 |
| | $ | (84 | ) | | (5 | )% | | $ | 3,521 |
| | $ | 3,432 |
| | $ | 89 |
| | 3 | % |
Overhead and other expenses | 375 |
| | 262 |
| | 113 |
| | 43 |
| | 707 |
| | 528 |
| | 179 |
| | 34 |
| 253 |
| | 375 |
| | (122 | ) | | (33 | ) | | 544 |
| | 707 |
| | (163 | ) | | (23 | ) |
Outside services and consulting | 224 |
| | 241 |
| | (17 | ) | | (7 | ) | | 396 |
| | 448 |
| | (52 | ) | | (12 | ) | 270 |
| | 224 |
| | 46 |
| | 21 |
| | 479 |
| | 396 |
| | 83 |
| | 21 |
|
Depreciation and amortization | 3 |
| | 15 |
| | (12 | ) | | (80 | ) | | 9 |
| | 34 |
| | (25 | ) | | (74 | ) | 2 |
| | 3 |
| | (1 | ) | | (33 | ) | | 3 |
| | 9 |
| | (6 | ) | | (67 | ) |
Equity-based compensation | 31 |
| | 46 |
| | (15 | ) | | (33 | ) | | 48 |
| | 106 |
| | (58 | ) | | (55 | ) | (8 | ) | | 31 |
| | (39 | ) | | (126 | ) | | 17 |
| | 48 |
| | (31 | ) | | (65 | ) |
Total sales and marketing expenses | $ | 2,412 |
| | $ | 2,524 |
| | $ | (112 | ) | | (4 | )% | | $ | 4,592 |
| | $ | 4,975 |
| | $ | (383 | ) | | (8 | )% | $ | 2,212 |
| | $ | 2,412 |
| | $ | (200 | ) | | (8 | )% | | $ | 4,564 |
| | $ | 4,592 |
| | $ | (28 | ) | | (1 | )% |
Total sales and marketing expenses as a percent of revenues were 32%41% and 38%32% for the three months ended June 30, 20182019 and 2017,2018, respectively, and 37% for both of the six-month periods ended June 30, 20182019 and 2017.2018. The Company had 2827 and 3628 sales and marketing personnel at June 30, 2019 and 2018, and 2017, respectively.
The decreasesdecrease in expenses of $112,000 and $383,000 in the three and six months ended June 30, 2018, respectively, compared to the corresponding 2017 periods, were primarily driven by lower employee costs, due to fewer sales and marketing personnel, and continued improvement in the Company's operational efficiency in the three and six months ended June 30, 2018 compared to the corresponding 2017 periods. The Company incurred severance expense relating to sales and marketing cost reduction initiatives of $6,000 and $25,000$200,000 in the three months ended June 30, 2019 compared to the corresponding 2018 period was primarily driven by continued cost reduction initiatives reflected in overhead and 2017, respectively,other expenses and $51,000lower compensation and $101,000 foremployee-related costs due to the mix and number of sales and marketing personnel, partially offset by increased severance expense.
The decrease in expenses of $28,000 in the six months ended June 30, 2019 compared to the corresponding 2018 period was primarily driven by continued cost reduction initiatives reflected in overhead and 2017, respectively.other expenses, partially offset by increased compensation and employee-related costs resulting from increased commissions expense and severance expense.
General and administrative
General and administrative expenses were as follows (dollars in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Increase (Decrease) | | Percent Increase (Decrease) | | | 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 | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 | | 2019 | | 2018 | | 2018 to 2019 | | 2018 to 2019 |
Compensation and employee-related | $ | 647 |
| | $ | 892 |
| | $ | (245 | ) | | (27 | )% | | $ | 1,442 |
| | $ | 1,869 |
| | $ | (427 | ) | | (23 | )% | $ | 739 |
| | $ | 647 |
| | $ | 92 |
| | 14 | % | | $ | 1,458 |
| | $ | 1,442 |
| | $ | 16 |
| | 1 | % |
Overhead and other expenses | 233 |
| | 215 |
| | 18 |
| | 8 |
| | 559 |
| | 577 |
| | (18 | ) | | (3 | ) | 239 |
| | 233 |
| | 6 |
| | 3 |
| | 580 |
| | 559 |
| | 21 |
| | 4 |
|
Outside services and consulting | 596 |
| | 450 |
| | 146 |
| | 32 |
| | 1,354 |
| | 1,089 |
| | 265 |
| | 24 |
| 355 |
| | 596 |
| | (241 | ) | | (40 | ) | | 805 |
| | 1,354 |
| | (549 | ) | | (41 | ) |
Depreciation and amortization | 117 |
| | 190 |
| | (73 | ) | | (38 | ) | | 263 |
| | 381 |
| | (118 | ) | | (31 | ) | 83 |
| | 117 |
| | (34 | ) | | (29 | ) | | 154 |
| | 263 |
| | (109 | ) | | (41 | ) |
Equity-based compensation | 154 |
| | 262 |
| | (108 | ) | | (41 | ) | | 310 |
| | 553 |
| | (243 | ) | | (44 | ) | 163 |
| | 154 |
| | 9 |
| | 6 |
| | 328 |
| | 310 |
| | 18 |
| | 6 |
|
Total general and administrative expenses | $ | 1,747 |
| | $ | 2,009 |
| | $ | (262 | ) | | (13 | )% | | $ | 3,928 |
| | $ | 4,469 |
| | $ | (541 | ) | | (12 | )% | $ | 1,579 |
| | $ | 1,747 |
| | $ | (168 | ) | | (10 | )% | | $ | 3,325 |
| | $ | 3,928 |
| | $ | (603 | ) | | (15 | )% |
Total general and administrative expenses as a percent of revenues were 23%30% and 30%23% for the three months ended June 30, 20182019 and 2017,2018, respectively, and 32%27% and 34%32% for the six months ended June 30, 20182019 and 2017,2018, respectively. The Company had 1719 and 2217 general and administrative personnel at June 30, 20182019 and 2017,2018, respectively.
The decrease in expenses of $262,000 and $541,000$168,000 in the three months ended June 30, 2019 compared to the corresponding 2018 period was primarily driven by cost savings in outside services and consulting expense due to reduced utilization of consultants and lower legal and audit fees.
The decrease in expenses of $603,000 in the six months ended June 30, 2018, respectively,2019 compared to the corresponding 2017 periods,2018 period was driven primarily by lower employeeoutside services costs due to fewer general and administrative personnel, and continued improvementresulting from a reduction in the Company's operational efficiencyaudit fees incurred in the three and six months ended June 30, 2018.2019.
Amortization of Purchased Intangibles
Operating expenses include $227,000$201,000 and $226,000$227,000 for the three months ended June 30, 20182019 and 2017,2018, respectively, and $456,000$419,000 and $449,000$456,000 for the six months ended June 30, 20182019 and 2017,2018, respectively, for the amortization of intangible assets
acquired as part of the Company’s acquisition of Qumu, Inc. in October 2011 and Kulu Valley in October 2014. Operating expenses for the full year 20182019 are expected to include approximately $0.9$0.8 million of amortization expense associated with purchased intangibles, exclusive of the portion classified in cost of revenue.
Other Income (Expense), Net
Other income (expense), net was as follows (dollars in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | Increase (Decrease) | | Percent Increase (Decrease) | | | | Increase (Decrease) | | Percent Increase (Decrease) | 2019 | | 2018 | | 2019 | | 2018 |
| 2018 | | 2017 | | 2017 to 2018 | | 2017 to 2018 | | 2018 | | 2017 | | 2017 to 2018 | | 2017 to 2018 | |
Interest income (expense), net | $ | (510 | ) | | $ | (334 | ) | | $ | (176 | ) | | 53 | % | | $ | (1,354 | ) | | $ | (651 | ) | | $ | (703 | ) | | 108 | % | |
Interest expense, net | | $ | (214 | ) | | $ | (510 | ) | | $ | (419 | ) | | $ | (1,354 | ) |
Decrease (increase) in fair value of warrant liability | (278 | ) | | 11 |
| | (289 | ) | | (2,627 | ) | | 109 |
| | (67 | ) | | 176 |
| | (263 | ) | (1,436 | ) | | (278 | ) | | (1,725 | ) | | 109 |
|
Other, net | (16 | ) | | (124 | ) | | 108 |
| | (87 | ) | | (403 | ) | | (179 | ) | | (224 | ) | | 125 |
| 66 |
| | (16 | ) | | 35 |
| | (403 | ) |
Total other expense, net | $ | (804 | ) | | $ | (447 | ) | | $ | (357 | ) | | 80 | % | | $ | (1,648 | ) | | $ | (897 | ) | | $ | (751 | ) | | 84 | % | |
Total other income (expense), net | | $ | (1,584 | ) | | $ | (804 | ) | | $ | (2,109 | ) | | $ | (1,648 | ) |
The Company recognized interest expense on its term loan and capitalfinance leases of $510,000$214,000 and $334,000$510,000 for the three months ended June 30, 20182019 and 2017,2018, respectively, and $1,354,000$419,000 and $651,000$1.4 million for the six months ended June 30, 20182019 and 2017,2018, respectively, which includes the accrual of interest on the Company's term loans, as well as the amortization of deferred financing costs. Amortization of deferred financing costs for the six months ended June 30, 2018 includes $395,000 of expense related to the Company's acceleration of the amortization of deferred financing costs in connection with the modification of its term loan credit agreement with Hale Capital Partners, LP in the fourth quarter of 2017 and subsequent refinancingrepayment in full of this debt with the debtproceeds from the ESW Holdings, Inc. term loan in the first quarter of 2018.
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued two warrants for the purchase of up to 314,286 shares and 925,000 shares, respectively, of Additionally, interest expense on the Company's common stock, which remained unexercisedterm loan was lower in the three and outstanding atsix months ended June 30, 2018. The warrants contain a cash settlement feature upon2019, compared to the occurrence of a certain events, essentiallycorresponding 2018 periods, due to the sale of the Company as definedCompany's $6.0 million paydown on its term loan principal balance in the warrant agreements. As a result of this feature, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the respective dates of issuance were recorded in the Company’s consolidated balance sheets as a liability. The fair value of the warrant liability is estimated at the end of each reporting period and the change in the fair value is recorded as a non-operating gain or loss in the Company’s consolidated statements of operations. July 2018.
The Company recorded a non-cash gain (loss)losses of $(278,000)$1.4 million and $11,000$278,000 during the three months ended June 30, 2019 and 2018, and 2017, respectively, and a non-cash gain (loss)loss of $109,000 and $(67,000)$1.7 million during the six months ended June 30, 20182019, and 2017, respectively,a non-cash gain $109,000 for the six months ended June 30, 2018 from the change in fair value of the warrant liability. The increase in fair value for the three months ended June 30, 2019, the three months ended June 30, 2018 and the six months ended June 30, 2019 was primarily driven by corresponding increases in the Company’s stock price of 69%, 25% and 118% for the respective periods. The decrease in fair value forduring the six months ended June 30, 2018 was primarily driven by a corresponding increase and decrease respectively, in the Company’s stock price. The decrease in fair value during the three months ended June 30, 2017 was primarily driven by decreased volatility in the Company’s stock price and the increase in fair valueof 7% during the six months ended June 30, 2017 was primarily driven by an increase in the Company’s stock price impacting the Hale warrant, which was the only warrant outstanding as of such date.period.
Other expense included net gains on foreign currency transactions of $31,000 and $169,000 for the three months ended June 30, 2019 and 2018, respectively, and net losses on foreign currency transactions of $128,000 for the three months ended June 30, 2018$63,000 and 2017, respectively, and $102,000 and $176,000 for the six months ended June 30, 20182019 and 2017,2018, respectively. Other expense also included debt issuance costs of $110,000 for the six months ended June 30, 2018 related to thea warrant issued in the first quarter of 2018. See “Liquidity and Capital Resources” below for a discussion of changes in cash levels.
Income Taxes
The provision for income taxes represents federal, state, and foreign income taxes or income tax benefit on income or loss. Net income tax benefit amounted towas $11,000 and $78,000 and $25,000 for the three months ended June 30, 20182019 and 2017,2018, respectively, and $166,000$15,000 and $29,000$166,000 for the six months ended June 30, 2019 and 2018, respectively. The net income tax benefit for the three and 2017, respectively,six months ended June 30, 2019, was impacted by the tax benefit for refundable research credits from United Kingdom operations offset by an increase in reserves for unrecognized tax benefits. The net income tax benefit for the three and six months ended June 30, 2018, is primarily attributable to refundable research credits from United Kingdom operations, which include refundable research credits.operations.
Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Company's liquidity and capital resources (in thousands):
| | | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | $ | 5,202 |
| | $ | 7,690 |
| $ | 7,349 |
| | $ | 8,636 |
|
Working capital | $ | (3,146 | ) | | $ | (1,467 | ) | $ | (6,663 | ) | | $ | 865 |
|
Financing obligations | $ | 226 |
| | $ | 1,050 |
| $ | 402 |
| | $ | 209 |
|
Operating lease liabilities | | 1,473 |
| | — |
|
Term loan | 7,956 |
| | 7,605 |
| 3,693 |
| | 3,431 |
|
Financing obligations and term loan | $ | 8,182 |
| | $ | 8,655 |
| |
Financing obligations, operating lease liabilities and term loan | | $ | 5,568 |
| | $ | 3,640 |
|
The Company expects it will be able to maintain current operations and anticipated capital expenditure requirements for at least the next 12 months through its cash reserves, which includesreserves. Due to the proceedsCompany's strong accounts receivable collections and cash management during the second quarter 2019 and to the expected timing of the debt financing completedcash to be provided by revenues in the firstsecond half 2019, management no longer expects that it will achieve breakeven cash flow for the third quarter of 2018,2019, though management's internal forecast of cash and proceeds received in July 2018 from the sale of the Company’s interest in BriefCam, as well as any cash flows that may be generated from current operations. Based on expected revenue performance and continued management of expenses to scale with revenue, theequivalents at December 31, 2019 remains unchanged. The Company expects that it will be cash flow breakeven forable repay the fourth quarter of 2018.principal and accrued interest due to ESW Holdings on January 10, 2020, and, if required, the Company would secure a facility sufficient to meet working capital requirements following repayment. If the Company is unable to meet its revenue expectations or secure an alternative facility, it is positioned to further reduce costs to mitigate the impact on its cash reserves for at least the next 12 months.
At June 30, 2018,2019, the Company had aggregate negative working capital of $3.1$6.7 million, compared to negativepositive working capital of $1.5 million$865,000 at December 31, 2017.2018. Working capital includes current deferred revenue of $8.5$8.6 million and $8.9$9.7 million at June 30, 20182019 and December 31, 2017,2018, respectively. The primary contributorcontributors to the change in working capital waswere the decreasereclassification of the carrying value of the Company's term loan of $3.7 million and related accrued interest of $376,000 from long-term liabilities to current liabilities as the loan and accrued interest is due and payable on January 10, 2020, the increase in cash and cash equivalents by $2.5the warrant liability of $1.7 million driven by the $4.6 million operating loss forduring the six months ended June 30, 2018.2019, and cash used to fund the Company's operating loss during the six months ended June 30, 2019.
Financing obligations as of June 30, 2019 and December 31, 2018 primarily consistconsists of capitalfinance leases related to the acquisition of computer and network equipment and furniture.
During the six months ended Upon adoption of Topic 842 on January 1, 2019, operating lease liabilities as of June 30, 2018,2019 consists of liabilities primarily related to the Company used $8.8 million of the $10.0 million term loan proceeds provided through the credit agreement with ESW Holdings, Inc. to pay all outstanding obligations under the term loan credit agreement dated as of October 21, 2016 among the Company, Qumu, Inc., HCP-FVD, LLC, as lender and Hale Capital Partners, LP, as administrative agent. Concurrently with such repayment, the October 21, 2016 term loan credit agreement terminated by its terms effective January 12, 2018.Company's operating leases for office space.
The term loan with ESW Holdings, Inc. consists of a two-year note having a face value of $10.0$4.0 million andat June 30, 2019 that 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%. As of June 30, 2018,2019, interest accrued at 9.0%9.50% and accrued and unpaid interest was $414,000.
Subsequent to June 30, 2018, on July 19, 2018, the Company paid $6,463,000 on its outstanding term loan from ESW Holdings, Inc. under that certain 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 $9,638,000 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.$376,000.
The Company's primary source of cash from operating activities has been cash collections from sales of products and services to customers. The Company expects cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. The Company's primary use of cash for operating activities has been for personnel costs and outside service providers, payment of royalties associated with third-party software licenses and purchases of equipment to fulfill customer orders. The Company expects cash flows from operating activities to be affected by fluctuations in revenues, personnel costs, outside service providers, and the amount and timing of royalty payments and equipment purchases as the Company continues to support the growth of the business. The amount of cash and cash equivalents held by the Company's international subsidiaries that is not available to fund domestic operations unless repatriated was $1.5$2.9 million as of June 30, 2018.2019. The repatriation of cash and cash equivalents held by the Company's international subsidiaries would not result in an adverse tax impact on cash given that the future tax consequences of repatriation are expected to be insignificant as a result of the Tax Cuts and Jobs Act of 2017.
Summary of Cash Flows
A summary of cash flows is as follows (in thousands):
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
Cash flows provided by (used in): | |
| | |
| |
| | |
|
Operating activities | $ | (2,772 | ) | | $ | (1,065 | ) | $ | (1,069 | ) | | $ | (2,772 | ) |
Investing activities | (73 | ) | | (20 | ) | (43 | ) | | (73 | ) |
Financing activities | 418 |
| | (391 | ) | (169 | ) | | 418 |
|
Effect of exchange rate changes on cash | (61 | ) | | 94 |
| (6 | ) | | (61 | ) |
Net change in cash and cash equivalents | $ | (2,488 | ) | | $ | (1,382 | ) | $ | (1,287 | ) | | $ | (2,488 | ) |
Operating activities
Net cash used in operating activities was $2.8$1.1 million for the six months ended June 30, 20182019 compared to $1.1$2.8 million for the corresponding 20172018 period. The operating cash flows for the 2019 period were favorably impacted by the change in receivables, offset by unfavorable changes in contract assets, deferred income and customer deposits, and accrued compensation. The operating cash flows for the 2018 period were unfavorably impacted by the change in accounts payable and other accrued liabilities. The change in operating cash flows period over period was unfavorably impacted by the changes in receivables and accounts payable and other accrued liabilities, partially offset by the change in deferred revenue.
Investing activities
Net cash used in investing activities for the purchases of property and equipment totaled $73,000$43,000 for the six months ended June 30, 20182019 compared to $20,000$73,000 used also for the purchases of property and equipment in the corresponding 20172018 period.
Financing activities
Financing activities providedused net cash of $418,000$169,000 for the six months ended June 30, 20182019 and usedprovided net cash of $391,000$418,000 in the comparable 20172018 period. Primarily impacting the current period use of cash were principal payments of $158,000 on finance leases and other financing obligations. Primarily impacting the 2018 period provision of cash waswere the cash proceeds from the Company's refinancing of its $10.0 million term loan in January 2018, offset by principal payments on capital leases and other financing obligations of $247,000, athe principal payment on the Hale term loan of $8.0 million and a debt prepayment fee of $800,000.
In October 2010, the Company’s Board of Directors approved a common stock repurchase program of up to 3,500,000 shares. Shares may be purchased at prevailing market prices in the open market or in private transactions, subject to market conditions, share price, trading volume and other factors. The repurchase program has been funded to date using cash on hand and may be discontinued at any time. The Company did not repurchase any shares of its common stock under the repurchase program during the six months ended June 30, 20182019 and 2017.2018. As of June 30, 2018,2019, the Company had 778,365 shares available for repurchase under the authorizations. While the current authorization remains in effect, the Company expects its primary use of cash will be to fund operations in support of the Company’s goals for revenue growth and operating margin improvement. Under the credit agreement, the Company is prohibited from repurchasing or redeeming its stock, subject to certain exceptions relating to the exercise or vesting of equity awards.
The Company did not declare or pay any dividends during the six months ended June 30, 20182019 and 2017.2018. Under the credit agreement, the Company is prohibited from declaring or paying any dividends.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties. The Company's actual results could differ significantly from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, the following, as well as other factors not now identified: the markets for video content and software to manage video content are each in early stages of development, and if these markets do not develop or develop more slowly than we expect, our revenues may decline or fail to grow; if we are unable to attract new customers, retain existing customers and sell additional products and services to our existing and new customers, our revenue growth and profitability will be adversely affected and we may violate our covenants under the ESW Holdings credit agreement; we will need additional capital to fund repayment of our term loan due in January
2020 and any additional capital we seek may not be available in the amount or at the time we need it; we have a history of losses and while our goal is to become cash flow breakeven in the fourth quarter of 2018, we may not achieve that goal or achieve or sustain cash flows or profitability in the future; if we are unable to retain our existing customers, our revenue and results of operations will be adversely affected; we encounter long sales cycles with our Qumu enterprise video solutions, which could adversely affect our operating results in
a given period; to compete effectively, we must continually improve existing products and introduce new products that achieve market acceptance; we face intense competition and such competition may result in price reductions, lower gross profits and loss of market share; adverse economic and market conditions, particularly those affecting our customers, have harmed and may continue to harm our business; our sales will decline, and our business will be materially harmed, if our sales and marketing efforts are not effective; competition for highly skilled personnel is intense and if we fail to attract and retain talented employees, we may fail to compete effectively; our enterprise video content management software products must be successfully integrated into our customers’ information technology environments and workflows and changes to these environments, workflows or unforeseen combinations of technologies may harm our customers’ experience in using our software products; the growth and functionality of our enterprise video content management software products depend upon the solution’s effective operation with mobile operating systems and computer networks; any failure of major elements of our products could lead to significant disruptions in the ability to serve customers, which could damage our reputation, reduce our revenues or otherwise harm our business; if we lose access to third-party licenses, our software product development and production may be delayed or we may incur additional expense to modify our products or products in development; if the limited amount of open source software that is incorporated into our products were to become unavailable or if we violate the terms of open source licenses, it could adversely affect sales of our products, which could disrupt our business and harm our financial results; we sell a significant portion of our products internationally, which exposes us to risks associated with international operations; if our domestic or international intellectual property rights are not adequately protected, others may offer products similar to ours or independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets which could depress our product selling prices and gross profit or result in loss of market share; changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our products, and could have a negative impact on our business; expanding laws, regulations and customer requirements relating to data security and privacy may adversely affect sales of our products and result in increased compliance costs; we may face circumstances in the future that could result in impairment charges, including, but not limited to, significant goodwill impairment charges; we may experience significant quarterly and annual fluctuations in our results of operations due to a number of factors and these fluctuations may negatively impact the market price of our common stock; the limited liquidity for our common stock could affect your ability to sell your shares at a satisfactory price; and provisions of Minnesota law, our bylaws and other agreements may deter a change of control of our company and may have a possible negative effect on our stock price. These forward-looking statements are made as of the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Translation.As of June 30, 2018,a smaller reporting company, the Company is exposednot required to market risk primarily from foreign exchange rate fluctuations of the British Pound Sterling and Japanese Yen to the U.S. Dollar as the financial position and operating results of the Company’s foreign subsidiaries are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.
Interest Rates. The Company's term loan requires payment of interest monthly at the prime rate plus 4% and changes in interest rates would impact the Company's monthly interest payment and cash reserves. A 100-basis point increase in the prime rate would increase our annual pre-tax interest expense by approximately $40,000.provide information typically disclosed under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, Vernon J. Hanzlik, and the Company’s Chief Financial Officer, David G. Ristow, have evaluated the Company’s disclosure controls and procedures as of June 30, 2018.2019. Based upon such evaluation, they have concluded that these disclosure controls and procedures are effective. The Company’s Chief Executive Officer and Chief Financial Officer used the definition of “disclosure controls and procedures” as set forth in Rule 13a-15(e) under the Exchange Act in making their conclusion as to the effectiveness of such controls and procedures.
Changes in Internal Control Over Financial Reporting
No changes in internal controls over financial reporting have occurred during the quarter ended June 30, 20182019 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In October 2010, the Company’s Board of Directors approved a common stock repurchase program of up to 3,500,000 shares of the Company’s common stock. Shares may be purchased at prevailing market prices in the open market or in private transactions, subject to market conditions, share price, trading volume and other factors. The repurchase program may be discontinued at any time. The repurchase program has been funded to date using cash on hand. During the three months ended June 30, 2018,2019, no repurchases were made under the repurchase program. While the current authorization remains in effect, the Company expects its primary use of cash will be to fund operations in support of the Company’s goals for revenue growth and operating margin improvement. Under the credit agreement with ESW Holdings, the Company is prohibited from repurchasing or redeeming its stock, subject to certain exceptions relating to the exercise or vesting of equity awards.
In addition to shares that may be purchased under the Board authorization, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax withholding on stock option exercises or vesting of restricted awards and performance stock units. All of the share repurchase activity included in the table below for the three months ended June 30, 20182019 was associated with satisfaction of employee tax withholding requirements on thestock option exercises and vesting of restricted stock awards and performance stock units.awards.
Information on the Company’s repurchases of its common stock during each month of the quarter ended June 30, 20182019 is as follows:
|
| | | | | | | | |
Monthly Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | | Maximum Number of Shares that may yet be Purchased under the Plans or Programs (at end of period) |
April 2018 | | — | | $— | | — | | 778,365 |
May 2018 | | 3,644 | | $2.27 | | — | | 778,365 |
June 2018 | | — | | $— | | — | | 778,365 |
|
| | | | | | | | |
Monthly Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | | Maximum Number of Shares that may yet be Purchased under the Plans or Programs (at end of period) |
April 2019 | | — | | $— | | — | | 778,365 |
May 2019 | | 16,718 | | $4.31 | | — | | 778,365 |
June 2019 | | — | | $— | | — | | 778,365 |
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.Not Applicable.
Item 6. Exhibits
| |
(a) | The following exhibits are included herein: |
SIGNATURES
In accordance with the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
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| | | | |
| | | | QUMU CORPORATION |
| | | | Registrant |
| | | | |
Date: | August 7, 20186, 2019 | | By: | /s/ Vernon J. Hanzlik |
| | | | Vernon J. Hanzlik |
| | | | President and Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | | |
Date: | August 7, 20186, 2019 | | By: | /s/ David G. Ristow |
| | | | David G. Ristow |
| | | | Chief Financial Officer |
| | | | (Principal Financial Officer) |
| | | | (Principal Accounting Officer) |