FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-20728
 
QUMU CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
 
41-1577970
State or other jurisdiction of incorporation or organization
 
(I.R.S. Employer Identification No.)
 
 
 
510 1st Avenue North, Suite 305, Minneapolis, MN 55403
(Address of principal executive offices)
 
(612) 638 - 9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, $.01 par value
 
 
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by checkmark 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
The aggregate market value of common stock held by non-affiliates of the registrant, computed by reference to the last quoted price at which such stock was sold on such date as reported by the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $37,187,000.
As of March 24, 2017, the registrant had 9,221,614 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2017 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III hereof.
 

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TABLE OF CONTENTS
 
 
Page
 
 
 
 

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General Information
PART I
Cautionary Note Regarding Forward-Looking Statements
We make statements from time to time regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements. Forward-looking statements may appear in documents, reports, filings with the Securities and Exchange Commission (SEC), news releases, written or oral presentations made by our authorized officers or other representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results expressed in or implied by forward-looking statements, involve a number of risks and uncertainties. Forward-looking statements are not guarantees of future actions, outcomes, results or performance. Any forward-looking statement made by us or on our behalf speaks only as of the date on which such statement is made. We do not undertake any obligation to update or keep current any forward-looking statement to reflect events or circumstances arising after the date of such statement.
In addition to the factors identified or described by us from time to time in filings with the SEC, there are many important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or the results expressed in or implied by any forward-looking statements. These important factors are described below under Item 1A. Risk Factors.
ITEM 1. BUSINESS
Overview
Qumu Corporation ("Qumu" or the "Company") provides the software applications businesses use to create, manage, secure, deliver and measure the success of their videos. The Company's innovative solutions release the power in video to engage and empower employees, partners and clients, allowing organizations around the world to realize the greatest possible value from video they create and publish. Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does video. Qumu markets its products to customers primarily in North America, Europe and Asia.
Qumu generates revenue through the sale of enterprise video content management software solutions, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support, and professional and other services. An individual sale can range from single year agreements for thousands of dollars to multi-year agreements for over a million dollars.
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
 
2015 to 2016
 
2014 to 2015
Software licenses and appliances
$
5,839

 
$
9,456

 
$
11,363

 
$
(3,617
)
 
$
(1,907
)
 
(38
)%
 
(17
)%
Service
25,843

 
24,998

 
15,158

 
845

 
9,840

 
3
 %
 
65
 %
Total revenues
$
31,682

 
$
34,454

 
$
26,521

 
$
(2,772
)
 
$
7,933

 
(8
)%
 
30
 %
History
The Company was founded in 1978, incorporated as IXI, Inc. in Minnesota in February 1987 and changed its name to Rimage Corporation in April 1988. From 1995 to 2011, the Company focused its business on the development and sale of its CD recordable publishing systems and DVD recordable publishing systems.
In response to declines in the disc publishing business due to technology substitutions and the rise of video as a communication and collaboration platform, in October 2011, the Company acquired Qumu, Inc., a leader in the enterprise video content management software market, and changed its name to Qumu Corporation in September 2013. Qumu completed the transition to an enterprise video content management software company in July 2014, when the Company closed on the sale of its disc publishing assets to Equus Holdings, Inc. and Redwood Acquisition, Inc. (now known as Rimage Corporation).

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On October 3, 2014, the Company acquired Kulu Valley Ltd., a private limited company incorporated and operating in England and Wales, subsequently renamed Qumu Ltd (“Kulu Valley”). The acquisition was made to expand Qumu’s addressable market through the offering of Kulu Valley’s best-in-class video content creation capabilities and easy-to-deploy pure cloud solution, while providing customers with access to industry-leading video content management and delivery capability.
Enterprise Video Content Management and Delivery Software
To increase communication, engagement and collaboration between employees and stakeholders, organizations have and continue to be invested significantly in content and network infrastructure that connects these employees and stakeholders across offices, conference rooms, computers, tablets and smart phones. As part of this, enterprises are adopting video as a mainstream communication and collaboration tool because they understand its benefits over other mediums.
Qumu video content management software solutions allow organizations to create, capture, organize and deliver content across the extended enterprise to a wide variety of end points, including mobile devices and thin clients. Qumu's video platform supports both live and on-demand streaming, and also secure download capabilities, a critical component for enterprise delivery. Qumu provides information technology administrators and corporate communication leaders a way to securely address the challenges of video that might otherwise overwhelm their data networks while utilizing their existing information technology infrastructures, thereby maximizing their investment and enabling the rapid adoption of video in their content, collaboration, communication and marketing infrastructures.
Qumu provides an end-to-end solution with an intuitive and rich user experience to create, manage and deliver live and on-demand video content both behind and beyond the secure firewall.
Capabilities and Products
Qumu Platform - Creating a Global Video Infrastructure for Organizations
The Qumu platform is a video content management software solution that can be deployed as a perpetual software license, a term software license or a cloud-hosted software as a service (SaaS). Qumu’s implementations can range in size from tens of thousands to millions of dollars, and they integrate with customers' existing video services (e.g., videoconferencing systems), business applications and broader IT infrastructures using Qumu's extensive application services or "APIs." Deployments also range from a single customer location to a global infrastructure serving over one hundred thousand corporate employees. Qumu’s platform solution components are deployed as needed to serve different capabilities of the enterprise video content lifecycle of creating, capturing, managing, delivering and experiencing video content.
Video Capture
Qumu Capture Studio is a portable software-enabled device that quickly and easily records, edits, and publishes video and presentation content.
Qumu Quick Capture is a browser-based applet for the simple creation of videos captured from a user's computer screen and/or webcam.
Qumu's encoder control facilitates live encoding and can leverage popular encoders from multiple vendors.
Qumu also integrates with videoconferencing systems or Unified Communication software to enable their use as “studios” for the creation of live or on-demand video content.
Qumu’s Creator provides ease of use for anyone to create slides and video at the desktop to produce their own rich content.
Video Management
Qumu’s platform is an enterprise scalable solution that provides central control for all video applications, content and resources involved in the production and delivery of enterprise video. Video Control Center manages both live streamed video and video on-demand workflows. This comprehensive business video platform includes numerous industry-leading features:
Patent pending Qumu Pathfinder technology for intelligent routing to multiple device types with different bitrates, enabling more efficient use of the network and improved user experience.
Qumu Speech Search for searching and indexing the spoken dialogue within video programs, greatly reducing time-to-knowledge.
Live Broadcast Console for managing and deploying live streamed videos across an organization.
Broad and deep security capabilities encompassing single-sign-on ("SSO"), Active Directory/LDAP integration, and Security Assertion Markup Language ("SAML") that make it easy to create a secure video application and network based on the enterprise's existing security standards.

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Video Delivery
The combination of Pathfinder with Qumu’s VideoNet Edge software creates a unique, highly secure, fault tolerant video delivery network with advanced streaming and caching features to provide outstanding performance for an unlimited number of users. By ensuring that only one stream crosses the WAN on its way to viewers in remote locations, VideoNet Edge minimizes the strain placed on the network by live webcasting or video on demand. VideoNet Edge can work as the sole distribution platform for video or in conjunction with other enterprise or Internet-based content distribution networks (“CDNs”). Qumu VideoNet Edge provides caching of H.264/MPEG-4, Windows Media & Flash video, Video on Demand and live broadcast content, reducing traffic from the centrally-located origin server. Importantly, Qumu offers VideoNet Edge software in a variety of form factors (Windows Software, virtual machine, appliance, and integrated with Citrix CloudBridge and Riverbed VSP) to provide customers with the most deployment options.
Qumu VideoNet Edge software solutions can federate existing CDNs into a single system for intranet and Internet content distribution of video and related media assets. The federation capability includes Internet-based CDNs like Akamai and Amazon CloudFront as well as intranet-based devices like Riverbed Steelhead, Cisco ACNS/WaaS/CDS, and Blue Coat Director. This federation capability allows customers and partners to execute an “embrace and replace” strategy for upgrading their networks as opposed to “rip and replace” from other vendors.
Qumu Secure Download allows video to be securely delivered to mobile devices, viewed offline, and managed/disposed automatically based on prescribed policies.
Mobility and Integration
Qumu provides Mobile Apps for iOS, Android and Windows phones and tablets. The apps are complete out-of-the-box native video applications built using the Qumu Mobile SDKs. Customers can also work with Qumu Professional Services to create fully branded applications accessing Qumu's video infrastructure. Qumu’s HTML5-based video portal also provides native support for all device platforms.
Qumu provides integration between its mobile apps and leading mobile device management/mobile application management ("MDM/MAM") platforms such as Good Technology and XenMobile to ensure that Qumu's solutions work within the environments its customers are investing in for mobile security.
Qumu integrates with a variety of key business applications and infrastructure capabilities to enable organizations to employ video in any work context required. Qumu offers integration with Microsoft SharePoint and Lync as well as with Office365; IBM Connections and IBM WebSphere; Jive and other collaborative and social platforms. Qumu continues to work with partners and integrators to extend video functionality through the use of its REST APIs. Qumu also integrates with Citrix capabilities such as XenApp and XenDesktop, enabling Qumu video to be delivered to thick or thin clients managed within a Citrix virtual desktop infrastructure.
Externalizing Video for Maximum Reach and Impact
The Qumu platform in a cloud deployment allows SaaS enabled customers to easily create video and rich media presentations and deliver video seamlessly to customers, partners, and employees. Cloud deployments allow organizations worldwide to rapidly and clearly present their messages and drive business opportunities through the integration of video with their web sites and their marketing and campaign automation platforms.
The Qumu platform in a cloud delivery brings the power of Qumu video to organizations that do not wish to make infrastructure investments to own and support their applications. Instead, Qumu provides the following capabilities that are easily purchased, implemented, and available through the web browser:
Create rich media with the Qumu platform in minutes - Qumu's customers can capture video and easily integrate it with PowerPoint slides to ensure that messages are delivered and understood; provide high quality sales enablement on a regular basis from the desktop; and broadcast news about products and services to partners and customers every week.
Embed and share Qumu content easily with nearly any application - video “widgets” can be embedded, played, and tracked within any external application, ranging from web sites, to email offers, to campaigns managed and executed by platforms like Eloqua and Salesforce.com. Analytics on origin and viewership are easily captured and integrated back for targeted marketing and sales.
Quickly create and deliver video for both live and on-demand - organizations purchase Qumu's cloud platform to support a variety of live broadcasts and on-demand scenarios, and the platform enables both to be executed and managed easily whenever desired. Video and content created and captured is managed within the cloud platform resident on IBM SoftLayer, thus providing market-leading security and compliance for users.

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Support an unlimited number of users - Qumu's cloud platform scales easily with a customer's needs, enabling organizations to create rich video presentations for 100's or to drive high performance video marketing campaigns to many thousands. Video is also transcoded automatically to support any user, format, or device for viewing.
Marketing and Distribution
Qumu’s solutions serve a growing customer base of large enterprises across a wide range of vertical and horizontal markets. Qumu has primarily targeted enterprises with 10,000+ employees and a history of video use for corporate communications. Qumu's customers are some the largest corporations worldwide. Beginning in 2014, Qumu increased its efforts and ability in targeting mid-size businesses with less than 10,000 employees by promoting the new cloud deployment model.
Qumu serves its customer base primarily via direct sales, and to a lesser extent via channel partners, offering a variety of deployment methodologies and business models to meet customer demand including software, software on server appliance, software-enabled devices, SaaS and managed services.
In 2016, Qumu was selected as a leader by multiple industry reports:
Gartner’s Critical Capabilities reports focus on a group of competing products or services based on a set of use cases that match typical client deployment scenarios. These use cases are based on the real-world problems that clients need to solve, as well as how they intend to use the technology or service within their enterprises. Qumu received the highest scores for video content management.
Aragon Research named Qumu a leader in its Video Content Management report.
Wainhouse Research positioned Qumu as the leader in Enterprise Streaming Market.
These selections are visible proof points in the market that had a positive impact on Qumu’s market awareness and lead generation activities.
Qumu sells products and services internationally through its U.S. operation and its subsidiaries in the United Kingdom and Japan. International sales comprised approximately 27%, 27% and 15% of revenues for the years ended December 31, 2016, 2015 and 2014, respectively. During the years ended December 31, 2016 and 2015, the Company had one customer that accounted for more than 10% of its revenues; no customer accounted for more than 10% of revenues for the year ended December 31, 2014.
Competition
Major competitors of Qumu include Kaltura, Kontiki, Cisco, Polycom, vBrick, Brightcove and MediaPlatform. Due to Qumu's unique end to end solution for a complete video infrastructure that includes support for mobile devices and existing IT infrastructure, Qumu believes it is able to compete effectively with these competitors. Qumu also differentiates itself from its competitors through its video delivery technology and flexibility as to solution deployment and service options.
Research and Development
Qumu develops its software internally and licenses or purchases software from third parties. Research and development expense was $8.5 million, $10.7 million and $9.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, the Company employed 61 employees in research and development. This staff engages in research and development of new products and enhancements to existing products. In addition, Qumu partners with third parties to utilize their competencies in creating products to enhance its product offerings.
Backlog of Contracted Commitments
The Company's contracted commitment backlog was $22.9 million at December 31, 2016, compared to $33.4 million at December 31, 2015. The Company defines contracted commitments as the dollar value of signed non-cancellable customer purchase commitments. Of the total at December 31, 2016, the Company expects to recognize between $16.0 million and $17.0 million as revenue during the year ended December 31, 2017. Actual amounts could differ depending on timing of customer deployments and other factors.
Intellectual Property
Qumu currently maintains three U.S. patents and has two non-provisional utility patent applications pending in the U.S. Further, Qumu protects the proprietary nature of its software primarily through copyright and license agreements. It is Qumu's policy to protect the proprietary nature of its newly developed products whenever they are likely to become significant sources

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of revenue. No assurance can be given that Qumu will be able to obtain patent or other protection for its products. In addition, Qumu has registered and may in the future register trademarks and other marks used in its business.
Qumu also licenses or purchases the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate Qumu to pay a flat license fee or royalties, typically based on a dollar amount per unit shipped or a percentage of the revenue generated by those programs. Contractual obligations with respect to such licenses will require cash payments of $301,000 in 2017.
As the number of Qumu's products increases and the functionality of those products expand, Qumu believes that it may become increasingly subject to attempts by others to duplicate its proprietary technology and to the possibility of infringement of its intellectual property. In addition, although Qumu does not believe that any of its products infringe on the rights of others, third parties have claimed, and may in the future claim, Qumu's products infringe on their rights and these third parties may assert infringement claims against Qumu in the future. Qumu may litigate to enforce its intellectual property rights and to defend against claimed infringement of the rights of others or to determine the ownership, scope, or validity of Qumu's proprietary rights and the rights of others. Any claim of infringement against Qumu could involve significant liabilities to third parties, could require Qumu to seek licenses from third parties and could prevent Qumu from developing, selling or using its products.

The Company is the owner of various trademarks and trade names referenced in this Annual Report on Form 10-K including: "Qumu," "VideoNet Edge" and "Pathfinder." Solely for convenience, the trademarks and trade names in this Report are referred to without the ® and TM symbols, but such references should not be construed as any indicator that the Company or the other respective owners will not assert, to the fullest extent under applicable law, its or their rights thereto.
Employees
As of December 31, 2016, the Company had 150 employees, of which 61 were involved in research and development, 28 in service and support, 37 in sales and marketing, and 24 in administration and management. None of Qumu's employees are represented by a labor union or covered by a collective bargaining agreement.
Available Information
Qumu maintains a website at www.qumu.com. Qumu files reports with the Securities and Exchange Commission and its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available on its website, as soon as reasonably practicable after these documents are filed with the SEC. To obtain copies of these reports, go to www.qumu.com and click on “Company,” then click on “Investor Relations,” then "SEC Filings" and all current EDGAR reports are available for viewing. A copy of any report filed by the Company with the SEC will also be furnished without charge to any shareholder who requests it in writing to: Secretary, Qumu Corporation 510 1st Avenue North, Suite 305, Minneapolis, MN 55403.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our results of operations, cash flows and the market price of our common stock could be negatively impacted. Although we believe that we have identified and discussed below the most significant risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our performance or financial condition. Any forecast regarding our future performance, including, but not limited to, forecasts regarding estimated bookings, revenue, or cash flow from our operating activities, are forward-looking statements. These forward-looking statements reflect various assumptions and are subject to significant uncertainties and risks that could cause the actual results to differ materially from those described in the forward-looking statement, including the risks reflected in the risk factors set forth below. Consequently, the future results expressed or implied by any forward-looking statement are not guaranteed and the variation of actual results or events from such statements may be material and adverse.
The markets for video content and software to manage video content are each in early stages of development. If this market does not develop or develops more slowly than we expect, our revenues may decline or fail to grow.
With the sale of the disc publishing business on July 1, 2014, we now derive all of our revenues from providing video content management software. The use of video as a mainstream communication and collaboration platform and the market for video content management software is in an early stage of development, and it is uncertain whether this use of video will achieve high levels of acceptance. Widespread acceptance and use of video in the enterprise is critical to our future growth and success. Likewise, it is uncertain whether video content management software will achieve high levels of demand and market acceptance. Our success will depend on enterprises adopting video as a platform and upon enterprise demand for software to help them capture, organize and distribute this content.

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Some customers may be reluctant or unwilling to use video as a medium within the enterprise for a number of reasons, including lack of perceived benefit of this new method of communication and existing investments in other enterprise-wide communications tools. Further, even if customers are using video as a medium, these customers may choose to rely upon their own IT infrastructure and resources to manage their video content. Because many companies generally are predisposed to maintaining control of their IT systems and infrastructure, there may be resistance to using software as a service provided by a third party. Privacy concerns and transition costs are also factors that may affect a potential customer’s decision to subscribe to an external solution.
Additional factors that may limit market acceptance of our video content management software include:
competitive dynamics may cause pricing levels to change as the market matures and cause customers to seek out lower priced alternatives to our video content management software or force us to reduce the prices we charge for our products or services; or
existing and new market participants may introduce new types of solutions and different approaches to enable enterprises to address their enterprise communications or video communications needs and these disruptive technologies may reduce demand for our video content management software.
If customers do not perceive the benefits of our video content management software, or if customers are unwilling to accept video content as an alternative to other more traditional forms of enterprise communication, the market for our software might not continue to develop or might develop more slowly than we expect, either of which would significantly adversely affect our financial results and prospects.
To compete effectively, we must continually improve existing products and introduce new products that achieve market acceptance.
The software industry in general, and in particular, software targeted to a new and developing market like enterprise video content management, is characterized by rapid technological changes, evolving industry standards, changing customer requirements, and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make our existing products, or products under development, obsolete or unmarketable. If these technologies are patented or proprietary to our competitors, we may not be able to access these technologies. In order to remain competitive and increase sales, we must anticipate and adapt to these rapidly changing technologies, enhance our existing products and introduce new products to address the changing demands of our customers. If we fail to anticipate or respond to technological developments or customer requirements, or if we are significantly delayed in developing and introducing products, our revenues will decline.
The process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends, our business could be harmed. We must commit significant resources and may incur obligations (such as royalty obligations) to develop new products and features before knowing whether our investments will result in products the market will accept and without knowing the levels of revenue, if any, that may be derived from these products. Although we expect to continue to invest substantial resources in product development activities, our efforts to achieve and maintain profitability will require us to be selective and focused with our research and development expenditures. Some of our competitors have greater engineering and product development resources than we have, allowing them to develop a greater number of products or improvements or to develop them more quickly.
If we fail to anticipate or respond in a cost-effective and timely manner to technological developments, changes in industry standards or customer requirements, or if we experience any significant delays in the development or introduction of new products or improvements to existing products, our business, operating results and financial condition could be affected adversely.
If we do not generate sufficient cash flow to fund our operations, we may need additional capital and any additional capital we seek may not be available in the amount or at the time we need it.
In the year ended December 31, 2016, we had an operating loss of $11.4 million, used $9.4 million of net cash in continuing operating activities, and ended 2016 with $10.4 million in cash and cash equivalents. In the third quarter of 2015 through early 2016, we implemented a significant expense reduction program that, when combined with expected revenue growth in 2017, we believe will allow us to attain our goal of being cash flow breakeven for the second half of 2017.
On October 21, 2016, we entered into a credit agreement with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent for an $8.0 million term loan secured by substantially all of our assets. The credit agreement was amended effective March 31, 2017 to modify certain covenants and certain prepayment terms. The term loan requires payment of interest monthly at the prime rate plus 6% and is due in full at its maturity date of October 21, 2019. As of December 31, 2016, interest was payable at 9.75%.

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Our financing needs are based upon management estimates as to future revenue and expense. If we are not able to become cash flow breakeven for the second half of 2017 by increasing revenue and controlling expenses, we may need to raise funds in the future to execute our business plan and pursue our growth objectives. Our credit agreement also contains covenants requiring minimum cash in the U.S. of $4.0 million and requiring that our combined eligible accounts receivable and cash in the U.S. be no less than 118% of our obligations under the credit agreement. If we are not able to achieve our operating plan for 2017, we may need to raise funds in the future to achieve covenant compliance. In addition to these potential short-term capital needs, we will need to generate sufficient cash to repay the term loan at maturity or secure capital to refinance the term loan at maturity. If we are unable to maintain compliance with our covenants, we may have to negotiate with our lender and there can be no assurance the lender will not accelerate the repayment of such borrowings.
If we are able to raise funds in the future, we cannot assure you that additional financing will be available in the amount or at the time we need it, or that it will be available on acceptable terms or at all. We may obtain future additional financing by incurring indebtedness or from an offering of our equity securities or both.
If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests and the value of shares of our common stock could decline. Our efforts to raise additional funds from the sale of equity may be hampered by the currently depressed trading price of our common stock. If we raise additional equity financing, the provisions our credit agreement require us to use the proceeds from the equity financing to prepay our term loan. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. Our efforts to raise funds by incurring additional indebtedness may be hampered by the covenants and restrictions of our existing outstanding indebtedness and the fact that our assets are pledged to our lender to secure existing debt. The covenants of our credit agreement restrict our ability to make dividends, create liens, incur indebtedness, and sell our assets and properties, subject to certain exceptions. Likewise, any additional debt we incur would likely have covenants that would affect the manner in which we conduct our business, including by restricting our ability to incur additional indebtedness, preventing us from creating liens or requiring specified financial covenants. In addition, we may face challenges in securing additional debt financing if our future cash flow from operations is not sufficient to support debt service payments. If we raise capital through the sale of our investment in BriefCam, the credit agreement also requires us to use the proceeds to prepay our term loan. If we cannot timely raise any needed funds, we may be forced to make further substantial reductions in our operating expenses, which could limit our sales and marketing efforts, adversely affect our ability to attract and retain qualified personnel, limit our ability to develop and enhance our solutions, make it more difficult for us to respond to competitive pressures or unanticipated working capital requirements, and otherwise adversely affect our ability to pursue our growth objectives.
We have limited operating history with our video content software management business, which may make evaluating our business and prospects difficult.
With our acquisition of Qumu, Inc. in October 2011, we began our video content management business. Prior to the acquisition of Qumu, Inc. and through July 1, 2014, we also operated the disc publishing business. On October 3, 2014, we acquired Kulu Valley Ltd., a private limited company incorporated in England and Wales, subsequently renamed Qumu Ltd, to add its cloud-based video content creation capabilities and expanded market reach to include external use cases. As a result, we have a limited history with our video content software management business and an even more limited history with the standalone operation of our video content software management business. Accordingly, our historical financial results are not necessarily indicative of the future financial condition or results of operations of our video content management business. This limited history may make it difficult for shareholders, prospective investors, analysts and others to evaluate our business and prospects given the risks and uncertainties that we face as a relatively early stage, high technology company entering a new and rapidly evolving market.
We face intense competition and such competition may result in price reductions, lower gross profits and loss of market share.
Our products face intense competition, both from other products and from other technologies, both in the U.S. and in international markets. We compete with others such as Kaltura, Kontiki, Cisco, Polycom, vBrick, Brightcove and MediaPlatform who deliver video content to businesses. Further, because some prospective customers may choose to rely upon their own IT infrastructure and resources to manage their video content, we compete with customer-created solutions for video content management. We expect the intensity of competition we face to increase in the future from other established and emerging companies.
Many of our competitors have greater resources than we do, including greater sales, product development, marketing, financial, technical or engineering resources. In addition, because our enterprise video content management software business is relatively new with a limited operating history, our target customers may prefer to purchase software products that are critical to their business from one of our larger, more established competitors.

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To remain competitive, we believe that we must continue to provide:
technologically advanced products and solutions that anticipate and satisfy the demands of end-users;
continuing advancements or innovations in our product offerings, including products with price-performance advantages or value-added features in security, reliability or other key areas of customer interest;
innovations in video content creation, management, delivery and user experience;
a responsive and effective sales force;
a dependable and efficient sales distribution network;
superior customer service; and
high levels of quality and reliability.
We cannot assure you that we will be able to compete successfully against our current or future competitors. Competition may result in price reductions, lower gross profit margins, increased discounts to customers and loss of market share, and could require increased spending by us on research and development, sales and marketing and customer support.
We encounter long sales cycles with our enterprise video solutions, which could adversely affect our operating results in a given period.
Our ability to increase revenues and achieve profitability depends, in large part, on widespread acceptance of our enterprise video content management software products by large businesses and other organizations. As we target our sales efforts at these customers, we face greater costs, longer sales cycles and less predictability in completing sales. In the large enterprise market, the customer’s decision to use our products may be an enterprise-wide decision and, therefore, these types of sales require us to provide greater levels of education regarding the use and benefits of our applications. Further, given the constant innovation with our industry and our products, customers may delay purchasing decisions until certain features or products in development are brought to market. Longer sales cycles could cause our operating and financial results to suffer in a given period.
Adverse economic conditions, particularly those affecting our customers have harmed and may continue to harm our business.
Unfavorable changes in economic conditions, including recession, inflation, lack of access to capital, lack of consumer confidence or other changes have resulted and may continue to result in lower spending among our customers and target customers.
Further, we sell our products throughout the United States, as well as in several international countries to commercial and government customers. Our business may be adversely affected by factors in the United States and other countries such as disruptions in financial markets, reductions in government spending, or downturns in economic activity in specific countries or regions, or in the various industries in which we operate; social, political or labor conditions in specific countries or regions; or adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations. These factors are beyond our control, but may result in further decreases in spending among customers and softening demand for our products.
Further, challenging economic conditions also may impair the ability of our customers to pay for products and services they have purchased. As a result, our cash flow may be negatively impacted and our allowance for doubtful accounts and write-offs of accounts receivable may increase.
Our sales will decline, and our business will be materially harmed, if our sales and marketing efforts are not effective.
We will need to continue to optimize our sales infrastructure in order to grow our customer base and our business. Identifying and recruiting qualified personnel and training them in the use and functionality of our software requires significant time, expense and attention. It can take six months or longer before our sales representatives are fully-trained and productive. If we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenues. We also intend to expand new sales models that focus on different sales strategies tailored to different customer types. Our business may be adversely affected if our efforts to train our internal sales force or execute our selling strategies do not generate a corresponding increase in revenues.
For sales that are made to customers through our channel partners, we depend on these businesses to provide effective sales and marketing support to our products. Our channel partners are independent businesses that we do not control. Our agreements with channel partners do not contain requirements that a certain percentage of such parties’ sales are of our products. These channel partners may choose to devote their efforts to other products in different markets or reduce or fail to devote the resources to provide effective sales and marketing support of our products, any of which could harm our business by reducing sales to customers.

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We believe that our future growth and success will depend upon the success of our internal sales and marketing efforts as well as those of our channel partners.
Competition for highly skilled personnel is intense and if we fail to attract and retain talented employees, we may fail to compete effectively.
Our future success depends, in significant part, on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees, particularly in senior management, product development and sales, is intense. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees given the high demand for these employees from other employers. Our ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
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.
A significant portion of our sales are made into applications that require our enterprise video content management software products to be integrated into other enterprise workflows, enterprise information technology environments or software functionalities. Any significant changes to enterprise workflows, IT environments or software programs may limit the use or functionality of or demand for our products. As our customers advance technologically, we must be able to effectively integrate our products to remain competitive. Further, current and potential customers may choose to use products offered by our competitors or may not purchase our products if our products would require changes in their existing enterprise workflows, IT environments or software.
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.
Our products are currently compatible with various mobile operating systems including the iOS, Windows Mobile and Android operating systems. The functionality of our products depends upon the continued interoperability of these products with popular mobile operating systems. Any changes in these systems that degrade our products’ functionality or give preferential treatment to competitive offerings could adversely affect the operability and usage of our video management software products on mobile devices. Additionally, in order to deliver a high quality user experience, it is important that our products work well with a range of mobile technologies, systems, and networks. We may not be successful in keeping pace with changes in mobile technologies, operating systems, or networks or in developing products that operate effectively within existing or future technologies, systems, and networks. Further, any significant changes to mobile operating systems by their respective developers may prevent our products from working properly or at all on these systems. In the event that it is more difficult for users to access content delivered by our solutions to their mobile devices, if our products do not operate effectively within the most popular operating systems or if popular mobile devices do not offer a high quality user experience, sales of and customer demand for our software products could be harmed.
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.
Our business is dependent upon providing customers with fast, efficient and reliable services. A reduction in the performance, reliability or availability of required network infrastructure may harm our ability to distribute content to our customers, as well as our reputation and ability to attract and retain customers. Our content management software solutions and operations are susceptible to, and could be damaged or interrupted by outages caused by fire, flood, power loss, telecommunications failure, Internet or mobile network breakdown, earthquake and similar events. Our solutions are also subject to human error, security breaches, power losses, computer viruses, break-ins, “denial of service” attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems and network communications. Our failure to protect our network against damage from any of these events could harm our business.

11



Our operations also depend on web browsers, ISPs (Internet service providers) and mobile networks to provide our customers’ end-users with access to websites, streaming and mobile content. Many of these providers have experienced outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our solutions. Any such outage, delay or difficulty could adversely affect our ability to effectively provide our products and services, which would 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.
Some of our solutions contain software licensed from third parties. Third-party licensing arrangements are subject to a number of risks and uncertainties, including:
undetected errors or unauthorized use of another person’s code in the third-party’s software;
disagreement over the scope of the license and other key terms, such as royalties payable;
infringement actions brought by third-party licensees;
that third parties will create solutions that directly compete with our products; and
termination or expiration of the license.
Because of these risks, some of these licenses may not be available to us in the future on terms that are acceptable to us or allow our products to remain competitive. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or impair the functionality or enhancement of existing products, leading to increased expense associated with licenses of third-party software or development of alternative software to provide comparable functionality for our existing products and modification of our existing products. Further, if we lose or are unable to maintain any of these third-party licenses or are required to modify software obtained under third-party licenses, it could delay the release of new products, delay enhancements to our existing products or delay sales of our existing products. Any delays could result in loss of competitive position, loss of sales and loss of customer confidence, which could have a material adverse effect on our business, results of operations and financial condition.
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.
Our products incorporate a limited amount of “open source” software. Open source software is made available to us and to the public by its authors or other third parties under licenses that impose certain obligations on licensees that re-distribute or make derivative works of the open source software. We may not be able to replace the functionality provided by the open source software currently incorporated in our products if that software becomes unavailable, obsolete or incompatible with future versions of our products. In addition, we must carefully monitor our compliance with the licensing requirements applicable to that open source software. If we have failed or if in the future we fail to comply with the applicable license requirements, we might lose the right to use the subject open source software. The terms of some open source licenses would require us to give our customers significant rights to open source software that is subject to those licenses and is incorporated in our products. This would include the right to obtain from us the source code form of that open source software, and the right to use, modify and distribute that open source software to others. We may be required to provide these rights to customers on a royalty-free basis. Those rights might also extend to modifications and additions we make to the subject open source software. That open source software, and those modifications and additions, also might be obtained by our competitors and used in competing products.
The enforceability and interpretation of open source licenses remains uncertain under applicable law. Unfavorable court decisions could require us to replace open source software incorporated in our products. In some cases this might require us to obtain licenses to commercial software under terms that restrict our use of that commercial software and require us to pay royalties. In some cases we might need to redesign our software products, or to discontinue the sale of our software products if a redesign could not be accomplished on a timely basis. These same consequences result if our use of any open source software or commercial software is found to infringe any intellectual property right of another party. Any of these occurrences would harm our business, operating results and financial condition.
We sell a significant portion of our products internationally, which exposes us to risks associated with international operations.
We sell a significant amount of our products to customers outside the United States, particularly in Europe and Asia. International sales comprised approximately 27%, 27% and 15% of revenues for the years ended December 31, 2016, 2015 and 2014, respectively. We expect that sales to international customers, including customers in Europe and Asia, will continue to account for a significant portion of our net sales. Sales outside the United States involve the following risks, among others:
international governments may impose tariffs, quotas and taxes;

12



the demand for our products will depend, in part, on local economic health;
political and economic instability may reduce demand for our products;
restrictions on the export or import of technology may reduce or eliminate our ability to sell in certain markets;
potentially limited intellectual property protection in certain countries may limit our recourse against infringing products or cause us to refrain from selling in certain markets;
potential difficulties in managing our international operations;
the burden and cost of complying with a variety of international laws, including those relating to data security and privacy;
we may decide to price our products in foreign currency denominations;
our contracts with international channel partners cannot fully protect us against political and economic instability;
potential difficulties in collecting receivables; and
we may not be able to control our international channel partners’ efforts on our behalf.
The financial results of our non-U.S. subsidiaries are translated into U.S. dollars for consolidation with our overall financial results. Currency translations and fluctuations may adversely affect the financial performance of our consolidated operations. Currency fluctuations may also increase the relative price of our product in international markets and thereby could also cause our products to become less affordable or less price competitive than those of international manufacturers. These risks associated with international operations may have a material adverse effect on our revenue from or costs associated with international sales.
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.
We believe that protecting our proprietary technology is important to our success and competitive positioning. In addition to common law intellectual property rights, we rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors.
Our competitors, who may have or could develop or acquire significant resources, may make substantial investments in competing technologies, or may apply for and obtain patents that will prevent, limit or interfere with our ability to develop or market our products. Further, although we do not believe that any of our products infringe on the rights of others, third parties have claimed, and may claim in the future, that our products infringe on their rights, and these third parties may assert infringement claims against us in the future.
Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence of this litigation, or the effect of an adverse determination in any of this type of litigation, could have a material adverse effect on our business, financial condition and results of operations. Further, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as the United States or at all. Our failure to protect or enforce our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.
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.
The future success of our business depends in part upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or international government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our products in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based applications such as ours. The adoption of any laws or regulations that adversely affect the growth, popularity or use of the Internet could limit the growth of the video as a mainstream communication and collaboration tool, limit the market for video content management software generally, and limit the demand for our products.

13



In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our applications could suffer.
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.
Our customers can use our products to collect, use and store personal or identifying information regarding their employees, customers and suppliers. Federal, state and international government bodies and agencies have adopted, are considering adopting, or may adopt laws and regulations regarding data security, privacy and the collection, use, storage and disclosure of personal information obtained from consumers and individuals. These laws and regulations could reduce the demand for our software products if we fail to design or enhance our products to enable our customers to comply with the privacy and security measures required by the legislation.
We also must comply with the policies, procedures and business requirements of our customers relating to data privacy and security, which can vary based upon the customer, the customer’s industry or location, and the product the customer selects, and which may be more restrictive than the privacy and security measures required by law or regulation. In particular, the European Union and many countries in Europe have stringent privacy laws and regulations, which may impact our ability to profitably operate in certain European countries or to offer products that meet the needs of customers subject to European Union privacy laws and regulations.
The costs of compliance with, and other burdens imposed by, our customers’ own requirements and the privacy and security laws and regulations that are applicable to our customers’ businesses may limit the use and adoption of our products and reduce overall demand. Non-compliance with our customers’ specific requirements may lead to termination of contracts with these customers or liabilities to the customers; non-compliance with applicable laws and regulations may lead to significant fines, penalties or liabilities.
Furthermore, privacy concerns may cause our customers’ workers to resist providing the personal data necessary to allow our customers to use our products effectively. If a customer experiences a significant data security breach involving our software products, our customers could lose confidence in our software’s ability to protect the personal information of their employees, customers and suppliers, which could cause our customers to discontinue use of our products. The loss of confidence from a significant data security breach involving our software products could hurt our reputation, cause sales and marketing challenges to existing and new customers, cause loss of market share or exacerbate competitive pressures, result in an increase in our development costs to address any potential vulnerabilities in our software products, and may result in reduced demand and revenue. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our products in certain industries.
Domestic and international legislative and regulatory initiatives and our customers’ privacy policies and practices may adversely affect our customers’ ability to process, handle, store, use and transmit demographic and personal information from their employees, customers and suppliers, which could reduce demand for our products.
In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on our software products. If the processing of personal information were to be curtailed in this manner, our software products would be less effective, which may reduce demand for our products and adversely affect our business.
A failure to maintain adequate internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 or to prevent or detect material misstatements in our annual or interim financial statements in the future could result in inaccurate financial reporting, or could otherwise harm our business.
Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we are required to perform annual system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. Furthermore, implementing any appropriate future changes to our internal control over financial reporting may entail substantial costs in order to modify our existing accounting systems, may take a significant period of time to complete and may distract our officers, directors and employees from the operation of our business. If we are not able to comply with the

14



requirements of Section 404 in the future, or if material weaknesses are identified, the market price of our common stock could decline.
We may face circumstances in the future that could result in impairment charges, including, but not limited to, significant goodwill impairment charges.
If the fair value of any of our long-lived assets decreases as a result of an economic slowdown, a downturn in the markets where we sell products and services or a downturn in our financial performance and/or future outlook, we may be required to record an impairment charge on such assets, including goodwill.
We are required to test intangible assets with indefinite life periods for potential impairment annually and on an interim basis if there are indicators of a potential impairment. We also are required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment. One potential indicator of impairment is the value of our market capitalization, or enterprise value, as compared to our net book value.
As of December 31, 2016, the Company’s market capitalization, without a control premium, was greater than its book value and the Company concluded there was no goodwill impairment. Declines in the Company’s market capitalization or a downturn in our 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 our results of operations.
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.
Our quarterly and annual results of operations may fluctuate significantly due to a variety of factors, many of which are outside of our control. With the sale of the disc publishing business on July 1, 2014, there may be even wider fluctuations in our results of operations given the smaller size of our retained software business. This variability may lead to volatility in our stock price as research analysts and investors respond to quarterly fluctuations and this volatility may be exacerbated by the relatively illiquid nature of our common stock. In addition, comparing our results of operations on a period-to-period basis, particularly on a sequential quarterly basis, may not be meaningful. You should not rely on our past results as an indication of our future performance.
Factors that may affect our results of operations include:
the number and mix of products and solutions sold in the period;
the timing and amount of our recorded revenue, which will depend upon the mix of products and solutions selected by our customers with revenue from paid-up perpetual software licenses being recognized upon delivery, revenue from term software licenses recognized over the term of the contract, and revenue from cloud-hosted services recognized over the term of the subscription agreement;
timing of customer purchase commitments, including the impact of long sales cycles and seasonal buying patterns;
variability in the size of customer purchases and the impact of large customer orders on a particular period;
the timing of major development projects and market launch of new products or improvements to existing products;
reductions in our customers’ budgets for information technology purchases and delays in their purchasing cycles, due to changing global economic or market conditions;
the impact to the marketplace of competitive products and pricing;
the timing and level of operating expenses;
the impact on revenue and expenses of acquisitions by us or by our competitors;
future accounting pronouncements or changes in our accounting policies; and
the impact of a recession or any other adverse global economic conditions on our business, including uncertainties that may cause a delay in entering into or a failure to enter into significant customer agreements.
The foregoing factors are difficult to forecast, and these, as well as other factors, could adversely affect our quarterly and annual results of operations. Failure to achieve our quarterly or annual forecasts or to meet or exceed the expectations of research analysts or investors may cause our stock price to decline abruptly and significantly.
The limited liquidity for our common stock could affect your ability to sell your shares at a satisfactory price.
Our common stock is relatively illiquid. As of December 31, 2016, we had 9,227,247 shares of common stock outstanding. The average daily trading volume in our common stock, as reported by the Nasdaq Stock Market, for the 63 trading days beginning October 1, 2016 and ending December 31, 2016 was approximately 28,900 shares. A more active public market for our

15



common stock may not develop, which could adversely affect the trading price and liquidity of our common stock. Moreover, a thin trading market for our stock could cause the market price for our common stock to fluctuate significantly more than the stock market as a whole. Without a larger float, our common stock is less liquid than the stock of companies with broader public ownership. As a result, the trading prices of our common stock have been and may continue to be more volatile. In addition, in the absence of an active public trading market, shareholders may be unable to liquidate their shares of our common stock at a satisfactory price.
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.
Certain provisions of Minnesota law, our bylaws and other agreements may make it more difficult for a third-party to acquire, or discourage a third-party from attempting to acquire, control of our company, including:
the provisions of Minnesota law relating to business combinations and control share acquisitions;
the provisions of our bylaws regarding the business properly brought before shareholders;
the right of our board of directors to establish more than one class or series of shares and to fix the relative rights and preferences of any such different classes or series;
the provisions of our stock incentive plans allowing for the acceleration of vesting or payments of awards granted under the plans in the event of specified events that result in a “change in control”;
the provisions of our agreements provide for severance payments to our executive officers in the event of certain terminations following a “change in control”; and
the provisions of our credit agreement requiring prepayment in full of our term loan upon a change in control.
These measures could discourage or prevent a takeover of our company or changes in our management, even if an acquisition or such changes would be beneficial to our shareholders. This may have a negative effect on the price of our common stock.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses and will constitute a larger percentage of our annual revenue than prior to the sale of the disc publishing business.
Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public company disclosure requirements, including the Sarbanes-Oxley Act of 2002 and in particular Section 404 of that Act relating to management certification of internal controls, the regulations of the Securities and Exchange Commission and the rules of the Nasdaq Stock Market have required an increased amount of management attention and external resources. We intend to invest all reasonably necessary resources to comply with evolving corporate governance and public disclosure standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. While all public companies face the costs and burdens associated with being public companies, the costs and burden of being a public company will be a significant portion of our annual revenues, which have been reduced following the sale of the disc publishing business on July 1, 2014.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Location of Property
Use of Property
Approximate Monthly Rent (USD)
 
Approximate Leased Square Footage
 
Lease Expiration Date
Minneapolis, Minnesota (Headquarters)
Engineering, service, sales, marketing and administration
$
23,000

(1) 
16,500

 
January 2023
San Bruno, California
Engineering, service, sales, marketing and administration
$
36,000

(2) 
13,900

 
June 2018
London, England
Engineering, service, sales, marketing and administration
$
36,500

 
5,500

 
September 2019
Hyderabad, India
Software development and testing
$
7,500

 
4,800

 
September 2018
_________________________________________________
(1) 
The agreement has escalating lease payments ranging from approximately $23,000 to $26,000 per month during the course of the lease.
(2) 
The agreement has escalating lease payments ranging from approximately $33,000 to $38,000 per month during the course of the lease.

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ITEM 3. LEGAL PROCEEDINGS
The Company is exposed to a number of asserted and unasserted legal claims encountered in the ordinary course of its business. Although the outcome of any such legal actions cannot be predicted, management believes that there are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

17



PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Qumu's common stock is traded on the Nasdaq Global Market under the symbol “QUMU.” The following table sets forth, for the periods indicated, the range of low and high sales prices for Qumu's common stock as reported on The Nasdaq Stock Market.
 
 
Year Ended December 31,
 
 
2016
 
2015
 
 
Low
 
High
 
Low
 
High
First Quarter
 
$
2.10

 
$
5.48

 
$
12.31

 
$
15.87

Second Quarter
 
$
3.53

 
$
5.50

 
$
6.80

 
$
14.99

Third Quarter
 
$
2.19

 
$
4.84

 
$
1.58

 
$
8.59

Fourth Quarter
 
$
2.20

 
$
3.77

 
$
2.40

 
$
4.94

Shareholders
As of March 24, 2017, there were 107 shareholders of record of Qumu's common stock.
Dividends
The Company did not pay a dividend in 2016 or 2015 and does not expect to pay a dividend in 2017. The payment by Qumu of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on Qumu's future earnings, financial condition, capital requirements and other relevant factors. Under the credit agreement, the Company is prohibited from making dividends, distributions or payments on its capital stock.
Issuer Purchases of Equity Securities
The Company’s Board of Directors has approved common stock repurchases of up to 3,500,000 shares of the Company’s common stock. The Company has implemented a Rule 10b5-1 plan in connection with the repurchase program in order to give the Company the ability to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed blackout periods. 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 December 31, 2016, 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.

In addition to shares 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 stock awards. All of the share repurchase activity included in the table below for the three months ended December 31, 2016 was associated with satisfaction of employee tax withholding requirements on vesting of restricted stock awards. 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.
Information on the Company’s repurchases of its common stock during each month of the fourth quarter ended December 31, 2016, 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)
October 2016
 
1,680

 
$
3.28

 

 
778,365

November 2016
 
796

 
$
2.83

 

 
778,365

December 2016
 

 
$

 

 
778,365


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Other Information Regarding Equity Compensation Plans
The following table sets forth information regarding Qumu's equity compensation plans in effect as of December 31, 2016. Each of the Company’s equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.
 
 
Securities Authorized for Issuance Under Equity Compensation Plans
Plan category
 
Number of Shares of
Common Stock to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Shares of
Common Stock Remaining
Available for Future
Issuance Under Equity
Compensation Plans(1)
Equity compensation plans approved by shareholders
 
1,277,700

 
$
6.81

 
741,831

Equity compensation plans not approved by shareholders(2)
 
230,000

 
$
8.28

 

Total
 
1,507,700

 
$
7.03

 
741,831

_______________________________________ 
(1) Excludes shares of common stock listed in the first column.
(2) Consists of outstanding non-qualified stock option grants to two of the Company’s current senior management level employees, Vern Hanzlik and Peter Goepfrich on November 26, 2012 and May 18, 2015, the respective first days of employment with Qumu. The stock options were granted outside of the Company’s current equity incentive plan, the 2007 Stock Incentive Plan, as “inducement awards” pursuant to Nasdaq Listing Rule 4350(i)(1)(A)(iv). The options have an exercise price equal to the closing price of the Company’s common stock as reported by the Nasdaq Stock Market on the grant dates, vest in four equal installments on each of the first four anniversaries of the date of grant, and have a term of seven years. In other respects, the options were structured to mirror the terms of options granted under the Company’s 2007 Stock Incentive Plan and are subject to a stock option plan and agreement entered into by and between the Company and each employee.

19



Performance Graph
The Company’s common stock is quoted on The Nasdaq Global Market. The graph and table below set forth a comparison of the cumulative total return of the Company’s common stock over the last five fiscal years with a broad market index and published industry index. The Company has selected the NASDAQ Computer Services Index as its published industry index.
The following graph shows changes during the period from December 31, 2011 to December 31, 2016 in the value of $100 invested in: (1) the NASDAQ US Benchmark TR Index; (2) the NASDAQ Computer Services Index; and (3) Qumu's common stock. The values of each investment as of the dates indicated are based on share prices plus any dividends paid in cash, with the dividends reinvested on the date they were paid. The calculations exclude trading commissions and taxes. The table and graph are not necessarily indicative of future investment performance.
qumu10kgraphica08.jpg
 
12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
Nasdaq US Benchmark TR Index
$
100.00

 
$
116.43

 
$
155.41

 
$
174.78

 
$
175.62

 
$
198.47

Nasdaq Computer Services Index
$
100.00

 
$
110.13

 
$
118.95

 
$
113.21

 
$
110.85

 
$
127.18

Qumu Corporation
$
100.00

 
$
59.38

 
$
113.78

 
$
121.51

 
$
24.09

 
$
21.16


20



ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 below and the Consolidated Financial Statements and the Notes thereto included in Item 8 below. Results of operations exclude the operations of the disc publishing business, which are reported as discontinued operations for all periods presented in the Consolidated Financial Statements due to the sale of the Disc Publishing business on July 1, 2014.
Consolidated Statements of Operations Information
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Total revenues
$
31,682

 
$
34,454

 
$
26,521

 
$
17,736

 
$
9,836

Gross profit
$
19,322

 
$
16,955

 
$
12,049

 
$
10,402

 
$
5,917

Operating loss (1)
$
(11,361
)
 
$
(29,404
)
 
$
(28,726
)
 
$
(19,605
)
 
$
(49,428
)
Net loss from continuing operations (1) (2)
$
(11,175
)
 
$
(28,689
)
 
$
(22,343
)
 
$
(16,221
)
 
$
(53,790
)
Net income (loss) (1) (2)
$
(11,175
)
 
$
(28,699
)
 
$
(8,520
)
 
$
(9,694
)
 
$
(48,338
)
Net loss from continuing operations per share – basic(1)(2)
$
(1.21
)
 
$
(3.11
)
 
$
(2.53
)
 
$
(1.87
)
 
$
(5.39
)
Net loss from continuing operations per share – diluted(1)(2)
$
(1.23
)
 
$
(3.11
)
 
$
(2.53
)
 
$
(1.87
)
 
$
(5.39
)
Weighted average shares outstanding:
 
 
 

 
 

 
 

 
 

Basic
9,232

 
9,235

 
8,836

 
8,691

 
9,971

Diluted
9,232

 
9,235

 
8,836

 
8,691

 
9,971

_________________________________________________
(1) The Company recorded non-cash goodwill and intangible asset impairment charges of $29,548 before tax in fiscal year 2012.
(2) The Company recorded non-cash deferred tax asset valuation allowance charge of $13,967 in fiscal year 2012.
Consolidated Balance Sheets Information
 
December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Cash and cash equivalents
$
10,364

 
$
7,072

 
$
11,684

 
$
37,725

 
$
28,644

Marketable securities
$

 
$
6,249

 
$
23,486

 
$
13,233

 
$
21,496

Current assets
$
20,646

 
$
28,629

 
$
52,752

 
$
71,774

 
$
75,950

Total assets
$
42,229

 
$
54,412

 
$
80,177

 
$
89,146

 
$
95,563

Current liabilities
$
15,431

 
$
19,113

 
$
19,377

 
$
23,028

 
$
19,807

Long-term liabilities
$
8,222

 
$
4,542

 
$
2,527

 
$
3,537

 
$
5,129

Stockholders’ equity
$
18,576

 
$
30,757

 
$
58,273

 
$
62,581

 
$
70,627

Historical data is not necessarily indicative of the Company's future results of operations or financial condition. See discussion of "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.


21



ITEM 7. 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 “Selected Financial Data” and our audited financial statements and related notes which are included elsewhere in this 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 elsewhere in this Annual Report on Form 10-K.
Overview
Qumu Corporation ("Qumu" or the "Company") provides the software applications businesses use to create, manage, secure, deliver and measure the success of their videos. The Company's innovative solutions release the power in video to engage and empower employees, partners and clients, allowing organizations around the world to realize the greatest possible value from video they create and publish. Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does video.
The Company generates revenue through the sale of enterprise video content management software solutions, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support, and professional and other services.
For the years ended December 31, 2016, 2015 and 2014, the Company generated revenues of $31.7 million, $34.5 million and $26.5 million, respectively. Subscription, maintenance and support revenue, which is included in service revenue in the Company's consolidated statements of operations, increased 14% in 2016 to $21.4 million from $18.8 million in 2015 as the Company continues to advance its transition to more revenue that is recurring in nature from primarily perpetual software license revenue.
History
The Company was founded in 1978, incorporated as IXI, Inc. in Minnesota in February 1987 and changed its name to Rimage Corporation in April 1988. From 1995 to 2011, the Company focused its business on the development and sale of its CD recordable publishing systems and DVD recordable publishing systems.
In response to declines in the disc publishing business due to technology substitutions and the rise of video as a communication and collaboration platform, in October 2011, the Company acquired Qumu, Inc., a leader in the enterprise video content management software market and changed its name to Qumu Corporation in September 2013. Qumu completed the transition to enterprise video content management software company in July 2014, when the Company closed on the sale of its disc publishing assets to Equus Holdings, Inc. and Redwood Acquisition, Inc. (now known as Rimage Corporation). As a result, the disc publishing business was classified as held for sale and qualified for presentation as discontinued operations effective with the reporting of the Company's financial results for the second quarter of 2014.
On October 3, 2014, the Company acquired Kulu Valley Ltd., a private limited company incorporated and operating in England and Wales, subsequently renamed Qumu Ltd (“Kulu Valley”). The acquisition was made to expand Qumu’s addressable market through the offering of Kulu Valley’s best-in-class video content creation capabilities and easy-to-deploy pure cloud solution, and provides Kulu Valley’s customers with access to industry-leading video content management and delivery capability.
The results of the discontinued disc publishing business and associated financial impacts from the sale of this business have been presented as discontinued operations for the years ended December 31, 2016, 2015 and 2014. No general corporate charges were allocated to the discontinued business. The assets and liabilities of the discontinued business are presented on the consolidated balance sheets as assets and liabilities from discontinued operations. Other than consolidated amounts reflecting operating results and balances for both the continuing and discontinued operations, all remaining amounts presented in the accompanying consolidated financial statements reflect the financial results and financial position of the Company's continuing enterprise video content management software business.
The following discussion of year-to-year changes and trends in financial statement results under "Management’s Discussion and Analysis of Financial Condition and Results of Operations” aligns with the financial statement presentation described above.

22



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 these 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 believes that of the Company's significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment, complexity and effect on materiality. A critical accounting policy is one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on the Company's financial condition and results of operations. Accordingly, these are the policies management believes are the most critical to aid in fully understanding and evaluating the Company's financial condition and results of operations.
Revenue Recognition
The Company follows specific and detailed guidelines in determining the proper amount of revenue to be recorded; however, certain judgments affect the application of its revenue recognition policy. 
The Company commences revenue recognition when all of the following conditions are met: there is persuasive evidence of an arrangement; the product has been delivered or the services have been provided to the customer; the collection of the fees is reasonably assured; and the amount of fees to be paid by the customer is fixed or determinable.
Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause the Company's operating results to vary significantly from period to period. The significant judgments for revenue recognition typically involve allocation of revenue to multiple element arrangements, which must be analyzed to determine the fair value of each element, the amount of revenue to be recognized for each element, if any, and the period and conditions under which deferred revenue should be recognized. As a result, if facts and circumstances change that affect management's current judgments, the Company's revenue could be materially different in the future.
Long-lived Assets
The Company continually monitors events and changes in circumstances that could indicate that carrying amounts of its long-lived assets, including property and equipment and intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through their undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Goodwill
The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review. The Company has determined that there is a single reporting unit for the purpose of goodwill impairment tests. For purposes of assessing the impairment of goodwill, the Company annually, at its fiscal year end, estimates the fair value of the reporting unit and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.
As of December 31, 2016, 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.
Investment in Nonconsolidated Company
As of December 31, 2016 and 2015, 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

23



and surveillance systems to facilitate review of surveillance video. The investment is included in other non-current assets. Because Qumu's ownership interest is less than 20% and it has no other rights or privileges that enable it to exercise significant influence over the operating and financial policies of BriefCam, Qumu accounts for this equity investment using the cost method. Equity securities accounted for under the cost method are reviewed quarterly for changes in circumstances or the occurrence of events that suggest the Company’s investment may not be fully recoverable. If an unrealized loss for the investment is considered to be other-than-temporary, the loss will be recognized in the consolidated statements of operations in the period the determination is made. Qumu 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.
Derivative Liability
In conjunction with debt financing completed in October 2016, the Company issued a warrant for the purchase of up to 314,286 shares of the Company's common stock, the entire portion of which remained unexercised and outstanding at December 31, 2016. The Company accounts for the warrant, a derivative financial instrument issued in conjunction with the Company's 2016 debt financing, as a current liability based upon the characteristics and provisions of the instrument. The warrant was determined to be ineligible for equity classification because of provisions that allow the holder under certain circumstances, essentially the sale of the Company as defined in the warrant agreement, to elect to receive a minimum cash payment in lieu of the Company's common shares. The warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the date 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 estimates the fair value of this liability using an option pricing model that is based on the individual characteristics of the warrant on the valuation date, which includes assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument. Changes in the assumptions used could have a material impact on the resulting fair value. The primary input affecting the value of the warrant liability is the Company’s stock price. Generally, increases (decreases) in the fair value of the underlying stock would result in a corresponding increase (decrease) in the fair value of the warrant liability.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized ratably as an expense over the vesting period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. Management uses the Black-Scholes option pricing model to value award grants and determine the related compensation expense. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and management uses different assumptions, the Company's stock-based compensation expense could be materially different in the future. The Company expects to continue to grant stock-based awards in the future, and to the extent that the Company does, its actual stock-based compensation expense recognized in future periods will likely increase.
Royalties for Third-Party Technology
Royalties for third-party technology are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalties are generally expensed to cost of revenue generally at the greater of a rate based on the contractual or estimated term or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Each quarter, the Company also evaluates the expected future realization of its prepaid royalties, as well as any minimum commitments not yet paid to determine amounts it deems unlikely to be realized through product sales. Any impairments or losses determined before the launch of a product are generally charged to general and administrative expense, and any impairments or losses determined post-launch are charged to cost of revenue. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
Income Taxes
Significant judgment is required in determining the realizability of deferred tax assets. Management must assess the likelihood that the Company's net deferred tax assets will be recovered from future taxable income, and to the extent management believes that recovery is not likely, the Company must establish a valuation allowance. Considerations for determining the realizability of the Company's deferred tax assets primarily involve cumulative pre-tax income for financial reporting purposes, cumulative taxable income for the past three years, estimated future pre-tax income for financial reporting purposes and estimated future

24



taxable income from the Company's core business. Management also considers the expiration dates and amounts of net operating loss carryforwards and other tax credits, and estimate the impact of future tax deductions from the exercise of stock options. These estimates are projected through the life of the related deferred tax assets based on assumptions which management believes to be reasonable and consistent with current operating results.
Since 2012, the Company has maintained a full valuation allowance against the Company U.S. deferred tax assets. If pretax results improve in future periods, the Company may be able to reverse the valuation allowance, which would positively impact earnings. As of December 31, 2016, the Company had $78.1 million of net operating loss carryforwards for U.S. federal tax purposes and $63.9 million of net operating loss carryforwards for various states.
Results of Operations
The percentage relationships to revenues of certain income and expense items for the years ended December 31, 2016, 2015 and 2014, and the percentage changes in these income and expense items between years, are contained in the following table (all amounts presented reflect only the financial results of the Company's continuing enterprise video content management software business):
 
Percentage of Revenues
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
(8
)%
 
30
 %
Cost of revenues
(39.0
)
 
(50.8
)
 
(54.6
)
 
(29
)
 
21

Gross profit
61.0

 
49.2

 
45.4

 
14

 
41

Operating expenses:
 

 
 

 
 

 
 
 
 
Research and development
27.0

 
31.0

 
35.8

 
(20
)
 
12

Sales and marketing
36.4

 
52.2

 
67.8

 
(36
)
 

General and administrative
30.7

 
49.0

 
47.6

 
(42
)
 
34

Amortization of purchased intangibles
2.8

 
2.3

 
2.5

 
12

 
22

Total operating expenses
96.9

 
134.5

 
153.7

 
(34
)
 
14

Operating loss
(35.9
)
 
(85.3
)
 
(108.3
)
 
(61
)
 
2

Other expense, net
(0.2
)
 
(0.4
)
 
(0.7
)
 
(47
)
 
(31
)
Loss before income taxes
(36.1
)
 
(85.7
)
 
(109.0
)
 
(61
)
 
2

Income tax benefit
(0.8
)
 
(2.4
)
 
(24.8
)
 
(70
)
 
(87
)
Net loss from continuing operations
(35.3
)%
 
(83.3
)%
 
(84.2
)%
 
(61
)%
 
28
 %
Revenues
The Company generates revenue through the sale of enterprise video content management software solutions, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support, and professional and other services.
The table below describes Qumu's revenues by product category (in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
 
2015 to 2016
 
2014 to 2015
Software licenses and appliances
$
5,839

 
$
9,456

 
$
11,363

 
$
(3,617
)
 
$
(1,907
)
 
(38
)%
 
(17
)%
Service
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription, maintenance and support
21,443

 
18,804

 
12,229

 
2,639

 
6,575

 
14

 
54

Professional services and other
4,400

 
6,194

 
2,929

 
(1,794
)
 
3,265

 
(29
)
 
111

Total service
25,843

 
24,998

 
15,158

 
845

 
9,840

 
3

 
65

Total revenues
$
31,682

 
$
34,454

 
$
26,521

 
$
(2,772
)
 
$
7,933

 
(8
)%
 
30
 %
The $2.8 million decrease in total revenues from 2015 to 2016 reflects a $3.6 million decrease in software licenses and appliances revenues, partially offset by a $0.8 million increase in service revenues. The decrease in software licenses and appliances revenues in 2016 was largely impacted by a decrease in the value of perpetual product license contracts entered into in 2016 and converted to revenue. Revenues can vary year to year based on the type of contract the Company enters into with each customer. Contracts for perpetual software licenses, which are included in software licenses and appliances revenue, generally result in revenue recognized closer to the contract commitment date, while contracts for term software licenses and

25



SaaS, which are included in service revenue, result in most of the revenue being recognized over the period of the contract. The $0.8 million increase in service revenues from 2015 to 2016 resulted from a $2.6 million increase in subscription, maintenance and support revenues driven primarily from growth in the customer base and $1.2 million of previously deferred subscription, maintenance and support revenue contingent on a customer's acceptance, which was received in the fourth quarter of 2016. Partially offsetting the growth in subscription, maintenance and support revenues was an approximately $1.8 million decrease in professional services revenues. The decrease in professional services revenues, which generally move directionally with changes in perpetual license sales, was driven by the decrease in the value of perpetual product license contracts entered into in 2016, partially offset by the recognition of $0.4 million of previously deferred professional service revenue contingent on a customer's acceptance, which was received in the fourth quarter of 2016.
The $7.9 million increase in total revenues from 2014 to 2015 reflects a $9.8 million increase in service revenues, partially offset by a $1.9 million decrease in software licenses and appliances revenues. The decrease in software license revenues in 2015 was largely impacted by a decrease in the value of perpetual product license contracts entered into in 2015 and converted to revenue. The $9.8 million increase in service revenues from 2014 to 2015 resulted from a $6.6 million increase in subscription, maintenance and support revenues driven primarily from growth in the customer base, including the favorable impact of SaaS revenues from Qumu’s acquisition of Kulu Valley effective October 3, 2014. Also contributing to the growth in services revenue was an approximately $3.3 million increase in professional services revenues as Qumu assists its customers in the deployment of its growing base of enterprise video solutions.
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 perpetual software license, a term 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, 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):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
 
2015 to 2016
 
2014 to 2015
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
$
3,365

 
$
6,507

 
$
7,547

 
$
(3,142
)
 
$
(1,040
)
 
(48
)%
 
(14
)%
Service
15,957

 
10,448

 
4,502

 
5,509

 
5,946

 
53

 
132

Total gross profit
$
19,322

 
$
16,955

 
$
12,049

 
$
2,367

 
$
4,906

 
14
 %
 
41
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
57.6
%
 
68.8
%
 
66.4
%
 
(11.2
)%
 
2.4
%
 
 
 
 
Service
61.7
%
 
41.8
%
 
29.7
%
 
19.9
 %
 
12.1
%
 
 
 
 
Total gross margin
61.0
%
 
49.2
%
 
45.4
%
 
11.8
 %
 
3.8
%
 
 
 
 
For the years ended December 31, 2016, 2015 and 2014, gross margins are inclusive of the impact of approximately $1.3 million, $1.3 million and $0.7 million, respectively, in amortization expense associated with 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. The Company had 28, 43 and 49 service personnel at December 31, 2016, 2015 and 2014, respectively.
The 11.8% improvement in gross margin in 2016 compared to 2015 was primarily due to a 19.9% improvement in service gross margin primarily driven by improved economies of scale on increased service revenue and a reduction in headcount. Additionally, the year ended December 31, 2016 included severance expense of $116,000 relating to cost reduction initiatives. Service margin for the full year 2016 also benefited from the cost savings initiatives in the second half of 2015 and a 1.8% favorable impact in 2016 of $1.6 million of previously deferred service revenue contingent on a customer's acceptance, which was received in the fourth quarter 2016. Partially offsetting the improvement in service gross margin was a 11.2% decrease in software licenses and appliance gross margin due to the decrease in software licenses revenues.
The 3.8% improvement in gross margin in 2015 compared to 2014 was primarily due to a 12.1% improvement in service gross margin primarily driven by improved economies of scale on increased service revenue. Service margin also improved due to cost savings initiatives in the second half of 2015. The year ended December 31, 2015 included severance expense of $49,000 relating the cost reduction initiatives.

26



Future gross profit margins will fluctuate quarter to quarter and will be impacted by the rate of growth and mix of the Company's product and service offerings and foreign currency exchange rate fluctuations. Cost of software licenses and appliances revenues in 2017 are expected to include approximately $1.2 million of amortization expense for purchased intangibles.
Operating Expenses
The following is a summary of operating expenses:
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
 
2015 to 2016
 
2014 to 2015
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
8,541

 
$
10,689

 
$
9,506

 
$
(2,148
)
 
$
1,183

 
(20
)%
 
12
%
Sales and marketing
11,529

 
17,994

 
17,991

 
(6,465
)
 
3

 
(36
)
 

General and administrative
9,722

 
16,878

 
12,626

 
(7,156
)
 
4,252

 
(42
)
 
34

Amortization of purchased intangibles
891

 
798

 
652

 
93

 
146

 
12

 
22

Total operating expenses
$
30,683

 
$
46,359

 
$
40,775

 
$
(15,676
)
 
$
5,584

 
(34
)%
 
14
%
Operating expenses for the year ended December 31, 2016 reflected cost savings initiatives in the second half of 2015 and into 2016 across all functional expense categories, with the exception of amortization of purchased intangibles. Operating expenses for the year ended December 31, 2016 included severance expense of $447,000 relating the cost reduction initiatives.
Operating expenses for the year ended December 31, 2015 included an equipment operating lease loss of $1.0 million, a loss relating to a third-party license agreement of $1.2 million, and severance expense of $2.1 million relating the cost reduction initiatives and executive transitions.
Research and development
Research and development expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
 
2015 to 2016
 
2014 to 2015
Compensation and employee-related
$
6,238

 
$
6,738

 
$
5,762

 
$
(500
)
 
$
976

 
(7
)%
 
17
 %
Overhead and other expenses
1,201

 
1,067

 
749

 
134

 
318

 
13

 
42

Outside services and consulting
685

 
2,349

 
2,403

 
(1,664
)
 
(54
)
 
(71
)
 
(2
)
Depreciation and amortization
210

 
273

 
349

 
(63
)
 
(76
)
 
(23
)
 
(22
)
Equity-based compensation
207

 
262

 
243

 
(55
)
 
19

 
(21
)
 
8

Total research and development expenses
$
8,541

 
$
10,689

 
$
9,506

 
$
(2,148
)
 
$
1,183

 
(20
)%
 
12
 %
Total research and development expenses for the years ended December 31, 2016, 2015 and 2014 represented 27%, 31% and 36% of revenues, respectively. The Company had 61, 57 and 61 research and development personnel at December 31, 2016, 2015 and 2014, respectively.
The decrease in expenses from 2015 to 2016 was driven primarily by less utilization of contractors in 2016 and lower employee costs due to fewer U.S. research and development personnel during 2016. The year ended December 31, 2016 included severance expense of $13,000 relating to cost reduction initiatives. The increase in expenses from 2014 to 2015 was driven primarily by increased employee costs through the addition of engineering employees from the acquisition of Kulu Valley in October 2014. The year ended December 31, 2015 included severance expense of $136,000 relating to cost reduction initiatives.

27



Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
 
2015 to 2016
 
2014 to 2015
Compensation and employee-related
$
9,175

 
$
14,293

 
$
14,487

 
$
(5,118
)
 
$
(194
)
 
(36
)%
 
(1
)%
Overhead and other expenses
1,172

 
1,691

 
921

 
(519
)
 
770

 
(31
)
 
84

Outside services and consulting
844

 
1,521

 
2,174

 
(677
)
 
(653
)
 
(45
)
 
(30
)
Depreciation and amortization
128

 
130

 
135

 
(2
)
 
(5
)
 
(2
)
 
(4
)
Equity-based compensation
210

 
359

 
274

 
(149
)
 
85

 
(42
)
 
31

Total sales and marketing expenses
$
11,529

 
$
17,994

 
$
17,991

 
$
(6,465
)
 
$
3

 
(36
)%
 
 %
Total sales and marketing expenses for the years ended December 31, 2016, 2015 and 2014 represented 36%, 52% and 68% of revenues, respectively. The Company had 37, 61 and 81 sales and marketing personnel at December 31, 2016, 2015 and 2014, respectively.
The decrease in expenses from 2015 to 2016 was driven primarily by lower employee costs due to fewer sales and marketing personnel during 2016 and by less utilization of contractors in 2016. The year ended December 31, 2016 included severance expense of $356,000 relating to cost reduction initiatives. Expenses remained flat from 2014 to 2015, as the favorable impact of an expense reduction program implemented in the 2015 third quarter was offset by additional employee costs and the allocation of corporate overhead expense in connection with the Kulu Valley operations, which included a full year of expense in 2015 compared to one quarter of expense in 2014, and severance costs incurred in 2015. The year ended December 31, 2015 included severance expense of $550,000 relating the cost reduction initiatives.
General and administrative
General and administrative expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2016
 
2015
 
2014
 
2015 to 2016
 
2014 to 2015
 
2015 to 2016
 
2014 to 2015
Compensation and employee-related
$
3,920

 
$
7,522

 
$
6,189

 
$
(3,602
)
 
$
1,333

 
(48
)%
 
22
 %
Overhead and other expenses
1,708

 
3,607

 
1,261

 
(1,899
)
 
2,346

 
(53
)
 
186

Outside services and consulting
2,383

 
4,146

 
3,697

 
(1,763
)
 
449

 
(43
)
 
12

Depreciation and amortization
756

 
549

 
210

 
207

 
339

 
38

 
161

Equity-based compensation
955

 
1,054

 
1,269

 
(99
)
 
(215
)
 
(9
)
 
(17
)
Total general and administrative expenses
$
9,722

 
$
16,878

 
$
12,626

 
$
(7,156
)
 
$
4,252

 
(42
)%
 
34
 %
Total general and administrative expenses for the years ended December 31, 2016, 2015 and 2014 represented 31%, 49% and 48% of revenues, respectively. The Company had 24, 31 and 31 general and administrative personnel at December 31, 2016, 2015 and 2014, respectively.
The decrease in expenses from 2015 to 2016 was partially driven by the realization in 2016 of expense reduction initiatives which included decreased contractor utilization and lower headcount. The year ended December 31, 2016 included severance expense of $78,000. Additionally, expenses incurred in 2015 that contributed to the decrease included an equipment operating lease loss of $1.0 million, a loss relating to a third-party license agreement of $1.2 million, and severance expense of $1.4 million relating the cost reduction and executive transition initiatives. Also driving the decrease were non-recurring audit, legal and outside service costs in 2015 associated with transition and reorganization activities resulting from the divestiture in 2014 of the Company's disc publishing business. These non-recurring costs in 2015 were also the primary driver of the dollar increase in expenses from 2014 to 2015.
Amortization of Purchased Intangibles
Operating expenses include $891,000, $798,000 and $652,000 in 2016, 2015 and 2014, 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 in 2017 are expected to include approximately $0.9 million of amortization expense associated with purchased intangibles, exclusive of the portion classified in cost of revenue.

28



Other Income (Expense), Net
The Company recognized interest expense on its term loan and capital leases of $287,000 in 2016 and interest income on cash and marketable securities, net of interest expense on capital leases, of $7,000 and $60,000 in 2015 and 2014, respectively.
In conjunction with the debt financing completed in October 2016, the Company issued a warrant for the purchase of up to 314,286 shares of the Company's common stock, the entire portion of which remained unexercised and outstanding at December 31, 2016. The warrant contains a cash settlement feature upon the occurrence of a certain events, essentially the sale of the Company as defined in the warrant agreement. As a result of this feature, the warrant is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrant on the date of issuance was 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. During the year ended December 31, 2016, the Company recorded a non-cash gain from the change in fair value of the warrant liability of $137,000. The decrease in fair value was primarily driven by a decrease in the Company’s stock price, which had a corresponding impact to the valuation of the warrant liability. 
Other income also included the net gains on foreign currency transactions of $162,000 in 2016 and net losses on foreign currency transactions of $131,000 and $201,000 in 2015 and 2014, respectively. 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. For the years ended December 31, 2016, 2015 and 2014, net income tax benefit amounted to $252,000, $839,000 and $6.6 million, respectively.
Income tax benefit in 2016 and 2015 is primarily attributable to UK operations, which include refundable research credits. Income tax benefit in 2014 primarily reflects the realization of income tax benefits on losses from continuing operations as a result of income generated from discontinued operations, including the gain on sale of the disc publishing business recognized in the third quarter of 2014.
Net Income from Discontinued Operations, Net of Tax
The Company closed the sale of its disc publishing business effective July 1, 2014. As a result, net income from discontinued operations includes the financial results of the Company’s disc publishing business through June 30, 2014. Included in net income from discontinued operations for the third quarter of 2014 is the recognition of a gain on sale of the disc publishing business of $16.2 million. This amount excludes the impact of transaction related expenses which were primarily incurred and recognized prior to the third quarter of 2014. Discontinued operations results also include non-recurring expenses incurred by the Company as a result of the sale of the disc publishing business. These expenses included third-party transaction specific costs, one-time income tax related impacts and the acceleration of vesting of cash-based long-term incentive and stock-based awards payable to employees of the disc publishing business upon completion of the asset sale transaction. Non-recurring expenses and income tax related impacts amounted to approximately $9.6 million for the year ended December 31, 2014.

29



Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Company's liquidity and capital resources (in thousands):
 
December 31,
 
2016
 
2015
Cash and cash equivalents
$
10,364

 
$
7,072

Marketable securities

 
6,249

Cash, cash equivalents and marketable securities
$
10,364

 
$
13,321

Working capital
$
5,215

 
$
9,516

Financing obligations
$
678

 
$
1,021

Term loan
6,617

 

Financing obligations and term loan
$
7,295

 
$
1,021

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 includes the proceeds of the debt financing completed in the fourth quarter of 2016, as well as any cash flows that may be generated from current operations. Based on expected revenue growth and continued management of expenses to scale with revenue, the Company expects that it will be cash flow breakeven for the second half of 2017. If the Company is unable to meet its revenue growth expectations, it is positioned to further reduce costs to mitigate the impact on its cash reserves for at least the next 12 months.
At December 31, 2016, the Company had aggregate working capital of $5.2 million, down $4.3 million from working capital of $9.5 million at December 31, 2015. The primary contributors to the decrease in working capital were the generation of a net loss adjusted for non-cash items during the year ended December 31, 2016 of $6.7 million, purchases of property and equipment of $76,000 and principal payments on capital lease obligations of $513,000, which were partially offset by net proceeds from the debt financing completed in October 2016 of $7.5 million.
Financing obligations consist of capital leases related to the acquisition of computer and network equipment and furniture and other financing obligations. The term loan consists of a three-year note having a face value of $8.0 million, due in full at maturity on October 21, 2019.
Apart from proceeds from the term loan received in the fourth quarter of 2016, 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, 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 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 $1.4 million as of December 31, 2016. The repatriation of cash and cash equivalents held by the Company's international subsidiaries would not result in an adverse tax impact on cash due to the Company's net operating loss position with respect to income taxes.
Summary of Credit Agreement and Warrant
On October 21, 2016, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into a term loan credit agreement (the “credit agreement”) with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent (the “Administrative Agent”). HCP-FVD, LLC is an affiliate of Hale Capital Partners, LP.
Pursuant to the credit agreement, the Company borrowed $8.0 million as a term loan on October 21, 2016. The term loan is scheduled to mature on October 21, 2019, requires payment of interest monthly at the prime rate plus 6.0%. As of December 31, 2016, interest was payable at 9.75%.
The Company may prepay the term loan at any time with the payment of the applicable pre-payment fee. The Company is obligated to prepay the term loan, with the payment of the applicable pre-payment fee, with the net proceeds from certain dispositions (other than its interest in BriefCam, Ltd.), issuances of equity or debt securities, extraordinary transactions and upon a change of control.
The credit agreement contains affirmative and negative covenants and requirements relating to the Company and its operations. The affirmative covenants require, among other things, that the Company deliver to the Administrative Agent financial statements, annual operating plan, updated schedules, various reports, compliance certificates and other financial, bank account

30



and accounts receivable information. There are also affirmative covenants relating to access to collateral and the Company's books and records, insurance, compliance with laws, payment of taxes, maintenance of existence, employee benefit plans, maintenance of accounts, and environmental matters. The negative covenants prohibit the Company from incurring debt, encumbering its assets, exceeding operating lease expense amounts, making dividends, distributions or payments on the Company's capital stock, being a party to any acquisition or any merger or consolidation or similar transaction, modifying its organizational documents, entering into certain transactions with affiliates, making certain transfers to or conducting certain business through foreign subsidiaries, and incentivizing accelerated customer payments. The negative covenants of the credit agreement also require the Company to meet various financial covenants relating to a maximum cumulative net cash operating amount, minimum eligible accounts receivable and cash, minimum cash, minimum core bookings, maximum deferred revenue non-current, minimum subscription, and maintenance and support revenue until the quarter ended September 30, 2017 and after the quarter ended September 30, 2017, minimum subscription and maintenance and support dollar renewal rates. The Company was in compliance with all its covenants as of December 31, 2016.
Upon certain events of default relating to bankruptcy or insolvency, as defined in the credit agreement, the obligations will become immediately due and payable. Upon other events of default – including those relating to non-payment of the term loan obligations, non-payment of other debt, default of other material obligations, non-compliance with loan covenants, breach of representations or warranties, certain pension plan events, certain judgments, invalidity of collateral documents, termination of the Company's reporting obligations to the Securities and Exchange Commission or failure to be listed on any national stock exchange, material adverse effect or cessation of business – the Administrative Agent may declare all or any part of the obligations under the credit agreement to be due and payable.
Pursuant to the credit agreement, for so long as any obligations are outstanding, Hale Capital Partners, LP has the right to appoint and remove one observer to the Company's Board of Directors. The initial board observer appointed by Hale Capital Partners, LP is Martin Hale, Jr.
In connection with the credit agreement, the Company granted a first priority security interest in substantially all of the Company's properties, rights and assets and Qumu, Inc. provided a guaranty of the Company's obligations under the credit agreement pursuant to a guaranty and collateral agreement dated October 21, 2016 in favor of the Administrative Agent. As part of the security granted by the guaranty and collateral agreement, the Company pledged to the Administrative Agent all of the Company's shares in Qumu, Inc. Pursuant to a charge over shares by deed by Qumu Corporation as Chargor and the Administrative Agent, the Company pledged to the Administrative Agent 65% of the Company's shares in Qumu UK Holdings Ltd.
In connection with the credit agreement, on October 21, 2016, the Company issued to HCP-FVD, LLC a warrant to purchase 314,286 shares of the Company's common stock. The warrant has an exercise price of $2.80 per share, an expiration date of October 21, 2026, and is transferable. Upon a “Fundamental Transaction,” essentially the sale of the Company as defined in the warrant agreement, the warrant holder has the right thereafter to receive, upon exercise of the warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if the holder had been, immediately prior to such Fundamental Transaction, the holder of the number of common shares then issuable upon such exercise of the warrant. Alternatively, the holder may require us to purchase the warrant from the holder thereof for a cash amount equal to the greater of the Original Issuance Value ($915,389) in respect of the remaining unexercised portion of the warrant and the Black-Scholes value of the remaining unexercised portion of the warrant through the date of consummation of the Fundamental Transaction. Pursuant to the terms of the warrant, the Company filed and caused to be effective a registration statement to register the resale of the shares of common stock underlying the warrant.
See Item 9B. Other Information – Amendment No. 1 to Credit Agreement for a summary of the amendments to the credit agreement effective March 31, 2017.
Summary of Cash Flows. A summary of cash flows is as follows (in thousands):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Cash flows from (used in):
 

 
 

 
 

Operating activities
$
(9,484
)
 
$
(23,227
)
 
$
(22,644
)
Investing activities
6,174

 
18,923

 
(3,180
)
Financing activities
6,956

 
(228
)
 
35

Effect of exchange rate changes on cash
(354
)
 
(80
)
 
(252
)
Net change in cash and cash equivalents
$
3,292

 
$
(4,612
)
 
$
(26,041
)
Net change in marketable securities and restricted cash
$
(6,249
)
 
$
(19,537
)
 
$
12,553


31



Operating activities
Net cash used in operating activities was $9.5 million for 2016 compared to $23.2 million for 2015.
The change in operating cash flows for the 2016 period as compared to the 2015 period was favorably impacted by the change in receivables, as well as a lower net loss for the year ended December 31, 2016 compared to 2015. The change in operating cash flows for the 2016 period as compared to the 2015 period was unfavorably impacted by the changes in accounts payable and other accrued liabilities, accrued compensation, and deferred revenue balances, which decreased during the year ended December 31, 2016, driven by the timing of sales and maintenance renewals, and the timing of delivery of products and services as impacted by the appropriate revenue recognition criteria. Additionally, the change in cash used in operating activities for the year ended December 31, 2016 as compared to the 2015 period was impacted by a $715,000 unfavorable change in cash from discontinued operations in connection with the Company's sale of its discontinued disc publishing business effective July 1, 2014.
Investing activities
Net cash provided by investing activities totaled, in the aggregate, $6.2 million for 2016 compared to net cash provided of $18.9 million in 2015. Primarily driving the generation of cash in 2016 were maturities of marketable securities of $6.3 million, partially offset by purchases of property and equipment of $76,000. The $18.9 million cash provided by investing activities in 2015 resulted from maturities of marketable securities, net of related purchases, of $17.2 million, the Company's receipt of escrowed proceeds from the sale of the disc publishing business of $2.3 million, and purchases of property and equipment of $635,000.
Financing activities
Financing activities provided net cash of $7.0 million during 2016, primarily from net proceeds from the debt financing of $7.5 million, offset in part by cash used for payments on financing obligations of $513,000. Financing activities used $228,000 of cash in the comparable period in 2015, primarily consisting of cash used for payments on financing obligations.
Since October 2010, the Company’s Board of Directors has approved common stock repurchases 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 years ended December 31, 2016, 2015 and 2014. As of December 31, 2016, 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 for relating to the exercise or vesting of equity awards.
The Company did not declare or pay any dividends during the years ended December 31, 2016, 2015 and 2014. Under the credit agreement, the Company is prohibited from declaring or paying any dividends.
Contractual Obligations. The following table summarizes the Company's contractual cash obligations at December 31, 2016, and the net effect such obligations are expected to have on liquidity and cash flow in future periods. Some of the amounts included in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the amounts the Company will actually pay in future periods may vary from those reflected in the table.
(In thousands)
Payments Due by Period
Contractual Obligations
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Term loan(1)
$
791

 
$
791

 
$
8,637

 
$

 
$

 
$

 
$
10,219

Operating leases
1,185

 
978

 
522

 
298

 
300

 
332

 
3,615

Capital leases and other financing obligations (1)
545

 
171

 
3

 

 

 

 
719

Purchase obligations(2)
734

 
128

 

 

 

 

 
862

Income tax liabilities under ASC 740 (3)

 

 

 

 

 

 

Total contractual cash obligations
$
3,255

 
$
2,068

 
$
9,162

 
$
298

 
$
300

 
$
332

 
$
15,415

_________________________________________________
(1) 
Amounts include principal and interest.

32



(2) 
Purchase obligations include all commitments to purchase goods or services that meet one or both of the following criteria: (1) they are non-cancelable or (2) the Company must make specified minimum payments even if it does not take delivery of the contracted products or services. If the obligation is non-cancelable, the entire value of the contract is included in the table.
(3) 
The Company does not currently expect any income tax liabilities accrued under ASC 740 as of December 31, 2016 to be paid to the applicable tax authorities in 2017. The full balance of unrecognized tax benefits under ASC 740 of $1.0 million at December 31, 2016, has been excluded from the above table as the period of payment or reversal cannot be reasonably estimated. This amount is before reduction for deferred federal benefits of uncertain tax positions and also excludes potential interest and penalties.
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. The new standard is effective for the Company on January 1, 2018 but may be early adopted effective January 1, 2017.
The new revenue standard may be applied using either of the following transition methods: a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company will adopt the standard in the first quarter of 2018 and preliminarily expects to use the modified retrospective method. However, the Company is continuing to evaluate the impact of the standard, and its adoption method is subject to change.
Currently, the Company is in the process of reviewing its historical contracts to quantify the impact that the adoption of the standard will have on specific performance obligations. The Company is also continuing to evaluate the impact of the standard on its recognition of costs related to obtaining customer contracts (namely, sales commissions). While the Company continues to assess all potential impacts of this new standard, it currently believes the most significant impacts relate to the accounting for the timing of revenue recognition of subscription, or term-based, software license arrangements. Specifically, under the new standard:
Software revenue associated with non-cancellable subscription or, term-based, software license arrangements will generally be recognized upon delivery of the license. Historically, these arrangements have been material, and the Company currently recognizes this revenue ratably over the term of the software license; and
The Company expects that the accounting for software revenue derived from perpetual based licensing arrangements and associated services revenues will not be materially impacted.
The adoption of the standard will require the implementation of new accounting processes, which will change the Company's internal controls over revenue recognition, contract acquisition costs and financial reporting. The Company is designing and implementing these controls in anticipation of adopting the new standard January 1, 2018.
Information regarding other new accounting pronouncements for which the Company does not expect the adoption to have a material impact to the consolidated financial statements and related disclosures, or for which the impact of adoption is currently being evaluated, is included in Note 1 to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Translation. As of December 31, 2016, the Company is exposed to market risk primarily from foreign exchange rate fluctuations of the British Pound Sterling, Japanese Yen and Singapore Dollar 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 6% and changes in interest rates would impact the Company's monthly interest payment and cash reserves.

33



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
 
Page in Annual
Report on Form 10-K
For Year Ended
December 31, 2016

34



Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Qumu Corporation:

We have audited the accompanying consolidated balance sheets of Qumu Corporation and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Qumu Corporation and subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP
Minneapolis, Minnesota
March 31, 2017


35



QUMU CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
 
December 31,
 
2016
 
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,364

 
$
7,072

Marketable securities

 
6,249

Receivables, net
7,495

 
11,257

Income tax receivable
317

 
659

Prepaid expenses and other current assets
2,470

 
3,392

Total current assets
20,646

 
28,629

Property and equipment, net
1,827

 
2,942

Intangible assets, net
8,110

 
11,032

Goodwill
6,749

 
8,103

Deferred income taxes, non-current
70

 
57

Other assets, non-current
4,827

 
3,649

Total assets
$
42,229

 
$
54,412

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and other accrued liabilities
$
2,394

 
$
3,864

Accrued compensation
2,361

 
4,014

Deferred revenue
8,992

 
10,413

Deferred rent
283

 
270

Financing obligations
508

 
502

Warrant liability
893



Current liabilities from discontinued operations

 
50

Total current liabilities
15,431

 
19,113

Long-term liabilities:
 

 
 

Deferred revenue, non-current
423

 
2,215

Income taxes payable, non-current
6

 
9

Deferred tax liability, non-current
294

 
575

Deferred rent, non-current
712

 
998

Financing obligations, non-current
170

 
519

Term loan, non-current
6,617

 

Other non-current liabilities

 
226

Total long-term liabilities
8,222

 
4,542

Total liabilities
23,653

 
23,655

Commitments and contingencies (Note 7)
 
 
 
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 9,227,247 and 9,188,682, respectively
92

 
92

Additional paid-in capital
66,864

 
65,484

Accumulated deficit
(44,473
)
 
(33,298
)
Accumulated other comprehensive loss
(3,907
)
 
(1,521
)
Total stockholders’ equity
18,576

 
30,757

Total liabilities and stockholders’ equity
$
42,229

 
$
54,412

See accompanying notes to consolidated financial statements.

36



QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
 
Year Ended December 31,
 
2016
 
2015
 
2014
Revenues:
 

 
 

 
 

Software licenses and appliances
$
5,839

 
$
9,456

 
$
11,363

Service
25,843

 
24,998

 
15,158

Total revenues
31,682

 
34,454

 
26,521

Cost of revenues:
 

 
 

 
 

Software licenses and appliances
2,474

 
2,949

 
3,816

Service
9,886

 
14,550

 
10,656

Total cost of revenues
12,360

 
17,499

 
14,472

Gross profit
19,322

 
16,955

 
12,049

Operating expenses:
 

 
 

 
 

Research and development
8,541

 
10,689

 
9,506

Sales and marketing
11,529

 
17,994

 
17,991

General and administrative
9,722

 
16,878

 
12,626

Amortization of purchased intangibles
891

 
798

 
652

Total operating expenses
30,683

 
46,359

 
40,775

Operating loss
(11,361
)
 
(29,404
)
 
(28,726
)
Other income (expense):
 

 
 

 
 

Interest income (expense), net
(287
)
 
7

 
60

Change in fair value of warrant liability
137

 

 

Other, net
84

 
(131
)
 
(241
)
Total other expense, net
(66
)
 
(124
)
 
(181
)
Loss before income taxes
(11,427
)
 
(29,528
)
 
(28,907
)
Income tax benefit
(252
)
 
(839
)
 
(6,564
)
Net loss from continuing operations
(11,175
)
 
(28,689
)
 
(22,343
)
Net income (loss) from discontinued operations, net of tax

 
(10
)
 
13,823

Net loss
$
(11,175
)
 
$
(28,699
)
 
$
(8,520
)
Net income (loss) per share – basic:
 
 
 
 
 
Net loss from continuing operations per share – basic
$
(1.21
)
 
$
(3.11
)
 
$
(2.53
)
Net income (loss) from discontinued operations per share – basic

 

 
1.57

Net loss per share – basic
$
(1.21
)
 
$
(3.11
)
 
$
(0.96
)
Basic weighted average shares outstanding
9,232

 
9,235

 
8,836

Net income (loss) per share – diluted:
 
 
 
 
 
Net loss from continuing operations per share – diluted
$
(1.23
)
 
$
(3.11
)
 
$
(2.53
)
Net income (loss) from discontinued operations per share – diluted

 

 
1.57

Net loss per share – diluted
$
(1.23
)
 
$
(3.11
)
 
$
(0.96
)
Diluted weighted average shares outstanding
9,232

 
9,235

 
8,836

See accompanying notes to consolidated financial statements.


37



QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
 
Year Ended December 31,
 
2016
 
2015
 
2014
Net loss
$
(11,175
)
 
$
(28,699
)
 
$
(8,520
)
Other comprehensive income (loss):
 
 
 
 
 
Net change in foreign currency translation adjustments
(2,387
)
 
(749
)
 
(856
)
Change in net unrealized gain (loss) on marketable securities, net of tax
1

 
13

 
5

Total other comprehensive loss
(2,386
)
 
(736
)
 
(851
)
Total comprehensive loss
$
(13,561
)
 
$
(29,435
)
 
$
(9,371
)

See accompanying notes to consolidated financial statements.



38



QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accum
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2013
8,674

 
$
87

 
$
58,411

 
$
3,921

 
$
162

 
$
62,581

Net loss

 

 

 
(8,520
)
 

 
(8,520
)
Other comprehensive loss, net of taxes

 

 

 

 
(851
)
 
(851
)
Issuance of restricted stock
156

 
1

 
(1
)
 

 

 

Stock issued in stock option exercise
86

 
1

 
192

 

 

 
193

Redemption of stock to cover tax withholding for employee stock plans
(64
)
 
(1
)
 
(98
)
 

 

 
(99
)
Net tax reductions relating to exercise and expiration of stock options

 

 
(8
)
 

 

 
(8
)
Stock-based compensation

 

 
2,039

 

 

 
2,039

Foreign currency translation transfer related to the sale of foreign operations

 

 

 

 
(96
)
 
(96
)
Shares issued for acquisition
275

 
3

 
3,031

 

 

 
3,034

Balance at December 31, 2014
9,127

 
$
91

 
$
63,566

 
$
(4,599
)
 
$
(785
)
 
$
58,273

Net loss

 

 

 
(28,699
)
 

 
(28,699
)
Other comprehensive loss, net of taxes

 

 

 

 
(736
)
 
(736
)
Issuance of restricted stock
48

 
1

 
(1
)