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, 2017
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 check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark 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 check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 check mark 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
Large Accelerated Filer o Accelerated Filer o
Non-Accelerated Filer o Smaller Reporting Company x Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
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 $24,328,000.
As of March 21, 2018, the registrant had 9,359,400 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2018 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 tools to create, manage, secure, distribute and measure the success of live and on-demand video for the enterprise. The Qumu Qx platform enables global organizations to drive employee engagement, increase access to video, and modernize the workplace by providing a more efficient and effective way to share knowledge. The world’s largest organizations leverage the Qumu Qx platform for a variety of cloud-based, on premise and hybrid use cases including self-service webcasting, sales enablement, internal communications, product training, regulatory compliance and customer engagement. The Company 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 cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services. An individual sale can range from single year agreements for thousands of dollars to multi-year agreements for over a million dollars.
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Software licenses and appliances
$
5,982

 
$
5,839

 
$
9,456

 
$
143

 
$
(3,617
)
 
2
 %
 
(38
)%
Service
22,185

 
25,843

 
24,998

 
(3,658
)
 
845

 
(14
)%
 
3
 %
Total revenues
$
28,167

 
$
31,682

 
$
34,454

 
$
(3,515
)
 
$
(2,772
)
 
(11
)%
 
(8
)%
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. Until October 2011, the Company focused its business on the development and sale of its CD recordable publishing systems and DVD recordable publishing systems.
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

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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.
In October 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 Qx Enterprise Video Platform
Qumu Qx is an end-to-end video creation, management and delivery solution for enterprises. Qx can be purchased as a perpetual software license, cloud-hosted software as a service (SaaS) or hybrid. Qx offers a scalable and extensible platform that organizations can use to improve how they lead, learn and collaborate both internally and externally.
Qumu’s implementations can range in size from tens of thousands to millions of dollars. The Qx platform integrates with customers' existing video services (e.g., videoconferencing systems), business applications (e.g., Skype, WebEx, etc.,.) 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.
Qx offers a flexible deployment model that can be leveraged by organizations in three different ways:
Inside the firewall as an on-premise enterprise-grade solution for high quality, secure internal communication over existing networks
Outside of the firewall as a cloud-based solution for flexible, external communication applications, and
As a hybrid solution, providing the flexibility of cloud, combined with Qumu’s intelligent delivery technology.
Qx encompasses four distinct elements:
Video Capture
Video Content Management
Intelligent Delivery
Extensions and Add-Ons

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qxgraphic.jpg
Video Capture
Qumu’s intelligent video capture (sometimes referred to as ingest) dynamically supports unlimited video content sources, accommodating a wide variety of video formats. Video conferencing solutions have emerged as a rapidly growing source of video content. These range from high-end, hardware-intensive conference room systems, such as those provided by Polycom and Cisco, to popular unified communications solutions such as Skype for Business and WebEx.
Qumu brings streaming and management to these video communications tools. As video conferencing becomes the de facto form of team communication, organizations can record, manage and broadcast these videos live or on demand to hundreds or thousands of employees. Intelligent video capture allows users to record and broadcast using existing video conferencing tools. With one enterprise-wide video management and delivery platform, IT can extend their existing video conferencing system investment and concurrently move forward with new unified communications strategies.
Video Content Management
Organizations use Qumu to centrally manage all video content through a single interface. Qumu's video content management allows system users to ingest video, create metadata and share content quickly and securely to endpoints with rights and rules management. Some of Qx’s notable functionality includes:
Creation & Editing
Qx provides comprehensive, easy-to-use tools to create and edit video from desktop and mobile devices or using conference room and studio systems. The tools can be used across a wide range of applications from creating a simple mobile phone presentation, to editing a video conference recording, to producing a multi-camera town hall event.
Advanced Analytics
Qumu Advanced Analytics provide leaders and communications staff with real-time visibility and insights into employee engagement for both live streaming video and video on demand (VOD). Advanced Analytics also help IT teams monitor and solve issues with buffering, bit rate and latency across internal networks, VPNs and external CDNs.
Automated Workflows
Qx allows users to automate processes and comply with policies by creating workflows for content approval, management and viewing rights. Automated workflows can be set for specific types of meeting recordings with disclaimers, security, time of life settings, and repurposing parameters.

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Security and Access Control
Qumu's access control model can leverage most major enterprise authentication solutions, securing access to videos, channels and administrative functions. In cases where a corporate authentication service is not available, Qumu provides its own user management tools for user creation, self-registration, approvals, and group assignment.
Speech Search
Qumu Speech Search allows organizations to use their video repository for eDiscovery, internal clipping services or simply to find information quickly. Qumu Speech Search can quickly analyze thousands of hours of audio and video, index all spoken words and phrases, and return results beyond what metadata or caption-based searches can provide.
Intelligent Delivery
Qx provides a diverse, flexible and robust series of solutions for enterprise delivery of live streaming or on demand video. At the core of Qumu’s solution is an intelligent business rules engine and CDN broker. This proprietary technology allows organizations to configure and optimize video for their specific offices, mobile users, and various endpoints.
Qx’s intelligent delivery supports multiple content delivery network configurations, automatically and intelligently selecting the optimal video quality for a given user, delivering video via eCDN, software CDN, and/or public CDNs. Qumu’s intelligent delivery technology can be deployed as hardware, software, or Virtual Machine. Intelligent delivery can be centrally monitored, managed, and updated.
Extensions and Add-Ons
Qx is designed to be a customizable, enhancing the customer’s enterprise communication and collaboration solution. With its service-based extensible architecture, Qx can be built upon by third-party developers. Current integrations and extensions from Qumu and its partners include Microsoft Office 365, SharePoint, Skype for Business, Yammer, IPTV, Jive, IBM Connections and Dashboard.
Extensibility is important for meeting customers who have complex and unique digital environments and for Qumu’s network of partners. Qumu’s open, service-based architecture enables customers to more easily support native apps for iOS, Android, and Windows Mobile platforms. Qx offers robust REST APIs for both user and administrative functions, allowing customers to develop integrations of their own on top of the Qumu platform.
Marketing and Distribution
Qumu’s solutions serve a growing customer base of medium- and large-sized enterprises across a wide range of vertical and horizontal markets, the five primary markets being 1) Banking, Finance and Insurance, 2) Manufacturing, 3) Services and Consulting, 4) Telecom and Technology, and 5) Biotech and Health Care. Qumu has historically targeted enterprises with 10,000+ employees and a history of video use for corporate communications, although its Qumu Cloud product can service organizations as small as 5,000 or more employees. Across all deployment types (cloud, on premise and hybrid), Qumu’s customers are among the largest Fortune 500 and Global 2000 companies in the world.
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.
Qumu has been identified as a leader by multiple industry analysts:
Gartner’s Critical Capabilities reports focuses 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. Out of 15 competitors outlined in the current Gartner report, Qumu received a #1 ranking in both Internal Executive Messaging and Internal Collaboration, a #2 ranking in Internal Training and a #3 ranking in External Video for Sales.
Aragon Research named Qumu a leader in its Video Content Management report.
Wainhouse Research positioned Qumu as a leader in Enterprise Streaming Market.
Frost & Sullivan identified Qumu as the 2018 Competitive Strategy Innovation and Leadership Award winner, among 20 total companies the firm covers in the Enterprise Video space.
These selections are visible proof points in the market that had a positive impact on Qumu’s market awareness and lead generation activities.

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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% of revenues for each of the years ended December 31, 2017, 2016 and 2015. During each of the years ended December 31, 2017, 2016 and 2015, the Company had one customer that accounted for more than 10% of its revenues.
Competition
Major competitors of Qumu include Kaltura, VBrick, Brightcove, MediaPlatform and Panopto. Qumu competes with these other companies based primarily upon its unique end-to-end solution for a complete video infrastructure that includes support for mobile devices and existing IT infrastructure. Qumu occasionally encounters organizations utilizing Microsoft’s Skype and Stream technologies. By some, Microsoft is viewed as a competitor, but our technology integrates and enables organizations to securely ingest, managed and distribute video content from a wide variety of organizational tool sets with greater flexibility and improved manageability. Qumu also differentiates itself from its competitors through its video ingestion and delivery technology, as well as its 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 $7.3 million, $8.5 million and $10.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, the Company employed 41 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.
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 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 $200,000 in 2018.
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, 2017, the Company had 121 employees, of which 41 were involved in research and development, 33 in sales and marketing, 26 in service and support and 21 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

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practicable after these documents are filed with the SEC. To obtain copies of these reports, go to www.qumu.com and click on “About,” 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.
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.
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.
We will need additional capital to fund repayment of our $10 million term loan due in January 2020 and any additional capital we seek may not be available in the amount or at the time we need it.
In the year ended December 31, 2017, we had an operating loss of $8.9 million, used $2.0 million of net cash in continuing operating activities, and ended 2017 with $7.7 million in cash and cash equivalents. At December 31, 2017, we had approximately $8.0 million in outstanding debt under a term loan credit agreement dated October 21, 2016 with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent.
On January 10, 2018, we entered into a credit agreement for a $10 million term loan from ESW Holdings, Inc. and used $8.8 million of the $10 million term loan proceeds to repay the outstanding obligations to HCP-FVD, LLC and Hale Capital Partners, LP. Under the credit agreement with ESW Holdings, the $10 million term loan is scheduled to mature on January 10, 2020. Interest will accrue and compound monthly at a variable rate per annum equal to the prime rate plus 4%. We may prepay

8



the term loan at any time with the payment of a pre-payment fee of 10% of the amount prepaid. We are obligated to prepay the term loan, with the payment of the applicable pre-payment fee, with the net proceeds from certain dispositions, issuances of equity or debt securities, extraordinary transactions and upon a change of control. Notwithstanding the foregoing, the disposition of our interest in BriefCam, Ltd. will not trigger a mandatory pre-payment and the pre-payment fee will not attach to a voluntary pre-payment from proceeds of the disposition of BriefCam.
Over the last several years including 2017 and into 2018, we have implemented an ongoing expense reduction program that, when combined with expected revenue performance in 2018, we believe will allow us to attain our goal of becoming cash flow breakeven in the fourth quarter of 2018.
Even if we achieve our goal of becoming cash flow breakeven in the fourth quarter of 2018, we do not expect that we will generate sufficient cash flow from operations in 2018 and 2019 in order to fund repayment of the full amount of the obligations to ESW Holdings at the January 10, 2020 maturity date. Accordingly, to fund this short-term capital need, we will need to secure capital to refinance the term loan at maturity. At maturity, assuming no earlier repayment of the term loan, the total amount of principal and interest due will be approximately $11.9 million.
Additionally, if we are not able to become cash flow breakeven in the fourth quarter of 2018 by increasing revenue and controlling expenses, we may need to raise capital in the future to execute our business plan and pursue our growth objectives. We believe the key factors to funding our long-term capital needs will be our ability to increase revenue and bookings and positive cash flow from our operations. Because of the mandatory prepayment provisions of our credit agreement with ESW Holdings, we will be required to repay the term loan in full before we would be able to use any of the net proceeds from the issuances of equity or debt securities to fund any long-term capital needs.
We may obtain future capital by incurring indebtedness, from an offering or sales of our equity securities, or from the disposition of our investment in BriefCam, or a combination of any of these. If we seek to raise capital in the future to fund our short-term or long-term capital needs, 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.
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 with ESW Holdings requires 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. BriefCam is a private company with no readily available market for its stock and its organizational documents and stockholder agreements impose significant restrictions on transfer, including significant restrictions on transfer of our equity in BriefCam.
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.
Further, upon a payment default, ESW Holdings may declare all or any part of the obligations under the ESW credit agreement to be due and payable and proceed to exercise its rights and remedies as a secured lender pursuant to the credit agreement and related agreements we have entered into giving ESW Holdings a security interest in substantially all of our properties, rights and assets (including equity interests of our subsidiaries).
We have a history of losses and while our goal is to become cash flow breakeven in the fourth quarter of 2018, we may not achieve that goal or achieve or sustain cash flows or profitability in the future.
We experienced consolidated net losses of $11.7 million, $11.1 million and $28.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. Moreover, we have historically not generated sufficient operating cash flow to fund our operations and expect to incur additional operating losses through at least the first half of 2018. Over the last several years including 2017 and into 2018, we have implemented an ongoing expense reduction program that, when combined with

9



expected revenue performance in 2018, we believe will allow us to attain our goal of becoming cash flow breakeven in the fourth quarter of 2018.
In order to achieve our goal of becoming cash flow breakeven and to achieve cash flow positivity and profitability in the future, we must increase the revenues received from the sale of our enterprise video content management software solutions, hardware, maintenance and support, and professional and other services, as well as achieve and maintain an expense structure that is aligned with our forecasted revenue and cash flows. Our ability to increase revenues depends upon increasing the number of new customers and expanding our sales to existing customers, maintaining high renewal rates among our existing customers, and maintaining our prices (despite pricing pressure due to competition).
We cannot assure you that we will achieve our goal of becoming cash flow breakeven in the fourth quarter of 2018, particularly if the benefits we expect to realize from some of our recent expense reduction efforts do not materialize in the timeframes or the amount of reduction to expenses that we have planned. We cannot assure you that we will generate increases in our revenues, attain a level of profitable operations, or successfully implement our business plan or future business opportunities. Our business plan and financing needs are subject to change depending on, among other things, success of our efforts to grow revenue and our efforts to continue to effectively manage expenses. If we are ultimately unable to generate sufficient revenue to meet our financial targets, become profitable and have sustainable positive cash flows, we may be required to further reduce expenses, which could have a further negative effect on our ability to generate revenue, or we may be required to raise additional capital more quickly than we expect or we may need more capital than we expect.
If we are unable to retain our existing customers, our revenue and results of operations will be adversely affected.
We sell our products pursuant to agreements that are generally for annual or other fixed terms. Our customers have no obligation to renew their subscriptions after their subscription period expires, and these subscriptions may not be renewed on the same or on more profitable terms. As a result, our ability to retain our existing customers and grow depends in part on subscription renewals. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our services, the cost of our services and the cost of services offered by our competitors, reductions in our customers’ spending levels or the introduction by competitors of attractive features and functionality. If our customer retention rates decrease, we may need to increase the rate at which we add new customers in order to maintain and grow our revenue, which may require us to incur significantly higher advertising and marketing expenses than we currently anticipate, or our revenue may decline. If our customers do not renew their subscriptions for our services, renew on less favorable terms, or do not purchase additional functionality or subscriptions, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed.
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.
To compete effectively, we must continually improve existing products and introduce new products that achieve market acceptance.
In order to remain competitive and increase sales to customers, we must anticipate and adapt to the rapidly changing technologies in the enterprise video content management market, 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.
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. 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.

10



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.
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, VBrick, Brightcove, MediaPlatform and Panopto who deliver video content to businesses. Qumu occasionally encounters organizations utilizing Microsoft’s Skype and Stream technologies. By some, Microsoft is viewed as a competitor, but our technology integrates and enables organizations to securely ingest, managed and distribute video content from a wide variety of organizational tool sets with greater flexibility and improved manageability. 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.
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.
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

11



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.
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

12



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.
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.

13



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. 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;
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

14



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.
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.
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.

15



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, 2017, 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. 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, 2017, we had 9,364,804 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, 2017 and ending December 31, 2017 was approximately 26,900 shares. A more active public market for our 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.

16



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.
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
$
37,000

(2) 
13,900

 
June 2018
London, England
Engineering, service, sales, marketing and administration
$
34,000

(3) 
5,500

 
September 2019
Hyderabad, India
Software development and testing
$
8,000

 
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.
(3) 
Effective January 1, 2018, approximately 2,750 square feet of the leased space was sublet for approximately $12,000 per month through September 2019.
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,
 
 
2017
 
2016
 
 
Low
 
High
 
Low
 
High
First Quarter
 
$
1.80

 
$
2.97

 
$
2.10

 
$
5.48

Second Quarter
 
$
2.45

 
$
3.23

 
$
3.53

 
$
5.50

Third Quarter
 
$
2.50

 
$
3.12

 
$
2.19

 
$
4.84

Fourth Quarter
 
$
2.08

 
$
3.28

 
$
2.20

 
$
3.77

Shareholders
As of March 21, 2018, there were 98 shareholders of record of Qumu's common stock.
Dividends
The Company did not pay a dividend in 2017 or 2016 and does not expect to pay a dividend in 2018. 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, 2017, 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, 2017 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, 2017, 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 2017
 
1,680

 
$
3.14

 

 
778,365

November 2017
 
446

 
$
2.40

 

 
778,365

December 2017
 

 
$

 

 
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, 2017. 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
 
1,122,875

 
$
5.94

 
582,188

Equity compensation plans not approved by shareholders(2)
 
165,000

 
$
7.78

 

Total
 
1,287,875

 
$
6.18

 
582,188

_______________________________________ 
(1) Excludes shares of common stock listed in the first column.
(2) Consists of outstanding non-qualified stock option grants on November 26, 2012 and May 18, 2015 to Vern Hanzlik, the Company’s President and Chief Executive Officer, and Peter Goepfrich, the Company's former Chief Financial Officer, on the respective start dates of their 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



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,
 
2017
 
2016
 
2015
 
2014
 
2013
Total revenues
$
28,167

 
$
31,682

 
$
34,454

 
$
26,521

 
$
17,736

Gross profit
$
17,905

 
$
19,322

 
$
16,955

 
$
12,049

 
$
10,402

Operating loss
$
(8,871
)
 
$
(11,361
)
 
$
(29,404
)
 
$
(28,726
)
 
$
(19,605
)
Net loss from continuing operations
$
(11,724
)
 
$
(11,175
)
 
$
(28,689
)
 
$
(22,343
)
 
$
(16,221
)
Net loss
$
(11,724
)
 
$
(11,175
)
 
$
(28,699
)
 
$
(8,520
)
 
$
(9,694
)
Net loss from continuing operations per share – basic
$
(1.25
)
 
$
(1.21
)
 
$
(3.11
)
 
$
(2.53
)
 
$
(1.87
)
Net loss from continuing operations per share – diluted
$
(1.25
)
 
$
(1.23
)
 
$
(3.11
)
 
$
(2.53
)
 
$
(1.87
)
Weighted average shares outstanding:
 
 
 

 
 

 
 

 
 

Basic
9,347

 
9,232

 
9,235

 
8,836

 
8,691

Diluted
9,347

 
9,232

 
9,235

 
8,836

 
8,691

Consolidated Balance Sheets Information
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Cash and cash equivalents
$
7,690

 
$
10,364

 
$
7,072

 
$
11,684

 
$
37,725

Marketable securities
$

 
$

 
$
6,249

 
$
23,486

 
$
13,233

Current assets
$
15,205

 
$
20,646

 
$
28,629

 
$
52,752

 
$
71,774

Total assets
$
34,276

 
$
42,229

 
$
54,412

 
$
80,177

 
$
89,146

Current liabilities
$
16,672

 
$
15,431

 
$
19,113

 
$
19,377

 
$
23,028

Long-term liabilities
$
8,412

 
$
8,222

 
$
4,542

 
$
2,527

 
$
3,537

Stockholders’ equity
$
9,192

 
$
18,576

 
$
30,757

 
$
58,273

 
$
62,581

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.

20



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 in Item 1A 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 cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services.
For the years ended December 31, 2017, 2016 and 2015, the Company generated revenues of $28.2 million, $31.7 million and $34.5 million, respectively.
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 and 2015; there were no such financial impacts to the consolidated financial statements for the year ended December 31, 2017. No general corporate charges were allocated to the discontinued business. 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.
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

21



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.
Investment in Nonconsolidated Company
As of December 31, 2017 and 2016, the Company held an investment totaling $3.1 million in convertible preferred stock of BriefCam, Ltd. ("BriefCam") a privately-held Israeli company that develops video synopsis technology to augment security and surveillance systems to facilitate review of surveillance video. The investment is included in other non-current assets. Qumu's ownership interest is less than 20%. 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, 2017. 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 inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.

22



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.
Results of Operations
The percentage relationships to revenues of certain income and expense items for the years ended December 31, 2017, 2016 and 2015, 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)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
(11
)%
 
(8
)%
Cost of revenues
(36.4
)
 
(39.0
)
 
(50.8
)
 
(17
)
 
(29
)
Gross profit
63.6

 
61.0

 
49.2

 
(7
)
 
14

Operating expenses:
 

 
 

 
 

 
 
 
 
Research and development
25.9

 
27.0

 
31.0

 
(15
)
 
(20
)
Sales and marketing
35.6

 
36.4

 
52.2

 
(13
)
 
(36
)
General and administrative
30.4

 
30.7

 
49.0

 
(12
)
 
(42
)
Amortization of purchased intangibles
3.2

 
2.8

 
2.3

 
1

 
12

Total operating expenses
95.1

 
96.9

 
134.5

 
(13
)
 
(34
)
Operating loss
(31.5
)
 
(35.9
)
 
(85.3
)
 
(22
)
 
(61
)
Other expense, net
(11.4
)
 
(0.2
)
 
(0.4
)
 
4,765

 
(47
)
Loss before income taxes
(42.9
)
 
(36.1
)
 
(85.7
)
 
6

 
(61
)
Income tax benefit
(1.3
)
 
(0.8
)
 
(2.4
)
 
42

 
(70
)
Net loss from continuing operations
(41.6
)%
 
(35.3
)%
 
(83.3
)%
 
5
 %
 
(61
)%
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 cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services.
The table below describes Qumu's revenues by product category (in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Software licenses and appliances
$
5,982

 
$
5,839

 
$
9,456

 
$
143

 
$
(3,617
)
 
2
 %
 
(38
)%
Service
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription, maintenance and support
19,374

 
21,443

 
18,804

 
(2,069
)
 
2,639

 
(10
)
 
14

Professional services and other
2,811

 
4,400

 
6,194

 
(1,589
)
 
(1,794
)
 
(36
)
 
(29
)
Total service
22,185

 
25,843

 
24,998

 
(3,658
)
 
845

 
(14
)
 
3

Total revenues
$
28,167

 
$
31,682

 
$
34,454

 
$
(3,515
)
 
$
(2,772
)
 
(11
)%
 
(8
)%
The $3.5 million decrease in total revenues from 2016 to 2017 reflects a $3.7 million decrease in service revenues, partially offset by a $143,000 increase in software licenses and appliances revenues. The increase in software licenses and appliances revenues in 2017 was largely impacted by an increase in the value of perpetual product license contracts entered into in 2017

23



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 SaaS, which are included in service revenue, result in most of the revenue being recognized over the period of the contract. The $3.7 million decrease in service revenues from 2016 to 2017 resulted from a $2.1 million decrease in subscription, maintenance and support revenues driven primarily by approximately $800,000 of decreased recurring revenue resulting from the loss of a large customer in the fourth quarter of 2017 and the prior year inclusion of $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. The $1.6 million decrease in professional services revenues, which generally move directionally with changes in perpetual license sales, was driven by the timing of professional services related to perpetual product license contracts entered into in 2017 and the prior year 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 $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 $845,000 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. The 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.
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)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
$
3,575

 
$
3,365

 
$
6,507

 
$
210

 
$
(3,142
)
 
6
 %
 
(48
)%
Service
14,330

 
15,957

 
10,448

 
(1,627
)
 
5,509

 
(10
)
 
53

Total gross profit
$
17,905

 
$
19,322

 
$
16,955

 
$
(1,417
)
 
$
2,367

 
(7
)%
 
14
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
59.8
%
 
57.6
%
 
68.8
%
 
2.2
%
 
(11.2
)%
 
 
 
 
Service
64.6
%
 
61.7
%
 
41.8
%
 
2.9
%
 
19.9
 %
 
 
 
 
Total gross margin
63.6
%
 
61.0
%
 
49.2
%
 
2.6
%
 
11.8
 %
 
 
 
 
For the years ended December 31, 2017, 2016 and 2015, gross margins are inclusive of the impact of approximately $1.2 million, $1.3 million and $1.3 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 26, 28 and 43 service personnel at December 31, 2017, 2016 and 2015, respectively. Cost of revenues for 2017, 2016 and 2015 included severance expense of $9,000, $116,000 and $49,000, respectively, relating to cost reduction initiatives.
The 2.6% improvement in gross margin in 2017 compared to 2016 was primarily due to a 2.9% improvement in service gross margin primarily driven by improved economies of scale on increased revenue in software licenses and appliances and a reduction in headcount.
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, service margin for the full year 2016 benefited from the cost savings initiatives in the second half of

24



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 2016 service gross margin was an 11.2% decrease in software licenses and appliance gross margin due to the decrease in software licenses revenues.
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 2018 is 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)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
7,279

 
$
8,541

 
$
10,689

 
$
(1,262
)
 
$
(2,148
)
 
(15
)%
 
(20
)%
Sales and marketing
10,026

 
11,529

 
17,994

 
(1,503
)
 
(6,465
)
 
(13
)
 
(36
)
General and administrative
8,567

 
9,722

 
16,878

 
(1,155
)
 
(7,156
)
 
(12
)
 
(42
)
Amortization of purchased intangibles
904

 
891

 
798

 
13

 
93

 
1

 
12

Total operating expenses
$
26,776

 
$
30,683

 
$
46,359

 
$
(3,907
)
 
$
(15,676
)
 
(13
)%
 
(34
)%
With the exception of amortization of purchased intangibles, which are subject to variances primarily due to currency fluctuations, operating expenses for the year ended December 31, 2017 reflected the continued benefit of cost savings initiatives in the second half of 2015 through the end of 2017 across all functional expense categories. Operating expenses for 2017, 2016 and 2015 included severance expense of $256,000, $447,000 and $2.1 million, respectively, relating the cost reduction initiatives and executive transitions. Operating expenses for the year ended December 31, 2015 also included an equipment operating lease loss of $1.0 million and a loss relating to a third-party license agreement of $1.2 million.
Research and development
Research and development expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Compensation and employee-related
$
5,475

 
$
6,238

 
$
6,738

 
$
(763
)
 
$
(500
)
 
(12
)%
 
(7
)%
Overhead and other expenses
1,064

 
1,201

 
1,067

 
(137
)
 
134

 
(11
)
 
13

Outside services and consulting
473

 
685

 
2,349

 
(212
)
 
(1,664
)
 
(31
)
 
(71
)
Depreciation and amortization
133

 
210

 
273

 
(77
)
 
(63
)
 
(37
)
 
(23
)
Equity-based compensation
134

 
207

 
262

 
(73
)
 
(55
)
 
(35
)
 
(21
)
Total research and development expenses
$
7,279

 
$
8,541

 
$
10,689

 
$
(1,262
)
 
$
(2,148
)
 
(15
)%
 
(20
)%
Total research and development expenses for the years ended December 31, 2017, 2016 and 2015 represented 26%, 27% and 31% of revenues, respectively. The Company had 41, 61 and 57 research and development personnel at December 31, 2017, 2016 and 2015, respectively.
The decrease in expenses in 2017 and 2016, compared to the respective prior year periods, was driven primarily by less utilization of contractors and lower employee costs due to fewer U.S. research and development personnel. Research and development expenses for 2017, 2016 and 2015 included severance expense of $22,000, $13,000 and $136,000, respectively, relating cost reduction initiatives.

25



Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Compensation and employee-related
$
7,806

 
$
9,175

 
$
14,293

 
$
(1,369
)
 
$
(5,118
)
 
(15
)%
 
(36
)%
Overhead and other expenses
1,046

 
1,172

 
1,691

 
(126
)
 
(519
)
 
(11
)
 
(31
)
Outside services and consulting
935

 
844

 
1,521

 
91

 
(677
)
 
11

 
(45
)
Depreciation and amortization
58

 
128

 
130

 
(70
)
 
(2
)
 
(55
)
 
(2
)
Equity-based compensation
181

 
210

 
359

 
(29
)
 
(149
)
 
(14
)
 
(42
)
Total sales and marketing expenses
$
10,026

 
$
11,529

 
$
17,994

 
$
(1,503
)
 
$
(6,465
)
 
(13
)%
 
(36
)%
Total sales and marketing expenses for the years ended December 31, 2017, 2016 and 2015 represented 36%, 36% and 52% of revenues, respectively. The Company had 33, 37 and 61 sales and marketing personnel at December 31, 2017, 2016 and 2015, respectively.
The decrease in expenses in 2017 and 2016, compared to the respective prior year periods, was driven primarily by lower employee costs due to fewer sales and marketing personnel and, in 2016, less utilization of contractors. Sales and marketing expenses for 2017, 2016 and 2015 included severance expense of $234,000, $356,000 and $550,000, respectively, relating 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)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Compensation and employee-related
$
3,525

 
$
3,920

 
$
7,522

 
$
(395
)
 
$
(3,602
)
 
(10
)%
 
(48
)%
Overhead and other expenses
1,078

 
1,708

 
3,607

 
(630
)
 
(1,899
)
 
(37
)
 
(53
)
Outside services and consulting
2,404

 
2,383

 
4,146

 
21

 
(1,763
)
 
1

 
(43
)
Depreciation and amortization
724

 
756

 
549

 
(32
)
 
207

 
(4
)
 
38

Equity-based compensation
836

 
955

 
1,054

 
(119
)
 
(99
)
 
(12
)
 
(9
)
Total general and administrative expenses
$
8,567

 
$
9,722

 
$
16,878

 
$
(1,155
)
 
$
(7,156
)
 
(12
)%
 
(42
)%
Total general and administrative expenses for the years ended December 31, 2017, 2016 and 2015 represented 30%, 31% and 49% of revenues, respectively. The Company had 21, 24 and 31 general and administrative personnel at December 31, 2017, 2016 and 2015, respectively.
The decrease in expenses in 2017 and 2016, compared to the respective prior year periods, was driven primarily by lower employee costs due to fewer general and administrative personnel. Additionally, expenses incurred in 2015 that contributed to the decrease included an equipment operating lease loss of $1.0 million and a loss relating to a third-party license agreement of $1.2 million. 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. General and administrative expenses for 2016 and 2015 included severance expense of $78,000 and $1.4 million, respectively, relating cost reduction initiatives and executive transition initiatives; no significant severance expense was incurred in 2017.
Amortization of Purchased Intangibles
Operating expenses include $904,000, $891,000 and $798,000 in 2017, 2016 and 2015, 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 2018 are expected to include approximately $0.9 million of amortization expense associated with purchased intangibles, exclusive of the portion classified in cost of revenue.

26



Other Income (Expense), Net
Other income (expense), net was as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2017
 
2016
 
2015
 
2016 to 2017
 
2015 to 2016
 
2016 to 2017
 
2015 to 2016
Interest income (expense), net
$
(2,852
)
 
$
(287
)
 
$
7

 
$
(2,565
)
 
$
(294
)
 
894
 %
 
(4,200
)%
Change in fair value of warrant liability
74

 
137

 

 
(63
)
 
137

 
(46
)
 
n/m

Other, net
(433
)
 
84

 
(131
)
 
(517
)
 
215

 
(615
)
 
(164
)
Total other expense, net
$
(3,211
)
 
$
(66
)
 
$
(124
)
 
$
(3,145
)
 
$
58

 
4,765
 %
 
(47
)%
The Company recognized interest expense on its term loan and capital leases of $2.9 million and $287,000 in 2017 and 2016, respectively, and interest income on cash and marketable securities, net of interest expense on capital leases, of $7,000 in 2015. Interest expense for 2017 and 2016 includes the accrual of interest on the Company's term loan at prime plus 6%, as well as the amortization of deferred financing costs. During 2017, concurrent with the Company's modification its term loan credit agreement with Hale Capital Partners, LP, the Company commenced a plan to refinance the term loan, which it completed upon the closing of its $10.0 million credit agreement with ESW Holdings, Inc. on January 12, 2018. In connection with this refinancing plan, upon loan modification, the Company accelerated the amortization of deferred financing costs by recognizing the unamortized deferred financing costs over the expected remaining term of the Hale credit agreement. As a result of the loan modification, the Company had unamortized debt discount and debt issuance costs of $2.0 million on November 6, 2017, of which it recognized $1.6 million of interest expense for the amortization of deferred financing costs through December 31, 2017, resulting in unamortized debt discount and debt issuance costs of $395,000 as of December 31, 2017. The balance of unamortized deferred financing costs will be recognized in 2018 during the year-to-date period ending January 12, 2018, to coincide with the extinguishment of the term note under the Hale credit agreement
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, 2017. 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 years ended December 31, 2017 and 2016, the Company recorded a non-cash gain from the change in fair value of the warrant liability of $74,000 and $137,000, respectively. The decrease in fair value in 2017 was primarily driven by decreased volatility in the Company’s stock price and in 2016 was primarily driven by a decrease in the Company’s stock price, each of which had a corresponding impact to the valuation of the warrant liability. 
During 2017, the Company determined that one of its two office spaces in London, England was no longer needed and, in December 2017, ceased using the leased space, subsequently making it available for sublessee occupancy. Also in December 2017, the Company entered into a sublease agreement, having a term beginning January 1, 2018 and extending through September 2019, and received the first year’s sublease payment of $122,000. Accordingly, the Company recorded a liability at fair value of $194,000, which is reported in accrued liabilities as of December 31, 2017, for the future contractual lease payments, net of expected sublease receipts. The Company also recorded a loss related to the exit activity of $72,000, which is included in other income (expenses) for the year ended December 31, 2017.
Other income also included the net gains (losses) on foreign currency transactions of $(356,000), $162,000 and $(131,000) in 2017, 2016 and 2015, 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, 2017, 2016 and 2015, net income tax benefit amounted to $358,000, $252,000 and $839,000, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, significantly altering U.S. corporate income tax law. The Tax Act establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 34% to 21%, repeal of the corporate AMT system, limitations on the deductibility of interest expense and executive compensation, and changes to net operating loss carryforward rules. The Tax Act also includes various international provisions, including a one-time deemed mandatory repatriation of accumulated foreign earnings and a new tax referred to as Global Intangible Low-Tax Income (GILTI).

27



Income tax benefit in 2017 is primarily attributable to the Tax Act and to UK operations, which include refundable research credits. The Company recorded a provision tax benefit of $172,000 for the impact of the Tax Act. The tax benefit primarily relates to the future cash refund of excess AMT credits due to the repeal of the corporate AMT system. AMT credits previously had a full valuation allowance recorded, however a benefit was recorded as the AMT credits are now expected to be realized. For further discussion of the Tax Act and its impact on the Company's consolidated financial statements, see Note 9–"Income Taxes" of the accompanying consolidated financial statements.
Income tax benefit in 2016 and 2015 is primarily attributable to UK operations, which include refundable research credits.
Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Company's liquidity and capital resources (in thousands):
 
December 31,
 
2017
 
2016
Cash and cash equivalents
$
7,690

 
$
10,364

Working capital
$
(1,467
)
 
$
5,215

Financing obligations
$
1,050

 
$
678

Term loan
7,605

 
6,617

Financing obligations and term loan
$
8,655

 
$
7,295

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 first quarter of 2018, as well as any cash flows that may be generated from current operations. Based on expected revenue performance and continued management of expenses to scale with revenue, the Company expects that it will be cash flow breakeven for the fourth quarter of 2018. If the Company is unable to meet its revenue 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, 2017, the Company had aggregate negative working capital of $1.5 million, down $6.7 million from positive working capital of $5.2 million at December 31, 2016. 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, 2017 of $5.6 million, debt issuance costs of $225,000 and principal payments on capital lease obligations of $505,000.
Financing obligations consist of capital leases related to the acquisition of computer and network equipment and furniture and other financing obligations. The term loan consisted of a three-year note having a face value of $8.0 million, which was paid in full upon the execution of a $10.0 million credit agreement with ESW Holdings, Inc. on January 12, 2018. The Company used $8.8 million of the $10.0 million term loan proceeds provided through the credit agreement with ESW, Holdings, Inc. to pay all outstanding obligations under the term loan credit agreement dated as of October 21, 2016 among the Company, Qumu, Inc., HCP-FVD, LLC, as lender and Hale Capital Partners, LP, as administrative agent. Concurrently with such repayment, the October 21, 2016 term loan credit agreement terminated by its terms effective January 12, 2018.
Apart from proceeds from term loans received in the fourth quarter of 2016 and the first quarter of 2018, the Company's primary source of cash from operating activities has been cash collections from sales of products and services to customers. The Company expects cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. The Company's primary use of cash for operating activities has been for personnel costs and outside service providers, payment of royalties associated with third-party software licenses and purchases of equipment to fulfill customer orders. The Company expects cash flows from operating activities to be affected by fluctuations in revenues, personnel costs, outside service providers, and the amount and timing of royalty payments and equipment purchases as the Company continues to support the growth of the business. The amount of cash and cash equivalents held by the Company's international subsidiaries that is not available to fund domestic operations unless repatriated was $894,000 as of December 31, 2017. The repatriation of cash and cash equivalents held by the Company's international subsidiaries would not result in an adverse tax impact on cash given that the future tax consequences of repatriation are expected to be insignificant as a result of the Tax Act.
Summary of Credit Agreement and Warrant
On January 12, 2018, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into a term loan credit agreement (the “ESW Credit Agreement”) with ESW Holdings, Inc. as lender and administrative agent (the “Administrative Agent”) pursuant to which the Company borrowed $10.0 million in the form of a term loan.
The term loan is scheduled to mature on January 10, 2020. Interest will accrue and compound monthly at a variable rate per annum equal to the prime rate plus 4%. The Company may prepay the term loan at any time with the payment of a pre-payment

28



fee of 10% of the amount prepaid. 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, issuances of equity or debt securities, extraordinary transactions and upon a change of control. Notwithstanding the foregoing, the disposition of the Company’s interest in BriefCam, Ltd. would not trigger a mandatory pre-payment, and the pre-payment fee would not attach to a voluntary pre-payment from proceeds of a disposition of BriefCam, Ltd.
The ESW 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 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 ESW Credit Agreement also require the Company to meet financial covenants beginning with the quarter ended September 30, 2018 relating to minimum core bookings, maximum deferred revenue non-current, minimum subscription, and maintenance and support revenue and minimum subscription and maintenance and support dollar renewal rates.
Upon certain events of default relating to bankruptcy or insolvency, the obligations under the ESW Credit Agreement will become immediately due and payable. Upon other events of default – including relating to non-payment of the term loan obligations, non-payment of other debt, default of other material obligations, non-compliance with loan documents, 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 and cessation of business – the Administrative Agent may declare all or any part of the obligations under the ESW Credit Agreement to be due and payable.
Pursuant to a Guaranty and Collateral Agreement dated January 12, 2018 in favor of the Administrative Agent, the Company granted a first priority security interest in substantially all of its properties, rights and assets (including equity interests of the Company’s subsidiaries) and Qumu, Inc. provided a full and unconditional guaranty of the Company’s obligations under the ESW Credit Agreement.
In connection with the ESW Credit Agreement, on January 12, 2018, the Company issued to ESW Holdings, Inc. a warrant to purchase 925,000 shares of the Company's common stock. On February 28, 2018, the Company agreed with ESW to amend and restate the warrant to add a limitation on the number of shares issuable upon exercise of the warrant due to anti-dilution adjustments. That amended and restated warrant is summarized below.
The warrant has an exercise price of $1.96 per share (subject to anti-dilution adjustments), an expiration date of January 12, 2028, and is transferable. Simultaneously with any adjustment to the exercise price described as a result of anti-dilution adjustments, the number of shares of the Company's common stock that may be purchased upon exercise of the warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable under the warrant for the increased or decreased number of warrant shares shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. However, in the case of an adjustment to the exercise price due to a “Dilutive Issuance” (as defined in the warrant), the number of warrant shares shall not be increased in excess of 1,878,049 (subject to adjustment as provided in the warrant for other adjustments not relating to Dilutive Issuances).
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 the Company to purchase the warrant from the holder thereof for a cash amount equal to the greater of the Original Issuance Value ($1,936,535) 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 will file and cause to be effective a registration statement to register the resale of the shares of common stock underlying the warrant.

29



Summary of Cash Flows. A summary of cash flows is as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Cash flows from (used in):
 

 
 

 
 

Operating activities
$
(2,012
)
 
$
(9,484
)
 
$
(23,227
)
Investing activities
(24
)
 
6,174

 
18,923

Financing activities
(747
)
 
6,956

 
(228
)
Effect of exchange rate changes on cash
109

 
(354
)
 
(80
)
Net change in cash and cash equivalents
$
(2,674
)
 
$
3,292

 
$
(4,612
)
Net change in marketable securities and restricted cash
$

 
$
(6,249
)
 
$
(19,537
)
Operating activities
Net cash used in operating activities was $2.0 million for 2017 compared to $9.5 million for 2016.
The change in operating cash flows for the 2017 period as compared to the 2016 period was due to the reduction the Company's operating loss and the favorable impacts of changes in accounts payable and other accrued liabilities, deferred revenue, prepaid expenses and other current assets, and accrued compensation.
Investing activities
Net cash used by investing activities totaled, in the aggregate, $24,000 for 2017 compared to net cash provided of $6.2 million in 2016. Primarily driving the use of cash in 2017 were purchases of property and equipment. The $6.2 million cash provided by investing activities in 2016 resulted from maturities of marketable securities of $6.3 million, net of related purchases, partially offset by purchases of property and equipment of $76,000.
Financing activities
Financing activities used net cash of $747,000 during 2017, primarily consisting of cash used for payments on financing obligations of $505,000 and payments for fees to amend the Company's credit agreement with Hale Capital Partners, LP of $225,000. Financing activities provided $7.0 million of cash in the comparable period in 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.
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, 2017, 2016 and 2015. As of December 31, 2017, 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 ESW 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, 2017, 2016 and 2015. Under the ESW Credit Agreement, the Company is prohibited from declaring or paying any dividends.

30



Contractual Obligations. The following table summarizes the Company's contractual cash obligations at December 31, 2017, 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
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Term loan(1)
$
2,727

 
$
5,273

 
$

 
$

 
$

 
$

 
$
8,000

Pre-payment penalty on term loan(2)
273

 

 

 

 

 

 
273

Operating leases
889

 
538

 
298

 
300

 
306

 
26

 
2,357

Capital leases and other financing obligations (3)
255

 
3

 

 

 

 

 
258

Purchase obligations(4)
455

 
35

 

 

 

 

 
490

Income tax liabilities under ASC 740 (5)

 

 

 

 

 

 

Total contractual cash obligations
$
4,599

 
$
5,849

 
$
298

 
$
300

 
$
306

 
$
26

 
$
11,378

_________________________________________________
(1) 
Amounts include principal payments as set forth in Amendment No. 2 to the Company's credit agreement with Hale Capital Partners, LP ("Amendment No. 2").
(2) 
Amount for 2018 consists of a pre-payment penalty contractually required under the payment schedule set forth in Amendment No. 2.
(3) 
Amounts include principal and interest.
(4) 
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.
(5) 
The Company does not currently expect any income tax liabilities accrued under ASC 740 as of December 31, 2017 to be paid to the applicable tax authorities in 2018. The full balance of unrecognized tax benefits under ASC 740 of $1.1 million at December 31, 2017, 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. The FASB has issued numerous amendments to ASU 2014-09 from August 2015 through January 2018, which provide supplemental and clarifying guidance, as well as amend the effective date of the new standard. The new standard is effective for the Company on January 1, 2018.
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 utilizing the modified retrospective (cumulative effect) method. Such method provides that the cumulative effect from prior periods upon applying the new guidance is recognized in the Company's consolidated balance sheets as of the date of adoption, including an adjustment to retained earnings. Prior periods will not be retrospectively adjusted. 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.
At the date of adoption of this new guidance, the Company expects to record a cumulative adjustment to the Company's consolidated balance sheet, including an adjustment to retained earnings, to adjust for the aggregate impact of these revenue items, as calculated under the new guidance. The Company currently estimates the amount of such adjustment to retained earnings to be approximately $1.1 million, or 4% of its annual 2017 revenues. Such estimate is preliminary and subject to change as the Company finalizes its implementation process.

31



The adoption of the standard required the implementation of enhanced accounting systems and processes, including an advanced revenue module to the Company's ERP system to assist in maintaining multi-books (i.e., ASC 606 and ASC 605) to aid in monitoring and reporting on the cumulative impact of the adoption on a going forward basis. This implementation will impact the Company's internal controls over revenue recognition and financial reporting. The Company has implemented revised controls in anticipation adopting the new standard January 1, 2018.
The Company's analysis and evaluation of the new standard will continue through the filing of its first quarter 2018 consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Translation. As of December 31, 2017, 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. Upon execution of the ESW Credit Agreement on January 12, 2018, the Company is required to accrue interest, compounding monthly, at a variable rate per annum equal to the prime rate plus 4%, due at maturity on January 10, 2020. Changes in interest rates would impact the Company's cash reserves upon payment of accrued interest. A 100-basis point increase in the prime rate would increase the Company's annual pre-tax interest expense by approximately $100,000.

32



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
 
Page in Annual
Report on Form 10-K
For Year Ended
December 31, 2017

33



Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Qumu Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Qumu Corporation and subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 1989.
Minneapolis, Minnesota
March 23, 2018


34



QUMU CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
 
December 31,
 
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,690

 
$
10,364

Receivables, net
5,529

 
7,495

Income tax receivable
156

 
317

Prepaid expenses and other current assets
1,830

 
2,470

Total current assets
15,205

 
20,646

Property and equipment, net
911

 
1,827

Intangible assets, net
6,295

 
8,110

Goodwill
7,390

 
6,749

Deferred income taxes, non-current
77

 
70

Other assets, non-current
4,398

 
4,827

Total assets
$
34,276

 
$
42,229

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and other accrued liabilities
$
3,878

 
$
2,394

Accrued compensation
1,824

 
2,361

Deferred revenue
8,923

 
8,992

Deferred rent
181

 
283

Financing obligations
1,047

 
508

Warrant liability
819


893

Total current liabilities
16,672

 
15,431

Long-term liabilities:
 

 
 

Deferred revenue, non-current
141

 
423

Income taxes payable, non-current
3

 
6

Deferred tax liability, non-current
153

 
294

Deferred rent, non-current
507

 
712

Financing obligations, non-current
3

 
170

Term loan, non-current
7,605

 
6,617

Total long-term liabilities
8,412

 
8,222

Total liabilities
25,084

 
23,653

Commitments and contingencies (Note 4)
 
 
 
Stockholders’ equity:
 

 
 

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

 

Common stock, $0.01 par value, authorized 29,750,000 shares, issued and outstanding 9,364,804 and 9,227,247, respectively
94

 
92

Additional paid-in capital
68,035

 
66,864

Accumulated deficit
(56,197
)
 
(44,473
)
Accumulated other comprehensive loss
(2,740
)
 
(3,907
)
Total stockholders’ equity
9,192

 
18,576

Total liabilities and stockholders’ equity
$
34,276

 
$
42,229

See accompanying notes to consolidated financial statements.

35



QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenues:
 

 
 

 
 

Software licenses and appliances
$
5,982

 
$
5,839

 
$
9,456

Service
22,185

 
25,843

 
24,998

Total revenues
28,167

 
31,682

 
34,454

Cost of revenues:
 

 
 

 
 

Software licenses and appliances
2,407

 
2,474

 
2,949

Service
7,855

 
9,886

 
14,550

Total cost of revenues
10,262

 
12,360

 
17,499

Gross profit
17,905

 
19,322

 
16,955

Operating expenses:
 

 
 

 
 

Research and development
7,279

 
8,541

 
10,689

Sales and marketing
10,026

 
11,529

 
17,994

General and administrative
8,567

 
9,722

 
16,878

Amortization of purchased intangibles
904

 
891

 
798

Total operating expenses
26,776

 
30,683

 
46,359

Operating loss
(8,871
)
 
(11,361
)
 
(29,404
)
Other income (expense):
 

 
 

 
 

Interest income (expense), net
(2,852
)
 
(287
)
 
7

Change in fair value of warrant liability
74

 
137

 

Other, net
(433
)
 
84

 
(131
)
Total other expense, net
(3,211
)
 
(66
)
 
(124
)
Loss before income taxes
(12,082
)
 
(11,427
)
 
(29,528
)
Income tax benefit
(358
)
 
(252
)
 
(839
)
Net loss from continuing operations
(11,724
)
 
(11,175
)
 
(28,689
)
Net loss from discontinued operations, net of tax

 

 
(10
)
Net loss
$
(11,724
)
 
$
(11,175
)
 
$
(28,699
)
Net loss per share – basic:
 
 
 
 
 
Net loss from continuing operations per share – basic
$
(1.25
)
 
$
(1.21
)
 
$
(3.11
)
Net loss from discontinued operations per share – basic
$

 
$

 
$

Net loss per share – basic
$
(1.25
)
 
$
(1.21
)
 
$
(3.11
)
Weighted average shares outstanding – basic
9,347

 
9,232

 
9,235

Net loss per share – diluted:
 
 
 
 
 
Net loss from continuing operations per share – diluted
$
(1.25
)
 
$
(1.23
)
 
$
(3.11
)
Net loss from discontinued operations per share – diluted
$

 
$

 
$

Net loss per share – diluted
$
(1.25
)
 
$
(1.23
)
 
$
(3.11
)
Weighted average shares outstanding – diluted
9,347

 
9,232

 
9,235

See accompanying notes to consolidated financial statements.


36



QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Net loss
$
(11,724
)
 
$
(11,175
)
 
$
(28,699
)
Other comprehensive income (loss):
 
 
 
 
 
Net change in foreign currency translation adjustments
1,167

 
(2,387
)
 
(749
)
Change in net unrealized loss on marketable securities, net of tax

 
1

 
13

Total other comprehensive income (loss)
1,167

 
(2,386
)
 
(736
)
Total comprehensive loss
$
(10,557
)
 
$
(13,561
)
 
$
(29,435
)

See accompanying notes to consolidated financial statements.



37



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, 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
)
 

 

 

Stock issued in stock option exercise
20

 

 
142

 

 

 
142

Redemption of stock to cover tax withholding for employee stock plans
(6
)
 

 
(50
)
 

 

 
(50
)
Net tax reductions relating to exercise and expiration of stock options

 

 
(7
)
 

 

 
(7
)
Stock-based compensation

 

 
1,834

 

 

 
1,834

Balance at December 31, 2015
9,189

 
$
92

 
$
65,484

 
$
(33,298
)
 
$
(1,521
)
 
$
30,757

Net loss

 

 

 
(11,175
)
 

 
(11,175
)
Other comprehensive loss, net of taxes

 

 

 

 
(2,386
)
 
(2,386
)
Issuance of restricted stock
45