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, 2019
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:
Title of each class
 
Trading
Symbol
 
Name of each exchange on which registered
Common stock, par value $0.01
 
QUMU
 
The NASDAQ Stock Market LLC
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 every Interactive Data File required to be submitted 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 such files).  Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
Large Accelerated Filer o Accelerated Filer o
Non-Accelerated Filer x Smaller Reporting Company x Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
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 $33,451,000.
As of March 2, 2020, the registrant had 13,555,588 outstanding shares of common stock.
 

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General Information
PART I
Cautionary Note Regarding Forward-Looking Statements
We make statements from time to time regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements. Forward-looking statements may appear in documents, reports, filings with the Securities and Exchange Commission (SEC), news releases, written or oral presentations made by our authorized officers or other representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results expressed in or implied by forward-looking statements, involve a number of risks and uncertainties. Forward-looking statements are not guarantees of future actions, outcomes, results or performance. Any forward-looking statement made by us or on our behalf speaks only as of the date on which such statement is made. We do not undertake any obligation to update or keep current any forward-looking statement to reflect events or circumstances arising after the date of such statement.
In addition to the factors identified or described by us from time to time in filings with the SEC, there are many important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or the results expressed in or implied by any forward-looking statements. These important factors are described below under Item 1A. Risk Factors.
ITEM 1. BUSINESS
Overview
Qumu Corporation ("Qumu" or the "Company") provides the software solutions to create, manage, secure, distribute and measure the success of live and on-demand video for enterprises. The Qumu 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 platform for a variety of cloud, on-premise and hybrid deployments. Use cases including self-service webcasting, sales enablement, internal communications, product training, regulatory compliance and customer engagement. The Company and its channel partners market Qumu's products to customers primarily in North America, Europe and Asia.
The Company generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services. Sales can range from a single year agreement for thousands of dollars to a multi-year agreement for over a million dollars.
The table below describes Qumu's revenues by category (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Software licenses and appliances
$
4,903

 
$
5,814

 
$
5,982

 
$
(911
)
 
$
(168
)
 
(16
)%
 
(3
)%
Service
20,459

 
19,199

 
22,185

 
1,260

 
(2,986
)
 
7
 %
 
(13
)%
Total revenues
$
25,362

 
$
25,013

 
$
28,167

 
$
349

 
$
(3,154
)
 
1
 %
 
(11
)%
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.

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In October 2011, the Company acquired Qumu, Inc., a leader in the enterprise video content management software market and changed its name to Qumu Corporation in September 2013. Qumu completed the transition to an enterprise video content management software company in July 2014, when the Company closed on the sale of its disc publishing assets to Equus Holdings, Inc. and Redwood Acquisition, Inc.
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.
On February 11, 2020, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) for a proposed “merger of equals” transaction with Synacor, Inc. (“Synacor”), and Quantum Merger Sub I, Inc., a direct, wholly owned subsidiary of Synacor (“Merger Sub”). Pursuant to the Merger Agreement, and subject to the conditions in the Merger Agreement, Merger Sub will merge with and into Qumu (the “Merger”), with Qumu surviving the Merger as a wholly owned subsidiary of Synacor. At the effective time of the Merger, by virtue of the Merger and without any action on the part of Synacor, Qumu, Merger Sub or any holder of any of the securities of Synacor, Qumu or Merger Sub, each share of common stock of Qumu issued and outstanding immediately prior to the effective time (other than the shares that are owned by Qumu, Synacor or Merger Sub) will be converted into the right to receive 1.61 newly issued shares of common stock of Synacor.
The consummation of the Merger is subject to customary closing conditions, including, among others, the approval of the Merger Agreement by Qumu shareholders and the approval of the issuance of shares of Synacor common stock pursuant to the Merger Agreement by Synacor stockholders. The parties expect the Merger will be completed in mid-2020.
The foregoing description of the Merger and Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 to our Current Report on Form 8-K, filed with the SEC on February 11, 2020. In addition, see Part I – Item 1A – Risk Factors – Risks Relating to the Merger and Note 14 – Subsequent Event of this Form 10-K for further details on the Merger.
Enterprise Video Content Management and Delivery Software
To increase communication, engagement and collaboration between employees and stakeholders, organizations are continuing to focus on technology investments that improve the engagement and connectivity of people across offices, conference rooms, computers, tablets and smart phones. As part of this shift in technology investment, enterprises are quickly moving to video as the primary communication and collaboration medium. We integrate with and extend the reach of video conferencing solutions such as Zoom, WebEx and Skype for Business and support distributing video via collaboration tools such as Slack and Social Chorus.
Qumu is the leading provider of best-in-class tools to create, manage, secure, distribute and measure the success of live and on-demand video for the enterprise. As a trusted adviser to clients and partners, Qumu is the innovation leader when scalability, reliability and security are critical. Backed by the most talented and experienced team in the industry, the Qumu 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 platform for a variety of cloud, on-premise or hybrid deployments. Use cases include executive webcasting, corporate communications, training and onboarding, employee collaboration, external sales, marketing communications, iPTV and digital signage.
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
The Qumu Enterprise Video Platform
Qumu offers an end-to-end video creation, management and delivery solution for enterprises. The solution can be purchased as a perpetual software license or software as a service (SaaS) for cloud or hybrid deployments. The Qumu platform offers a scalable and extensible platform that organizations can use to improve stakeholders' engagement both internally and externally.
Qumu’s implementations can range in size from thousands to millions of dollars. The Qumu platform integrates with customers' existing video services (e.g., video conferencing systems), business applications (e.g., Zoom, Skype, WebEx, Outlook, Slack) and broader information technology (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

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corporate employees. Qumu’s 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.
The Qumu platform offers a flexible deployment model that can be leveraged by organizations in three different ways:
Outside of the firewall as a cloud-based solution
As a hybrid solution, providing the flexibility of cloud, combined with Qumu’s intelligent delivery technology
Inside the firewall as an on-premise enterprise-grade solution
The Qumu platform encompasses four distinct elements, each of which is detailed further below:
Video Capture
Video Content Management
Intelligent Delivery
Extensions and Add-Ons
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, Zoom 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 live and on-demand corporate 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 the platform’s notable functionality includes:
Creation & Editing
The Qumu platform 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.
Closed Captioning
The Qumu platform allows enterprises to extend the reach and engagement of both live and on-demand corporate video assets, via an integration with a service called CaptionHub. Using AI-based transcription and translation technology, CaptionHub adds frame-accurate captions to Qumu enterprise video in real time—and at broadcast quality—in over 50 languages.
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
The Qumu platform 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
The Qumu platform 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.
Qumu’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
The Qumu platform is designed to be customizable, enhancing the customer’s enterprise communication and collaboration solution. With its service-based extensible architecture, Qumu's technology can be built upon by third-party developers. Current integrations and extensions from Qumu and its partners include Microsoft Office 365, Zoom, SharePoint, Skype for Business, Social Chorus, Yammer, IPTV, Jive, IBM Connections, Polycom, Pexip and Citrix.
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. The Qumu platform offers robust REST APIs for both user and administrative functions, allowing customers to develop integrations of their own on top of the Qumu platform. At the present time, Qumu has available extensions and add-ons for live captioning, speech search, advanced analytics, content syndication, WebRTC and several other functions.
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, with the six primary markets being 1) Banking, Finance and Insurance, 2) Manufacturing, 3) Services and Consulting, 4) Telecom and Technology, 5) Biotech and Health Care and 6) Government. 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 small organizations. Across all deployment types (cloud, on-premise and hybrid) and in all six markets, 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 appliances, software-enabled devices, SaaS and managed services.
Qumu has been identified as a leader by multiple industry analysts:
Gartner named Qumu a leader in the most recent Magic Quadrant for Enterprise Video Content Management.
Aragon Research named Qumu a leader in the most recent Globe Report for Enterprise Video Content Management, as well as a new contender in the most recent Globe Report for Web and Video Conferencing.
Frost & Sullivan named Qumu as the industry leader by honoring the company with the Competitive Strategy Innovation and Leadership Award over 20 total firms it covers in the Enterprise Video space.
Wainhouse Research has positioned Qumu as a leader in the Enterprise Streaming Market on multiple occasions.
As indicated by these honors, Qumu is among the leading enterprise video platform vendors in the space.

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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 35%, 33% and 27% of revenues for the years ended December 31, 2019, 2018 and 2017, respectively. During the year ended December 31, 2017, the Company had one customer that accounted for more than 10% of its revenues; no single customer accounted for more than 10% of the Company's revenues for the years ended December 31, 2019 and 2018.
Competition
Major competitors of Qumu include Kaltura, Brightcove, MediaPlatform, Vbrick and Panopto. Qumu competes with these other companies based primarily upon its full-stack, end-to-end solution for a complete video infrastructure that includes support for mobile devices and leverages existing IT infrastructure. Qumu occasionally encounters organizations utilizing Zoom and Microsoft’s Skype and Stream technologies for video. While some view Zoom and Microsoft as competitors to Qumu and some customers view their products as a complete alternative to Qumu’s technology, we believe that the Zoom, Microsoft and Qumu technologies can be seamlessly integrated and provide the customer with greater flexibility and improved manageability than use of their technologies alone. 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.
Qumu also differentiates itself from competitors through its agnostic video delivery technology, as well as its flexible deployment models—on-premise, cloud and hybrid—which Qumu customers can choose from and customize based on their own unique organizational needs for video.
Research and Development
Qumu develops its software internally and licenses or purchases software from third parties. Research and development expense was $7.4 million, $7.0 million and $7.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019, the Company employed 36 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 four U.S. patents. 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 the software using those programs. Contractual obligations with respect to such licenses will require cash payments of $400,000 in 2020.
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," "Enterprise Video as a Service (EVaaS)", "VideoNet Edge," "Pathfinder" and "How Business Does Video." 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.

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Employees
As of December 31, 2019, the Company had 105 employees, all of which were full-time employees and of which 36 were involved in research and development, 32 in sales and marketing, 19 in service and support and 18 in administration and management. None of Qumu's employees are represented by a labor union or covered by a collective bargaining agreement.
Available Information
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, like Qumu, that file electronically with the SEC. The SEC’s website is www.sec.gov.
Qumu also maintains a website at www.qumu.com. Qumu's 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 Exchange Act are available on Qumu's website as soon as reasonably practicable after these documents are filed electronically 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" to view all of Qumu's current EDGAR reports.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our business, results of operations, and financial condition 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 future revenue, product mix, cash flow and cash balances, 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.
RISKS RELATING TO THE MERGER
Our shareholders will receive a fixed ratio of 1.61 shares of Synacor common stock for each share of Qumu common stock regardless of any changes in market value of Qumu common stock or Synacor common stock before the completion of the merger.
At the effective time of the merger, each share of Qumu common stock will be converted into the right to receive 1.61 shares of Synacor common stock. There will be no adjustment to the exchange ratio (except for adjustments to reflect the effect of any stock split, reverse stock split, stock dividend, reorganization, recapitalization, reclassification or other like change with respect to Synacor common stock or Qumu common stock), and the parties do not have a right to terminate the merger agreement based upon changes in the market price of either Synacor common stock or Qumu common stock. The respective market value of Qumu’s and Synacor’s common stock since the announcement of the merger has fluctuated and may continue to fluctuate as a result of a variety of factors, including general market and economic conditions and changes in Qumu’s or Synacor’s businesses, operations and prospects. Many of these factors are outside the control of Qumu and Synacor.
The market value of Synacor common stock at the time of completion of the merger may be lower or higher than the closing price of Synacor common stock on the last full trading day preceding the public announcement of the proposed merger on February 11, 2020 (the date that Qumu and Synacor entered into the merger agreement), the last full trading day prior to the date that the joint proxy statement/prospectus is filed with the SEC, or the last full trading day prior to the date of Qumu’s and Synacor’s shareholder meetings. Moreover, completion of the merger may occur some time after the requisite shareholder approvals have been obtained. Consequently, at the time Qumu shareholders must decide whether to approve the merger agreement, they will not know the market price of the Synacor common stock they will receive and the market price of the Qumu common stock they will surrender when the merger is actually consummated. The value of the Synacor common stock received by Qumu shareholders will depend on the market price of the Synacor common stock at that time the merger occurs, and the value of the Qumu common stock surrendered by Qumu shareholders will depend on the market price of the Qumu common stock at that time.

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Whether or not the merger is completed, the announcement and pendency of the merger could impact or cause disruptions in the businesses of Qumu and Synacor, which could have an adverse effect on the businesses and operating results of Qumu and Synacor.
Whether or not the merger is completed, the announcement and pendency of the merger could cause disruptions in or otherwise negatively impact the businesses and operating results of Qumu and Synacor, including among others:
Qumu and Synacor employees may experience uncertainty about their future roles with the combined company, which might adversely affect Qumu’s and Synacor’s ability to retain and hire key personnel and other employees;
the attention of Qumu’s and Synacor’s management may be directed toward completion of the merger and transaction-related considerations and may be diverted from the day-to-day operations and pursuit of other opportunities that could have been beneficial to the businesses of Qumu and Synacor; and
customers, channel partners, vendors or suppliers may seek to modify or terminate their business relationships with Qumu or Synacor, or delay or defer decisions concerning Qumu’s or Synacor’s products or services or seek alternatives to the products or services offered by Qumu or Synacor.
These disruptions could be exacerbated by a delay in the completion of the merger or termination of the merger agreement and could have an adverse effect on the businesses, operating results or prospects of Qumu and Synacor if the merger is not completed or the business, operating results or prospects of the combined company if the merger is completed.
Customer uncertainties related to the merger could adversely affect Qumu’s business, operating results and prospects.
In response to the announcement of the merger or due to ongoing uncertainty about the merger, customers of Qumu may delay or defer purchasing decisions or elect to switch to other providers of enterprise video content management software solutions or develop internal capabilities for video communications within their enterprise. In particular, prospective customers could be reluctant to purchase the products and services of Qumu due to uncertainty about the direction of the combined company’s product offerings and willingness to support existing Qumu products. To the extent that the proposed merger creates uncertainty among customers or prospective customers such that they delay, defer or change purchases in response to the proposed merger, Qumu’s revenues would be adversely affected. Qumu may make customer assurances to address their uncertainty about the direction of the combined company’s product and support for Qumu products, which may result in additional obligations of Qumu or the combined company. As a result of any of these actions, Qumu revenues and other operating results or the operating results of the combined company could be substantially below expectations of market analysts and a decline in Qumu’s, Synacor’s or the combined company’s stock prices could result.
Certain directors and executive officers of Qumu have interests in the merger that may be different from, or in addition to, the interests of Qumu shareholders.
Executive officers of Qumu negotiated the terms of the merger agreement under the direction of our board of directors. Our board of directors unanimously approved the merger agreement and the transactions contemplated thereby and unanimously recommended that Qumu shareholders vote in favor of the merger agreement. These directors and executive officers may have interests in the merger that are different from, or in addition to, or may be deemed to conflict with, the interests of Qumu shareholders. These interests include the continued employment of certain executive officers of Qumu by Synacor, the continued positions of certain directors of Qumu as directors of the combined company and the indemnification of former Qumu directors and officers by the combined company. With respect to our directors and executive officers, these interests also include the treatment in the merger of change of control, severance and retention agreements, stock options, restricted stock units, and restricted stock held by these directors and executive officers, including the right to vesting acceleration upon or following a change of control under various equity awards and agreements. Our shareholders should be aware of these interests when they consider the recommendation of our board of directors that they vote in favor of the merger agreement.
Provisions of the merger agreement may deter alternative business combinations and could negatively impact Qumu's stock price if the merger agreement is terminated in certain circumstances.
In connection with the execution and delivery of the merger agreement, each of Qumu and Synacor agreed to immediately cease all existing activities, discussions or negotiations with any persons previously conducted with respect to certain acquisition proposals and acquisition transactions relating to Qumu and Synacor. The merger agreement prohibits each of Qumu and Synacor from soliciting, initiating, or knowingly encouraging or facilitating certain acquisition proposals with any third party, subject to exceptions set forth in the merger agreement. The merger agreement allows neither Qumu nor Synacor to terminate the merger agreement solely due to the receipt of an alternative acquisition proposal. The merger agreement also

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provides for the payment by Synacor of a termination fee of $2.0 million if the merger agreement is terminated in certain circumstances (relating to, among other things, certain breaches of Synacor’s no-shop obligations, failure by the Synacor board of directors to recommend the merger, and failure by Synacor to bring the merger before a vote to its stockholders) in connection with a competing third party acquisition proposal for Synacor and for the payment by Qumu of a termination fee of $2.0 million if the merger agreement is terminated in certain circumstances (relating to, among other things, certain breaches of Qumu’s no-shop obligations, failure by the Qumu board to recommend the merger, and failure by Qumu to bring the merger before a vote to its shareholders) in connection with a competing third party acquisition proposal for Qumu. These provisions limit our ability to pursue offers from third parties that could result in greater value to Qumu shareholders. The obligation to pay the termination fee also may discourage a third party from pursuing an acquisition proposal. If the merger agreement is terminated and we determine to seek another business combination, we cannot assure our shareholders that we will be able to negotiate a transaction with another acquiror on terms comparable to the terms of the merger, or that we will avoid the termination fee associated with the termination of the merger agreement. Additionally, in the event the merger agreement is terminated by either Synacor or Qumu, our stock price may decline, even if we are not required to pay the termination fee.
We are subject to business uncertainties and contractual restrictions while the proposed transactions are pending, which could adversely affect our business and operations.
Under the terms of the merger agreement, we are subject to certain restrictions on the conduct of our business prior to the completion of the merger, which may adversely affect our ability to execute certain of our business strategies, including the ability in certain cases to enter into contracts, incur indebtedness or incur capital expenditures, or otherwise pursue actions that are not in the ordinary course of business, even if such actions would be beneficial to Qumu. Synacor is subject to comparable restrictions on the conduct of its business prior to the completion of the merger. Such limitations could negatively affect each party’s respective business, operating results and financial condition prior to the completion of the merger.
If the proposed merger is not completed, we will have incurred substantial costs that may adversely affect our financial results and operations and the market price of Qumu common stock.
We have incurred and will incur substantial costs in connection with the proposed merger, even if the merger is not completed. These costs are primarily associated with the fees of our attorneys, accountants, transaction advisors, and financial advisors. Also, if the merger agreement is terminated under specified circumstances, we may be required to pay a termination fee to Synacor of $2.0 million. In the event that the proposed merger is not completed, these merger related costs may adversely affect our business, operating results and financial condition, as well as the price of Qumu common stock.
RISKS RELATING TO OUR BUSINESS
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 adoption 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 adoption. 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.

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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.
If we are unable to attract new customers, retain existing customers and sell additional products and services to our existing and new customers, our revenue growth and profitability will be adversely affected.
To increase our revenues and achieve profitability, we must regularly add new customers, retain our existing customers, ensure high rates of renewals among our existing customers, sell additional products and services to new and existing customers, or convert existing customers to our latest SaaS solution.
We intend to grow our business by developing and improving our product offerings, ensuring high levels of customer satisfaction, competing effectively with products and services offered by others, retaining and attracting talent, developing relationships with channel partners and increasing our marketing activities.
If we fail to add new customers or lose existing customers, or if our existing customers do not renew their subscriptions at the same levels or do not increase their purchases of products and services, we will not grow our revenue as expected and our operating results will suffer.
We have a history of losses, and while our goal is to become cash flow breakeven in late 2020, we may not achieve that goal or achieve or sustain cash flows or profitability in the future.
We experienced consolidated net losses of $6.4 million, $3.6 million and $11.7 million for the years ended December 31, 2019, 2018 and 2017, 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 2020. Over the last several years, including into 2019, we have implemented an ongoing expense reduction program that, when combined with expected revenue performance in 2020, we believe will allow us to attain our goal of becoming cash flow breakeven in late 2020.
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 late 2020. 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.
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 adoption 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.

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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.
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, Brightcove, MediaPlatform, Vbrick and Panopto who deliver video solutions to businesses. Qumu occasionally encounters organizations utilizing Zoom and Microsoft’s Skype and Stream technologies. While some view Zoom and Microsoft as competitors to Qumu and some customers view their products as a complete alternative to Qumu’s technology, we believe that the Zoom, Microsoft and Qumu technologies can be seamlessly integrated and provide the customer with greater flexibility and improved manageability than use of their technologies alone. 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 operating within an evolving marketplace, 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.
Economic and market 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.

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Our sales will decline, and our business will be materially harmed, if our sales and marketing efforts are not effective.
We will need to continue to optimize our sales infrastructure in order to grow our customer base and our business. Identifying and recruiting qualified personnel and training them in the use and functionality of our software requires significant time, expense and attention. It can take six months or longer before our sales representatives are fully trained and productive. If we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenues. We also intend to expand new sales models that focus on different sales strategies tailored to different customer types. Our business may be adversely affected if our efforts to train our internal sales force or execute our selling strategies do not generate a corresponding increase in revenues.
For sales that are made to customers through our channel partners, we depend on these businesses to provide effective sales and marketing support to our products. Our channel partners are independent businesses that we do not control. Our agreements with channel partners do not contain requirements that a certain percentage of such parties’ sales are of our products. These channel partners may choose to devote their efforts to other products in different markets or reduce or fail to devote the resources to provide effective sales and marketing support of our products, any of which could harm our business by reducing sales to customers.
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 may not 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.

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Any failure of major elements of our products could lead to significant disruptions in our ability to serve customers, which could damage our reputation, reduce our revenues or otherwise harm our business.
Our business is dependent upon providing customers with fast, efficient and reliable services. A reduction in the performance, reliability or availability of required network infrastructure may harm our ability to distribute content to our customers, as well as our reputation and ability to attract and retain customers. Our content management software solutions and operations are susceptible to, and could be damaged or interrupted by, outages caused by fire, flood, power loss, telecommunications failure, Internet or mobile network breakdown, earthquake and similar events. Our solutions are also subject to human error, security breaches, power losses, computer viruses, break-ins, “denial of service” attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems and network communications. Our failure to protect our network against damage from any of these events could have a material adverse effect on our business, results of operations and financial condition.
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

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royalties. In some cases, we might need to redesign our software products, or to discontinue the sale of our software products if a redesign could not be accomplished on a timely basis. These same consequences result if our use of any open source software or commercial software is found to infringe any intellectual property right of another party. Any of these occurrences would harm our business, operating results and financial condition.
We sell a significant portion of our products internationally, which exposes us to risks associated with international operations.
We sell a significant amount of our products to customers outside the United States, particularly in Europe and Asia. 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;
public health emergencies, such as the recent coronavirus outbreak and the subsequent public health measures, may affect our employees, suppliers, customers and our ability to provide services and maintenance in the affected regions;
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.

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Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our products, and could have a negative impact on our business.
The future success of our business depends in part upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or international government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our products in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based applications such as ours. The adoption of any laws or regulations that adversely affect the growth, popularity or use of the Internet could limit the growth of the video as a mainstream communication and collaboration tool, limit the market for video content management software generally, and limit the demand for our products.
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. Likewise, the California Consumer Privacy Act is a state statute intended to enhance privacy rights and consumer protection that may impact our ability to profitably operate across the United States given that our customers’ employees may be resident in California or to offer products that meet the needs of customers subject to California 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.

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Computer malware, viruses, hacking, phishing attacks, spamming, and other cyber-threats could harm our business and cause customers to lose confidence in us and our products, which could significantly impact our business and results of operations.
Computer malware, viruses, computer hacking, phishing attacks, social engineering, and other electronic threats have become more prevalent, have occurred on our systems in the past, and may occur on our systems in the future. While we are taking measures to safeguard our solutions and services from cybersecurity threats and vulnerabilities, cyber-attacks and other security incidents continue to evolve in sophistication and frequency. The connection of our software solutions to our customers and their information technology environments could present the opportunity for an attack on our systems to serve as a way to obtain access into our customers’ systems, which could have a material adverse effect on our financial condition and growth prospects. Our security measures may also be breached due to employee or other error, intentional malfeasance and other third-party acts, and system errors or vulnerabilities, including vulnerabilities of our third-party vendors, customers, or otherwise. Businesses have experienced material sales declines after discovering data breaches, and our business could be similarly impacted. The costs to continuously improve the security of our solutions and reduce the likelihood of a successful attack are high and may continue to increase. Furthermore, some U.S. states and international jurisdictions have enacted laws requiring companies to notify consumers of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of the data security measures of our solutions. Any negative incidents can quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations or litigation. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of our products and technical infrastructure to the satisfaction of our customers may harm our reputation, impair our ability to retain existing customers and attract new customers and expose us to legal claims and government action, each of which could have a material adverse impact on our business, results of operations and financial condition.
We may face circumstances in the future that could result in impairment charges, including, but not limited to, significant goodwill impairment charges.
If the fair value of any of our long-lived assets decreases as a result of an economic slowdown, a downturn in the markets where we sell products and services or a downturn in our financial performance and/or future outlook, we may be required to record an impairment charge on such assets, including goodwill.
We are required to test intangible assets with indefinite life periods for potential impairment annually and on an interim basis if there are indicators of a potential impairment. We also are required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment. One potential indicator of impairment is the value of our market capitalization, or enterprise value, as compared to our net book value.
As of December 31, 2019, 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;

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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, 2019, we had 13,553,409 shares of common stock outstanding. The average daily trading volume in our common stock, as reported by the Nasdaq Stock Market, for the 64 trading days beginning October 1, 2019 and ending December 31, 2019 was approximately 35,400 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.
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
$
20,000

(1) 
13,000

 
January 2023
Burlingame, California
Engineering, service, sales, marketing and administration
$
16,000

(2) 
3,800

 
September 2022
London, England
Engineering, service, sales, marketing and administration
$
21,000

 
2,900

 
July 2024
Hyderabad, India
Software development and testing
$
2,000

(3) 
3,300

 
July 2024
_________________________________________________
(1) 
The agreement has escalating lease payments ranging from approximately $20,000 to $21,000 per month during the course of the lease.
(2) 
The agreement has escalating lease payments ranging from approximately $16,000 to $17,000 per month during the course of the lease.
(3) 
The agreement has escalating lease payments ranging from approximately $2,000 to $3,000 per month during the course of the lease.
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.

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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 Capital Market under the symbol “QUMU.”
Shareholders
As of March 2, 2020, there were 101 shareholders of record of Qumu's common 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, 2019, no repurchases were made under the repurchase program. While the current authorization remains in effect, the Company expects its primary use of cash will be to fund operations in support of the Company’s goals for revenue growth and operating margin improvement. Under the Company's Merger Agreement with Synacor, Inc., the Company is prohibited from repurchasing or redeeming its stock, subject to certain exceptions relating to the exercise or vesting of equity awards.

In addition to shares 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, 2019 was associated with satisfaction of employee tax withholding requirements on vesting of restricted stock awards.
Information on the Company’s repurchases of its common stock during each month of the fourth quarter ended December 31, 2019, 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 2019
 

 
$

 

 
778,365

November 2019
 

 
$

 

 
778,365

December 2019
 
7,723

 
$
2.62

 

 
778,365

Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding common stock authorized for issuance under equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.

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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
The Company generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services.
For the years ended December 31, 2019, 2018 and 2017, the Company generated revenues of $25.4 million, $25.0 million and $28.2 million, respectively.
Critical Accounting Policies
The discussion of the Company's financial condition and results of operations is based upon its financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that management believes to be reasonable. The Company's actual results may differ from these estimates under different assumptions or conditions.
Management believes that of the Company's significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment, complexity and effect on materiality. A critical accounting policy is one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on the Company's financial condition and results of operations. Accordingly, these are the policies management believes are the most critical to aid in fully understanding and evaluating the Company's financial condition and results of operations.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers, as of January 1, 2018. The Company generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services. Sales can range from a single year agreement for thousands of dollars to a multi-year agreement for over a million dollars.
The Company follows a five-step model to assess a sale to a customer: identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time.
Revenue is recognized upon transfer of control of promised products or services (i.e., performance obligations) to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time (for cloud-hosted software as a service, maintenance and support, and other services) or at a point in time (for software licenses and hardware).
The Company enters into contracts that can include various combinations of software licenses, appliances, maintenance and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each distinct performance obligation, on a relative basis using its standalone selling price.

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Table of Contents

The Company determines the standalone selling price (SSP) for software-related elements, including professional services and software maintenance and support contracts, based on the price charged for the deliverable when sold separately. The Company estimates SSP by maximizing use of observable prices such as the prices charged to customers on a standalone basis, established prices lists, contractually stated prices, profit margins and other entity-specific factors, or by using information such as market conditions and other observable inputs. However, the selling prices of its software licenses and cloud-hosted SaaS arrangements are highly variable. Thus, the Company estimates SSP for software licenses and cloud-hosted SaaS arrangements using the residual approach, determined based on total transaction price less the SSP of other goods and services promised in the contract.
Other items relating to charges collected from customers include reimbursable expenses, shipping and handling charges and sales taxes charges. Charges collected from customers as part of the Company's sales transactions are included in revenues and the associated costs are included in cost of revenues. Sales taxes charged to and collected from customers as part of the Company’s sales transactions are excluded from revenues and recorded as a liability to the applicable governmental taxing authority.
Perpetual software licenses
The Company’s perpetual software license arrangements grant customers the right to use the software indefinitely as it exists at the time of purchase. The Company recognizes revenue for distinct software licenses once the license period has begun and the software has been made available to the customer. Payments for perpetual software license contracts are generally received upon fulfillment of the software product.
Term software licenses
The Company's term software licenses differ from perpetual software licenses in that the customer's right to use the licensed product has a termination date. Term software licenses are recognized upon transfer of control, which is typically at fulfillment, resulting in up-front revenue recognition. The Company categorizes revenue from term software licenses as subscription, maintenance and support revenue in service revenues. Payments are generally received quarterly or annually in equal or near equal installments over the term of the agreement.
Cloud-hosted software as a service
Cloud-hosted software as a service (SaaS) arrangements grant customers the right to access and use the licensed products at the outset of an arrangement via third-party cloud providers. Updates are generally made available throughout the entire term of the arrangement, which is generally one to three years. The Company provides an online library and technical support resources in these cloud-hosted SaaS arrangements, which in conjunction with the SaaS license constitute a single, combined performance obligation, and revenue is recognized over the term of the license. Payments are generally received annually in advance of the service period.
Hardware
The Company sells appliances that are typically drop shipped from third-party suppliers selected by the Company. The transaction price allocated to the appliance is generally recognized as revenue at fulfillment when the customer obtains control of the product. Payments for appliances are generally received upon delivery of the hardware product.
Maintenance and support
Maintenance and support arrangements grant customers the right to software updates and technical support over the term of the maintenance and support contract. Revenue from maintenance and support is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is upon fulfillment of the software obligation. Payments are generally received annually in advance of the service period.
Professional services and training
Professional services and training generally consist of software implementation, on-boarding services and best practices consulting. Revenue from professional services contracts is typically recognized as performed, generally using hours expended to measure progress. Services are generally invoiced monthly for work performed.

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Leases
The Company is a lessee in several non-cancellable (1) operating leases, primarily for office space, and (2) finance leases, for certain IT equipment. The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right of use (ROU) asset and a lease liability at the lease commencement date.
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and at the same date as for operating leases, and is subsequently measured at amortized cost using the effective interest method. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the earlier of the useful life or the lease term.
Key estimates and judgments in accounting for leases under Topic 842 include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments. The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term.
Derivative Liability
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued two warrants for the purchase of up to an aggregate of 1,239,286 shares of the Company's common stock and on August 31, 2018, issued a separate warrant to a sales partner for the purchase of up to 100,000 shares of the Company's common stock. All warrants remained unexercised and outstanding at December 31, 2019. The Company accounts for the warrants, which are derivative financial instruments, as a current liability based upon the characteristics and provisions of the instruments. The warrants were 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 agreements, to receive cash payment or other consideration at the option of the holder in lieu of the Company's common shares. See Note 14–"Subsequent Event" of the accompanying consolidated financial statements for a discussion of the Company's merger agreement with Synacor, Inc., which impacts the cash settlement feature of the Hale warrant and ESW warrant.
A warrant liability is 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 option pricing models that are based on the individual characteristics of the warrants on the valuation date, which include the Company’s stock price and 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 for the warrants, when applicable. Changes in the assumptions used could have a material impact on the resulting fair value of each warrant. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.

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Table of Contents

Results of Operations
The percentage relationships to revenues of certain income and expense items for the years ended December 31, 2019, 2018 and 2017, and the percentage changes in these income and expense items between years, are contained in the following table:
 
Percentage of Revenues
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
1
 %
 
(11
)%
Cost of revenues
(27.8
)
 
(34.0
)
 
(36.4
)
 
(17
)
 
(17
)
Gross profit
72.2

 
66.0

 
63.6

 
11

 
(8
)
Operating expenses:
 

 
 

 
 

 
 
 
 
Research and development
29.0

 
27.9

 
25.9

 
5

 
(4
)
Sales and marketing
34.3

 
33.6

 
35.6

 
4

 
(16
)
General and administrative
26.8

 
28.5

 
30.4

 
(5
)
 
(17
)
Amortization of purchased intangibles
3.0

 
3.6

 
3.2

 
(16
)
 

Total operating expenses
93.1

 
93.6

 
95.1

 
1

 
(12
)
Operating loss
(20.9
)
 
(27.6
)
 
(31.5
)
 
(23
)
 
(22
)
Other income (expense), net
(5.3
)
 
14.3

 
(11.4
)
 
(137
)
 
(212
)
Loss before income taxes
(26.2
)
 
(13.3
)
 
(42.9
)
 
100

 
(73
)
Income tax expense (benefit)
(0.8
)
 
1.2

 
(1.3
)
 
(165
)
 
(183
)
Net loss
(25.4
)%
 
(14.5
)%
 
(41.6
)%
 
78
 %
 
(69
)%
Revenues
The Company generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services.
The table below describes Qumu's revenues by product category (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Software licenses and appliances
$
4,903

 
$
5,814

 
$
5,982

 
$
(911
)
 
$
(168
)
 
(16
)%
 
(3
)%
Service
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription, maintenance and support
18,249

 
17,132

 
19,374

 
1,117

 
(2,242
)
 
7

 
(12
)
Professional services and other
2,210

 
2,067

 
2,811

 
143

 
(744
)
 
7

 
(26
)
Total service
20,459

 
19,199

 
22,185

 
1,260

 
(2,986
)
 
7

 
(13
)
Total revenues
$
25,362

 
$
25,013

 
$
28,167

 
$
349

 
$
(3,154
)
 
1
 %
 
(11
)%
Revenues can vary year to year based on the type of contract the Company enters into with each customer. The $349,000 increase in total revenues from 2018 to 2019 reflects a $1.3 million increase in service revenues and a $911,000 decrease in software licenses and appliances revenues. The $1.3 million increase in service revenues from 2018 to 2019 resulted from a $1.1 million increase in subscription, maintenance and support revenues and a $143,000 increase in professional services revenues. The decrease in software licenses and appliances revenues in 2019 compared to 2018 was driven by a decrease in perpetual software license and appliance sales to both new and existing customers. The increase in subscription, maintenance and support revenues in 2019 compared to 2018 primary resulted from significant first quarter 2019 term software license sales for which revenue is recognized up front, as well as the revenue attributable to new subscription, maintenance and support agreements from new and existing customers.
The $3.2 million decrease in total revenues from 2017 to 2018 reflects a $3.0 million decrease in service revenues and a $168,000 decrease in software licenses and appliances revenues. The $3.0 million decrease in service revenues from 2017 to 2018 resulted from a $2.2 million decrease in subscription, maintenance and support revenues and a $744,000 decrease in professional services revenues. The decrease in subscription, maintenance and support revenues was driven primarily by approximately $2.4 million of decreased recurring revenue resulting from the loss of a large customer in the fourth quarter of 2017 and a $212,000 decrease in revenue related to the Company's adoption of Topic 606 effective January 1, 2018, partially offset by subscription, maintenance and support growth from new and existing customers. The $0.7

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million decrease in professional services revenues, which generally move directionally with changes in perpetual license sales and are impacted by custom work and the timing of customer acceptance, was primarily due to the inclusion of a large former customer in 2017 revenues and to lower utilization and reduced size of the Company's global professional services team in 2018.
Future consolidated revenues will be dependent upon many factors, including the rate of adoption of the Company's software solutions in its targeted markets and whether arrangements with customers are structured as a perpetual, term or SaaS licenses, which impacts the timing of revenue recognition. Other factors that will influence future consolidated revenues include the timing of customer orders and renewals, the product and service mix of customer orders, the impact of changes in economic conditions and the impact of foreign currency exchange rate fluctuations.
Gross Profit and Gross Margin
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)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
$
2,992

 
$
3,537

 
$
3,575

 
$
(545
)
 
$
(38
)
 
(15
)%
 
(1
)%
Service
15,311

 
12,983

 
14,330

 
2,328

 
(1,347
)
 
18

 
(9
)
Total gross profit
$
18,303

 
$
16,520

 
$
17,905

 
$
1,783

 
$
(1,385
)
 
11
 %
 
(8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Software licenses and appliances
61.0
%
 
60.8
%
 
59.8
%
 
0.2
%
 
1.0
%
 
 
 
 
Service
74.8
%
 
67.6
%
 
64.6
%
 
7.2
%
 
3.0
%
 
 
 
 
Total gross margin
72.2
%
 
66.0
%
 
63.6
%
 
6.2
%
 
2.4
%
 
 
 
 
For the years ended December 31, 2019, 2018 and 2017, gross margins are inclusive of the impact of approximately $455,000, $1.0 million and $1.2 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 19, 18 and 26 service personnel at December 31, 2019, 2018 and 2017, respectively.
Gross margin percentages by category and in total increased for both 2019 and 2018, compared to the respective prior years. The 6.2% improvement in gross margin in 2019, compared to 2018, was primarily driven by a 7.2% improvement in service gross margin due to an increase in term software license revenue, decreased amortization expense as certain purchased intangible assets became fully amortized during 2018, and lower royalty expense associated with third-party software licenses.
The 2.4% improvement in gross margin in 2018, compared to 2017, was primarily driven by a 3.0% improvement in service gross margin due to lower royalty expense associated with third-party software licenses, fewer service personnel in 2018 as compared to 2017 and decreased amortization expense as certain purchased intangible assets became fully amortized during 2018.
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 2020 is expected to include approximately $0.3 million of amortization expense for purchased intangibles.
Operating Expenses
The following is a summary of operating expenses (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
$
7,360

 
$
7,013

 
$
7,279

 
$
347

 
$
(266
)
 
5
 %
 
(4
)%
Sales and marketing
8,709

 
8,394

 
10,026

 
315

 
(1,632
)
 
4

 
(16
)
General and administrative
6,787

 
7,122

 
8,567

 
(335
)
 
(1,445
)
 
(5
)
 
(17
)
Amortization of purchased intangibles
757

 
904

 
904

 
(147
)
 

 
(16
)
 

Total operating expenses
$
23,613

 
$
23,433

 
$
26,776

 
$
180

 
$
(3,343
)
 
1
 %
 
(12
)%

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Table of Contents

While operating expenses for 2019 increased 1% compared to 2018, operating expenses as a percent of revenue decreased slightly to 93.1% for 2019 compared to 93.6% for 2018 and 95.1% for 2017, reflecting continued year-over-year improvement in the Company's operational efficiency. Operating expenses for 2019, 2018 and 2017 included severance expense of $152,000, $237,000 and $256,000, respectively, relating the cost reduction initiatives and personnel transitions.
Research and development
Research and development expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Compensation and employee-related
$
5,123

 
$
5,215

 
$
5,475

 
$
(92
)
 
$
(260
)
 
(2
)%
 
(5
)%
Overhead and other expenses
1,516

 
1,211

 
1,064

 
305

 
147

 
25

 
14

Outside services and consulting
589

 
409

 
473

 
180

 
(64
)
 
44

 
(14
)
Depreciation and amortization
2

 
28

 
133

 
(26
)
 
(105
)
 
(93
)
 
(79
)
Equity-based compensation
130

 
150

 
134

 
(20
)
 
16

 
(13
)
 
12

Total research and development expenses
$
7,360

 
$
7,013

 
$
7,279

 
$
347

 
$
(266
)
 
5
 %
 
(4
)%
Total research and development expenses for the years ended December 31, 2019, 2018 and 2017 represented 29%, 28% and 26% of revenues, respectively. The Company had 36, 34 and 41 research and development personnel at December 31, 2019, 2018 and 2017, respectively.
The $347,000 increase in total expenses in 2019, compared to 2018, was primarily due to transition costs related to the Company's in-process migration and consolidation of cloud hosting providers during 2019, impacting outside services and consulting expenses, as well as overhead and other expenses. The $266,000 decrease in total expense in 2018, compared to 2017, was driven primarily by less utilization of contractors and lower employee costs due to fewer research and development personnel in 2018 as compared to 2017, partially offset by increased hosting service expense included in overhead and other expenses. Depreciation and amortization expense decreased during 2019 and 2018 as certain fixed assets became fully depreciated.
Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Compensation and employee-related
$
6,822

 
$
6,199

 
$
7,806

 
$
623

 
$
(1,607
)
 
10
 %
 
(21
)%
Overhead and other expenses
1,022

 
1,230

 
1,046

 
(208
)
 
184

 
(17
)
 
18

Outside services and consulting
781

 
802

 
935

 
(21
)
 
(133
)
 
(3
)
 
(14
)
Depreciation and amortization
11

 
12

 
58

 
(1
)
 
(46
)
 
(8
)
 
(79
)
Equity-based compensation
73

 
151

 
181

 
(78
)
 
(30
)
 
(52
)
 
(17
)
Total sales and marketing expenses
$
8,709

 
$
8,394

 
$
10,026

 
$
315

 
$
(1,632
)
 
4
 %
 
(16
)%
Total sales and marketing expenses for the years ended December 31, 2019, 2018 and 2017 represented 34%, 34% and 36% of revenues, respectively. The Company had 32, 27 and 33 sales and marketing personnel at December 31, 2019, 2018 and 2017, respectively.
The $315,000 increase in total sales and marketing expense in 2019 as compared to 2018 was driven primarily driven by increased compensation and employee-related costs due to higher commissions expense and the mix and number of sales and marketing personnel, partially offset by a decrease in overhead and other expenses impacted by continued cost reduction initiatives. The $1.6 million decrease in total sales and marketing expense in 2018 as compared to 2017 was driven primarily by lower employee costs due to fewer sales and marketing personnel in 2018. Sales and marketing expenses for 2019, 2018 and 2017 included severance expense of $152,000, $111,000 and $234,000, respectively, relating to cost reduction initiatives and personnel transitions.

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Table of Contents

General and administrative
General and administrative expenses were as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Compensation and employee-related
$
3,147

 
$
2,797

 
$
3,525

 
$
350

 
$
(728
)
 
13
 %
 
(21
)%
Overhead and other expenses
1,127

 
1,028

 
1,078

 
99

 
(50
)
 
10

 
(5
)
Outside services and consulting
1,584

 
2,159

 
2,404

 
(575
)
 
(245
)
 
(27
)
 
(10
)
Depreciation and amortization
301

 
391

 
724

 
(90
)
 
(333
)
 
(23
)
 
(46
)
Equity-based compensation
628

 
747

 
836

 
(119
)
 
(89
)
 
(16
)
 
(11
)
Total general and administrative expenses
$
6,787

 
$
7,122

 
$
8,567

 
$
(335
)
 
$
(1,445
)
 
(5
)%
 
(17
)%
Total general and administrative expenses for the years ended December 31, 2019, 2018 and 2017 represented 27%, 29% and 30% of revenues, respectively. The Company had 18, 18 and 21 general and administrative personnel at December 31, 2019, 2018 and 2017, respectively.
The $335,000 decrease in total expenses in 2019 as compared to 2018 was driven primarily by lower outside services costs resulting from lower expenses associated with legal professional services, a reduction in audit fees and lower contractor costs. The $1.4 million decrease in total expenses in 2018 compared to 2017 was driven primarily by lower employee costs due to fewer general and administrative personnel in 2018 .
Amortization of Purchased Intangibles
Operating expenses include $757,000, $904,000 and $904,000 in 2019, 2018 and 2017, 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 2020 are expected to include approximately $0.7 million of amortization expense associated with purchased intangibles, exclusive of the portion classified in cost of revenue.
Other Income (Expense), Net
Other income (expense), net was as follows (dollars in thousands):
 
Year Ended December 31,
 
Increase (Decrease)
 
Percent Increase (Decrease)
 
2019
 
2018
 
2017
 
2018 to 2019
 
2017 to 2018
 
2018 to 2019
 
2017 to 2018
Interest expense, net
$
(754
)
 
$
(1,809
)
 
$
(2,852
)
 
$
1,055

 
$
1,043

 
(58
)%
 
(37
)%
Decrease (increase) in fair value of warrant liability
(141
)
 
368

 
74

 
(509
)
 
294

 
(138
)
 
397

Gain on sale of BriefCam, Ltd.
41

 
6,602

 

 
(6,561
)
 
6,602

 
(99
)
 
n/a

Loss on extinguishment of debt
(348
)
 
(1,189
)
 

 
841

 
(1,189
)
 
(71
)
 
n/a

Other expense, net
(125
)
 
(378
)
 
(433
)
 
253

 
55

 
(67
)
 
(13
)
Total other income (expense), net
$
(1,327
)
 
$
3,594

 
$
(3,211
)
 
$
(4,921
)
 
$
6,805

 
(137
)%
 
(212
)%
Interest expense, net
The Company recognized interest expense of $754,000, $1.8 million and $2.9 million in 2019, 2018 and 2017, respectively, primarily related to its term loans and capital leases, including the amortization of deferred financing costs. The decrease in interest expense in 2019, compared to 2018, was primarily due to a decrease in term loan debt resulting from the Company's $6.0 million principal balance repayment in July 2018 on the $10.0 million credit agreement with ESW Holdings, Inc., and resulting from the Company's $4.0 million remaining principal balance payment which the Company paid on November 12, 2019.
The decrease in interest expense in 2018, compared to 2017, was primary due to the inclusion in 2017 of expense related to the accelerated amortization of deferred financing costs in connection with a modification to the Company's term loan agreement on November 6, 2017 with Hale Capital Partners, LP. At that time 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. As a result of the loan modification, the Company 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 was amortized 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.

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Change in fair value of warrant liability
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued two warrants for the purchase of up to an aggregate of 1,239,286 shares of the Company's common stock, which remained unexercised and outstanding at December 31, 2019. The warrant issued in conjunction with the October 21, 2016 debt financing (Hale warrant) for the purchase of up to 314,286 shares of the Company's common stock expires on October 21, 2026, has an exercise price of $2.80 per share and is transferable. The warrant issued in conjunction with the January 12, 2018 debt financing (ESW warrant) for the purchase of up to 925,000 shares of the Company's common stock expires on January 12, 2028, has an exercise price of $1.96 per share and is transferable. Additionally, on August 31, 2018, the Company issued a warrant to a sales partner, iStudy Co., Ltd., (iStudy warrant) for the purchase of up to 100,000 shares of the Company's common stock; the warrant expires on August 31, 2028, has an exercise price of $2.43 per share and is transferable. The Hale warrant and ESW warrant contain a cash settlement feature upon the occurrence of a certain events, essentially the sale of the Company as defined in the warrant agreements. Upon a sale of the Company, the holder of the iStudy warrant may exercise the warrant or may elect to receive the same consideration as it would have been entitled to receive upon the occurrence of such transaction if it had been the holder of the shares then issuable upon such exercise of the warrant. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the dates of issuance was recorded in the Company’s consolidated balance sheets as a liability.
The warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the respective dates of issuance and is revalued on each subsequent balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded as other income or expense. During 2019, 2018 and 2017, the Company recorded a non-cash gain (loss) from the change in fair value of the warrant liability of $(141,000), $368,000 and $74,000, respectively. The gain (loss) for each year resulted from changes in inputs for the Company’s stock price, expected volatility, expected life and risk-free interest rates, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable, along with management's assumptions including the probability and timing of certain events, such as a change in control or future equity offerings.
Gain on sale of BriefCam, Ltd.
As of December 31, 2017, the Company held an investment reported in other assets, non-current, 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. On May 7, 2018, BriefCam, Canon Inc. (Canon), and the shareholders of BriefCam, including the Company, entered into a stock purchase agreement by which Canon would acquire all of the outstanding shares of BriefCam. On July 3, 2018, BriefCam announced that Canon had completed its acquisition of BriefCam and, on July 6, 2018, the Company received $9.7 million from the closing proceeds for its shares of BriefCam, as well as received $100,000 on October 31, 2018 following the satisfaction of a contingency, resulting in a gain on sale of $6.6 million during 2018. Additionally, during 2019, the Company recognized a gain of $41,000 related to the release of cash from escrow in connection with the sale.
Loss on extinguishment of debt
On July 19, 2018, the Company paid $6.5 million on its outstanding term loan from ESW Holdings, Inc. under its term loan credit agreement dated January 12, 2018. The payment was comprised of principal of $6.0 million and accrued interest of $463,000 for the period January 12, 2018 to the payment date of July 19, 2018. The Company used a portion of the net proceeds from the sale of its investment in BriefCam to fund the prepayment. The Company determined that the prepayment of principal constituted a partial extinguishment of debt and, as such, recognized a $1.2 million loss related to the write down of unamortized debt discount and issuance costs in 2018.
On November 12, 2019, the Company paid the remaining $4.8 million due on its outstanding term loan from ESW Holdings, Inc. The payment was comprised of principal of $4.0 million and accrued interest of $528,000 for the period July 19, 2018 to the payment date of November 12, 2019. The Company used a portion of the $8.2 million in net proceeds from the issuance of common stock on November 7, 2019 to fund the payment. The Company determined that the payment of principal constituted an extinguishment of debt and, as such, recognized a $348,000 loss related to the write down of $98,000 of unamortized debt discount and issuance costs and recognition of a $250,000 prepayment fee upon payment of the remaining term loan balance.

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Other expense, net
The Company determined that it had excess capacity at its Minneapolis, Minnesota headquarters and effective May 1, 2018 ceased using a portion of its leased space, subsequently making it available for occupancy by a sublessee. The Company entered into a sublease agreement having a term beginning May 1, 2018 and extending through January 2023. Accordingly, the Company recorded a liability at fair value of $224,000 for the future contractual lease payments, net of expected sublease receipts. Included in other expense, net, for 2018 is the loss related to the leasing-related exit activity of $177,000, which is net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity. On January 17, 2019, the Company terminated the sublease agreement, effective February 15, 2019, and contemporaneously modified the Company's head lease agreement to relinquish to the lessor, and be relieved of future lease payments for, the previously sublet space, effective March 1, 2019.
During 2017, the Company determined that a portion of its leased space in London, England was no longer needed and, in December 2017, ceased using the unneeded space, subsequently making it available for occupancy by a sublessee. 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. The Company recorded a loss related to the exit activity of $72,000, which is included in other income (expense), net, for the year ended December 31, 2017.
Other expense, net, also includes net losses on foreign currency transactions of $260,000, $55,000 and $356,000 in 2019, 2018 and 2017, 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. Net income tax benefit was $194,000 and $358,000 for the years ended December 31, 2019 and 2017, respectively, and net income tax expense was $298,000 for the year ended December 31, 2018.
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 affecting 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). For further discussion of the Tax Act and its impact on the Company's consolidated financial statements, see Note 11–"Income Taxes" of the accompanying consolidated financial statements. All future impacts of future issued guidance will be appropriately accounted for in the period in which the law is enacted.
The net income tax benefit for 2019 was impacted by the tax benefit for refundable research credits from United Kingdom operations. The net income tax expense for 2018 was impacted by an increase in reserves for unrecognized tax benefits, partially offset by a tax benefit for refundable research credits from United Kingdom operations. Income tax benefit for 2017 is primarily attributable to provisional estimates recorded as a result of the Tax Act and to research credits from United Kingdom operations.
Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Company's liquidity and capital resources (in thousands):
 
December 31,
 
2019
 
2018
Cash and cash equivalents
$
10,639

 
$
8,636

Working capital
$
829

 
$
865

Financing obligations
$
240

 
$
209

Term loan

 
3,431

Financing obligations and term loan
$
240

 
$
3,640

The Company expects it will be able to maintain current operations and anticipated capital expenditure requirements for at least the next 12 months through its cash reserves, as well as any cash flows that may be generated from current operations.

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At December 31, 2019, the Company had aggregate positive working capital of $829,000, down $36,000 from working capital of $865,000 at December 31, 2018. Working capital includes current deferred revenue of $10.1 million and $9.7 million at December 31, 2019 and 2018, respectively. The primary contributor to the change in working capital was a $2.0 million increase in cash and cash equivalents resulting from $8.2 million of net proceeds from the issuance of common stock in November 2019, offset by a payment of $4.8 million for principal, accrued interest and prepayment fee on the Company's term loan with ESW Holdings, Inc., as well as a $5.3 million operating loss for the year ended December 31, 2019.
The term loan balance of $3.4 million as of December 31, 2018 consisted of the carrying value of the Company's term loan credit agreement with ESW Holdings, Inc. as lender and administrative agent, dated January 12, 2018. On November 12, 2019, the Company paid the outstanding balance due on the term loan. The payment was comprised of principal of $4.0 million, accrued interest of $528,000 for the period July 19, 2018 to the payment date of November 12, 2019, and prepayment fee of $250,000. The Company used a portion of the $8.2 million in net proceeds from the issuance of common stock, as described in Note 6–"Stockholders Equity" of the accompanying consolidated financial statements to fund the payment.
Financing obligations of $240,000 as of December 31, 2019 consist of capital leases related to the acquisition of computer and network equipment and furniture and other financing obligations.
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. In addition, the Company expects cash flows to be negatively impacted in the first quarter 2020 by approximately $0.6 million in professional fees, costs and other expenses associated with the Merger Agreement that was signed on February 11, 2020 and the Company anticipates additional transaction related expenses in future quarters. See Part I – Item 1A – Risk Factors – Risks Relating to the Merger. 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 $2.8 million as of December 31, 2019. The repatriation of cash and cash equivalents held by the Company's international subsidiaries would not result in an adverse tax impact on cash given that the future tax consequences of repatriation are expected to be insignificant as a result of the Tax Act.
Summary of Cash Flows. A summary of cash flows is as follows (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Cash flows from (used in):
 

 
 

 
 

Operating activities
$
(1,538
)
 
$
(2,843
)
 
$
(2,012
)
Investing activities
(127
)
 
9,651

 
(24
)
Financing activities
3,602

 
(5,743
)
 
(747
)
Effect of exchange rate changes on cash
66

 
(119
)
 
109

Net change in cash and cash equivalents
$
2,003

 
$
946

 
$
(2,674
)
Operating activities
Net cash used in operating activities was $1.5 million for 2019 compared to $2.8 million in 2018. The change in operating cash flows for 2019 as compared to 2018 was impacted by changes in operating assets and liabilities, including the favorable impacts of changes in receivables and accounts payable and other accrued liabilities, offset by unfavorable changes in contract assets and accrued compensation.
Investing activities
Net cash provided by investing activities from the sale of the Company's investment in BriefCam totaled $41,000 in 2019 compared to $9.8 million in 2018. Net cash used in investing activities for the purchases of property and equipment totaled $168,000 in 2019 compared to $127,000 in 2018.
Financing activities
Financing activities provided net cash of $3.6 million in 2019, primarily consisting $8.2 million in net proceeds from the issuance of common stock, partially offset by cash used for payments on the Company's term note, capital leases and other financing obligations. During 2019, financing cash outflows included a principal payment of $4.0 million, accrued interest of

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Table of Contents

$528,000 for the period July 19, 2018 to the payment date of November 12, 2019, and prepayment fee of $250,000 on the outstanding term loan with ESW Holdings, Inc. Additionally, during 2019, the Company made principal payments of $320,000 on capital leases and other financing obligations.
Financing activities used net cash of $5.7 million in 2018, primarily consisting of a principal payment of $6.0 million on the outstanding term loan with ESW Holdings, Inc., principal payments of $402,000 on capital leases and other financing obligations, a principal payment on the term loan credit agreement (Hale credit agreement) with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent, of $8.0 million and a prepayment fee of $800,000, offset by $10.0 million in proceeds from the term loan with ESW Holdings in January 2018, a portion of which was used to repay the term loan under the Hale credit agreement. 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 Hale credit agreement of $225,000.
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, 2019, 2018 and 2017. As of December 31, 2019, the Company had 778,365 shares available for repurchase under the authorizations. While the current authorization remains in effect, the Company expects its primary use of cash will be to fund operations in support of the Company’s goals for revenue growth and operating margin improvement. Under the Company's Merger Agreement with Synacor, Inc., the Company is prohibited from repurchasing or redeeming its stock, subject to certain exceptions relating to the exercise or vesting of equity awards.
The Company did not declare or pay any dividends during the years ended December 31, 2019, 2018 and 2017. Under the Company's Merger Agreement with Synacor, Inc., the Company is prohibited from making dividends, distributions or payments on its capital stock.
Contractual Obligations. The following table summarizes the Company's contractual cash obligations at December 31, 2019, 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
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total
Operating leases
$
764

 
$
712

 
$
672

 
$
294

 
$
114

 
$

 
$
2,556

Capital leases and other financing obligations (1)
91

 
80

 
5

 

 

 

 
176

Purchase obligations (2)
524

 
124

 
70

 

 

 

 
718

Income tax liabilities under ASC 740 (3)

 

 

 

 

 

 

Total contractual cash obligations
$
1,379

 
$
916

 
$
747

 
$
294

 
$
114

 
$

 
$
3,450

_________________________________________________
(1) 
Amounts include principal and interest.
(2) 
Purchase obligations include all commitments to purchase goods or services that meet one or both of the following criteria: (1) they are non-cancellable 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-cancellable, the entire value of the contract is included in the table.
(3) 
The Company does not currently expect any income tax liabilities accrued under ASC 740 as of December 31, 2019 to be paid to the applicable tax authorities in 2020. The full balance of unrecognized tax benefits under ASC 740 of $1.8 million at December 31, 2019, 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.
Recently Adopted Accounting Standards and Recently Issued Accounting Standards Not Yet Adopted
For information about our recently adopted accounting standards and recently issued accounting standards not yet adopted, see Note 1 of the accompanying Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
 
Page in Annual
Report on Form 10-K
For Year Ended
December 31, 2019

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Table of Contents

Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Qumu Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Qumu Corporation and its subsidiaries (the Company) as of December 31, 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of FASB Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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 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 audit 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 audit included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2019. 
Minneapolis, Minnesota
March 6, 2020

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Table of Contents

Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Qumu Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Qumu Corporation and subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two‑year period ended December 31, 2018, 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, 2018, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in 2018 due to the adoption of ASC 606, Revenue from Contracts with Customers.
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. 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 served as the Company’s auditor from 1989 to 2018.
Minneapolis, Minnesota
March 15, 2019

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Table of Contents

QUMU CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,639

 
$
8,636

Receivables, net
4,586

 
6,278

Contract assets
1,089

 
485

Income tax receivable
338

 
327

Prepaid expenses and other current assets
1,981

 
2,192

Total current assets
18,633

 
17,918

Property and equipment, net
596

 
545

Right of use assets – operating leases
1,746

 

Intangible assets, net
3,075

 
4,247

Goodwill
7,203

 
6,971

Deferred income taxes, non-current
21

 
55

Other assets, non-current
442

 
544

Total assets
$
31,716

 
$
30,280

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and other accrued liabilities
$
2,816

 
$
2,838

Accrued compensation
1,165

 
1,548

Operating lease liabilities
587

 

Deferred revenue
10,140

 
9,672

Deferred rent

 
45

Financing obligations
157

 
152

Warrant liability
2,939


2,798

Total current liabilities
17,804

 
17,053

Long-term liabilities:
 

 
 

Deferred revenue, non-current
1,449

 
1,672

Income taxes payable, non-current
585

 
563

Deferred tax liability, non-current

 
2

Operating lease liabilities, non-current
1,587

 

Deferred rent, non-current

 
302

Financing obligations, non-current
83

 
57

Term loan, non-current

 
3,431

Other non-current liabilities

 
195

Total long-term liabilities
3,704

 
6,222

Total liabilities
21,508

 
23,275

Commitments and contingencies (Note 4 and Note 14)
 
 
 
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 13,553,409 and 9,624,060, respectively
136

 
96

Additional paid-in capital
78,061

 
69,072

Accumulated deficit
(65,128
)
 
(58,875
)
Accumulated other comprehensive loss
(2,861
)
 
(3,288
)
Total stockholders’ equity
10,208

 
7,005

Total liabilities and stockholders’ equity
$
31,716

 
$
30,280

See accompanying notes to consolidated financial statements.

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QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
 
Year Ended December 31,
 
2019
 
2018
 
2017
Revenues:
 

 
 

 
 

Software licenses and appliances
$
4,903

 
$
5,814

 
$
5,982

Service
20,459

 
19,199

 
22,185

Total revenues
25,362

 
25,013

 
28,167

Cost of revenues:
 

 
 

 
 

Software licenses and appliances
1,911

 
2,277

 
2,407

Service
5,148

 
6,216

 
7,855

Total cost of revenues
7,059

 
8,493

 
10,262

Gross profit
18,303

 
16,520

 
17,905

Operating expenses:
 

 
 

 
 

Research and development
7,360

 
7,013

 
7,279

Sales and marketing
8,709

 
8,394

 
10,026

General and administrative
6,787

 
7,122

 
8,567

Amortization of purchased intangibles
757

 
904

 
904

Total operating expenses
23,613

 
23,433

 
26,776

Operating loss
(5,310
)
 
(6,913
)
 
(8,871
)
Other income (expense):
 

 
 

 
 

Interest expense, net
(754
)
 
(1,809
)
 
(2,852
)
Decrease (increase) in fair value of warrant liability
(141
)
 
368

 
74

Gain on sale of BriefCam, Ltd.
41

 
6,602

 

Loss on extinguishment of debt
(348
)
 
(1,189
)
 

Other expense, net
(125
)
 
(378
)
 
(433
)
Total other income (expense), net
(1,327
)
 
3,594

 
(3,211
)
Loss before income taxes
(6,637
)
 
(3,319
)
 
(12,082
)
Income tax expense (benefit)
(194
)
 
298

 
(358
)
Net loss
$
(6,443
)
 
$
(3,617
)
 
$
(11,724
)
 
 
 
 
 
 
Net loss per share – basic:
 
 
 
 
 
Net loss per share – basic
$
(0.62
)
 
$
(0.38
)
 
$
(1.25
)
Weighted average shares outstanding – basic
10,395

 
9,499

 
9,347

Net loss per share – diluted:
 
 
 
 
 
Loss attributable to common shareholders
$
(6,548
)
 
$
(3,778
)
 
$
(11,724
)
Net loss per share – diluted
$
(0.63
)
 
$
(0.39
)
 
$
(1.25
)
Weighted average shares outstanding – diluted
10,414

 
9,606

 
9,347

See accompanying notes to consolidated financial statements.


35

Table of Contents

QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net loss
$
(6,443
)
 
$
(3,617
)
 
$
(11,724
)
Other comprehensive income (loss):
 
 
 
 
 
Net change in foreign currency translation adjustments
427

 
(543
)
 
1,167

Total other comprehensive income (loss)
427

 
(543
)
 
1,167

Total comprehensive loss
$
(6,016
)
 
$
(4,160
)
 
$
(10,557
)

See accompanying notes to consolidated financial statements.



36

Table of Contents

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, 2016
9,227

 
$
92

 
$
66,864

 
$
(44,473
)
 
$
(3,907
)
 
18,576

Net loss

 

 

 
(11,724
)
 

 
(11,724
)
Other comprehensive income, net of taxes

 

 

 

 
1,167

 
1,167

Issuance of stock under employee stock plan, net of forfeitures
144

 
2

 
(2
)
 

 

 

Redemption of stock related to tax withholdings on employee stock plan issuances
(6
)
 

 
(17
)
 

 

 
(17
)
Stock-based compensation

 

 
1,190

 

 

 
1,190

Balance at December 31, 2017
9,365

 
$
94

 
$
68,035

 
$
(56,197
)
 
$
(2,740
)
 
$
9,192

Adoption of ASC Topic 606

 

 

 
939

 
(5
)
 
934

Net loss

 

 

 
(3,617
)
 

 
(3,617
)
Other comprehensive income, net of taxes

 

 

 

 
(543
)
 
(543
)
Issuance of stock under employee stock plan, net of forfeitures
277

 
2

 
(12
)
 

 

 
(10
)
Redemption of stock related to tax withholdings on employee stock plan issuances
(18
)
 

 
(33
)
 

 

 
(33
)
Stock-based compensation

 

 
1,082

 

 

 
1,082

Balance at December 31, 2018
9,624

 
$
96

 
$
69,072

 
$
(58,875
)
 
$
(3,288
)
 
$
7,005

Adoption of ASC Topic 842

 

 

 
190

 

 
190

Net loss

 

 

 
(6,443
)
 

 
(6,443
)
Other comprehensive income, net of taxes

 

 

 

 
427

 
427

Issuance of common stock, net of issuance costs
3,652

 
37

 
8,164

 

 

 
8,201

Issuance of stock under employee stock plan, net of forfeitures
304

 
3

 
43

 

 

 
46

Redemption of stock related to tax withholdings on employee stock plan issuances
(27
)
 

 
(75
)
 

 

 
(75
)
Stock-based compensation

 

 
857

 

 

 
857

Balance at December 31, 2019
13,553

 
$
136

 
$
78,061

 
$
(65,128
)
 
$
(2,861
)
 
$
10,208



See accompanying notes to consolidated financial statements.

37

Table of Contents

QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
 
Year Ended December 31,
 
2019
 
2018
 
2017
Operating activities:
 

 
 

 
 

Net loss
$
(6,443
)
 
$
(3,617
)
 
$
(11,724
)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
 

 
 

 
 

Depreciation and amortization
1,526

 
2,366

 
3,045

Stock-based compensation
857

 
1,082

 
1,190

Accretion of debt discount and issuance costs
471

 
1,321

 
2,013

Gain on sale of BriefCam, Ltd.
(41
)
 
(6,602
)
 

Loss on debt extinguishment
348

 
1,189

 

Gain on lease modification
(21
)
 

 

Loss on lease contract termination

 
177

 
72

Increase (decrease) in fair value of warrant liability
141

 
(368
)
 
(74
)
Deferred income taxes
31

 
(131
)
 
(166
)
Changes in operating assets and liabilities:
 
 
 
 
 
Receivables
1,720

 
(786
)
 
2,101

Contract assets
(604
)
 
65

 

Income taxes receivable / payable
13

 
375

 
167

Prepaid expenses and other assets
522

 
449

 
1,166

Accounts payable and other accrued liabilities
174

 
(1,196
)
 
1,656

Accrued compensation
(389
)
 
(263
)
 
(574
)
Deferred revenue
181

 
3,092

 
(573
)
Deferred rent

 
(144
)
 
(311
)
Other non-current liabilities
(24
)
 
148

 

Net cash used in operating activities
(1,538
)
 
(2,843
)
 
(2,012
)
Investing activities:
 

 
 

 
 

Proceeds from sale of BriefCam, Ltd.
41

 
9,778

 

Purchases of property and equipment
(168
)
 
(127
)
 
(24
)
Net cash provided by (used in) investing activities
(127
)
 
9,651

 
(24
)
Financing activities:
 

 
 

 
 

Proceeds from common stock issuance
8,201