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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-20728
qumu-20200930_g1.jpg
QUMU CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota41-1577970
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
510 1st Avenue North, Suite 305
Minneapolis,Minnesota55403
(Address of principal executive offices)(Zip Code)
(612) 638-9100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol
Name of each exchange on which registered
Common Stock, $0.01 par valueQUMUThe Nasdaq Stock Market LLC
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No
As of October 29, 2020, the registrant had 13,712,845 outstanding shares of $.01 par value common stock.


Table of Contents
QUMU CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2020
 DescriptionPage
 
 
 
 
 
 
 

2

Table of Contents
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
QUMU CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
2020
December 31,
2019
Assets(unaudited)
Current assets:
Cash and cash equivalents$11,352 $10,639 
Receivables, net of allowance for doubtful accounts of $44 and $45, respectively
5,699 4,586 
Contract assets802 1,089 
Income tax receivable289 338 
Prepaid expenses and other current assets1,882 1,981 
Total current assets20,024 18,633 
Property and equipment, net of accumulated depreciation of 2,741 and 2,520, respectively
431 596 
Right of use assets – operating leases1,425 1,746 
Intangible assets, net2,341 3,075 
Goodwill7,036 7,203 
Deferred income taxes, non-current12 21 
Other assets, non-current458 442 
Total assets$31,727 $31,716 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable and other accrued liabilities$2,104 $2,816 
Accrued compensation1,777 1,165 
Deferred revenue12,280 10,140 
Operating lease liabilities627 587 
Financing obligations123 157 
Note payable1,767  
Derivative liability36  
Warrant liability1,814 2,939 
Total current liabilities20,528 17,804 
Long-term liabilities:  
Deferred revenue, non-current3,612 1,449 
Income taxes payable, non-current602 585 
Operating lease liabilities, non-current1,137 1,587 
Financing obligations, non-current18 83 
Other liabilities, non-current264  
Total long-term liabilities5,633 3,704 
Total liabilities26,161 21,508 
Commitments and contingencies (Note 3)
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 13,712,845
 and 13,553,409, respectively
137 136 
Additional paid-in capital78,758 78,061 
Accumulated deficit(70,350)(65,128)
Accumulated other comprehensive loss(2,979)(2,861)
Total stockholders’ equity5,566 10,208 
Total liabilities and stockholders’ equity$31,727 $31,716 
See accompanying notes to unaudited condensed consolidated financial statements.
3

Table of Contents
QUMU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited – in thousands, except per share data)
 Three Months Ended
 September 30,
Nine Months Ended
 September 30,
 2020201920202019
Revenues:    
Software licenses and appliances$548 $1,962 $6,149 $3,656 
Service6,082 4,709 16,042 15,478 
Total revenues6,630 6,671 22,191 19,134 
Cost of revenues:    
Software licenses and appliances219 719 2,344 1,366 
Service1,435 1,294 4,337 3,747 
 Total cost of revenues1,654 2,013 6,681 5,113 
Gross profit4,976 4,658 15,510 14,021 
Operating expenses:    
Research and development2,105 1,849 5,973 5,361 
Sales and marketing2,044 2,083 6,443 6,647 
General and administrative2,142 1,673 7,055 4,998 
Amortization of purchased intangibles165 168 492 587 
Total operating expenses6,456 5,773 19,963 17,593 
Operating loss(1,480)(1,115)(4,453)(3,572)
Other income (expense):    
Gain on sale of BriefCam, Ltd. 41  41 
Interest expense, net(33)(235)(38)(654)
Decrease (increase) in fair value of derivative liability(1) 104  
Decrease (increase) in fair value of warrant liability(332)973 (730)(752)
Other, net(55)(3)(252)32 
Total other income (expense), net(421)776 (916)(1,333)
Loss before income taxes(1,901)(339)(5,369)(4,905)
Income tax benefit(43)(118)(147)(133)
Net loss$(1,858)$(221)$(5,222)$(4,772)
Net loss per share – basic:
Net loss per share – basic$(0.14)$(0.02)$(0.39)$(0.49)
Weighted average shares outstanding – basic13,579 9,913 13,555 9,822 
Net loss per share – diluted:
Loss attributable to common shareholders$(1,858)$(1,194)$(5,516)$(4,772)
Net loss per share – diluted$(0.14)$(0.11)$(0.41)$(0.49)
Weighted average shares outstanding – diluted13,579 10,413 13,575 9,822 
See accompanying notes to unaudited condensed consolidated financial statements.

4

Table of Contents
QUMU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited - in thousands)
 Three Months Ended
 September 30,
Nine Months Ended
 September 30,
 2020201920202019
Net loss$(1,858)$(221)$(5,222)$(4,772)
Other comprehensive income (loss):   
Net change in foreign currency translation adjustments380 (254)(118)(289)
Total other comprehensive income (loss)380 (254)(118)(289)
Total comprehensive loss$(1,478)$(475)$(5,340)$(5,061)

See accompanying notes to unaudited condensed consolidated financial statements.

5

Table of Contents
QUMU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited – in thousands)

Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
 SharesAmount
Balance at December 31, 20189,624 $96 $69,072 $(58,875)$(3,288)$7,005 
Adoption of ASC Topic 842— — — 190  190 
Net loss— — — (950)— (950)
Other comprehensive income, net of taxes— — — — 243 243 
Issuance of stock under employee stock plan, net of forfeitures156 2 (1)— — 1 
Redemption of stock related to tax withholdings on employee stock plan issuances(15)— (36)— — (36)
Stock-based compensation— — 231 — — 231 
Balance at March 31, 20199,765 $98 $69,266 $(59,635)$(3,045)$6,684 
Net loss— — — (3,601)— (3,601)
Other comprehensive loss, net of taxes— — — — (278)(278)
Issuance of stock under employee stock plan, net of forfeitures146 1 41 — — 42 
Redemption of stock related to tax withholdings on employee stock plan issuances(4)— (17)— — (17)
Stock-based compensation— — 194 — — 194 
Balance at June 30, 20199,907 $99 $69,484 $(63,236)$(3,323)$3,024 
Net loss— — — (221)— (221)
Other comprehensive loss, net of taxes— — — — (254)(254)
Issuance of stock under employee stock plan, net of forfeitures2  4 — — 4 
Redemption of stock related to tax withholdings on employee stock plan issuances — (2)— — (2)
Stock-based compensation— — 219 — — 219 
Balance at September 30, 20199,909 $99 $69,705 $(63,457)$(3,577)$2,770 

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Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
 SharesAmount
Balance at December 31, 201913,553 $136 $78,061 $(65,128)$(2,861)$10,208 
Net loss— — — (2,672)— (2,672)
Other comprehensive loss, net of taxes— — — — (480)(480)
Issuance of stock under employee stock plan, net of forfeitures4   — —  
Redemption of stock related to tax withholdings on employee stock plan issuances(29)— (53)— — (53)
Stock-based compensation— — 245 — — 245 
Balance at March 31, 202013,528 $136 $78,253 $(67,800)$(3,341)$7,248 
Net loss— — — (692)— (692)
Other comprehensive loss, net of taxes— — — — (18)(18)
Issuance of stock under employee stock plan, net of forfeitures1 (1) — — (1)
Redemption of stock related to tax withholdings on employee stock plan issuances — (1)— — (1)
Stock-based compensation— — 164 — — 164 
Balance at June 30, 202013,529 $135 $78,416 $(68,492)$(3,359)$6,700 
Net loss— — — (1,858)— (1,858)
Other comprehensive loss, net of taxes— — — — 380 380 
Issuance of stock under employee stock plan, net of forfeitures206 2 236 — — 238 
Redemption of stock related to tax withholdings on employee stock plan issuances(22)— (105)— — (105)
Stock-based compensation— — 211 — — 211 
Balance at September 30, 202013,713 $137 $78,758 $(70,350)$(2,979)$5,566 


See accompanying notes to unaudited condensed consolidated financial statements.

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QUMU CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited – in thousands)
 Nine Months Ended
 September 30,
 20202019
Operating activities:  
Net loss$(5,222)$(4,772)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization935 1,170 
Stock-based compensation620 644 
Accretion of debt discount and issuance costs52 403 
Gain on sale of BriefCam, Ltd. (41)
Gain on lease modification (21)
Decrease in fair value of derivative liability(104) 
Increase in fair value of warrant liability730 752 
Deferred income taxes9 8 
Changes in operating assets and liabilities:
Receivables(1,107)2,038 
Contract assets296 (845)
Income taxes receivable / payable70 62 
Prepaid expenses and other assets268 573 
Accounts payable and other accrued liabilities(629)546 
Accrued compensation617 (732)
Deferred revenue4,338 (431)
Other non-current liabilities264 (24)
 Net cash provided by (used in) operating activities1,137 (670)
Investing activities:  
Proceeds from sale of BriefCam, Ltd. 41 
Purchases of property and equipment(68)(137)
Net cash used in investing activities(68)(96)
Financing activities:  
Proceeds from issuance of common stock under employee stock plans238 46 
Principal payments on financing obligations(286)(242)
Common stock repurchases to settle employee withholding liability(160)(54)
Net cash used in financing activities(208)(250)
Effect of exchange rate changes on cash(148)(95)
Net increase (decrease) in cash and cash equivalents713 (1,111)
Cash and cash equivalents, beginning of period10,639 8,636 
Cash and cash equivalents, end of period$11,352 $7,525 
Supplemental disclosures of net cash paid (received) during the period:  
Income taxes, net$(264)$(207)
Interest, net$12 $14 
Non-cash investing and financing activities:
Issuance of note payable and derivative liability for cancellation of warrant$1,855 $ 

See accompanying notes to unaudited condensed consolidated financial statements.
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QUMU CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1)     Nature of Business and Basis of Presentation
Qumu Corporation ("Qumu" or the "Company") provides the software solutions to create, manage, secure, distribute and measure the success of live, on-demand and video content management solutions 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 markets its products to customers primarily in North America, Europe and Asia.
The Company views its operations and manages its business as one segment and one reporting unit. Factors used to identify the Company's single operating segment and reporting unit include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The Company manages the marketing of its products and services through regional sales representatives and independent distributors in the United States and international markets.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in a complete set of financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations and cash flows of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2019.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which changes the fair value measurement disclosure requirements of ASC 820. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. The Company adopted ASU 2018-13 effective January 1, 2020. The impact of adopting this standard was not material to the Company's consolidated financial statements or disclosures.

Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This update amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity's own equity and improves and amends the related EPS guidance for both Subtopics. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing exceptions within the general principles of Topic 740 regarding the calculation of deferred tax liabilities, the incremental approach for intraperiod tax allocation, and calculating income taxes in an interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax) which is partially based on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effect of
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any enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The ASU is effective for fiscal years beginning after December 15, 2020, and will be applied either retrospectively or prospectively based upon the applicable amendments. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.

(2) Intangible Assets and Goodwill
Intangible Assets
The Company’s amortizable intangible assets consisted of the following (in thousands):
September 30, 2020
Customer RelationshipsDeveloped TechnologyTrademarks / Trade NamesTotal
Original cost$4,834 $8,054 $2,181 $15,069 
Accumulated amortization(3,654)(7,883)(1,191)(12,728)
Intangibles assets, net$1,180 $171 $990 $2,341 
December 31, 2019
Customer RelationshipsDeveloped TechnologyTrademarks / Trade NamesTotal
Original cost$4,878 $8,135 $2,182 $15,195 
Accumulated amortization(3,293)(7,741)(1,086)(12,120)
Intangibles assets, net$1,585 $394 $1,096 $3,075 
Changes to the carrying amount of net amortizable intangible assets consisted of the following (in thousands):
Nine Months Ended
 September 30, 2020
Balance, beginning of period$3,075 
Amortization expense(704)
Currency translation(30)
Balance, end of period$2,341 
Amortization expense of intangible assets consisted of the following (in thousands):
 Three Months Ended
 September 30,
Nine Months Ended
 September 30,
 2020201920202019
Amortization expense associated with the developed technology included in cost of revenues$72 $109 $212 $340 
Amortization expense associated with other acquired intangible assets included in operating expenses165 168 492 587 
Total amortization expense$237 $277 $704 $927 
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Goodwill
On October 3, 2014, the Company completed the acquisition of Kulu Valley, Ltd., subsequently renamed Qumu Ltd., and recognized $8.8 million of goodwill and $6.7 million of intangible assets. The goodwill balance of $7.0 million at September 30, 2020 reflects the impact of foreign currency exchange rate fluctuations since the acquisition date.
As of September 30, 2020, the Company’s market capitalization, without a control premium, was greater than its book value and, as a result, the Company concluded there was no goodwill impairment. Sustained declines in the Company’s market capitalization or a downturn in its future financial performance and/or future outlook could require the Company to record goodwill and other impairment charges. While a goodwill impairment charge is a non-cash charge, it would have a negative impact on the Company's results of operations.

(3) Commitments and Contingencies
Leases
The Company is obligated under finance leases covering certain IT equipment that expire at various dates over the next two years. The Company also has non-cancellable operating leases, primarily for office space, that expire at various dates over the next four years. The Company has two leases that each contain a renewal option for a period of five years. Because the Company is not reasonably certain to exercise this option, the option is not considered in determining the lease term.
The components of lease cost were as follows (in thousands):
Three Months Ended
 September 30,
Nine Months Ended
 September 30,
2020201920202019
Operating lease cost$103 $154 $297 $432 
Finance lease cost:
Amortization of right of use assets31 31 93 75 
Interest on lease liabilities2 3 6 8 
Total finance cost33 34 99 83 
Total lease cost$136 $188 $396 $515 
Future payments used in the measurement of lease liabilities on the condensed consolidated balance sheet as of September 30, 2020 are as follows (in thousands):
Operating
leases
Finance
leases
Remainder of 2020$237 $23 
2021711 80 
2022671 5 
2023294  
2024114  
Total undiscounted lease payments2,027 108 
Less amount representing interest(263)(4)
Present value of lease liabilities$1,764 $104 
Subleases
On January 17, 2019, the Company terminated a sublease agreement related to its Minneapolis, Minnesota headquarters and contemporaneously modified the Company's primary lease agreement. Upon modification, the Company recognized a gain of $21,000, which is reported in other income (expense) in the Company's condensed consolidated statement of operations for the nine months ended September 30, 2019. Sublease income was $32,000 and $105,000 for the three and nine months ended September 30, 2019, respectively, which is reported in other income (expense) in the Company's condensed consolidated statement of operations. The Company reported no sublease income for the three and nine months ended September 30, 2020.
Note Payable and Derivative Liability
On May 1, 2020, the Company canceled its outstanding warrant to ESW Holdings, Inc. ("ESW warrant") which was for the purchase of up to 925,000 shares of Qumu's common stock at an exercise price of $1.96 per share and expiring January 2028. Additionally, the terms of the warrant provided for a cash settlement in the event of a change of control transaction referred to
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as a Fundamental Transaction, computed using a Black-Scholes option pricing model with specified inputs stipulated in the warrant agreement. The fair value of the warrant instrument has historically been reported as a liability in Qumu's consolidated financial statements, and, for certain historical reporting periods since its issuance, the shares underlying the warrant instrument were dilutive in the calculation of earnings per share.
As consideration for the warrant cancellation, the Company entered into a secured promissory note to ESW Holdings, Inc. ("note payable"), having a face amount of $1,833,000, which was less than the cash settlement amount of $1,983,000 computed under the terms of the warrant agreement, due on April 1, 2021 and bearing no interest. The payment obligation of the note will be accelerated upon a Fundamental Transaction, and Qumu would be required to pay an additional $150,000 to ESW Holdings, Inc. upon the closing of a Fundamental Transaction. The note payable may be prepaid at any time without penalty.
The note payable was recorded at its present value of future cash flows of $1,833,000 discounted at 7.25% (prime plus 4.0%), which was $1,715,000 at May 1, 2020. The value of the note payable will be accreted up to its face value at maturity. As of September 30, 2020, the carrying value of the note payable was $1,767,000, which also approximated its fair value.
The note payable contains a $150,000 contingent payment obligation due upon the closing of a Fundamental Transaction on or prior to the April 1, 2021 maturity date. This contingent payment obligation qualifies as an embedded derivative in accordance with ASC Topic 815, Derivatives and Hedging. The embedded derivative is measured at fair value and is remeasured at fair value each subsequent reporting period and reported on the Company's consolidated balance sheet as a derivative liability. Changes in fair value are recognized in other income (expense) in the consolidated statement of operations as "Decrease (increase) in fair value of derivative liability." See Note 4–"Fair Value Measurements."
In connection with the note, the Company and ESW Holdings, Inc. entered into a security agreement dated May 1, 2020 providing for a future security interest in certain assets of the Company that would not attach unless and until the occurrence of the Triggering Event specified therein. The termination of the merger agreement with Synacor, Inc. represented a Triggering Event, resulting in ESW Holdings, Inc. securing an interest in certain of Qumu's cash deposit accounts.
Contingencies
In connection with the termination of merger agreement with Synacor, Inc. on June 29, 2020, Qumu is contingently obligated to pay Synacor, Inc. $1,450,000 upon the occurrence of certain events with respect to an Acquisition Transaction (as defined in the mutual termination agreement with Synacor, Inc.) during the 15 months following the termination, that is, by September 29, 2021. The Company has not accrued a liability related to this contingent obligation as the payment is not triggered unless and until an Acquisition Transaction occurs. See Note 9–"Termination of Merger Agreement with Synacor, Inc."
The Company is exposed to asserted and unasserted claims encountered in the normal course of business. Legal costs related to loss contingencies are expensed as incurred. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.
The Company’s standard arrangements include provisions indemnifying customers against liabilities if the Company's products infringe a third-party’s intellectual property rights. The Company has not incurred any costs in its continuing operations as a result of such indemnifications and has not accrued any liabilities related to such contingent obligations in the accompanying condensed consolidated financial statements.

(4) Fair Value Measurements
Assets and liabilities measured at fair value are classified into the following categories:
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect an entity’s own estimates of assumptions that market participants would use in pricing the asset or liability.
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As of September 30, 2020, the following warrants for the purchase of Qumu's common stock were outstanding and exercisable:
DescriptionNumber of underlying warrant sharesWarrant exercise price
(per share)
Warrant expiration date
Warrant issued in conjunction with October 2016 debt financing ("Hale warrant")314,286 $2.80 October 21, 2026
Warrant issued to sales partner, iStudy Co., Ltd. ("iStudy warrant")100,000 $2.43 August 31, 2028
Total warrants outstanding414,286 
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 in other income (expense) of the consolidated statement of operations as "Decrease (increase) in fair value of warrant liability." The Company recorded non-cash expense of $332,000 and non-cash income of $973,000 for the three months ended September 30, 2020 and 2019, respectively, and non-cash expense of $730,000 and $752,000 for the nine months ended September 30, 2020 and 2019, respectively, resulting from the change in fair value of the warrant liability.
On May 1, 2020, the Company canceled the ESW warrant in exchange for a note payable (see Note 3–"Commitments and Contingencies") which contained an embedded derivative liability that is measured on a recurring basis at fair value. The Company recorded non-cash expense of $1,000 for the three months ended September 30, 2020 and non-cash income of $104,000 for the nine months ended September 30, 2020 resulting from the change in fair value of the derivative liability.
The Company’s liabilities measured at fair value on a recurring basis and the fair value hierarchy utilized to determine such fair values is as follows at September 30, 2020 and December 31, 2019 (in thousands):
  Fair Value Measurements Using
 Total Fair
Value at
September 30, 2020
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:    
Warrant liability - Hale$1,462 $ $ $1,462 
Warrant liability - iStudy352   352 
Warrant liability$1,814 $ $ $1,814 
Derivative liability$36 $ $ $36 
Total$1,850 $ $ $1,850 

  Fair Value Measurements Using
 Total Fair
Value at
December 31, 2019
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities:    
Warrant liability - ESW$2,149 $ $ $2,149 
Warrant liability - Hale645   645 
Warrant liability - iStudy145   145 
Total$2,939 $ $ $2,939 
The Company's evaluation of the probability and timing of a change in control represents an unobservable input (Level 3) that shortens or lengthens the expected term input of the option pricing model for all warrants, and generally correspondingly increases or decreases, respectively, the discounted value of the minimum cash payment component of the Hale warrant and, prior to its cancellation, the ESW warrant. Consequently, as of September 30, 2020 and December 31, 2019, the liability related to each warrant was classified as a Level 3 liability.
The Company's evaluation of the probability and timing of a change in control represents an unobservable input (Level 3) that increases or decreases the likelihood of triggering the note payable agreement's Fundamental Transaction contingency, resulting in Level 3 classification of the derivative liability.
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The following table represents the significant unobservable input used in the fair value measurement of Level 3 warrant liability instruments:
 September 30, 2020
Probability-weighted timing of change in control5.1 years
The following table summarizes the changes in fair value measurements for the nine months ended September 30, 2020:
Warrant liabilityDerivative liabilityTotal
Balance at December 31, 2019$2,939 $ $2,939 
Cancellation of ESW warrant liability (Note 3)(1,855) (1,855)
Issuance of derivative liability upon cancellation of ESW warrant 140 140 
Change in fair value730 (104)626 
Balance at September 30, 2020$1,814 $36 $1,850 

(5) Revenue
The Company generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services.
Revenues by product category and geography
The Company combines its products and services into three product categories and three geographic regions, based on customer location, as follows (in thousands):
 Three Months Ended
 September 30,
Nine Months Ended
 September 30,
 2020201920202019
Software licenses and appliances$548 $1,962 $6,149 $3,656 
Service
Subscription, maintenance and support5,349 4,166 14,182 13,883 
Professional services and other733 543 1,860 1,595 
Total service6,082 4,709 16,042 15,478 
Total revenues$6,630 $6,671 $22,191 $19,134 

Three Months Ended
 September 30,
Nine Months Ended
 September 30,
 2020201920202019
North America$4,238 $4,916 $15,801 $12,416 
Europe2,106 1,505 5,596 5,650 
Asia286 250 794 1,068 
Total$6,630 $6,671 $22,191 $19,134 
Contract Balances
The Company’s balances for contract assets totaled $802,000 and $1.1 million as of September 30, 2020 and December 31, 2019, respectively. The Company’s balances for contract liabilities, which are included in deferred revenue, totaled $15.9 million and $11.6 million as of September 30, 2020 and December 31, 2019, respectively.
During the three and nine months ended September 30, 2020, the Company recognized $4.2 million and $8.6 million, respectively, of revenue that was included in the deferred revenue balance at the beginning of the period. During the three and nine months ended September 30, 2019, the Company recognized $3.4 million and $8.3 million respectively, of revenue that was included in the deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoices in relation to the timing of recognizable revenue as described above.
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and
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recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $26.7 million as of September 30, 2020, of which the Company expects to recognize $14.7 million of revenue over the next 12 months and the remainder thereafter. During the nine months ended September 30, 2020 and 2019, no revenue was recognized from performance obligations satisfied in previous periods.

(6) Stock-Based Compensation
The Company granted the following stock-based awards in the periods indicated:
 Three Months Ended
 September 30,
Nine Months Ended
 September 30,
 2020201920202019
Stock options457,692 14,000 457,692 39,000 
Restricted stock awards and restricted stock units511,392 25,900 564,992 222,588 
With the exception of the awards described in the following paragraph, the stock options, restricted stock awards and restricted stock units granted during the nine months ended September 30, 2020 and 2019 were granted under the Company's Second Amended and Restated 2007 Stock Incentive Plan (the "2007 Plan"), a shareholder approved plan.

In addition to awards granted under the 2007 Plan, the Company granted a non-qualified option to purchase 457,692 shares of its common stock to a newly hired executive management level employee on July 22, 2020, which was the first date of an open window period following the first day of employment. The option was granted outside of any shareholder-approved plan as an inducement to accept employment with the Company. The option has an exercise price equal to the closing price of the Company’s common stock as reported by the Nasdaq Stock Market on the grant date, vest in three equal installments on each of the first three anniversaries of the date of grant and has a term of seven years. In other respects, the option was structured to mirror the terms of the options granted under the 2007 Plan and are subject to a stock option agreement between the Company and the employee.

During the three months ended September 30, 2020, the Company's shareholders approved an amendment to the 2007 Plan to increase the number of shares authorized under the plan by 500,000 to a total of 3,730,320 shares.

In settlement of vested performance stock units granted in 2018, during the nine months ended September 30, 2019 the Company issued 98,492 shares of restricted stock, which was equal to the number of vested 2018 performance stock units multiplied by the performance goals achievement of 100%. At December 31, 2019, there were 40,599 shares of common stock underlying the outstanding 2018 performance stock units that were subject to vesting upon the achievement of performance goals for the performance period of January 1, 2019 to December 31, 2019. The outstanding unvested 2018 performance stock units were canceled on February 10, 2020 upon determination by the Compensation Committee of the Company's Board of Directors that the performance metric for the 2019 performance period was not achieved. Accordingly, as of September 30, 2020, there were no performance stock units outstanding.
The Company recognized the following expense related to its share-based payment arrangements (in thousands):
 Three Months Ended
 September 30,
Nine Months Ended
 September 30,
 2020201920202019
Stock-based compensation cost, before income tax benefit: