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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, 2020
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-20728
qumu-20201231_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.)
400 S 4th St,Suite 401-412
Minneapolis,Minnesota55415
(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
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 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 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.
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes 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 $41,459,000.
As of March 5, 2021, the registrant had 17,579,929 outstanding shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the 2021 Annual Meeting of Shareholders to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.
1


TABLE OF CONTENTS
  Page
 
 
Item 6.[Reserved]

 
 
2

Table of Contents
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, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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", "Company" or "we") provides the tools 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. Qumu’s customers, which include some of the world’s largest organizations, leverage the Qumu platform for a variety of cloud, on-premise and hybrid deployments. Use cases include 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. An individual sale 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)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Software licenses and appliances$6,762 $4,903 $5,814 $1,859 $(911)38 %(16)%
Service22,310 20,459 19,199 1,851 1,260 %%
Total revenues$29,072 $25,362 $25,013 $3,710 $349 15 %%
In the third quarter we began the initial implementation phase of our long-term strategic roadmap, which is designed to position Qumu as a focused, cloud-first organization driving improved, high-margin recurring revenue. As part of these initiatives, in the third and fourth quarter of 2020, we have:

Expanded our leadership team with the hiring of TJ Kennedy, our President and Chief Executive Officer and Jason Karp, our Chief Commercial Officer/Chief Counsel;
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Aligned our personnel to our new focus and created new roles consistent with that focus, including hiring a Chief Marketing Officer, Chief Revenue Officer and Vice President of Strategy
Launched a new Qumu app for Zoom, enabling self-service streaming of Zoom events to audiences of 100,000+ while adding comprehensive video content management and enterprise-grade security
Released the Qumu Cloud Build and Price Tool, which allows users to customize their own annual cloud video subscription based on parameters such as storage and bandwidth needs, user counts, live streams, distribution preferences and so on
Launched Qumu Cloud for Audio Streaming, a large-scale audio streaming service that provides enterprises with secure, high-quality audio-only call delivery and management at a significantly lower cost than standard audio-conferencing services
Introduced Qumu Video Control Center (VCC) version 10.5, the customer-hosted deployment of Qumu’s intelligent Enterprise Video platform, adding key features such as the Qumu Analytics Engine (QAE), which provides comprehensive, real-time and historical usage reporting of both live and on demand video content.

Enterprise Video Content Management and Delivery Software
To increase communication, engagement and collaboration between employees and stakeholders, organizations are accelerating technology investments to improve the engagement and connectivity of remote work forces, offices, conference rooms, computers and portable devices. As part of this shift in technology investment, enterprises are quickly embracing video as the primary communication and collaboration medium.
Qumu is a 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 an innovation leader when scalability, reliability and security are critical. Backed by one of the most talented and experienced teams 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. We integrate with and extend the reach of video conferencing solutions such as Zoom, WebEx and Microsoft Teams, supporting the distribution of video via collaboration tools such as Slack and Social Chorus.
Many of the world’s largest organizations leverage the Qumu platform for a variety of cloud, on-premise or hybrid deployments. These uses include executive webcasting, corporate communications, training and onboarding, employee collaboration, external sales, marketing communications, collaborative captioning and subtitling and centrally managing content for iPTV and digital signage solutions.
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 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., videoconferencing systems), SaaS business applications (e.g., Zoom, Cisco WebEx, Microsoft Teams and Socialive) and broader IT infrastructures using Qumu's extensive application services or "APIs." Deployments range from a single customer location to global infrastructures serving over one hundred thousand 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 encompasses four distinct elements:
Video Capture
Video Content Management
Intelligent Delivery
Extensions and Add-Ons
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Video Capture
Qumu’s intelligent video capture (sometimes referred to as ingest) dynamically supports 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 popular unified communications solutions such as Zoom, Cisco WebEx, Microsoft Teams and Socialive, to hardware-intensive conference room systems, such as Zoom Rooms, Polycom and Cisco.
Qumu brings streaming and video content management to these video communications tools, raising the capabilities that they can bring to the enterprise. As video conferencing becomes a common 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.
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.
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
Qumu provides a diverse, flexible and robust series of solutions for enterprise delivery of live streaming or on-demand video. At the core of the Qumu platform 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.
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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 Zoom, Cisco WebEx, Socialive, CaptionHub, Microsoft Office 365, Teams, SharePoint, Yammer, IPTV, Jive, IBM Connections, Polycom, Hive, 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 five primary markets being 1) Banking, Finance and Insurance, 2) Manufacturing, 3) Services and Consulting, 4) Telecom and Technology and 5) Biotech and Health Care. Qumu targets enterprises with 5,000+ employees. Across all deployment types (cloud, on-premise and hybrid) and in all five markets, Qumu’s customers include many of 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. Qumu has been identified as a leader by multiple industry analysts, some examples of which include:
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 2021, as well as a new contender in the most recent Globe Report for Web and Video Conferencing.
Wainhouse Research has positioned Qumu as a leader in the Enterprise Streaming Market on multiple occasions.
Streaming Media Magazine recognized Qumu as one of the 50 companies that matter most in online video.
CIO Applications recognized Qumu for reliable, unifying, easy-to-use communication tools that facilitate flexible work environments for distributed and remote employees.
As indicated by these honors, we believe Qumu is among the leading enterprise video platform vendors in the space.
Qumu sells products and services internationally through its U.S. operation and its subsidiaries in the United Kingdom and Japan. International sales comprised approximately 31%, 35% and 33% of revenues for the years ended December 31, 2020, 2019 and 2018, respectively. During the year ended December 31, 2020, 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 also encounters organizations utilizing Zoom, Cisco's WebEx and Microsoft’s Teams technologies for video. While some view Zoom, WebEx and Teams as competitors to Qumu and some customers view their products as a complete alternative to Qumu’s technology, their focus is individual and workgroup video conferencing. We believe that the Zoom, WebEx and Teams and Qumu technologies can be seamlessly integrated and provide the customer with greater scale, security and flexibility and improved manageability than use of those 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 $8.3 million, $7.4 million and $7.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
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As of December 31, 2020, 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 $50,000 in 2021.
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.
Regulation of Our Product
Qumu is subject to several U.S. federal and state and international laws and regulations relating to the operation of our business. These laws and regulations may involve privacy, data protection, data security, intellectual property, competition, anticorruption protection, export controls, online payment services, labor and employment and other matters relating to general business operations. Many laws and regulations to which the Company is subject are still evolving, particularly in the privacy and data protection area, and are being tested in practice and in domestic and international judicial tribunals. In addition, such laws and regulations may be interpreted and applied inconsistently country to country or in the U.S. state to state. As a result, the application, interpretation and enforcement of these laws and regulations creates some uncertainty, particularly relating to our rapidly evolving industry and given the new challenges relating to remote work in light of the Covid-19 pandemic. Given the untested application, ongoing evolution and interpretation of these regulations, we may incur increased compliance costs, we may incur increased research and development costs to enhance our products and services, and/or our products and services may not at all times be in full compliance with such applicable laws and regulations.
For example, the General Data Protection Regulation (“GDPR”), which took effect in May 2018, the United Kingdom’s transposition of GDPR into its domestic laws post Brexit in January 2021, and the California Consumer Privacy Act (“CCPA”), which took effect in January 2020, apply to all of our products and services used by people in Europe. the United Kingdom and California, respectively. These laws impose enhanced data protection requirements on companies, including Qumu, that receive or process the personal data of people in the relevant geographies. The Company may be subject to substantial monetary sanctions for violations of these laws and regulations. Similarly, there are a number of legislative proposals in the European Union, the United States, at both the federal and state level, as well as other jurisdictions that could impose new privacy and data security obligations or limitations affective our business and our products.
These and other laws create an increasingly complex framework and set of compliance obligations which may impact Qumu it's customers. Our failure to comply with applicable privacy or data security laws, regulations, and policies, or to protect personal data, or perception of the same, could result in possible enforcement and legal actions and significant penalties against the Company, which could result in negative publicity, increased costs, lost revenue, and/or have a material adverse effect on Qumu's business, financial condition and results of operations. The Company is also aware of increased scrutiny on Qumu's customer base in regulated industries such as banking, insurance and healthcare concerning data protection and privacy and this
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has led to more complex customer negotiations and onboarding processes as we are required to provide these organizations with sufficient comfort in our compliance and security procedures. Privacy and data security concerns are also factors that may affect a potential customer's decision to subscribe to our products and services. To the extent we are unable to meet with our customers’ data protection and security contract requirements, we may lose the customer opportunity or, in the case of an existing customer, we could face claims by, loss of revenue from, loss of confidence, or other adverse consequences from our customers.
For more information, see "Item 1A. Risk Factors Risk Factors – Risks Related to Our Business and Industry".
Human Capital
Qumu’s single most important and valuable resource is its people. Ensuring a happy, engaged and productive workforce is paramount to the Company's success and Qumu is committed to creating a culture of engagement, integrity, diversity, professional development, transparency, and accountability. Qumu offers a variety of programs and benefits to create a compelling value proposition for attracting and retaining qualified employees. In 2020, Qumu introduced its "Work from Wherever, Forever" policy. This allows Qumu attract and retain top notch talent without geographic limitations.
Diversity and Inclusion: Talent unbridled by geographic limitations also creates the opportunity for greater diversity. Qumu is dedicated to increasing diversity of its workforce and working with partners who emphasize the importance and benefits of a diverse workforce. In 2020, Qumu established a new Diversity, Equity and Inclusion ("DE&I") Committee comprised of employees from all functions and levels of the company. The Committee is charged with recommending and helping implement Qumu’s DE&I vision to ensure Qumu is leveraging a diverse set of viewpoints, perspectives and skills sets to make Qumu a stronger and more inclusive enterprise. Beginning in February 2021, the Governance Committee of the Company's Board of Directors (the "Board") is responsible for oversight of Qumu's Environmental, Social and Governance (ESG) programs, including DE&I initiatives. We believe this Governance Committee level of oversight demonstrates Qumu’s commitment to achieving diversity and inclusiveness.
Development and Training: Qumu employs a 360 degree review and communications tool which helps us streamline our personnel review process and emphasize the importance of candid and timely feedback for everyone in the organization. Through this tool, we have implemented:
360 degree reviews
Real-time feedback and engagement
1:1 check-ins with customizable templates and shared meeting agendas
Goal setting at organizational, departmental, & individual level
Employee engagement tools, including in-depth surveys and quick pulse surveys, and
Growth plan development
All employees are strongly encouraged to use this tool as part of the Company's commitment to transparency, growth and development.
In addition, Qumu believes in regular and ongoing compliance and development training and is committed to offering opportunities for training development and ensuring compliance with applicable rules and regulations.
Health and Wellness: With the increase in remote work, in particular due to the Covid-19 pandemic, in person interactions have decreased and the Company expects even after the pandemic is under control, its work force will have reduced levels of in-person interactions compared to pre-pandemic levels. As such, Qumu has adjusted its approach to interacting with employees and has focused on new health and wellness initiatives to ensure employees remain healthy and productive as they conduct their work. Some of these measures include communicating appropriate social distancing and mask wearing guidelines consistent with state and CDC guidance; leveraging multimedia communications, including video, to conduct most daily business operations, and weekly tips and guidance on maintaining both physical and mental health. In addition, to help employees remain productive and enable more focused work, Qumu has implemented the “Focus Fridays” program where all non-necessary video and conference calls have been eliminated, freeing up time to enable Qumu personnel to focus on productive, priority work on Fridays without unnecessary distractions.
In addition, in 2020, Qumu closed its three major physical office locations and instituted a "Work from Wherever, Forever" policy. Our employees are able to work from just about anywhere, which affords them a greater work - life balance. Commutes have all but been eliminated and business travel, due in part to the COVID-19 pandemic, has been significantly reduced. The Company anticipates reduced travel will continue throughout 2021 and will closely monitor CDC guidelines for travel guidance.
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Culture and Values: The successful business operation and reputation of Qumu is built upon the principles of fair dealing and ethical conduct of its employees. We believe Qumu's reputation for integrity and excellence requires careful observance of the spirit and letter of all applicable laws and regulations, as well as a scrupulous regard for the highest standards of conduct and personal integrity. We believe Qumu promotes a culture in which its values are clearly visible to all and its actions are uncompromised. We believe it is essential for each of our directors, officers, employees and other representatives to act at all times with honesty and propriety, to exercise good judgment and to conduct business in a manner that such action can be supported without reservation or apology.
Qumu maintains a code of business ethics applicable to all directors, officers, employees and other representatives of Qumu. The Company's third-party partners, vendors and suppliers are informed of these code requirements and we endeavor to incorporate key elements of such requirements into our contracting process. In addition, Qumu maintains a set of key core values that reflect who we are and the way our employees interact with one another, our customers, partners, suppliers, and shareholders. These core values include:
Innovation – We continually seek to transform our products and service, by anticipating future market and customer needs
Collaboration – We use the latest tools and technologies with the philosophy to connect employees, teams, and customers across the globe to operate seamlessly
Transparency – We foster visibility into our departments, processes, key decisions, philosophies and company approaches and welcome questions and feedback
Accountability – We take ownership of our actions, roles and results and accept responsibility, as well as seek to continually improve
Mindfulness – We make sure every decision, no matter the size, is in the best interest of the company, our customers, our shareholders, and our partners, ensuring we take care of our people along the way
The continued success of Qumu is dependent upon our customers’ trust and we are dedicated to preserving that trust. Qumu’s expectation is that employees will use good judgment and respond to each situation in an ethical and legal manner consistent with these core principles.
Competitive Pay and Benefits: Qumu is committed to providing a total compensation package that will attract, retain, motivate and reward quality employees who must operate in a highly competitive, high growth, tech/SaaS environment. We do this by making available multiple compensation elements aligned with overall company performance, including both cash and equity components depending on employee level and role. The emphasis on overall company performance aligns each employee’s financial interests with Company results and the interests of our shareholders. Qumu also regularly seeks to ensure equity in total compensation by using both internal and external comparisons and data to ensure both internal and external competitiveness and fairness.
Qumu's commitment to providing comprehensive benefit options include periodic reviews of benefits with a focus on offering benefits that will allow our employees and their families to live healthier and more secure lives. Examples of benefits offered include: Qumu’s "Work from Wherever, Forever" policy, medical insurance, prescription drug benefits, dental insurance, vision insurance, life insurance, disability insurance, health savings accounts, flexible spending accounts, adoption reimbursement, unlimited PTO for exempt employees, availability of legal services, identity theft insurance, 401(k) with company match, “work from home” equipment supplied along with a monthly stipend.
Employee Recruitment: Attracting the best talent is a core priority at Qumu. The Company leverages a diverse range of sources in order to meet the current and future demands of our business. We use various online recruiting platforms, social media platforms and specialized recruiters as appropriate, as well as internal employee networks and referrals, which is one of our most prolific recruiting assets. Qumu has implemented a robust internal recruiting and employee referral program where employees receive substantial financial rewards for referrals that are hired and remain with the company for at least one year.
We believe Qumu is in the midst of a unique and positive transformation – providing a compelling employee value proposition that includes exciting work and professional development opportunities, a culture of transparency, communication and collaboration, a shared understanding of our company goals and direction, and a shared sense of purpose and ownership in the company and its success. In addition, through our "Work from Wherever, Forever" policy, Qumu is able to offer new work opportunities to individuals who, based on location alone, may not have otherwise been eligible for such positions in the past, greatly expanding the pool of great talent available to Qumu and making the opportunities at Qumu more broadly available to a global audience.
As of December 31, 2020, the Company had 102 employees, all of which were full-time employees and of which 36 were involved in research and development, 28 in sales and marketing, 21 in service and support and 17 in administration and
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management. Of the 102 employees, 55 reside in North America, 31 reside in Europe and 16 reside in India. Of this headcount, 19 were comprised of women and 23 were considered diverse from an ethnicity perspective based on country.
Qumu defines diversity as a self-reported characteristic which is non-White or White plus another race/ethnicity based on the population make-up of the country. Our diversity numbers as of December 31, 2020 reflect 19% women and 23% reflected ethnic/racial diversity. Also, our employees located in India are all considered Indian nationals and therefore do not meet the definition of diverse in India and therefore are not included in the noted percentage.
None of Qumu's employees are represented by a labor union or covered by a collective bargaining agreement.
In the third quarter of 2020, we began the initial implementation phase of our long-term strategic roadmap, and as part of these initiatives, we intend to significantly expand our employee base. In 2021, we are targeting to add employees in research and development, sales and marketing, service and support and administration and management. Pending some of these hires, we may use outside consultants to expand our human capital resources.
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 Related to Our Business and Our Industry
We may not be successful at implementing our long-term strategic roadmap.
In July 2020, we began the process of developing our long-term strategic roadmap and late in the third quarter of 2020, we began the initial implementation phase of our long-term strategic roadmap. This strategy is aimed at transforming Qumu as a more focused, cloud-first organization driving improved, high-margin recurring revenues.
We cannot ensure that our long-term strategic roadmap will be successful either in the short-term or in the long-term, or that this strategy will generate the intended operational or financial results within the timeframes expected or at all. Further, if customer preferences and the use of video in the enterprise do not evolve as we believe they will, many of our strategic initiatives and investments may be of limited value.
Moreover, we may not execute our long-term strategic roadmap successfully because of errors in planning or timing, technical hurdles that we fail to overcome in a timely fashion, or lack of appropriate resources. Our failure to successfully execute on the initiatives within our long-term strategic roadmap, even if the strategy is sound, could result in loss of market share and sales. Additionally, if we do not effectively communicate our long-term strategic roadmap to our investors and stakeholders, we may not realize the full benefits that we would otherwise gain through successful execution of that strategy.
We have and intend to continue to implement our long-term strategic roadmap by investing in our cloud platform, in our go-to-market initiatives, targeted channel strategies, the development of new applications, products and features, and other initiatives that we have identified or that have yet to be developed. The process of identifying the specific initiatives to align with our long-term strategic roadmap and the process of implementing these initiatives is complex and uncertain. Additionally, we must
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commit significant resources to these initiatives before knowing whether our investments will result in the operational or financial results we expect or intend. The return on our investments in initiatives may be lower, or may develop more slowly, than we expect. For example, as Qumu continues to expand its SaaS salesforce, our operating expenses will increase in the first half of 2021 as compared to the first half of 2020 and we expect our revenue growth rate to accelerate in the second half of 2021 as compared to the first half of 2021. If we are not able to hire, train or integrate our SaaS sales force in the timeframes we expect or if they do not become productive in the timeframes we expect, our revenue growth may not accelerate as we expect. If we do not achieve the benefits anticipated from these investments or if the achievement of these benefits is delayed, our operating results may be adversely affected. There can be no assurance that we will develop and implement initiatives will advance the goals of our long-term strategic roadmap in a cost-effective or timely manner or at all.
The COVID-19 pandemic has significantly impacted worldwide business practices and economic conditions and could have a material effect on Qumu’s business, financial condition and operating results.
As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus, such as vaccine distribution, travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, and business shutdowns.
In response to these developments, we have modified our business practices by restricting employee travel, moving to remote work, cancelling in-person attendance at events and conferences, and implementing social distancing. The resources available to our employees working remotely may not enable them to maintain the same level of productivity and efficiency, particularly our sales employees whose in-person access to our customers and customer prospects has been significantly limited. While we have experienced only limited absenteeism from employees, absenteeism may increase in the future and may harm our productivity. Due to customer demand, Qumu has and may in the future rely upon outsourced professional services, which could negatively impact margins.
The COVID-19 pandemic also has changed worldwide business practices as companies have implemented COVID-19 travel restrictions, work-from-home requirements and social distancing protocols. As part of these changes, enterprises of all sizes are implementing technology plans to virtualize customer meetings, employee communications and major events – as well as record and store video assets for on-demand viewing.
Qumu believes that the COVID-19 crisis will act as a tipping point for the use and acceptance of video as a primary communication channel within the enterprise. As video content and software to manage video content achieve high levels of acceptance within the enterprise, we believe this will drive demand and market adoption for Qumu’s video platform and tools. Widespread adoption and use of video in the enterprise is critical to Qumu’s future growth and success. However, there is no assurance that the COVID-19 crisis will result in substantial and sustained increased in use and acceptance of video as a primary communication channel or that this increased in use and acceptance of video will result in an increased demand among customers for Qumu’s video platform and tools.
Restrictions on the manufacturing, operations or workforce of our vendors and suppliers could limit our ability to meet customer demand for hardware purchased as a component of the overall Qumu solution, which would harm our ability to meet our delivery and installation obligations to customers and result in delayed or lost revenue and cash flow from collections. Furthermore, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, may result in higher costs and delays for supply of hardware, which could reduce our margins on hardware.
The current spread of COVID-19 across many countries has caused a significant global recession with a high proportion of economies of many nations experiencing the recession. Unfavorable changes in economic conditions, including recession, inflation, lack of access to capital, or other changes, have in the past resulted in and may in the future result in lower corporate spending among our customers and target customer. At this time, it is uncertain whether the COVID-19 driven recession would result in lower spending by our customers and target customers on video technologies or soften the 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.
The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and geographic spread of the outbreak, its severity, the actions to contain the virus and address its impact, travel restrictions imposed, business closures or business disruption, and the actions taken throughout the world, to contain COVID-19 or treat its impact.
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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 Qumu expects, including as a result of COVID-19 impacts, Qumu’s 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 the use of video will achieve high levels of long-term acceptance. Widespread adoption and use of video in the enterprise is critical to Qumu’s future growth and success. Likewise, it is uncertain whether video content management software will achieve high levels of demand and market adoption. Qumu’s 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. Qumu believes that the COVID-19 crisis will act as a tipping point for the use and acceptance of video as a primary communication channel within the enterprise. As video content and software to manage video content achieve high levels of acceptance within the enterprise, we believe this will drive demand and market adoption for Qumu’s video platform and tools. In particular, we have noted a trend toward new customers choosing Qumu’s cloud-based enterprise video solution or existing customers converting to a cloud-based solution.
Despite the changes in business practices caused by the COVID-19 pandemic, 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 Qumu’s 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 Qumu’s video content management software or force Qumu to reduce the prices Qumu charges for its 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 Qumu’s video content management software.
If customers do not perceive the benefits of Qumu’s 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 Qumu’s software might not continue to develop or might develop more slowly than Qumu expects, either of which would significantly adversely affect Qumu’s financial results and prospects.
Further, there is no assurance that the COVID-19 crisis will result in substantial and sustained increased in use and acceptance of video as a primary communication channel or that this increased in use and acceptance of video will result in an increased demand among customers for Qumu’s video platform and tools, either of which would significantly adversely affect Qumu’s 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.
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We have a history of losses, and while we are investing heavily in sales, marketing and research and development to enhance revenue growth and become cash flow positive in late 2022, we may not achieve those goals or achieve or sustain cash flows or profitability in the future.
We experienced consolidated net losses of $9.2 million, $6.4 million and $3.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. While we generated positive cash flows from operations during 2020, we have historically not generated sufficient operating cash flow to fund our operations. In executing our long-term strategic roadmap, our strategy of driving improved, high-margin recurring revenues requires us to expand our SaaS sales force, hire additional personnel, and implement new software programs and systems. Accordingly, we expect our operating expenses will increase significantly in the first half of 2021 as compared to the first half of 2020, and we expect our revenue growth rate to accelerate in the second half of 2021 as compared to the first half of 2021. However, even if revenues grow as expected in 2021, we may not achieve cash flow positivity in 2022.
In order 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). In 2021, Qumu expects cash flows from operating activities to be significantly affected by expenditures associated with the execution of our strategic roadmap, as well as those factors that have historically impacted operating cash flows – fluctuations in revenues, timing of customer payments, personnel costs, outside service providers, and the amount and timing of royalty payments and equipment purchases as Qumu continues to support the growth of its business.
We cannot assure you that we will achieve our goal to improve cash flow in the second half of 2021 compared to the first half of 2021 nor that we will achieve cash flow positivity in 2022. 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 businesses and other organizations. As we target our sales efforts at these customers, we face greater costs, longer sales cycles and less predictability in completing sales. In the large enterprise market, the customer’s decision to use our products may be an enterprise-wide decision and, therefore, these types of sales require us to provide greater levels of education regarding the use and benefits of our applications. Further, given the constant innovation with our industry and our products, customers may delay purchasing decisions until certain features or products in development are brought to market. Longer sales cycles could cause our operating and financial results to suffer in a given period.
To compete effectively, we must continually improve existing products and introduce new products that achieve market acceptance.
In order to remain competitive and increase sales to customers, we must anticipate and adapt to the rapidly changing technologies in the enterprise video content management market, enhance our existing products and introduce new products to address the changing demands of our customers. If we fail to anticipate or respond to technological developments or customer requirements, or if we are significantly delayed in developing and introducing products, our revenues will decline.
If we fail to accurately predict customers’ changing needs and emerging technological trends, our business could be harmed. We must commit significant resources and may incur obligations (such as royalty obligations) to develop new products and features before knowing whether our investments will result in products the market will accept and without knowing the levels of revenue, if any, that may be derived from these products. Some of our competitors have greater engineering and product development resources than we have, allowing them to develop a greater number of products or improvements or to develop them more quickly.
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.
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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 also encounters organizations utilizing Zoom, Cisco's WebEx and Microsoft’s Teams technologies for video. While some view Zoom, WebEx and Teams as competitors to Qumu and some customers view their products as a complete alternative to Qumu’s technology, we believe that the Zoom, WebEx and Teams and Qumu technologies can be seamlessly integrated and provide the customer with greater scale, security and flexibility and improved manageability than use of those 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.
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 grow and optimize our sales infrastructure in order to grow our customer base and our revenues. 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 and customer success models that focus on different sales strategies
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tailored to different customer types and stages of our customers lifecycles. 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.
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;
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;
the demand for our products will depend, in part, on local economic health;
political and economic instability may reduce demand for our products;
restrictions on the export or import of technology may reduce or eliminate our ability to sell in certain markets;
potentially limited intellectual property protection in certain countries may limit our recourse against infringing products or cause us to refrain from selling in certain markets;
potential difficulties in managing our international operations;
the burden and cost of complying with a variety of international laws, including those relating to data security and privacy;
we may decide to price our products in foreign currency denominations;
our contracts with international channel partners cannot fully protect us against political and economic instability;
potential difficulties in collecting receivables; and
we may not be able to control our international channel partners’ efforts on our behalf.
The financial results of our non-U.S. subsidiaries are translated into U.S. dollars for consolidation with our overall financial results. Currency translations and fluctuations may adversely affect the financial performance of our consolidated operations. Currency fluctuations may also increase the relative price of our product in international markets and thereby could also cause our products to become less affordable or less price competitive than those of international manufacturers. These risks associated with international operations may have a material adverse effect on our revenue from or costs associated with international sales.
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Risks Relating to Our Technology
Our enterprise video content management software products must be successfully integrated into our customers’ information technology environments and workflows, and changes to these environments, workflows or unforeseen combinations of technologies may harm our customers’ experience in using our software products.
A significant portion of our sales are made into applications that require our enterprise video content management software products to be integrated into other enterprise workflows, enterprise information technology environments or software functionalities. Any significant changes to enterprise workflows, IT environments or software programs may limit the use or functionality of or demand for our products. As our customers advance technologically, we must be able to effectively integrate our products to remain competitive. Further, current and potential customers may choose to use products offered by our competitors or may not purchase our products if our products would require changes in their existing enterprise workflows, IT environments or software.
The growth and functionality of our enterprise video content management software products depend upon the solution’s effective operation with mobile operating systems and computer networks.
Our products are currently compatible with various mobile operating systems including the iOS, Windows Mobile and Android operating systems. The functionality of our products depends upon the continued interoperability of these products with popular mobile operating systems. Any changes in these systems that degrade our products’ functionality or give preferential treatment to competitive offerings could adversely affect the operability and usage of our video management software products on mobile devices. Additionally, in order to deliver a high-quality user experience, it is important that our products work well with a range of mobile technologies, systems, and networks. We may not be successful in keeping pace with changes in mobile technologies, operating systems, or networks or in developing products that operate effectively within existing or future technologies, systems, and networks. Further, any significant changes to mobile operating systems by their respective developers may prevent our products from working properly or at all on these systems. In the event that it is more difficult for users to access content delivered by our solutions to their mobile devices, if our products do not operate effectively within the most popular operating systems or if popular mobile devices do not offer a high-quality user experience, sales of and customer demand for our software products could be harmed.
Any failure of major elements of our products could lead to significant disruptions in 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
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termination or expiration of the license.
Because of these risks, some of these licenses may not be available to us in the future on terms that are acceptable to us or allow our products to remain competitive. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or impair the functionality or enhancement of existing products, leading to increased expense associated with licenses of third-party software or development of alternative software to provide comparable functionality for our existing products and modification of our existing products. Further, if we lose or are unable to maintain any of these third-party licenses or are required to modify software obtained under third-party licenses, it could delay the release of new products, delay enhancements to our existing products or delay sales of our existing products. Any delays could result in loss of competitive position, loss of sales and loss of customer confidence, which could have a material adverse effect on our business, results of operations and financial condition.
If the limited amount of open source software that is incorporated into our products were to become unavailable or if we violate the terms of open source licenses, it could adversely affect sales of our products, which could disrupt our business and harm our financial results.
Our products incorporate a limited amount of “open source” software. Open source software is made available to us and to the public by its authors or other third parties under licenses that impose certain obligations on licensees that re-distribute or make derivative works of the open source software. We may not be able to replace the functionality provided by the open source software currently incorporated in our products if that software becomes unavailable, obsolete or incompatible with future versions of our products. In addition, we must carefully monitor our compliance with the licensing requirements applicable to that open source software. If we have failed or if in the future we fail to comply with the applicable license requirements, we might lose the right to use the subject open source software. The terms of some open source licenses would require us to give our customers significant rights to open source software that is subject to those licenses and is incorporated in our products. This would include the right to obtain from us the source code form of that open source software, and the right to use, modify and distribute that open source software to others. We may be required to provide these rights to customers on a royalty-free basis. Those rights might also extend to modifications and additions we make to the subject open source software. That open source software, and those modifications and additions, also might be obtained by our competitors and used in competing products.
The enforceability and interpretation of open source licenses remains uncertain under applicable law. Unfavorable court decisions could require us to replace open source software incorporated in our products. In some cases this might require us to obtain licenses to commercial software under terms that restrict our use of that commercial software and require us to pay royalties. In some cases we might need to redesign our software products, or to discontinue the sale of our software products if a redesign could not be accomplished on a timely basis. These same consequences result if our use of any open source software or commercial software is found to infringe any intellectual property right of another party. Any of these occurrences would harm our business, operating results and financial condition.
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
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failure to protect or enforce our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our products, and could have a negative impact on our business.
The future success of our business depends in part upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or international government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our products in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based applications such as ours. The adoption of any laws or regulations that adversely affect the growth, popularity or use of the Internet could limit the growth of the video as a mainstream communication and collaboration tool, limit the market for video content management software generally, and limit the demand for our products.
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 law 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.
Risks Related to our Common Stock
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;
timing of customer payments, including customer decisions to pre-pay;
variability in the size of customer purchases and the impact of large customer orders on a particular period;
the timing of major development projects and market launch of new products or improvements to existing products;
reductions in our customers’ budgets for information technology purchases and delays in their purchasing cycles, due to changing global economic or market conditions;
the impact to the marketplace of competitive products and pricing;
the timing and level of operating expenses;
the impact on revenue and expenses of acquisitions by us or by our competitors;
future accounting pronouncements or changes in our accounting policies; and
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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 trading volume of our common stock could affect your ability to sell your shares at a satisfactory price.
We have historically experienced a limited trading volume in our common stock. 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.
Provisions of Minnesota law, our bylaws and other agreements may deter a change of control of our company and may have a possible negative effect on our stock price.
Certain provisions of Minnesota law, our bylaws and other agreements may make it more difficult for a third-party to acquire, or discourage a third-party from attempting to acquire, control of our company, including:
the provisions of Minnesota law relating to business combinations and control share acquisitions;
the provisions of our bylaws regarding the business properly brought before shareholders;
the right of our board of directors to establish more than one class or series of shares and to fix the relative rights and preferences of any such different classes or series;
the provisions of our stock incentive plan allowing for the acceleration of vesting or payments of awards granted under the plan in the event of specified events that result in a “change in control” and the provisions of our outstanding awards requiring acceleration of vesting or payments of those awards in the event of a “change in control”;
the provisions of our agreements provide for severance payments to our executive officers and other officers in the event of certain terminations following a “change in control”; and
the provisions of our mutual termination agreement dated June 29, 2020 with Synacor, Inc. that requires the payment to Synacor of $1,450,000 in the event of certain acquisitions of Qumu prior to September 29, 2021.
These measures could discourage or prevent a takeover of our company or changes in our management, even if an acquisition or such changes would be beneficial to our shareholders. This may have a negative effect on the price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our corporate headquarters is located in Minneapolis, Minnesota. We lease all of our facilities and do not own any real property. In December 2020, the Company transitioned to permanent remote work for all of its personnel as part of its “Work from Wherever, Forever” policy. The Company closed three of its four offices due to its new remote work policy. In connection with this the Company entered into flexible shared workspace arrangements, in Minneapolis, Minnesota, and London, England and Hyderabad, India. The Company intends to continue to pay all rental payments due and payable by the Company pursuant to the leases governing the leased premises. We believe that our facilities are generally suitable to meet our current and future needs, and out "Work from Wherever, Forever" policy will allow the Company to enter new geographic markets as needed to accommodate any such growth.
Location of PropertyUse of PropertyApproximate Monthly Rent (USD)Approximate Leased Square FootageLease Expiration Date
Minneapolis, Minnesota (Headquarters)Administration and co-working space$2,800 350 June 2022
Burlingame, California
Engineering and technology storage
$16,000 
(1)
3,800 September 2022
_________________________________________________
(1)The agreement has escalating lease payments ranging from approximately $16,000 to $17,000 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 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 5, 2021, there were 92 shareholders of record of Qumu's common stock.
Dividends
The Company did not pay a dividend in 2020 or 2019 and does not expect to pay a dividend in 2021. The payment by Qumu of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on Qumu's future earnings, financial condition, capital requirements and other relevant factors.
Pursuant to the terms of the Loan and Security Agreements dated January 15, 2021 (the "Loan Agreement"), by and between the Company and Wells Fargo Bank, National Association, the Company is prohibited from making dividends, distributions or payments on its capital stock.
Issuer Purchases of Equity Securities
The Company’s Board of Directors has approved common stock repurchases of up to 3,500,000 shares of the Company’s common stock. The Company has implemented a Rule 10b5-1 plan in connection with the repurchase program in order to give the Company the ability to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed blackout periods. Shares may be purchased at prevailing market prices in the open market or in private transactions, subject to market conditions, share price, trading volume and other factors. The repurchase program may be discontinued at any time. The repurchase program has been funded to date using cash on hand. During the three months ended December 31, 2020, no repurchases were made under the repurchase program. While the current authorization remains in effect, the Company expects its primary use of cash will be to fund operations in support of the Company’s goals for revenue growth and operating margin improvement.

In addition to shares purchased under the Board authorization, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax withholding on stock option exercises or vesting of restricted stock awards. All of the share repurchase activity included in the table below for the three months ended December 31, 2020 was associated with satisfaction of employee tax withholding requirements on vesting of restricted stock awards and restricted stock units.
Information on the Company’s repurchases of its common stock during each month of the fourth quarter ended December 31, 2020, is as follows:
Monthly PeriodTotal 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 202074 $4.50 — 778,365 
November 2020216 $4.96 — 778,365 
December 20204,857 $5.76 — 778,365 
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information regarding Qumu's equity compensation plans in effect as of December 31, 2020. Each of the Company’s equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.
Securities Authorized for Issuance
Under Equity Compensation Plans
Plan categoryNumber of Shares of Common Stock to be Issued Upon Exercise of Outstanding Options, Warrants and RightsWeighted-Average Exercise Price of Outstanding Options, Warrants and Rights
Number of Shares of Common Stock Remaining Available for Future Issuance Under Equity Compensation Plans(1)
Equity compensation plans approved by shareholders
806,813 $3.21 640,205 
Equity compensation plans not approved by shareholders(2)
457,692 $4.90 — 
Total1,264,505$3.82 640,205
_______________________________________
(1)     Excludes shares of common stock listed in the first column.
(2)    Consists of an outstanding non-qualified stock option grant to TJ Kennedy, the Company’s President and Chief Executive Officer, on July 22, 2020, which was the first date of an open window period following the first day of employment with Qumu. The stock option was granted outside of the Company’s current equity incentive plan, the 2007 Stock Incentive Plan, as an “inducement award” pursuant to Nasdaq Listing Rules. 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, vests 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 options granted under the Company’s 2007 Stock Incentive Plan and is subject to a stock option plan and agreement entered into by and between the Company and Mr. Kennedy.
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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, 2020, 2019 and 2018, the Company generated revenues of $29.1 million, $25.4 million and $25.0 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 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.
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
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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.
Leases
The Company is a lessee in several non-cancellable operating leases for office space and finance leases, for certain IT equipment, that expire at various dates over the next three years. 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.
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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. Because at the inception of the leases the Company was not reasonably certain to exercise the options, the options were not considered in determining the lease terms under Topic 842, which was adopted January 1, 2019. Many of the Company's leases include escalation clauses, renewal options and/or termination options that are factored into its determination of lease payments under Topic 842 when reasonably certain. These options to extend or terminate a lease are at the Company's discretion. The Company has elected to take the practical expedient and not separate lease and non-lease components of contracts. The Company estimates its incremental borrowing rate to discount the lease payments based on information available at lease commencement under Topic 842. The Company's lease agreements do not contain any material residual value guarantees.
During December 2020, the Company transitioned to permanent remote work for all of its personnel as part of its “Work from Wherever, Forever” policy. The Company notified its landlords that it was surrendering its right to occupy the office space as it closed three of its four offices due to its new remote work policy. The Company had early termination clauses for two of the three office leases which were closed. The Company notified its landlords for the two leases with these clauses that it would not be exercising its option to renew and would be exercising the leases' early termination clauses allowing the lease terms to end in May 2022 and August 2022. The impact of the reduction of the lease terms reduced the Company's operating lease liabilities by $433,000. Effective December 31, 2020, the Company will no longer occupy the leased office space in Minneapolis, Minnesota and London, England, which were primarily used for engineering, service, sales, marketing and administration, and the leased office space in Hyderabad, India, which was primarily used for software development and testing. The Company will continue to occupy its leased space in Burlingame, California, primarily for technology storage and research and development. Given the transition to permanent remote work, the Company recorded in the fourth quarter of 2020 a non-cash expense of approximately $637,000 related to the right of use assets–operating leases for the three surrendered office leases. Additionally, the Company incurred a non-cash expense of $280,000 in the fourth quarter of 2020 related to the surrender of certain leasehold improvements, office and computer equipment, and furniture at the leased premises.
During December 2020, the Company also entered into lease agreements associated with flexible shared workspace arrangements in Minneapolis, Minnesota, and London, England, and Hyderabad, India. The flexible shared workspace arrangement in Minneapolis, Minnesota has a lease term of 18 months and therefore is considered a lease under Topic 842. The other two flexible shared workspace arrangements are 12 months or less, and thus the Company has elected the practical expedient method and recognize the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term.
The Company intends to continue to pay all rental payments due and payable by the Company pursuant to the leases governing the leased premises.
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, of which one representing 314,286 shares remained outstanding as of December 31, 2020. Subsequent to year end, a portion of the warrants were exercised in a cashless exercise. The exercise resulted in the issuance by the Company of 50,000 shares of common stock and an overall reduction of 75,703 warrant shares. On May 1, 2020, the Company canceled the ESW warrant in exchange for a note payable (see Note 4–"Commitments and Contingencies" of the accompanying consolidated financial statements) which contained an embedded derivative liability that is measured on a recurring basis at fair value. On August 31, 2018, the Company issued a separate warrant to a sales partner for the purchase of up to 100,000 shares of the Company's common stock, which remained outstanding as of December 31, 2020. 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.
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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.
Results of Operations
The percentage relationships to revenues of certain income and expense items for the years ended December 31, 2020, 2019 and 2018, and the percentage changes in these income and expense items between years, are contained in the following table:
 Percentage of RevenuesPercent Increase (Decrease)
 2020201920182019 to 20202018 to 2019
Revenues100.0 %100.0 %100.0 %15 %%
Cost of revenues(28.7)(27.8)(34.0)18 (17)
Gross profit71.3 72.2 66.0 13 11 
Operating expenses:   
Research and development28.4 29.0 27.9 12 
Sales and marketing31.1 34.3 33.6 
General and administrative34.6 26.8 28.5 48 (5)
Amortization of purchased intangibles2.3 3.0 3.6 (13)(16)
Total operating expenses96.4 93.1 93.6 19 
Operating loss(25.1)(20.9)(27.6)38 (23)
Other income (expense), net(7.6)(5.3)14.3 66 (137)
Loss before income taxes(32.7)(26.2)(13.3)43 100 
Income tax expense (benefit)(1.1)(0.8)1.2 58 (165)
Net loss(31.6)%(25.4)%(14.5)%43 %78 %
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)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Software licenses and appliances$6,762 $4,903 $5,814 $1,859 $(911)38 %(16)%
Service
Subscription, maintenance and support19,555 18,249 17,132 1,306 1,117 
Professional services and other2,755 2,210 2,067 545 143 25 
Total service22,310 20,459 19,199 1,851 1,260 
Total revenues$29,072 $25,362 $25,013 $3,710 $349 15 %%
Revenues can vary year to year based on the type of contract the Company enters into with each customer. The $3.7 million, or 15%, increase in total revenues from 2019 to 2020 was primarily driven by revenue attributable to a large customer order received at the end of the first quarter 2020, which the customer identified as specifically driven by the change in working environment due to COVID-19, resulting in increases in both software licenses and appliances revenues and service revenues.
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The $1.9 million increase in service revenues from 2019 to 2020 primarily resulted from a $1.3 million increase in subscription, maintenance and support revenues due to the aforementioned large customer order received in 2020, partially offset by the recognition of large term license sales in 2019 that were absent in the comparable period of 2020. Also contributing to the increase in service revenues was a $545,000, or 25%, increase in professional services revenues, which benefited from large software and appliances sales during 2020.
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.
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)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Gross profit:
Software licenses and appliances$4,234 $2,992 $3,537 $1,242 $(545)42 %(15)%
Service16,485 15,311 12,983 1,174 2,328 18 
Total gross profit$20,719 $18,303 $16,520 $2,416 $1,783 13 %11 %
Gross margin:
Software licenses and appliances62.6 %61.0 %60.8 %1.6 %0.2 %
Service73.9 %74.8 %67.6 %(0.9)%7.2 %
Total gross margin71.3 %72.2 %66.0 %(0.9)%6.2 %
For the years ended December 31, 2020, 2019 and 2018, gross margins are inclusive of the impact of approximately $286,000, $455,000 and $1.0 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 21, 19 and 18 service personnel at December 31, 2020, 2019 and 2018, respectively.
Gross margin percentages decreased in total in 2020 as compared to 2019. The 0.9% decrease in gross margin in 2020, compared to 2019, was primarily driven by a 0.9% decrease in service gross margin in 2020 compared to 2019 due to lower term license revenue, which generally carries higher margins. Additionally, 2020 included outsourced professional services expenses for certain customer-specific projects, which negatively impacted services gross margin.
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.
Future gross profit margins will fluctuate quarter to quarter and will be impacted by the Company's continued expansion into new market opportunities, as well as, 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 2021 is expected to include approximately $0.1 million of amortization expense for purchased intangibles.
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Operating Expenses
The following is a summary of operating expenses (dollars in thousands):
Year Ended December 31,Increase (Decrease)Percent Increase (Decrease)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Operating expenses:
Research and development$8,252 $7,360 $7,013 $892 $347 12 %%
Sales and marketing9,055 8,709 8,394 346 315 
General and administrative10,059 6,787 7,122 3,272 (335)48 (5)
Amortization of purchased intangibles657 757 904 (100)(147)(13)(16)
Total operating expenses$28,023 $23,613 $23,433 $4,410 $180 19 %%

Operating expenses increased 19% for 2020 compared to 2019 and represented 96.4%, 93.1%, and 93.6% of revenues for 2020, 2019 and 2018, respectively. Operating expenses for 2020 increased from 2019 by $4.4 million, primarily driven by approximately $1.6 million in one-time transaction expense associated with the Company’s now terminated merger with Synacor, Inc. and approximately $917,000 in one-time non-cash office lease charges resulting from adoption of the Company’s remote work policy in the fourth quarter 2020. The Company incurred severance expense of $647,000 , $152,000 and $237,000 for 2020, 2019 and 2018, respectively, relating to cost reduction initiatives and personnel transitions and, in 2020, the departure of the Company's chief executive officer.
Research and development
Research and development expenses were as follows (dollars in thousands):
Year Ended December 31,Increase (Decrease)Percent Increase (Decrease)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Compensation and employee-related$5,553 $5,123 $5,215 $430 $(92)%(2)%
Overhead and other expenses1,736 1,516 1,211 220 305 15 25 
Outside services and consulting823 589 409 234 180 40 44 
Depreciation and amortization28 (26)100 (93)
Equity-based compensation136 130 150 (20)(13)
Total research and development expenses$8,252 $7,360 $7,013 $892 $347 12 %%
Total research and development expenses for the years ended December 31, 2020, 2019 and 2018 represented 28%, 29% and 28% of revenues, respectively. The Company had 36, 36 and 34 research and development personnel at December 31, 2020, 2019 and 2018, respectively.
The $892,000 increase in total expenses in 2020, compared to 2019, was primarily due to increased costs related to the mix of research and development personnel, incentive compensation costs and projects to support customers’ increased usage of Qumu’s cloud-based enterprise video solution due to COVID-19. 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. Depreciation and amortization expense decreased during 2019 and 2018 as certain fixed assets became fully depreciated.
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Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
Year Ended December 31,Increase (Decrease)Percent Increase (Decrease)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Compensation and employee-related$7,006 $6,822 $6,199 $184 $623 %10 %
Overhead and other expenses826 1,022 1,230 (196)(208)(19)(17)
Outside services and consulting1,088 781 802 307 (21)39 (3)
Depreciation and amortization35 11 12 24 (1)218 (8)
Equity-based compensation100 73 151 27 (78)37 (52)
Total sales and marketing expenses$9,055 $8,709 $8,394 $346 $315 %%
Total sales and marketing expenses for the years ended December 31, 2020, 2019 and 2018 represented 31%, 34% and 34% of revenues, respectively. The Company had 28, 32 and 27 sales and marketing personnel at December 31, 2020, 2019 and 2018, respectively.
The $346,000 increase in total sales and marketing expense in 2020 as compared to 2019 was primarily driven by increased costs for outside services and consulting associated with the implementation of the Company's strategic plan in 2020, higher compensation costs associated with changes in sales and marketing personnel, and increased commissions expense, partially offset by cost savings resulting from sales activities and customer marketing events that were conducted virtually rather than in person. 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. Sales and marketing expenses for 2020, 2019 and 2018 included severance expense of $145,000, $152,000 and $111,000, respectively, relating to cost reduction initiatives and personnel transitions.
General and administrative
General and administrative expenses were as follows (dollars in thousands):
Year Ended December 31,Increase (Decrease)Percent Increase (Decrease)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Compensation and employee-related$3,578 $3,147 $2,797 $431 $350 14 %13 %
Overhead and other expenses1,109 1,127 1,028 (18)99 (2)10 
Outside services and consulting1,670 1,584 2,159 86 (575)(27)
Depreciation and amortization256 301 391 (45)(90)(15)(23)
Equity-based compensation906 628 747 278 (119)44 (16)
Non-cash office lease surrender costs917 — — 917 — n/mn/m
Transaction-related expenses1,623 — — 1,623 — n/mn/m
Total general and administrative expenses$10,059 $6,787 $7,122 $3,272 $(335)48 %(5)%
Total general and administrative expenses for the years ended December 31, 2020, 2019 and 2018 represented 35%, 27% and 29% of revenues, respectively. The Company had 17, 18 and 18 general and administrative personnel at December 31, 2020, 2019 and 2018, respectively.
The $3.3 million increase in total expenses in 2020 as compared to 2019 was driven primarily by transaction-related expenses related to the Company's merger agreement and subsequent merger termination with Synacor, Inc. totaling $1.6 million in 2020, $917,000 in non-cash charges resulting from the adoption of the Company’s remote work policy in the fourth quarter 2020, and $0.4 million of severance costs incurred with the departure of the Company's chief executive officer in 2020. The $335,000 decrease in total expenses in 2019 as compared to 2018 was driven primarily by lower outside services costs resulting from decreased legal expenses, a reduction in audit fees and lower contractor costs.
Amortization of Purchased Intangibles
Operating expenses include $657,000, $757,000 and $904,000 in 2020, 2019 and 2018, respectively, for the amortization of intangible assets acquired as part of the Company’s acquisition of Qumu, Inc. in October 2011 and Kulu Valley in October
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2014. Operating expenses in 2021 are expected to include approximately $0.7 million of amortization expense associated with purchased intangibles, exclusive of the portion classified in cost of revenue.
Other Income (Expense), Net
Other income (expense), net was as follows (dollars in thousands):
Year Ended December 31,Increase (Decrease)Percent Increase (Decrease)
2020201920182019 to 20202018 to 20192019 to 20202018 to 2019
Interest expense, net$(73)$(754)$(1,809)$681 $1,055 (90)%(58)%
Decrease in fair value of derivative liability103 — — 103 — n/mn/m
Decrease (increase) in fair value of warrant liability(1,826)(141)368 (1,685)(509)1,195 (138)
Gain on sale of BriefCam, Ltd.— 41 6,602 (41)(6,561)(100)(99)
Loss on extinguishment of debt— (348)(1,189)348 841 (100)(71)
Other expense, net(406)(125)(378)(281)253 225 (67)
Total other income (expense), net$(2,202)$(1,327)$3,594 $(875)$(4,921)66 %(137)%
Interest expense, net
The Company recognized interest expense, net, of $73,000, $754,000 and $1.8 million in 2020, 2019 and 2018, respectively, primarily related to its note payable, term loans and capital leases, including the amortization of deferred financing costs. The decrease in interest expense in 2020 and 2019, compared to the respective prior years, 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 the Company's $4.0 million remaining principal balance payment on November 12, 2019.
Change in fair values of derivative liability and warrant liability
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued two transferable warrants for the purchase of up to an aggregate of 1,239,286 shares of the Company's common stock, of which one representing 314,286 shares remained unexercised and outstanding at December 31, 2020. On May 1, 2020, the Company canceled the ESW warrant in exchange for a note payable (see Note 4–"Commitments and Contingencies" of the accompanying consolidated financial statements) which contained an embedded derivative liability that is measured on a recurring basis at fair value. The Company recorded non-cash income of $103,000 for the year ended December 31, 2020 resulting from the change in fair value of the derivative liability. Additionally, on August 31, 2018, the Company issued a transferable 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.
During 2020 and 2019, the Company recorded non-cash expense of $1.8 million and $141,000, respectively, and during 2018 the Company recorded non-cash income of $368,000, resulting from the change in fair value of the warrant liability. See Note 4–"Commitments and Contingencies" of the accompanying consolidated financial statements for a description of inputs impacting changes in fair value. The non-cash expense of $1.8 million in 2020 primarily resulted from an increase in the Company's stock price to $7.99 per share at December 31, 2020 from $2.61 per share at December 31, 2019.
Gain on sale of BriefCam, Ltd.
During 2018, Canon Inc. ("Canon") acquired all of the outstanding shares of BriefCam, Ltd. ("BriefCam"), a privately-held Israeli company, and the Company received $9.7 million from the closing proceeds for its convertible preferred shares of BriefCam, as well as received $100,000 following the satisfaction of a contingency, resulting in a gain on sale of $6.6 million during the year ended December 31, 2018. Additionally, during the year ended December 31, 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.
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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.
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 also recorded a loss related to the exit activity of $177,000 (net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity), which is included in other income (expense) for the year ended December 31, 2018.
Other expense, net, includes sublease income from the Company's subleases of $105,000 and $160,000 for the years ended December 31, 2019 and 2018. No sublease income was recognized for the year ended December 31, 2020.
Other expense, net, also includes net losses on foreign currency transactions of $406,000, $260,000 and $55,000 in 2020, 2019 and 2018, 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 $306,000 and $194,000 for the years ended December 31, 2020 and 2019, 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. Many of the new elements of the Tax Act became effective during 2018, including limitations on the deductibility of interest expense, limitations on executive compensation, as well as international provisions. The Company has considered and incorporated the new provisions into its tax calculations. Such provisions included in the Tax Act did not significantly impact the Company in 2020 and 2019, due to the full valuation allowance on deferred tax assets. 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.
The net income tax benefit for 2020 and 2019 was impacted by the tax benefit for refundable research credits from the 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.
Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Company's liquidity and capital resources (in thousands):
 December 31,
 20202019
Cash and cash equivalents$11,878 $10,639 
Working capital$(2,918)$829 
Financing obligations$481 $240 
Operating lease liabilities1,289 2,174 
Note payable1,800 — 
Financing obligations, operating lease liabilities and note payable$3,570 $2,414 
The Company expects it will be able to maintain current operations and anticipated capital expenditure requirements for at least the next 12 months through any cash flows generated from current operations, cash reserves, and additional resources including the approximately $23.1 million in net proceeds from the Company's issuance of common stock and $10.0 million revolving credit facility both of which closed in January 2021. See Note 15–"Subsequent Events" of the accompanying consolidated financial statements.
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At December 31, 2020, the Company had aggregate negative working capital of $2.9 million, compared to positive working capital of $829,000 at December 31, 2019. Working capital includes current deferred revenue of $12.9 million and $10.1 million at December 31, 2020 and 2019, respectively. The decrease in working capital as of December 31, 2020, as compared to December 31, 2019, is primarily due to the timing of cash receipts from customers and disbursements made to vendors.
Financing obligations as of December 31, 2020 and 2019 primarily consisted of finance leases related to the acquisition of computer and network equipment. Operating lease liabilities consists of liabilities related to the Company's office leases, which decreased by $433,000 due to the reassessment of the lease term of two office leases in coordination with the implementation of the Company's "Work from Wherever, Forever" policy. The note payable to ESW Holdings, Inc., which was non-interest bearing having a face amount of $1.83 million and maturing on April 1, 2021, was repaid upon the Company's closing of its revolving credit facility in January 2021.
The Company's primary source of cash from operating activities has been cash collections from sales of products and services to customers. The Company expects cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. The Company's primary use of cash for operating activities has been for personnel costs and outside service providers, payment of royalties associated with third-party software licenses and purchases of equipment to fulfill customer orders. The Company expects cash flows from operating activities to be affected by fluctuations in revenues, personnel costs, outside service providers, and the amount and timing of royalty payments and equipment purchases as the Company continues to support the growth of the business. The amount of cash and cash equivalents held by the Company's international subsidiaries that is not available to fund domestic operations unless repatriated was $1.6 million as of December 31, 2020. 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,
202020192018
Cash flows from (used in):   
Operating activities$1,570 $(1,538)$(2,843)
Investing activities(128)(127)9,651 
Financing activities(120)3,602 (5,743)
Effect of exchange rate changes on cash(83)66 (119)
Net change in cash and cash equivalents$1,239 $2,003 $946 
Operating activities
Net cash provided from operating activities was $1.6 million for 2020 compared to net cash used in operating activities of $1.5 million in 2019. The operating cash flows for the 2020 were favorably impacted by the change in deferred revenue, offset by the net loss for 2020. The operating cash flows for 2019 and 2018 were primarily impacted by the net losses for those years.
Investing activities
Net cash used in investing activities for the purchases of property and equipment totaled $128,000, $168,000 and $127,000 in 2020, 2019 and 2018, respectively. 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.
Financing activities
Financing activities used net cash of $120,000 in 2020, primarily impacted by principal payments on finance leases and other financing obligations, offset by net proceeds from issuance of common stock under employee stock plans. During 2019, 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; financing cash outflows included a principal payment 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 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
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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.
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, 2020, 2019 and 2018. As of December 31, 2020, 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.
The Company did not declare or pay any dividends during the years ended December 31, 2020, 2019 and 2018.
Contractual Obligations. The following table summarizes the Company's contractual cash obligations at December 31, 2020, 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 Obligations20212022202320242025ThereafterTotal
Operating leases$811 $552 $— $— $— $— $1,363 
Capital leases and other financing obligations (1)
420 42 37 — — — 499 
Note payable (2)
1,833 — — — — — 1,833 
Purchase obligations (3)
436 433 136 — — — 1,005 
Income tax liabilities under ASC 740 (4)
— — — — — — — 
Total contractual cash obligations$3,500 $1,027 $173 $— $— $— $4,700 
_________________________________________________
(1)Amounts include principal and interest.
(2)On January 15, 2021, the Company closed on a $10 million revolving credit facility with Wells Fargo Bank, maturing January 15, 2023; the Company received an advance of $1.8 million and repaid the face amount of the note payable to ESW Holdings, Inc.
(3)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.
(4)The Company does not currently expect any income tax liabilities accrued under ASC 740 as of December 31, 2020 to be paid to the applicable tax authorities in 2021. The full balance of unrecognized tax benefits under ASC 740 of $1.8 million at December 31, 2020, 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, 2020
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Qumu Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Qumu Corporation and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows, for the years 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, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
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 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 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 financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the 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 audits 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 audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition
As described in Notes 1 and 7 to the consolidated financial statements, the Company’s contracts with customers typically contain promises to transfer multiple products and services to a customer. The nature of the Company’s products and services include perpetual and term software licenses, cloud-hosted software as a service, hardware, maintenance and support and professional services and training. For these contracts, the Company assesses the performance obligations and accounts for those obligations separately if they are distinct. In such cases, the transaction price is allocated to the distinct performance obligations on a relative standalone selling price (SSP) basis. Management exercises significant judgment in determining revenue recognition for these customer agreements as related to:

Determination of whether each product or service is considered a distinct performance obligation
Determination of standalone selling price for each distinct performance obligation
We identified the Company’s allocation of transaction price to multiple performance obligations as a critical audit matter as the identification of distinct performance obligations in revenue contracts and the determination of standalone selling price for each distinct performance obligation requires a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the audit evidence obtained.
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Our audit procedures related to the Company’s allocation of transaction price to multiple performance obligations included the following, among others:
Tested a sample of revenue contracts by obtaining and reading contracts and related source documents to test the reasonableness of the performance obligations identified by management.
Evaluated management’s estimate of SSP for reasonableness and tested the completeness and accuracy of the data used in determining SSP through the independent review of contract source documents, standalone sales and recalculation of the observable SSP values and residual transaction price allocation.
Tested the mathematical accuracy of management’s revenue calculations and the associated timing of revenue recognized in the financial statements.

/s/ RSM US LLP
We have served as the Company's auditor since 2019. 
Minneapolis, Minnesota
March 9, 2021
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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 statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows of Qumu Corporation and subsidiaries (the Company) for the year 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 results of the Company’s operations and its cash flows for the year 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 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 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 the 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 audit provides 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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QUMU CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
20202019
Assets
Current assets:
Cash and cash equivalents$11,878 $10,639 
Receivables, net5,612 4,586 
Contract assets467 1,089 
Income tax receivable479 338 
Prepaid expenses and other current assets2,302 1,981 
Total current assets20,738 18,633 
Property and equipment, net249 596 
Right of use assets – operating leases332 1,746 
Intangible assets, net2,143 3,075 
Goodwill7,455 7,203 
Deferred income taxes, non-current19 21 
Other assets, non-current490 442 
Total assets$31,426 $31,716 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable and other accrued liabilities$2,705 $2,816 
Accrued compensation2,145 1,165 
Operating lease liabilities735 587 
Deferred revenue12,918 10,140 
Financing obligations406 157 
Note payable1,800  
Derivative liability37  
Warrant liability2,910 2,939 
Total current liabilities23,656 17,804 
Long-term liabilities:  
Deferred revenue, non-current3,488 1,449 
Income taxes payable, non-current608 585 
Operating lease liabilities, non-current554 1,587 
Financing obligations, non-current75 83 
Other non-current liabilities160  
Total long-term liabilities4,885 3,704 
Total liabilities28,541 21,508 
Commitments and contingencies (Note 4)
Stockholders’ equity:  
Preferred stock, $0.01 par value, authorized 250,000 shares, no shares issued and outstanding
  
Common stock, $0.01 par value, authorized 29,750,000 shares, issued and outstanding 13,780,823 and 13,553,409, respectively
138 136 
Additional paid-in capital79,489 78,061 
Accumulated deficit(74,328)(65,128)
Accumulated other comprehensive loss(2,414)(2,861)
Total stockholders’ equity2,885 10,208 
Total liabilities and stockholders’ equity$31,426 $31,716 
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,
202020192018
Revenues:   
Software licenses and appliances$6,762 $4,903 $5,814 
Service22,310 20,459 19,199 
Total revenues29,072 25,362 25,013 
Cost of revenues:   
Software licenses and appliances2,528 1,911 2,277 
Service5,825 5,148 6,216 
Total cost of revenues8,353 7,059 8,493 
Gross profit20,719 18,303 16,520 
Operating expenses:   
Research and development8,252 7,360 7,013 
Sales and marketing9,055 8,709 8,394 
General and administrative10,059 6,787 7,122 
Amortization of purchased intangibles657 757 904 
Total operating expenses28,023 23,613 23,433 
Operating loss(7,304)(5,310)(6,913)
Other income (expense):   
Interest expense, net(73)(754)(1,809)
Decrease in fair value of derivative liability103   
Decrease (increase) in fair value of warrant liability(1,826)(141)368 
Gain on sale of BriefCam, Ltd. 41 6,602 
Loss on extinguishment of debt (348)(1,189)
Other expense, net(406)(125)(378)
Total other income (expense), net(2,202)(1,327)3,594 
Loss before income taxes(9,506)(6,637)(3,319)
Income tax expense (benefit)(306)(194)298 
Net loss$(9,200)$(6,443)$(3,617)
Net loss per share – basic:
Net loss per share – basic$(0.68)$(0.62)$(0.38)
Weighted average shares outstanding – basic13,612 10,395 9,499 
Net loss per share – diluted:
Loss attributable to common shareholders$(9,494)$(6,548)$(3,778)
Net loss per share – diluted$(0.70)$(0.63)$(0.39)
Weighted average shares outstanding – diluted13,627 10,414 9,606 
See accompanying notes to consolidated financial statements.

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QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Year Ended December 31,
202020192018
Net loss$(9,200)$(6,443)$(3,617)
Other comprehensive income (loss):