Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.10.0.1
Commitments and Contingencies
6 Months Ended
Jun. 30, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Leases and Other Financing Obligations
Balances for assets acquired under capital lease obligations and included in property and equipment were as follows (in thousands):
 
June 30,
2018
 
December 31,
2017
Computer and network equipment
$
511

 
$
511

Furniture
287

 
287

Assets acquired under capital lease obligations
798

 
798

Accumulated depreciation
(705
)
 
(613
)
Assets acquired under capital lease obligations, net
$
93

 
$
185


The current and long-term portions of capital leases and other financing obligations were as follows (in thousands):
 
June 30,
2018
 
December 31,
2017
Capital leases and other financing obligations, current
$
226

 
$
1,047

Capital leases and other financing obligations, non-current

 
3

Total capital leases and other financing obligations
$
226

 
$
1,050


The Company leases certain of its facilities and some of its equipment under non-cancelable operating lease arrangements. The rental payments under these leases are charged to expense on a straight-line basis over the non-cancelable term of the lease. Future minimum payments under capital lease obligations, other financing obligations, and non-cancelable operating leases, excluding property taxes and other operating expenses, as of June 30, 2018 are as follows (in thousands):
 
Capital leases and other financing obligations
 
Operating leases
 
Total
Remainder of 2018
$
230

 
$
310

 
$
540

2019
3

 
500

 
503

2020

 
266

 
266

2021

 
268

 
268

2022

 
273

 
273

Thereafter

 
23

 
23

Total minimum lease payments
233

 
$
1,640

 
$
1,873

Less amount representing interest
(7
)
 
 
 
 
Present value of net minimum lease payments
$
226

 
 
 
 

Lease Contract Termination
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 sublessee occupancy. During the three months ended June 30, 2018, the Company entered into a sublease agreement having a term beginning May 1, 2018 and extending through January 2023. Accordingly, the Company recorded a liability at fair value of $224,000 for the future contractual lease payments, net of expected sublease receipts. Included in other income (expenses) for three and six months ended June 30, 2018 is the loss related to the exit activity of $177,000, which is net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity. A reconciliation of the beginning and ending contract termination obligation balances, including the obligation for exit activities related to a portion of the Company's London, England leased office facilities in December 2017, is as follows (in thousands):
 
 
Three Months Ended 
 June 30, 2018
 
Six Months Ended 
 June 30, 2018
 
 
London, England
 
Minneapolis, Minnesota
 
Total
 
London, England
 
Minneapolis, Minnesota
 
Total
Contract termination obligation, beginning of period
 
$
149

 
$

 
$
149

 
$
194

 
$

 
$
194

Lease termination costs incurred
 

 
224

 
224

 

 
224

 
224

Accretion expense
 
4

 
4

 
8

 
9

 
4

 
13

Payments on obligations
 
(50
)
 
(14
)
 
(64
)
 
(100
)
 
(14
)
 
(114
)
Contract termination obligation, end of period
 
$
103

 
$
214

 
$
317

 
$
103

 
$
214

 
$
317


The contract termination obligation is included in other accrued liabilities in the Company's consolidated balance sheets.
Term Loans
The Company's term loans are reported in the consolidated balance sheets as follows (in thousands):
 
June 30,
2018
 
December 31,
2017
Term loan, at face value
$
10,000

 
$
8,000

Unamortized original issue discount
(1,729
)
 
(121
)
Unamortized debt issuance costs
(315
)
 
(274
)
Term loan
$
7,956

 
$
7,605


Credit Agreement – ESW Holdings, Inc.
On January 12, 2018, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into a term loan credit agreement (the “ESW credit agreement”) with ESW Holdings, Inc. as lender and administrative agent pursuant to which the Company borrowed $10.0 million in the form of a term loan. Proceeds from the ESW credit agreement were used to pay the remaining outstanding balance of $8.0 million on the Hale term note plus a 10% prepayment penalty of $800,000 on January 12, 2018.
The term loan is scheduled to mature on January 10, 2020. Interest accrues and compounds monthly at a variable rate per annum equal to the prime rate plus 4.0%. The Company may prepay the term loan at any time with the payment of a pre-payment fee of 10% of the amount prepaid. However, no pre-payment fee will be incurred for any pre-payment made from the proceeds of the Company’s sale of its investment in BriefCam, Ltd.
The term loan had an estimated fair value of $8.0 million as of June 30, 2018. The fair value of the term loan is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate. As the contractual terms of the loan provide all the necessary inputs for this calculation, the term loan is classified as Level 2 within the fair value hierarchy. The estimated fair value is not necessarily indicative of the amount that would be realized in a current market exchange.
Credit Agreement – Hale Capital Partners, LP
The term loan balance as of December 31, 2017 consisted of a term loan credit agreement (the “Hale credit agreement”) with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent, under which the Company borrowed $8.0 million as a term loan on October 21, 2016. The term loan was scheduled to mature on October 21, 2019 and required payment of interest monthly at the prime rate plus 6.0%.
Covenant Compliance
The ESW credit agreement contains affirmative and negative covenants and requirements relating to the Company and its operations. The negative covenants of the ESW credit agreement require the Company to meet financial covenants beginning with the quarter ended September 30, 2018 relating to minimum core bookings, maximum deferred revenue non-current, minimum subscription, and maintenance and support revenue, and minimum subscription and maintenance and support dollar renewal rates.
The Company’s monthly, quarterly and annual results of operations are subject to significant fluctuations due to a variety of factors, many of which are outside of the Company’s control. These factors include the number and mix of products and solutions sold in the period, timing of customer purchase commitments, including the impact of long sales cycles and seasonal buying patterns, and variability in the size of customer purchases and the impact of large customer orders on a particular period. The foregoing factors are difficult to forecast, and these, as well as other factors, could adversely affect the Company’s monthly, quarterly and annual results of operations. Failure to achieve its monthly, quarterly or annual forecasts may result in the Company being out of compliance with covenants or projecting noncompliance in the future. Management actively monitors its opportunity pipeline, forecast, and projected covenant compliance on an ongoing basis.
Contingencies
The Company is exposed to a number of asserted and unasserted claims encountered in the normal course of business. Legal costs related to loss contingencies are expensed as incurred. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.
The Company’s standard arrangements include provisions indemnifying customers against liabilities if the Company's products infringe a third-party’s intellectual property rights. The Company has not incurred any costs in its continuing operations as a result of such indemnifications and has not accrued any liabilities related to such contingent obligations in the accompanying condensed consolidated financial statements.