Qumu Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

Commitments and Contingencies

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Leases and Other Financing Obligations

Balances for assets acquired under capital lease obligations and included in property and equipment were as follows (in thousands):



	September 30, 2018			December 31, 2017
Computer and network equipment	$	511		$	511
Furniture	287			287
Assets acquired under capital lease obligations	798			798
Accumulated depreciation	(728		)	(613		)
Assets acquired under capital lease obligations, net	$	70		$	185

The current and long-term portions of capital leases and other financing obligations were as follows (in thousands):



	September 30, 2018		December 31, 2017
Capital leases and other financing obligations, current	$	144	$	1,047
Capital leases and other financing obligations, non-current	—		3
Total capital leases and other financing obligations	$	144	$	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 September 30, 2018 are as follows (in thousands):



	Capital leases and other financing obligations			Operating leases		Total
Remainder of 2018	$	62		$	150	$	212
2019	86			585		671
2020	—			458		458
2021	—			466		466
2022	—			425		425
Thereafter	—			23		23
Total minimum lease payments	148			$	2,107	$	2,255
Less amount representing interest	(4		)
Present value of net minimum lease payments	$	144

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. 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 the nine months ended September 30, 2018 is the loss related to the leasing-related exit activity of $177,000, which is net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity. 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 September 30,									Nine Months Ended September 30,
	London, England			Minneapolis, Minnesota			Total			London, England			Minneapolis, Minnesota			Total
Contract termination obligation, beginning of period	$	103		$	214		$	317		$	194		$	—		$	194
Lease termination costs incurred	—			—			—			—			224			224
Accretion expense	3			6			9			12			10			22
Payments on obligations	(50		)	(12		)	(62		)	(150		)	(26		)	(176		)
Change in currency exchange rate	(2		)	—			(2		)	(2		)	—			(2		)
Contract termination obligation, end of period	$	54		$	208		$	262		$	54		$	208		$	262

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):



	September 30, 2018			December 31, 2017
Term loan, at face value	$	4,000		$	8,000
Unamortized original issue discount	(589		)	(121		)
Unamortized debt issuance costs	(107		)	(274		)
Term loan	$	3,304		$	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.

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 $9.6 million in net proceeds from the sale of its investment in BriefCam to fund the prepayment. Under the term loan credit agreement, any voluntary prepayment by the Company from the net proceeds received from the disposition of the Company’s investment in BriefCam will not trigger a prepayment fee. 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.

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 prepayment fee of 10% of the amount prepaid. However, no prepayment fee will be incurred for any prepayment made from the proceeds of the Company’s sale of its investment in BriefCam.

The term loan had an estimated fair value of $3.4 million as of September 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%. The term loan required a prepayment fee of 10% of the amount prepaid.

On January 12, 2018, the Company repaid all outstanding obligations under the Hale credit agreement using $8.8 million of the $10.0 million term loan proceeds provided through the ESW credit agreement. Concurrently with such repayment, the Hale credit agreement terminated by its terms effective January 12, 2018.

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 was in compliance with all financial covenants for the quarter ended September 30, 2018.

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.