Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Leases
The Company is obligated under finance leases covering certain IT equipment that expire at various dates over the next three years. The Company also has several non-cancellable operating leases, primarily for office space, that expire over the next four years. The Company has one lease that contains a renewal option for a period of five years. Because the Company is not reasonably certain to exercise this option, the option is not considered in determining the lease term 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.
The components of lease cost were as follows (in thousands):
 
Three Months Ended
 March 31,
Operating lease cost
$
193

Finance lease cost:
 
Amortization of right of use assets
13

Interest on lease liabilities
2

Total finance cost
15

Total lease cost
$
208


The Company's ROU assets and lease liabilities were reported in the condensed consolidated balance sheet as follows (in thousands):
Leases
Classification on Balance Sheet
March 31,
2019
Assets
 
 
Operating
Right of use assets – operating leases
$
1,128

Finance
Property and equipment
224

Total lease assets
 
$
1,352

Liabilities
 
 
Current
 
 
Operating
Operating lease liabilities
$
549

Finance
Financing obligations
79

Non-current
 
 
Operating
Operating lease liabilities, non-current
1,021

Finance
Financing obligations, non-current
146

Total lease liabilities
 
$
1,795



Other information related to leases were as follows (in thousands):
 
Three Months Ended
 March 31,
Supplemental cash flow information:
 
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flow from operating leases
$
96

Operating cash flow from finance leases
13

Financing cash flow from finance leases
11

ROU assets obtained in exchange for new lease obligations
 
Finance leases
$
148

Weighted-average remaining lease term:
 
Operating leases
3.3 years

Finance leases
2.8 years

Weighted-average discount rate:
 
Operating leases
10.0
%
Finance leases
6.2
%

Future payments used in the measurement of lease liabilities on the condensed consolidated balance sheet as of March 31, 2019 are as follows (in thousands):
 
Operating
leases
 
Finance
leases
Remainder of 2019
$
566

 
$
68

2020
427

 
91

2021
435

 
80

2022
393

 
5

2023
20

 

Total undiscounted lease payments
1,841

 
244

Less amount representing interest
(271
)
 
(19
)
Present value of lease liabilities
$
1,570

 
$
225


Subleases
The Company determined that it had excess capacity at its Minneapolis, Minnesota headquarters and its London, United Kingdom office and effective May 1, 2018 and December 31, 2017, respectively, ceased using portions of its leased spaces, subsequently making them available for occupancy by sublessees. The Minneapolis sublease agreement had a term beginning May 1, 2018 and extending through January 2023. On January 17, 2019, the Company terminated the Minneapolis sublease agreement, effective February 15, 2019, and contemporaneously modified the Company's head lease agreement to relinquish to the lessor, and be relieved of future lease payments for, the previously sublet space, effective March 1, 2019. Upon modification of the Minneapolis lease agreement, the Company recognized a gain of $21,000, which is reported in other income (expense) in the Company's condensed consolidated statement of operations. Sublease income from the Company's subleases was $38,000 for the three months ended March 31, 2019, which is reported in other income (expense) in the Company's condensed consolidated statement of operations.
Prior to the adoption of Topic 842 on January 1, 2019, the Company accounted for the above subleases under guidance for exit and disposal activities (ASC 420). As such, the Company carried a lease contract termination liability of $218,000 as of December 31, 2018, representing the liability at fair value for the future contractual lease payments, net of expected sublease receipts.
Term Loans
The Company's term loan is reported in the condensed consolidated balance sheets as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Term loan, at face value
$
4,000

 
$
4,000

Unamortized original issue discount
(373
)
 
(481
)
Unamortized debt issuance costs
(68
)
 
(88
)
Term loan
$
3,559

 
$
3,431


Credit Agreement – ESW Holdings, Inc.
On January 12, 2018, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into a $10.0 million term loan credit agreement (the “ESW credit agreement”) with ESW Holdings, Inc. as lender and administrative agent to replace its previous $8.0 million term loan credit agreement with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent. Following the Company's $6.0 million principal payment on July 19, 2018, the term loan with ESW Holdings, Inc. has an outstanding principal balance of $4.0 million.
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%. As of both March 31, 2019 and December 31, 2018, interest was payable at 9.50%. 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 due 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 $3.6 million as of March 31, 2019. 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.
Covenant Compliance
The ESW credit agreement contains affirmative and negative covenants and requirements relating to the Company and its operations. The Company was in compliance with all financial covenants during the three months ended March 31, 2019.
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.