Qumu Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

Commitments and Contingencies

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

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 non-cancellable operating leases, primarily for office space, that expire over the next five years. The Company has two leases that each contain a renewal option for a period of five years. Because the Company is not reasonably certain to exercise this option, the option is not considered in determining the lease term under Topic 842, which was adopted January 1, 2019.

During the year ended December 31, 2019, the Company commenced leases for office space in London, United Kingdom and Hyderabad, India.

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):



	Year Ended December 31, 2019
Operating lease cost	$	526
Finance lease cost:
Amortization of right of use assets	106
Interest on lease liabilities	11
Total finance cost	117
Total lease cost	$	643

The Company's ROU assets and lease liabilities were reported in the consolidated balance sheet as follows (in thousands):



Leases	Classification on Balance Sheet	December 31, 2019
Assets
Operating	Right of use assets – operating leases	$	1,746
Finance	Property and equipment	130
Total lease assets		$	1,876
Liabilities
Current
Operating	Operating lease liabilities	$	587
Finance	Financing obligations	83
Non-current
Operating	Operating lease liabilities, non-current	1,587
Finance	Financing obligations, non-current	83
Total lease liabilities		$	2,340

Other information related to leases is as follows (in thousands):



	Year Ended December 31, 2019
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flow from operating leases	$	432
Financing cash flow from finance leases	77
ROU assets obtained in exchange for new lease obligations
Finance leases	$	148
Weighted-average remaining lease term:
Operating leases	3.8 years
Finance leases	2.0 years
Weighted-average discount rate:
Operating leases	10.0		%
Finance leases	6.2		%

Future payments used in the measurement of lease liabilities on the consolidated balance sheet as of December 31, 2019 are as follows (in thousands):



	Operating leases			Finance leases
2020	$	764		$	91
2021	712			80
2022	672			5
2023	294			—
2024	114			—
Thereafter	—			—
Total undiscounted lease payments	2,556			176
Less amount representing interest	(382		)	(10		)
Present value of lease liabilities	$	2,174		$	166

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 Company also recorded losses related to the exit activities of $177,000 (net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity) and $72,000, which are included in other income (expense) for the years ended December 31, 2018 and 2017, respectively.

The Minneapolis sublease agreement had a term beginning May 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 primary lease agreement to relinquish the sublet space 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 consolidated statement of operations for the year ended December 31, 2019. The London sublease agreement had a term beginning January 2018 and extending through September 2019. 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.

A reconciliation of the beginning and ending contract termination obligation balances is as follows (in thousands):



	London, England			Minneapolis, Minnesota			Total
Contract termination obligation, January 1, 2017	$	—		$	—		$	—
Lease termination costs incurred	72			—			72
Sublease payment received	122			—			122
Contract termination obligation, December 31, 2017	194			—			194
Lease termination costs incurred	—			224			224
Accretion expense	14			19			33
Payments on obligations	(189		)	(40		)	(229		)
Change in currency exchange rate	(4		)	—			(4		)
Contract termination obligation, December 31, 2018	15			203			218
Adjustment and reclassification upon adoption of Topic 842 (see Note 1)	(15		)	(203		)	(218		)
Contract termination obligation, December 31, 2019	$	—		$	—		$	—

The contract termination obligation is included in other accrued liabilities in the Company's consolidated balance sheets.

Sublease income from the Company's subleases was $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, 2017.

Term Loan

The Company's term loan, which was paid in full during the year ended December 31, 2019, is reported in the consolidated balance sheets as follows (in thousands):



	December 31,
	2019		2018
Term loan, remaining principal balance	$	—	$	4,000
Unamortized original issue discount	—		(481		)
Unamortized debt issuance costs	—		(88		)
Term loan	$	—	$	3,431

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 its previous term loan plus a 10% prepayment fee of $800,000 on January 12, 2018. On November 12, 2019, the Company paid the remaining outstanding principal, accrued interest and prepayment fee on the ESW credit agreement as explained below.

Interest on the term loan accrued and compounded monthly at a variable rate per annum equal to the prime rate plus 4.0%. In conjunction with this debt financing, the Company issued a warrant for the purchase of up to 925,000 shares of the Company's common stock, which remained unexercised and outstanding at December 31, 2019. See Note 5–"Fair Value Measurements" and Note 14–"Subsequent Event" for further discussion of the warrant.

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 $9.8 million in net proceeds from the sale of its investment in BriefCam, Ltd. (see Note 10–"Sale of Investment in Software Company") 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.

On November 12, 2019, the Company paid the remaining $4.8 million due 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 $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. The Company used a portion of the $8.2 million in net proceeds from the issuance of common stock, as described in Note 6–"Stockholders Equity" to fund the payment. The Company recognized a $348,000 loss on debt extinguishment 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.

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 consolidated financial statements.