Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.20.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2020
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 non-cancellable operating leases, primarily for office space, that expire at various dates over the next four 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.
The components of lease cost were as follows (in thousands):
 
Three Months Ended
 June 30,
 
Six Months Ended
 June 30,
 
2020
 
2019
 
2020
 
2019
Operating lease cost
$
98

 
$
85

 
$
194

 
$
278

Finance lease cost:
 
 
 
 
 
 
 
Amortization of right of use assets
31

 
31

 
62

 
44

Interest on lease liabilities
2

 
3

 
4

 
5

Total finance cost
33

 
34

 
66

 
49

Total lease cost
$
131

 
$
119

 
$
260

 
$
327


Future payments used in the measurement of lease liabilities on the condensed consolidated balance sheet as of June 30, 2020 are as follows (in thousands):
 
Operating
leases
 
Finance
leases
Remainder of 2020
$
411

 
$
45

2021
707

 
80

2022
668

 
5

2023
290

 

2024
112

 

Thereafter

 

Total undiscounted lease payments
2,188

 
130

Less amount representing interest
(332
)
 
(5
)
Present value of lease liabilities
$
1,856

 
$
125


Subleases
On January 17, 2019, the Company terminated a sublease agreement related to its Minneapolis, Minnesota headquarters and contemporaneously modified the Company's primary lease agreement. Upon modification, the Company recognized a gain of $21,000, which is reported in other income (expense) in the Company's condensed consolidated statement of operations for the six months ended June 30, 2019. Sublease income was $35,000 and $73,000 for the three and six months ended June 30, 2019, respectively, which is reported in other income (expense) in the Company's condensed consolidated statement of operations. The Company reported no sublease income for the three and six months ended June 30, 2020.
Note Payable and Derivative Liability
On May 1, 2020, the Company canceled its outstanding warrant to ESW Holdings, Inc., which was for the purchase of up to 925,000 shares of Qumu's common stock at an exercise price of $1.96 per share and expiring January 2028. Additionally, the terms of the warrant provided for a cash settlement in the event of a change of control transaction referred to as a Fundamental Transaction, computed using a Black-Scholes option pricing model with specified inputs stipulated in the warrant agreement. The fair value of the warrant instrument has historically been reported as a liability in Qumu's consolidated financial statements, and, for certain historical reporting periods since its issuance, the shares underlying the warrant instrument were dilutive in the calculation of earnings per share.
As consideration for the warrant cancellation, the Company entered into a secured promissory note to ESW Holdings, Inc. ("note payable"), having a face amount of $1,833,000, which was less than the cash settlement amount of $1,983,000 computed under the terms of the warrant agreement, due on April 1, 2021 and bearing no interest. The payment obligations of the note will be accelerated upon a Fundamental Transaction, and Qumu would be required to pay an additional $150,000 to ESW Holdings, Inc. upon the closing of a Fundamental Transaction. The note to ESW Holdings, Inc. may be prepaid at any time without penalty.
The note payable was recorded at its present value of future cash flows of $1,833,000 discounted at 7.25% (prime plus 4.0%), which was $1,715,000 at May 1, 2020. The value of the note payable will be accreted up to its face value at maturity. As of June 30, 2020, the carrying value of the note payable was $1,735,000, which also approximated its fair value (Level 2).
The note payable contains a $150,000 contingent payment obligation due upon the closing of a Fundamental Transaction on or prior to the April 1, 2021 maturity date. This contingent payment obligation qualifies as an embedded derivative in accordance with ASC Topic 815, Derivatives and Hedging. The embedded derivative is measured at fair value and is remeasured at fair value each subsequent reporting period and reported on the Company's consolidated balance sheet as a derivative liability. Changes in fair value are recognized in other income (expense) in the consolidated statement of operations as "Decrease (increase) in fair value of derivative liability." See Note 4–"Fair Value Measurements."
In connection with the note, the Company and ESW Holdings, Inc. entered into a security agreement dated May 1, 2020 providing for a future security interest in certain assets of the Company that would not attach unless and until the occurrence of the Triggering Event specified therein. The termination of the merger agreement with Synacor, Inc. represented a Triggering Event, resulting in ESW Holdings, Inc. securing an interest in certain of Qumu's cash deposit accounts.
Contingencies
In connection with the termination of merger agreement with Synacor, Inc. on June 29, 2020, Qumu is contingently obligated to pay Synacor, Inc. $1,450,000 upon the occurrence of certain events with respect to an Acquisition Transaction during the 15 months following the termination. The Company has not accrued a liability related to this contingent obligation as the payment is not triggered until an Acquisition Transaction occurs. See Note 9–"Termination of Merger Agreement with Synacor, Inc."
The Company is exposed to 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.