FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-20728
QUMU CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
41-1577970
State or other jurisdiction of incorporation or organization
(I.R.S. Employer Identification No.)
510 1st Avenue North, Suite 305, Minneapolis, MN 55403
(Address of principal executive offices)
(612) 638 - 9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes
No
The aggregate market value of common stock held by non-affiliates of the registrant, computed by reference to the last quoted price at which
such stock was sold on such date as reported by the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed
second fiscal quarter was approximately $68,649,000.
As of February 29, 2016, the registrant had 9,213,206 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2016 Annual Meeting of Shareholders, to be filed within 120 days after the end
of the fiscal year covered by this report, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Certain Relationships and Related Transactions and Directors Independence
Principal Accountant Fees and Services
Item 15.
SIGNATURES
Exhibits and Financial Statement Schedules
Page
3
3
7
16
17
17
17
18
18
21
22
31
32
59
59
60
61
61
61
61
61
61
62
62
63
2
General Information
PART I
Cautionary Note Regarding Forward-Looking Statements
We make statements from time to time regarding our business and prospects, such as projections of future performance,
statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or
similar expressions identify forward-looking statements. Forward-looking statements may appear in documents, reports, filings
with the Securities and Exchange Commission (SEC), news releases, written or oral presentations made by our authorized
officers or other representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results expressed in or implied by forward-looking statements, involve a number of risks and
uncertainties. Forward-looking statements are not guarantees of future actions, outcomes, results or performance. Any forward-
looking statement made by or on behalf of us speaks only as of the date on which such statement is made. We do not undertake
any obligation to update or keep current any forward-looking statement to reflect events or circumstances arising after the date
of such statement.
In addition to other matters identified or described by us from time to time in filings with the SEC, there are many important
factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by
us, or the results expressed in or implied by any forward-looking statements. These important factors are described below under
Item 1A. Risk Factors.
ITEM 1. BUSINESS
Overview
Qumu Corporation ("Qumu" or the "Company") provides the tools businesses need to create, manage, secure, deliver and
measure the success of their videos. The Company's innovative solutions release the power in video to engage and empower
employees, partners and clients. Organizations around the world realize the greatest possible value from video they create and
publish. Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does
video. Qumu markets its products to customers primarily in North America, Europe and Asia.
Qumu generates revenue through the sale of enterprise video content management software solutions, hardware, maintenance
and support, and professional and other services. Software sales may take the form of a perpetual software license, a term
software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales of
perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support, and
professional and other services.
Year Ended December 31,
2014
2013
2015
Software licenses and appliances
Service
Total revenues
$
$
9,456
24,998
34,454
$
$
11,363
15,158
26,521
$
$
7,269
10,467
17,736
History
Increase (Decrease)
2014 to 2015
$
(1,907) $
9,840
7,933
$
2013 to 2014
4,094
4,691
8,785
$
Percent Increase (Decrease)
2013 to 2014
2014 to 2015
56%
(17)%
45%
65 %
50%
30 %
The Company was founded in 1978, incorporated as IXI, Inc. in Minnesota in February 1987 and changed its name to Rimage
Corporation in April 1988. From 1995 to 2011, the Company focused its business on the development and sale of its CD
recordable publishing systems and DVD recordable publishing systems.
In response to declines in the disc publishing business due to technology substitutions and the rise of video as a
communication and collaboration tool, in October 2011, the Company acquired Qumu, Inc., a leader in the enterprise video
content management software market and changed its name to Qumu Corporation in September 2013. Qumu completed the
transition to an enterprise video content management software company in July 2014, when the Company closed on the sale of
its disc publishing assets to Equus Holdings, Inc. and Redwood Acquisition, Inc. (now known as Rimage Corporation).
3
On October 3, 2014, the Company acquired Kulu Valley Ltd., a private limited company incorporated in England and Wales
(“Kulu Valley”). The acquisition was made to expand Qumu’s addressable market through the offering of Kulu Valley’s best-in-
class video content creation capabilities and easy-to-deploy pure cloud solution, and provides Kulu Valley’s customers with
access to industry leading video content management and delivery capability.
Enterprise Video Content Management and Delivery Software
To increase communication, engagement and collaboration between employees and stakeholders, organizations have invested
significantly in content and network infrastructure that connects these employees and stakeholders across offices, conference
rooms, computers, tablets and smart phones. As part of this, enterprises are adopting video as a mainstream communication and
collaboration tool because they understand its benefits over other forms of content.
Qumu video content management software solutions allow organizations to create, capture, organize and deliver content across
the extended enterprise to a wide variety of end points, including mobile devices and thick or thin clients. Qumu's video
platform supports both live and on-demand streaming, and also secure download capabilities, a critical component for mobile
video solutions. Qumu provides information technology administrators and corporate communication leaders a way to securely
address the challenges of video that might otherwise overwhelm their data networks while utilizing their existing information
technology infrastructures, thereby maximizing their investment and enabling the rapid adoption of video in their content,
collaboration, communication and marketing infrastructures.
Qumu provides an end-to-end solution with an intuitive and rich user-experience to create, manage and deliver live and on-
demand video content both behind and beyond the secure firewall.
Capabilities and Products
Qumu Platform - Creating a Global Video Infrastructure for Organizations
The Qumu platform is a video content management software solution that can be deployed as a perpetual software license, a
term software license or a cloud-hosted software as a service (SaaS). Qumu’s implementations can range in size from tens of
thousands to millions of dollars, and they integrate with customers' existing video services (e.g., videoconferencing systems),
business applications and broader IT infrastructures using Qumu's extensive application services or "APIs". Deployments also
range from a single customer location to a global infrastructure serving over one hundred thousand corporate employees.
Qumu’s platform solution components are deployed as needed to serve different capabilities of the enterprise video content
lifecycle of creating, capturing, managing, delivering and experiencing video content.
Video Capture
• Qumu Capture Studio is a portable software-enabled device that quickly and easily records, edits, and publishes video
and presentation content.
• Qumu Quick Capture is a browser-based applet for the simple creation of videos captured from a user's computer
screen and/or webcam.
• Qumu's encoder control facilitates live encoding and can leverage popular encoders from multiple vendors.
• Qumu also integrates with videoconferencing systems or Unified Communication software to enable their use as
“studios” for the creation of live or on-demand video content.
• Qumu’s Creator provides ease of use for anyone to create slides and video at the desktop to produce their own rich
content.
Video Management
Qumu’s platform is an enterprise scalable solution that provides central control for all video applications, content and resources
involved in the production and delivery of enterprise video. Video Control Center manages both live streamed video and video
on-demand workflows. This comprehensive business video platform includes numerous industry leading features:
•
Patent pending Qumu Pathfinder technology for intelligent routing to multiple device types with different bitrates,
enabling more efficient use of the network and improved user experience.
• Qumu Speech Search for searching and indexing the spoken dialogue within video programs, greatly reducing time-to-
knowledge.
• Live Broadcast Console for managing and deploying live streamed videos across an organization.
• Broad and deep security capabilities encompassing single-sign-on ("SSO"), Active Directory/LDAP integration, and
Security Assertion Markup Language ("SAML") that make it easy to create a secure video application and network
based on the enterprise's existing security standards.
4
Video Delivery
• The combination of Pathfinder with Qumu’s VideoNet Edge software creates a unique, highly secure, fault tolerant
video delivery network with advanced streaming and caching features to provide outstanding performance for an
unlimited number of users. By ensuring that only one stream crosses the WAN on its way to viewers in remote
locations, VideoNet Edge minimizes the strain placed on the network by live webcasting or video on demand.
VideoNet Edge can work as the sole distribution platform for video or in conjunction with other enterprise or internet-
based content distribution networks (“CDNs”). Qumu VideoNet Edge provides caching of H.264/MPEG-4, Windows
Media & Flash video, Video on Demand and live broadcast content, reducing traffic from the centrally-located origin
server. Importantly, Qumu offers VideoNet Edge software in a variety of form factors (Windows Software, virtual
machine, appliance, and integrated with Citrix CloudBridge and Riverbed VSP) to provide customers with the most
deployment options.
• Qumu VideoNet Edge software solutions can federate existing CDNs into a single system for intranet and internet
content distribution of video and related media assets. The federation capability includes Internet-based CDNs like
Akamai and Amazon CloudFront as well as intranet based devices like Riverbed Steelhead, Cisco ACNS/WaaS/CDS,
and Blue Coat Director. This federation capability allows customers and partners to execute an “embrace and replace”
strategy for upgrading their networks as opposed to “rip and replace” from other vendors.
• Qumu Secure Download allows video to be securely delivered to mobile devices, viewed offline, and managed/
disposed automatically based on prescribed policies.
Mobility and Integration
• Qumu provides Mobile Apps for iOS, Android and Windows phones and tablets. The apps are complete out-of-the-box
native video applications built using the Qumu Mobile SDKs. Customers can also work with Qumu Professional
Services to create fully branded applications accessing Qumu's video infrastructure. Qumu’s HTML5-based video
portal also provides native support for all device platforms.
• Qumu provides integration between its mobile apps and leading mobile device management/mobile application
management ("MDM/MAM") platforms such as Good Technology and XenMobile to ensure that Qumu's solutions
work within the environments its customers are investing in for mobile security.
• Qumu integrates with a variety of key business applications and infrastructure capabilities to enable organizations to
employ video in any work context required. Qumu offers integration with Microsoft SharePoint and Lync as well as
with Office365; IBM Connections and IBM WebSphere; Jive and other collaborative and social platforms. Qumu
continues to work with partners and integrators to extend video functionality through the use of its REST APIs. Qumu
also integrates with Citrix capabilities such as XenApp and XenDesktop, enabling Qumu video to be delivered to thick
or thin clients managed within a Citrix virtual desktop infrastructure.
Externalizing Video for Maximum Reach and Impact
The Qumu platform in a cloud deployment allows SaaS enabled customers to easily create video and rich media presentations
and deliver video seamlessly to customers, partners, and employees. Cloud deployments allow organizations worldwide to
rapidly and clearly present their messages and drive business opportunities through the integration of video with their web sites
and their marketing and campaign automation platforms.
The Qumu platform in a cloud delivery brings the power of Qumu video to organizations that do not wish to make
infrastructure investments to own and support their applications. Instead, Qumu provides the following capabilities that are
easily purchased, implemented, and available through the web browser:
• Create rich media with the Qumu platform in minutes - Qumu's customers can capture video and easily integrate it
with PowerPoint slides to ensure that messages are delivered and understood; provide high quality sales enablement
on a regular basis from the desktop; and broadcast news about products and services to partners and customers every
week.
• Embed and share Qumu content easily with nearly any application - video “widgets” can be embedded, played, and
tracked within any external application, ranging from web sites, to e-mail offers, to campaigns managed and executed
by platforms like Eloqua and Salesforce.com. Analytics on origin and viewership are easily captured and integrated
back for targeted marketing and sales.
• Quickly create and deliver video for both live and on-demand - organizations that purchase Qumu's cloud platform to
support a variety of live broadcasts and on-demand scenarios, and the platform enables both to be executed and
managed easily whenever desired. Video and content created and captured is managed within the cloud platform
resident on IBM SoftLayer, thus providing market leading security and compliance for users.
5
•
Support an unlimited number of users - Qumu's cloud platform scales easily with a customer's needs, enabling
organizations to create rich video presentations for 100's or to drive high performance video marketing campaigns to
many thousands. Video is also transcoded automatically to support any user, format, or device for viewing.
Marketing and Distribution
Qumu’s solutions serve a growing customer base of large enterprises across a wide range of vertical and horizontal markets.
Qumu has primarily targeted enterprises with 10,000+ employees and a history of video use for corporate communications.
Beginning in 2014, Qumu increased its efforts and ability in targeting mid-size businesses with less than 10,000 employees by
promoting the new cloud deployment model.
Qumu serves its customer base via direct sales and channel partners offering a variety of deployment methodologies and
business models to meet customer demand including software, software on server appliance, software-enabled devices, SaaS
and managed services. During 2014, Qumu increased its focus and investment on channel and technology partners to expand
the reach of the Company’s solutions.
In 2015, Qumu was selected as a leader in the industry by three leading industry analysts:
• Gartner selected Qumu as a leader in their Magic Quadrant for Enterprise Video Content Management.
•
Forrester selected Qumu as a leader in their Forrester Wave report for Enterprise Webcast, Enterprise Video Portal, and
Enterprise Webcast and Video Portal combined Wave.
• Aragon Research named Qumu a leader in their Video Content Management report.
These selections are visible proof points in the market that had a positive impact on Qumu’s market awareness and lead
generation activities.
Qumu sells products and services internationally through its U.S. operation and its subsidiaries in Europe and Japan.
International sales comprised approximately 27%, 15% and 25% of revenues for the years ended December 31, 2015, 2014 and
2013, respectively. Customers in the United Kingdom, where Kulu Valley is located, are a significant source of international
sales.
Competition
Major competitors of Qumu's include Kaltura, Kontiki, Cisco, Polycom, vBrick, Brightcove and MediaPlatform. Due to
Qumu's unique focus on a complete video infrastructure that includes support for mobile devices and existing IT infrastructure,
Qumu believes it is able to compete effectively with these competitors. Qumu also differentiates itself from its competitors
through its video delivery technology and flexibility as to solution deployment and service options.
Research and Development
Qumu develops its software internally and also licenses or purchases the intellectual property ownership rights of programs
developed by others with license or technology transfer agreements that may obligate Qumu to pay a flat license fee or
royalties, typically based on a dollar amount per unit shipped or a percentage of the revenue generated by those programs.
As of December 31, 2015, the Company employed 57 employees in research and development. This staff engages in research
and development of new products and enhancements to existing products. In addition, Qumu partners with third parties to
utilize their competencies in creating products to enhance its product offerings.
Backlog of Contracted Commitments
The Company's contracted commitment backlog was $33.4 million at December 31, 2015 compared to $31.6 million at
December 31, 2014. The Company defines contracted commitments as the dollar value of signed non-cancellable customer
purchase commitments. Of the total at December 31, 2015, the Company expects to recognize between $20.0 million and $22.0
million as revenue during the year ended December 31, 2016. Actual amounts could differ depending on timing of customer
deployments and other factors.
Intellectual Property and Government Regulation
Qumu currently maintains two U.S. patents and has three non-provisional utility patent applications pending in the U.S.
Further, Qumu protects the proprietary nature of its software primarily through copyright and license agreements. It is Qumu's
policy to protect the proprietary nature of its newly developed products whenever they are likely to become significant sources
of revenue. No assurance can be given that Qumu will be able to obtain patent or other protection for its products. In addition,
Qumu has registered and may in the future register trademarks and other marks used in its business.
6
As the number of Qumu's products increases and the functionality of those products expand, Qumu believes that it may become
increasingly subject to attempts by others to duplicate its proprietary technology and to the possibility of infringement of its
patents. In addition, although Qumu does not believe that any of its products infringe on the rights of others, third parties have
claimed, and may in the future claim, Qumu's products infringe on their rights and these third parties may assert infringement
claims against Qumu in the future. Qumu may litigate to enforce patents issued to it and to defend against claimed infringement
of the rights of others or to determine the ownership, scope, or validity of Qumu's proprietary rights and the rights of others.
Any claim of infringement against Qumu could involve significant liabilities to third parties, could require Qumu to seek
licenses from third parties and could prevent Qumu from developing, selling or using its products.
The Company is the owner of various trademarks and trade names referenced in this Annual Report on Form 10-K including:
"Qumu," "VideoNet Edge" and "Pathfinder." Solely for convenience, the trademarks and trade names in this Report are referred
to without the ® and TM symbols, but such references should not be construed as any indicator that the Company or the other
respective owners will not assert, to the fullest extent under applicable law, its or their rights thereto.
Employees
As of December 31, 2015, the Company had 192 employees, of which 57 were involved in research and development, 43 in
service and support, 61 in sales and marketing, and 31 in administration and management. None of Qumu's employees are
represented by a labor union or covered by a collective bargaining agreement.
Available Information
Qumu maintains a website at www.qumu.com. Its annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available
on its website, as soon as reasonably practicable after these documents are filed with the SEC. To obtain copies of these reports,
go to www.qumu.com and click on “Company,” then click on “investor relations,” then "SEC filings" and all current EDGAR
reports are available for viewing. A copy of any report filed by the Company with the SEC will also be furnished without
charge to any shareholder who requests it in writing to: Secretary, Qumu Corporation 510 1st Avenue North, Suite 305,
Minneapolis, MN 55403.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our results of operations, cash flows and the market price of our common stock
could be negatively impacted. Although we believe that we have identified and discussed below the key risk factors affecting
our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to
be significant that may adversely affect our performance or financial condition. Any forecast regarding our future performance,
including, but not limited to, forecasts regarding estimated bookings, revenue, or cash flow from our operating activities, are
forward-looking statements. These forward-looking statements reflect various assumptions and are subject to significant
uncertainties and risks that could cause the actual results to differ materially from those described in the forward-looking
statement, including the risks reflected in the risk factors set forth below. Consequently, no forward-looking statement can be
guaranteed and the variation of actual results or events from such statements may be material and adverse.
The markets for video content and software to manage video content are each in early stages of development. If this
market does not develop or develops more slowly than we expect, our revenues may decline or fail to grow.
With the sale of the disc publishing business on July 1, 2014, we now derive all of our revenues from providing video content
management software. The use of video as a mainstream communication and collaboration tool and the market for video
content management software is in an early stage of development, and it is uncertain whether this use of video will achieve
high levels of acceptance. Widespread acceptance and use of video in the enterprise is critical to our future growth and
success. Likewise, it is uncertain whether video content management software will achieve high levels of demand and market
acceptance. Our success will depend on enterprises adopting video as a tool and upon enterprise demand for software to help
them capture, organize and distribute this content.
Some customers may be reluctant or unwilling to use video as a tool within the enterprise for a number of reasons, including
lack of perceived benefit of this new method of communication and existing investments in other enterprise-wide
communications tools. Further, even if customers are using video as a tool, these customers may choose to rely upon their own
IT infrastructure and resources to manage their video content. Because many companies generally are predisposed to
maintaining control of their IT systems and infrastructure, there may be resistance to using software as a service provided by a
third party. Privacy concerns and transition costs are also factors that may affect a potential customer’s decision to subscribe to
an external solution.
7
Additional factors that may limit market acceptance of our video content management software include:
•
•
competitive dynamics may cause pricing levels to change as the market matures and cause customers to seek
out lower priced alternatives to our video content management software or force us to reduce the prices we
charge for our products or services; or
existing and new market participants may introduce new types of solutions and different approaches to enable
enterprises to address their enterprise communications or video communications needs and these disruptive
technologies may reduce demand for our video content management software.
If customers do not perceive the benefits of our video content management software, or if customers are unwilling to accept
video content as an alternative to other more traditional forms of enterprise communication, the market for our software might
not continue to develop or might develop more slowly than we expect, either of which would significantly adversely affect our
revenues and growth prospects.
To compete effectively, we must continually improve existing products and introduce new products that achieve market
acceptance.
The software industry in general, and in particular, software targeted to a new and developing market like enterprise video
content management, is characterized by rapid technological changes, evolving industry standards, changing customer
requirements, and frequent new product and service introductions and enhancements. The introduction of products using new
technologies or the adoption of new industry standards can make our existing products, or products under development,
obsolete or unmarketable. If these technologies are patented or proprietary to our competitors, we may not be able to access
these technologies. In order to remain competitive and increase sales, we must anticipate and adapt to these rapidly changing
technologies, enhance our existing products and introduce new products to address the changing demands of our customers. If
we fail to anticipate or respond to technological developments or customer requirements, or if we are significantly delayed in
developing and introducing products, our revenues will decline.
The process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing
needs and emerging technological trends, our business could be harmed. We must commit significant resources and may incur
obligations (such as royalty obligations) to develop new products and features before knowing whether our investments will
result in products the market will accept and without knowing the levels of revenue, if any, that may be derived from these
products. Although we expect to continue to invest substantial resources in product development activities, our efforts to
achieve and maintain profitability will require us to be selective and focused with our research and development expenditures.
Some of our competitors have greater engineering and product development resources than we have, allowing them to develop
a greater number of products or improvements or to develop them more quickly.
If we fail to anticipate or respond in a cost-effective and timely manner to technological developments, changes in industry
standards or customer requirements, or if we experience any significant delays in the development or introduction of new
products or improvements to existing products, our business, operating results and financial condition could be affected
adversely.
If we do not generate sufficient cash flow to fund our operations, we may need additional capital and any additional
capital we seek may not be available in the amount or at the time we need it.
In the year ended December 31, 2015, we had an operating loss of $29.4 million, used $23.9 million of net cash in continuing
operating activities, and ended 2015 with $13.3 million in cash, cash equivalents and marketable securities. In the third quarter
of 2015, we implemented a significant expense reduction program that we believe will allow us to attain our goal of being cash
flow breakeven for the second half of 2016.
However, if we are not able to become cash flow breakeven for the second half of 2016 by increasing revenue and controlling
expenses, we will need to raise funds in the future to execute our business plan and pursue our growth objectives.
If we raise funds in the future, we cannot assure you that additional financing will be available in the amount or at the time we
need it, or that it will be available on acceptable terms or at all. We may obtain future additional financing by incurring
indebtedness or from an offering of our equity securities or both.
If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests and the
value of shares of our common stock could decline. Our efforts to raise additional funds from the sale of equity may be
hampered by the currently depressed trading price of our common stock. New investors may demand rights, preferences or
privileges senior to those of existing holders of common stock. If we raise additional funds by incurring debt, we could incur
significant expense to service the debt and we may be required to accept covenants that restrict our ability to incur additional
indebtedness, that force us to maintain specified liquidity or other ratios, or that otherwise could affect the manner in which we
8
conduct our business. If we cannot timely raise any needed funds, we may be forced to make further substantial reductions in
our operating expenses, which could limit our sales and marketing efforts, adversely affect our ability to attract and retain
qualified personnel, limit our ability to develop and enhance our solutions, make it more difficult for us to respond to
competitive pressures or unanticipated working capital requirements, and otherwise adversely affect our ability to pursue our
growth objectives.
We have limited operating history with our video content software management business, which may make evaluating
our business and prospects difficult.
With our acquisition of Qumu, Inc. in October 2011, we began our video content management business. Prior to the acquisition
of Qumu, Inc. and through July 1, 2014, we also operated the disc publishing business. On October 3, 2014, we acquired Kulu
Valley Ltd., a private limited company incorporated in England and Wales, to add its cloud-based video content creation
capabilities and expanded market reach to include external use cases. As a result, we have a limited history with our video
content software management business and an even more limited history with the standalone operation of our video content
software management business. Accordingly, our historical financial results are not necessarily indicative of the future financial
condition or results of operations of our video content management business. This limited history may make it difficult for
shareholders, prospective investors, analysts and others to evaluate our business and prospects given the risks and uncertainties
that we face as a relatively early stage, high technology company entering a new and rapidly evolving market.
We face intense competition and such competition may result in price reductions, lower gross profits and loss of market
share.
Our products face intense competition, both from other products and from other technologies, both in the U.S. and in
international markets. We compete with others such as Kaltura, Kontiki, Cisco, Polycom, vBrick, Brightcove and
MediaPlatform who deliver video content to businesses. Further, because some prospective customers may choose to rely upon
their own IT infrastructure and resources to manage their video content, we compete with customer-created solutions for video
content management. We expect the intensity of competition we face to increase in the future from other established and
emerging companies.
Many of our competitors have greater resources than we do, including greater sales, product development, marketing, financial,
technical or engineering resources. In addition, because our enterprise video content management software business is
relatively new with a limited operating history, our target customers may prefer to purchase software products that are critical
to their business from one of our larger, more established competitors.
To remain competitive, we believe that we must continue to provide:
•
•
•
•
•
•
•
technologically advanced products and solutions that anticipate and satisfy the demands of end-users;
continuing advancements or innovations in our product offerings, including products with price-performance
advantages or value-added features in security, reliability or other key areas of customer interest;
innovations in video content creation, management, delivery and user experience;
a responsive and effective sales force;
a dependable and efficient sales distribution network;
superior customer service; and
high levels of quality and reliability.
We cannot assure you that we will be able to compete successfully against our current or future competitors. Competition may
result in price reductions, lower gross profit margins, increased discounts to customers and loss of market share, and could
require increased spending by us on research and development, sales and marketing and customer support.
We encounter long sales cycles with our enterprise video solutions, which could adversely affect our operating results in
a given period.
Our ability to increase revenues and achieve profitability depends, in large part, on widespread acceptance of our enterprise
video content management software products by large businesses and other organizations. As we target our sales efforts at these
customers, we face greater costs, longer sales cycles and less predictability in completing sales. In the large enterprise market,
the customer’s decision to use our products may be an enterprise-wide decision and, therefore, these types of sales require us to
provide greater levels of education regarding the use and benefits of our applications. Further, given the constant innovation
with our industry and our products, customers may delay purchasing decisions until certain features or products in development
are brought to market. Longer sales cycles could cause our operating and financial results to suffer in a given period.
9
Adverse economic conditions, particularly those affecting our customers have harmed and may continue to harm our
business.
Unfavorable changes in economic conditions, including recession, inflation, lack of access to capital, lack of consumer
confidence or other changes have resulted and may continue to result in lower spending among our customers and target
customers.
Further, we sell our products throughout the United States, as well as in several international countries to commercial and
government customers. Our business may be adversely affected by factors in the United States and other countries such as
disruptions in financial markets, reductions in government spending, or downturns in economic activity in specific countries or
regions, or in the various industries in which we operate; social, political or labor conditions in specific countries or regions; or
adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations. These factors are beyond our
control, but may result in further decreases in spending among customers and softening demand for our products.
Further, challenging economic conditions also may impair the ability of our customers to pay for products and services they
have purchased. As a result, our cash flow may be negatively impacted and our allowance for doubtful accounts and write-offs
of accounts receivable may increase.
Our sales will decline, and our business will be materially harmed, if our sales and marketing efforts are not effective.
We will need to continue to optimize our sales infrastructure in order to grow our customer base and our business. Identifying
and recruiting qualified personnel and training them in the use and functionality of our software requires significant time,
expense and attention. It can take six months or longer before our sales representatives are fully-trained and productive. If we
are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired
productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or
increase our revenues. We also intend to expand new sales models that focus on different sales strategies tailored to different
customer types. Our business may be adversely affected if our efforts to train our internal sales force or execute our selling
strategies do not generate a corresponding increase in revenues.
For sales that are made to customers through our channel partners, we depend on these businesses to provide effective sales and
marketing support to our products. Our channel partners are independent businesses that we do not control. Our agreements
with channel partners do not contain requirements that a certain percentage of such parties’ sales are of our products. These
channel partners may choose to devote their efforts to other products in different markets or reduce or fail to devote the
resources to provide effective sales and marketing support of our products, any of which could harm our business by reducing
sales to customers.
We believe that our future growth and success will depend upon the success of our internal sales and marketing efforts as well
as those of our channel partners.
Competition for highly skilled personnel is intense and if we fail to attract and retain talented employees, we may fail to
compete effectively.
Our future success depends, in significant part, on our continuing ability to identify, hire, develop, motivate, and retain highly
skilled personnel for all areas of our organization. Competition in our industry for qualified employees, particularly in senior
management, product development and sales, is intense. In addition, our compensation arrangements, such as our equity award
programs, may not always be successful in attracting new employees and retaining and motivating our existing employees
given the high demand for these employees from other employers. Our ability to compete effectively depends on our ability to
attract new employees and to retain and motivate our existing employees.
Our enterprise video content management software products must be successfully integrated into our customers’
information technology environments and workflows and changes to these environments, workflows or unforeseen
combinations of technologies may harm our customers’ experience in using our software products.
A significant portion of our sales are made into applications that require our enterprise video content management software
products to be integrated into other enterprise workflows, enterprise information technology environments or software
functionalities. Any significant changes to enterprise workflows, IT environments or software programs may limit the use or
functionality of or demand for our products. As our customers advance technologically, we must be able to effectively integrate
our products to remain competitive. Further, current and potential customers may choose to use products offered by our
competitors or may not purchase our products if our products would require changes in their existing enterprise workflows, IT
environments or software.
10
The growth and functionality of our enterprise video content management software products depend upon the solution’s
effective operation with mobile operating systems and computer networks.
Our products are currently compatible with various mobile operating systems including the iOS, Windows Mobile and Android
operating systems. The functionality of our products depends upon the continued interoperability of these products with
popular mobile operating systems. Any changes in these systems that degrade our products’ functionality or give preferential
treatment to competitive offerings could adversely affect the operability and usage of our video management software products
on mobile devices. Additionally, in order to deliver a high quality user experience, it is important that our products work well
with a range of mobile technologies, systems, and networks. We may not be successful in keeping pace with changes in mobile
technologies, operating systems, or networks or in developing products that operate effectively within existing or future
technologies, systems, and networks. Further, any significant changes to mobile operating systems by their respective
developers may prevent our products from working properly or at all on these systems. In the event that it is more difficult for
users to access content delivered by our solutions to their mobile devices, if our products do not operate effectively within the
most popular operating systems or if popular mobile devices do not offer a high quality user experience, sales of and customer
demand for our software products could be harmed.
Any failure of major elements of our products could lead to significant disruptions in the ability to serve customers,
which could damage our reputation, reduce our revenues or otherwise harm our business.
Our business is dependent upon providing customers with fast, efficient and reliable services. A reduction in the performance,
reliability or availability of required network infrastructure may harm our ability to distribute content to our customers, as well
as our reputation and ability to attract and retain customers. Our content management software solutions and operations are
susceptible to, and could be damaged or interrupted by outages caused by fire, flood, power loss, telecommunications failure,
Internet or mobile network breakdown, earthquake and similar events. Our solutions are also subject to human error, security
breaches, power losses, computer viruses, break-ins, “denial of service” attacks, sabotage, intentional acts of vandalism and
tampering designed to disrupt our computer systems and network communications. Our failure to protect our network against
damage from any of these events could harm our business.
Our operations also depend on web browsers, ISPs (Internet service providers) and mobile networks to provide our customers’
end-users with access to websites, streaming and mobile content. Many of these providers have experienced outages in the past,
and could experience outages, delays and other difficulties due to system failures unrelated to our solutions. Any such outage,
delay or difficulty could adversely affect our ability to effectively provide our products and services, which would harm our
business.
If we lose access to third-party licenses, our software product development and production may be delayed or we may
incur additional expense to modify our products or products in development.
Some of our solutions contain software licensed from third parties. Third-party licensing arrangements are subject to a number
of risks and uncertainties, including:
•
•
•
•
•
undetected errors or unauthorized use of another person’s code in the third party’s software;
disagreement over the scope of the license and other key terms, such as royalties payable;
infringement actions brought by third-party licensees;
that third parties will create solutions that directly compete with our products; and
termination or expiration of the license.
Because of these risks, some of these licenses may not be available to us in the future on terms that are acceptable to us or
allow our products to remain competitive. The loss of these licenses or the inability to maintain any of them on commercially
acceptable terms could delay development of future products or impair the functionality or enhancement of existing products,
leading to increased expense associated with licenses of third-party software or development of alternative software to provide
comparable functionality for our existing products and modification of our existing products. Further, if we lose or are unable
to maintain any of these third-party licenses or are required to modify software obtained under third-party licenses, it could
delay the release of new products, delay enhancements to our existing products or delay sales of our existing products. Any
delays could result in loss of competitive position, loss of sales and loss of customer confidence, which could have a material
adverse effect on our business, results of operations and financial condition.
If the limited amount of open source software that is incorporated into our products were to become unavailable or if
we violate the terms of open source licenses, it could adversely affect sales of our products, which could disrupt our
business and harm our financial results.
Our products incorporate a limited amount of “open source” software. Open source software is made available to us and to the
public by its authors or other third parties under licenses that impose certain obligations on licensees that re-distribute or make
11
derivative works of the open source software. We may not be able to replace the functionality provided by the open source
software currently incorporated in our products if that software becomes unavailable, obsolete or incompatible with future
versions of our products. In addition, we must carefully monitor our compliance with the licensing requirements applicable to
that open source software. If we have failed or if in the future we fail to comply with the applicable license requirements, we
might lose the right to use the subject open source software. The terms of some open source licenses would require us to give
our customers significant rights to open source software that is subject to those licenses and is incorporated in our products.
This would include the right to obtain from us the source code form of that open source software, and the right to use, modify
and distribute that open source software to others. We may be required to provide these rights to customers on a royalty-free
basis. Those rights might also extend to modifications and additions we make to the subject open source software. That open
source software, and those modifications and additions, also might be obtained by our competitors and used in competing
products.
The enforceability and interpretation of open source licenses remains uncertain under applicable law. Unfavorable court
decisions could require us to replace open source software incorporated in our products. In some cases this might require us to
obtain licenses to commercial software under terms that restrict our use of that commercial software and require us to pay
royalties. In some cases we might need to redesign our software products, or to discontinue the sale of our software products if
a redesign could not be accomplished on a timely basis. These same consequences result if our use of any open source software
or commercial software is found to infringe any intellectual property right of another party. Any of these occurrences would
harm our business, operating results and financial condition.
We sell a significant portion of our products internationally, which exposes us to risks associated with international
operations.
We sell a significant amount of our products to customers outside the United States, particularly in Europe and Asia.
International sales accounted for 27% of our revenues for the year ended December 31, 2015, 15% of our revenues for the year
ended December 31, 2014 and 25% of our revenues for the year ended December 31, 2013. We expect that sales to
international customers, including customers in Europe and Asia, will continue to account for a significant portion of our net
sales. Sales outside the United States involve the following risks, among others:
•
•
•
•
•
•
•
•
•
•
•
international governments may impose tariffs, quotas and taxes;
the demand for our products will depend, in part, on local economic health;
political and economic instability may reduce demand for our products;
restrictions on the export or import of technology may reduce or eliminate our ability to sell in certain
markets;
potentially limited intellectual property protection in certain countries may limit our recourse against
infringing products or cause us to refrain from selling in certain markets;
potential difficulties in managing our international operations;
the burden and cost of complying with a variety of international laws, including those relating to data security
and privacy;
we may decide to price our products in foreign currency denominations;
our contracts with international channel partners cannot fully protect us against political and economic
instability;
potential difficulties in collecting receivables; and
we may not be able to control our international channel partners’ efforts on our behalf.
The financial results of our non-U.S. subsidiaries are translated into U.S. dollars for consolidation with our overall financial
results. Currency translations and fluctuations may adversely affect the financial performance of our consolidated operations.
Currency fluctuations may also increase the relative price of our product in international markets and thereby could also cause
our products to become less affordable or less price competitive than those of international manufacturers. These risks
associated with international operations may have a material adverse effect on our revenue from or costs associated with
international sales.
If our domestic or international intellectual property rights are not adequately protected, others may offer products
similar to ours or independently develop the same or similar technologies or otherwise obtain access to our technology
and trade secrets which could depress our product selling prices and gross profit or result in loss of market share.
We believe that protecting our proprietary technology is important to our success and competitive positioning. In addition to
common law intellectual property rights, we rely on patents, trade secrets, trademarks, copyrights, know-how, license
agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means
afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may
have over our competitors.
12
Our competitors, who may have or could develop or acquire significant resources, may make substantial investments in
competing technologies, or may apply for and obtain patents that will prevent, limit or interfere with our ability to develop or
market our products. Further, although we do not believe that any of our products infringe on the rights of others, third parties
have claimed, and may claim in the future, that our products infringe on their rights, and these third parties may assert
infringement claims against us in the future.
Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us
against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights
and the rights of others. Any claim of infringement against us may involve significant liabilities to third parties, could require
us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence
of this litigation, or the effect of an adverse determination in any of this type of litigation, could have a material adverse effect
on our business, financial condition and results of operations. Further, the laws of some of the countries in which our products
are or may be sold may not protect our products and intellectual property to the same extent as the United States or at all. Our
failure to protect or enforce our intellectual property rights could have a material adverse effect on our business, results of
operations and financial condition.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the
demand for our products, and could have a negative impact on our business.
The future success of our business depends in part upon the continued use of the Internet as a primary medium for commerce,
communication and business applications. Federal, state or international government bodies or agencies have in the past
adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in
these laws or regulations could require us to modify our products in order to comply with these changes. In addition,
government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or
commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or
communications generally, or result in reductions in the demand for Internet-based applications such as ours. The adoption of
any laws or regulations that adversely affect the growth, popularity or use of the Internet could limit the growth of the video as
a mainstream communication and collaboration tool, limit the market for video content management software generally, and
limit the demand for our products.
In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption
of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use,
accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely
affected by “viruses,” “worms” and similar malicious programs and the Internet has experienced a variety of outages and other
delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues,
demand for our applications could suffer.
Expanding laws, regulations and customer requirements relating to data security and privacy may adversely affect sales
of our products and result in increased compliance costs.
Our customers can use our products to collect, use and store personal or identifying information regarding their employees,
customers and suppliers. Federal, state and international government bodies and agencies have adopted, are considering
adopting, or may adopt laws and regulations regarding data security, privacy and the collection, use, storage and disclosure of
personal information obtained from consumers and individuals. These laws and regulations could reduce the demand for our
software products if we fail to design or enhance our products to enable our customers to comply with the privacy and security
measures required by the legislation.
We also must comply with the policies, procedures and business requirements of our customers relating to data privacy and
security, which can vary based upon the customer, the customer’s industry or location, and the product the customer selects,
and which may be more restrictive than the privacy and security measures required by law or regulation. In particular, the
European Union and many countries in Europe have stringent privacy laws and regulations, which may impact our ability to
profitably operate in certain European countries or to offer products that meet the needs of customers subject to European
Union privacy laws and regulations.
The costs of compliance with, and other burdens imposed by, our customers’ own requirements and the privacy and security
laws and regulations that are applicable to our customers’ businesses may limit the use and adoption of our products and reduce
overall demand. Non-compliance with our customers’ specific requirements may lead to termination of contracts with these
customers or liabilities to the customers; non-compliance with applicable laws and regulations may lead to significant fines,
penalties or liabilities.
13
Furthermore, privacy concerns may cause our customers’ workers to resist providing the personal data necessary to allow our
customers to use our products effectively. If a customer experiences a significant data security breach involving our software
products, our customers could lose confidence in our software’s ability to protect the personal information of their employees,
customers and suppliers, which could cause our customers to discontinue use of our products. The loss of confidence from a
significant data security breach involving our software products could hurt our reputation, cause sales and marketing challenges
to existing and new customers, cause loss of market share or exacerbate competitive pressures, result in an increase in our
development costs to address any potential vulnerabilities in our software products, and may result in reduced demand and
revenue. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our products in certain
industries.
Domestic and international legislative and regulatory initiatives and our customers’ privacy policies and practices may
adversely affect our customers’ ability to process, handle, store, use and transmit demographic and personal information from
their employees, customers and suppliers, which could reduce demand for our products.
In addition to government activity, privacy advocacy groups and the technology and other industries are considering various
new, additional or different self-regulatory standards that may place additional burdens on our software products. If the
processing of personal information were to be curtailed in this manner, our software products would be less effective, which
may reduce demand for our products and adversely affect our business.
We have identified material weaknesses in our internal control over financial reporting. These material weaknesses, if
not corrected, could affect the reliability of our financial statements and have other adverse consequences.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2015, we have
concluded that there are material weaknesses relating to our internal control over financial reporting. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be
prevented or detected on a timely basis.
We did not maintain effective risk assessment and monitoring processes. Specifically, with respect to our risk assessment
process, we did not adequately identify and analyze changes in the business and personnel and implement effective process
level controls and monitoring activities that are responsive to those changes and aligned with our financial reporting objectives.
Additionally, our risk assessment process did not adequately evaluate the impact of information technology control deficiencies
that affect the design and operating effectiveness of controls related to the completeness and accuracy of underlying data
included in system generated reports. With respect to our monitoring process, we did not design and maintain effective controls
for the timely identification, evaluation, communication and remediation of internal control deficiencies.
Additionally as it relates to specific control activities: The design of our controls were inadequate to ensure that a complete
population of manual journal entries had been appropriately identified and subjected to appropriate levels of review and
approval. The design and operating effectiveness of our controls were inadequate to ensure that account reconciliations were
consistently performed, that support was retained, and that reconciliations were approved to ensure the balances were complete
and accurate. We did not maintain effective controls over the accuracy and appropriateness of revenue entries recorded to the
general ledger. Specifically, we did not maintain adequate documentation to ensure that all entries had been subject to an
appropriate level of review and approval.
As a result, a reasonable possibility exists that material misstatements in the Company’s financial statements would not be
prevented or detected on a timely basis. For additional information on these matters, see Part II, Item 9A of this Annual Report
on Form 10-K. As a result of these material weaknesses, management has determined that our disclosure controls and
procedures and internal control over financial reporting were not effective as of December 31, 2015.
In light of the material weaknesses identified, we performed additional analysis and other post-closing procedures to ensure
that our consolidated financial statements present fairly, in all material respects, the Company’s financial position, results of
operations and cash flows for the periods disclosed in conformity with U.S. GAAP. We are in the process of implementing our
remediation plans. During 2015, we hired a new chief financial officer and corporate controller, created and hired for the new
role of SEC reporting and compliance manager, and hired additional accounting personnel over the past six months.
Additionally, the Company is expecting to complete the implementation of new financial reporting software by the end of the
third quarter of 2016. We expect that a substantial portion of our remediation efforts will be completed by the end of the third
quarter of 2016, with final testing of effectiveness of new and enhanced controls occurring at the end of 2016. We expect to
incur additional costs remediating these material weaknesses.
Although we believe we are taking appropriate actions to remediate the control deficiencies we identified and to strengthen our
internal control over financial reporting, we may need to take additional measures to fully mitigate the material weaknesses,
14
and the measures we have taken, and expect to take, to improve our internal controls may not be sufficient to address the issues
identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in
a material misstatement of our annual or interim consolidated financial statements. In addition, other material weaknesses or
deficiencies may be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls
in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time
periods specified in the rules and forms of the SEC may be adversely affected. This failure could negatively affect the market
price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information,
subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and
financial condition.
We may face circumstances in the future that could result in impairment charges, including, but not limited to,
significant goodwill impairment charges.
If the fair value of any of our long-lived assets decreases as a result of an economic slowdown, a downturn in the markets
where we sell products and services or a downturn in our financial performance and/or future outlook, we may be required to
record an impairment charge on such assets, including goodwill.
We are required to test intangible assets with indefinite life periods for potential impairment annually and on an interim basis if
there are indicators of a potential impairment. We also are required to evaluate amortizable intangible assets and fixed assets for
impairment if there are indicators of a possible impairment. One potential indicator of impairment is the value of our market
capitalization, or enterprise value, as compared to our net book value.
During the year ended December 31, 2015, the Company’s stock price traded at levels which caused the Company’s enterprise
value, excluding any control premium, to approximate its book value, resulting in increased risk of a potential impairment of
goodwill. As of December 31, 2015, the Company’s market capitalization, without a control premium, was less than its book
value suggesting a possible goodwill impairment. The Company engaged a third party valuation firm to assist the Company
with its goodwill impairment analysis. Based on the analysis, the Company determined its enterprise value using a discounted
cash flow analysis and a comparable public company analysis, giving both equal weight, was greater than the Company’s book
value by 14%. As a result, the Company concluded there was no goodwill impairment. Declines in the Company’s market
capitalization or a downturn in our future financial performance and/or future outlook could require the Company to record
goodwill and other impairment charges. While a goodwill impairment charge is a non-cash charge, it would have a negative
impact on our results of operations.
We may experience significant quarterly and annual fluctuations in our results of operations due to a number of factors
and these fluctuations may negatively impact the market price of our common stock.
Our quarterly and annual results of operations may fluctuate significantly due to a variety of factors, many of which are outside
of our control. With the sale of the disc publishing business on July 1, 2014, there may be even wider fluctuations in our results
of operations given the smaller size of our retained software business. This variability may lead to volatility in our stock price
as research analysts and investors respond to quarterly fluctuations and this volatility may be exacerbated by the relatively
illiquid nature of our common stock. In addition, comparing our results of operations on a period-to-period basis, particularly
on a sequential quarterly basis, may not be meaningful. Further, a comparison to our results of operations in periods prior to our
acquisition of Qumu, Inc. in October 2011 will not be meaningful. You should not rely on our past results as an indication of
our future performance.
Factors that may affect our results of operations include:
•
•
•
•
•
•
•
•
the number and mix of products and solutions sold in the period;
the timing and amount of our recorded revenue, which will depend upon the mix of products and solutions
selected by our customers with revenue from paid-up perpetual software licenses being recognized upon delivery,
revenue from term software licenses recognized over the term of the contract, and revenue from cloud-hosted
services recognized over the term of the subscription agreement;
timing of customer purchase commitments, including the impact of long sales cycles and seasonal buying
patterns;
variability in the size of customer purchases and the impact of large customer orders on a particular period;
the timing of major development projects and market launch of new products or improvements to existing
products;
reductions in our customers’ budgets for information technology purchases and delays in their purchasing cycles,
due to changing global economic or market conditions;
the impact to the marketplace of competitive products and pricing;
the timing and level of operating expenses;
15
•
•
•
the impact on revenue and expenses of acquisitions by us or by our competitors;
future accounting pronouncements or changes in our accounting policies; and
the impact of a recession or any other adverse global economic conditions on our business, including uncertainties
that may cause a delay in entering into or a failure to enter into significant customer agreements.
The foregoing factors are difficult to forecast, and these, as well as other factors, could adversely affect our quarterly and
annual results of operations. Failure to achieve our quarterly or annual forecasts or to meet or exceed the expectations of
research analysts or investors may cause our stock price to decline abruptly and significantly.
The limited liquidity for our common stock could affect your ability to sell your shares at a satisfactory price.
Our common stock is relatively illiquid. As of December 31, 2015, we had 9,188,682 shares of common stock outstanding. The
average daily trading volume in our common stock, as reported by the Nasdaq Stock Market, for the 64 trading days beginning
October 1, 2015 and ending December 31, 2015 was approximately 28,100 shares. A more active public market for our
common stock may not develop, which could adversely affect the trading price and liquidity of our common stock. Moreover, a
thin trading market for our stock could cause the market price for our common stock to fluctuate significantly more than the
stock market as a whole. Without a larger float, our common stock is less liquid than the stock of companies with broader
public ownership. As a result, the trading prices of our common stock have been and may continue to be more volatile. In
addition, in the absence of an active public trading market, shareholders may be unable to liquidate their shares of our common
stock at a satisfactory price.
Provisions of Minnesota law, our bylaws and other agreements may deter a change of control of our company and may
have a possible negative effect on our stock price.
Certain provisions of Minnesota law, our bylaws and other agreements may make it more difficult for a third-party to acquire,
or discourage a third-party from attempting to acquire, control of our company, including:
•
•
•
•
•
the provisions of Minnesota law relating to business combinations and control share acquisitions;
the provisions of our bylaws regarding the business properly brought before shareholders;
the right of our board of directors to establish more than one class or series of shares and to fix the relative rights
and preferences of any such different classes or series;
the provisions of our stock option plans allowing for the acceleration of vesting or payments of awards granted
under the plans in the event of specified events that result in a “change in control”; and
the provisions of our agreements provide for severance payments to our executive officers in the event of certain
terminations following a “change in control.”
These measures could discourage or prevent a takeover of our company or changes in our management, even if an acquisition
or such changes would be beneficial to our shareholders. This may have a negative effect on the price of our common stock.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses
and will constitute a larger percentage of our annual revenue than prior to the sale of the disc publishing business.
Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and
public company disclosure requirements, including the Sarbanes-Oxley Act of 2002 and in particular Section 404 of that Act
relating to management certification of internal controls, new disclosures relating to “conflict minerals,” the regulations of the
Securities and Exchange Commission and the rules of the Nasdaq Stock Market have required an increased amount of
management attention and external resources. We intend to invest all reasonably necessary resources to comply with evolving
corporate governance and public disclosure standards, and this investment may result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. While
all public companies face the costs and burdens associated with being public companies, the costs and burden of being a public
company will be a significant portion of our annual revenues, which have been reduced following the sale of the disc
publishing business on July 1, 2014.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
16
ITEM 2. PROPERTIES
Location of Property
Minneapolis, Minnesota
(Headquarters)
San Bruno, California
Use of Property
Engineering, service, sales, marketing and
administration
Engineering, service, sales, marketing and
administration
Tokyo, Japan
London, England
Sales and service
Engineering, service, sales, marketing and
administration
Hyderabad, India
Software development and testing
_________________________________________________
Approximate
Monthly Rent
(USD)
Approximate
Leased Square
Footage
Lease Expiration
Date
$
$
$
$
$
23,000 (1)
36,000 (2)
5,500
36,500
7,500
16,500
January 2023
13,900
June 2018
500
Not applicable
5,500
4,800
September 2019
September 2018
(1) The agreement has escalating lease payments ranging from approximately $23,000 to $27,000 per month during the course of the
lease.
(2) The agreement has escalating lease payments ranging from approximately $33,000 to $38,000 per month during the course of the
lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is exposed to a number of asserted and unasserted legal claims encountered in the ordinary course of its
business. Although the outcome of any such legal actions cannot be predicted, management believes that there are no pending
legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its
financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Qumu's common stock is traded on the Nasdaq Global Market under the symbol “QUMU.” The following table sets forth, for
the periods indicated, the range of low and high sales prices for Qumu's common stock as reported on The Nasdaq Stock
Market.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Shareholders
Year Ended December 31,
2015
2014
Low
High
Low
High
$
$
$
$
12.31
6.80
1.58
2.40
$
$
$
$
15.87
14.99
8.59
4.94
$
$
$
$
12.38
12.00
11.74
11.83
$
$
$
$
18.09
17.27
14.94
15.20
As of February 29, 2016, there were 99 shareholders of record of Qumu's common stock.
Dividends
The Company did not pay a dividend in 2015 and 2014 and does not expect to pay a dividend in 2016. The payment by Qumu
of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on
Qumu's future earnings, financial condition, capital requirements and other relevant factors.
Issuer Purchases of Equity Securities
The Company’s Board of Directors has approved common stock repurchases of up to 3,500,000 shares of the Company’s
common stock. The Company has implemented a Rule 10b5-1 plan in connection with the repurchase program in order to give
the Company the ability to repurchase its shares at times when it otherwise might be prevented from doing so under insider
trading laws or because of self-imposed blackout periods. Shares may be purchased at prevailing market prices in the open
market or in private transactions, subject to market conditions, share price, trading volume and other factors. The repurchase
program may be discontinued at any time. The repurchase program has been funded to date using cash on hand. During the
three months ended December 31, 2015, no repurchases were made under the repurchase program. While the current
authorization remains in effect, the Company expects its primary use of cash will be to fund operations in support of the
Company’s goals for revenue growth and operating margin improvement.
In addition to shares purchased under the Board authorization, the Company purchases shares of common stock held by
employees who wish to tender owned shares to satisfy the exercise price or tax withholding on stock option exercises or vesting
of restricted stock awards. All of the share repurchase activity included in the table below for the three months ended December
31, 2015 was associated with satisfaction of employee tax withholding requirements on vesting of restricted stock awards.
Information on the Company’s repurchases of its common stock during each month of the fourth quarter ended December 31,
2015, is as follows:
Monthly Period
October 2015
November 2015
December 2015
Total Number of
Shares
Purchased
Average Price
Paid per Share
—
2.80
—
1,512
— $
$
— $
Total Number of
Shares
Purchased as Part of
Publicly Announced
Plans or Programs
—
—
—
Maximum Number of
Shares That May Yet Be
purchased Under the
Plans or Programs (at
end of period)
778,365
778,365
778,365
18
Other Information Regarding Equity Compensation Plans
The following table sets forth information regarding Qumu's equity compensation plans in effect as of December 31, 2015.
Each of the Company’s equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the
Securities Act of 1933.
Plan category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders(2)
Total
_______________________________________
Securities Authorized for Issuance Under Equity Compensation Plans
Number of Shares of
Common Stock to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Shares of
Common Stock
Remaining
Available for Future
Issuance Under Equity
Compensation Plans(1)
1,333,077
480,000
1,813,077
$
$
$
9.80
10.54
10.00
337,456
—
337,456
(1) Excludes shares of common stock listed in the first column.
(2) Consists of outstanding non-qualified stock option grants to 1) three of the Company’s current senior management level employees, Vern
Hanzlik, Peter Shutte, and Peter Goepfrich on November 26, 2012, January 7, 2013, and May 18, 2015, the respective first days of
employment with Qumu; and 2) one of the Company’s former senior management level employees, Sherman L. Black, on April 1, 2009,
the first day of employment with Qumu. The stock options were granted outside of the Company’s current equity incentive plan, the 2007
Stock Incentive Plan, as “inducement awards” pursuant to Nasdaq Listing Rule 4350(i)(1)(A)(iv). The options have an exercise price equal
to the closing price of the Company’s common stock as reported by the Nasdaq Stock Market on the grant dates, vest in four equal
installments on each of the first four anniversaries of the date of grant, and have a term of seven years. In other respects, the options were
structured to mirror the terms of options granted under the Company’s 2007 Stock Incentive Plan and are subject to a stock option plan and
agreement entered into by and between the Company and each employee.
19
Performance Graph
The Company’s common stock is quoted on The Nasdaq Global Market. The graph and table below set forth a comparison of
the cumulative total return of the Company’s common stock over the last five fiscal years with a broad market index and
published industry index. The Company has selected the NASDAQ Computer Services Index as its published industry index.
The following graph shows changes during the period from December 31, 2010 to December 31, 2015 in the value of $100
invested in: (1) the NASDAQ US Benchmark TR Index; (2) the NASDAQ Computer Services Index; and (3) Qumu's common
stock. The values of each investment as of the dates indicated are based on share prices plus any dividends paid in cash, with
the dividends reinvested on the date they were paid. The calculations exclude trading commissions and taxes. The table and
graph are not necessarily indicative of future investment performance.
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Nasdaq US Benchmark TR Index
Nasdaq Computer Services Index
Qumu Corporation
$
$
$
100.00
100.00
100.00
$
$
$
100.31
116.70
75.45
$
$
$
116.79
128.53
44.80
$
$
$
155.90
138.82
85.85
$
$
$
175.33
132.12
91.68
$
$
$
176.17
129.36
18.18
20
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 below and the Consolidated Financial Statements and the Notes
thereto included in Item 8 below. Results of operations exclude the operations of the disc publishing business, which are
reported as discontinued operations for all periods presented in the Consolidated Financial Statements due to the sale of the
Disc Publishing business on July 1, 2014. We acquired Qumu, Inc. and began our enterprise video content software business in
October 2011. Accordingly, the Statement of Operations for 2011 presented below reflects a partial year. (In thousands, except
per share data).
Consolidated Statements of Operations Information
Total revenues
Gross profit
Operating loss (1)
Net loss from continuing operations (1) (2)
Net income (loss) (1) (2)
Net loss from continuing operations per basic and diluted
share (1) (2)
Weighted average shares outstanding
$
$
$
$
$
$
2015
Year Ended December 31,
2013
2014
2012
34,454
16,955
$
$
26,521
12,049
$
$
17,736
10,402
$
$
9,836
5,917
$
$
(29,404) $
(28,726) $
(19,605) $
(49,428) $
(28,689) $
(22,343) $
(16,221) $
(53,790) $
(28,699) $
(8,520) $
(9,694) $
(48,338) $
2011
1,760
733
(7,056)
(4,341)
2,835
(3.11) $
(2.53) $
(1.87) $
(5.39) $
(0.45)
Basic
Diluted
9,235
9,235
8,836
8,836
8,691
8,691
9,971
9,971
9,674
9,699
_________________________________________________
(1) The Company recorded non-cash goodwill and intangible asset impairment charges of $29,548 before tax in fiscal year 2012.
(2) The Company recorded non-cash deferred tax asset valuation allowance charge of $13,967 in fiscal year 2012.
Consolidated Balance Sheets Information
Cash and cash equivalents
Marketable securities
Current assets
Total assets
Current liabilities
Long-term liabilities
Stockholders’ equity
2015
2014
December 31,
2013
2012
2011
$
$
$
$
$
$
$
7,072
6,249
28,629
54,412
19,113
4,542
30,757
$
$
$
$
$
$
$
11,684
23,486
52,752
80,177
19,377
2,527
58,273
$
$
$
$
$
$
$
37,725
13,233
71,774
89,146
23,028
3,537
62,581
$
$
$
$
$
$
$
28,644
21,496
75,950
95,563
19,807
5,129
70,627
$
$
$
$
$
$
$
70,161
—
98,437
157,660
20,156
5,204
132,300
Historical data is not necessarily indicative of the Company's future results of operations or financial condition. See discussion
of "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.
21
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with the
section titled “Selected Financial Data” and our audited financial statements and related notes which are included elsewhere
in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking
statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in “Risk
Factors” included elsewhere in this Annual Report on Form 10-K.
Overview
Qumu Corporation ("Qumu" or the "Company") provides the tools businesses need to create, manage, secure, deliver and
measure the success of their videos. The Company's innovative solutions release the power in video to engage and empower
employees, partners and clients. Organizations around the world realize the greatest possible value from video they create and
publish. Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does
video.
The Company generates revenue through the sale of enterprise video content management software solutions, hardware,
maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license,
a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales
of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support,
and professional and other services.
For the years ended December 31, 2015, 2014 and 2013, the Company generated revenues of $34.5 million, $26.5 million and
$17.7 million, respectively. Subscription, maintenance and support revenue increased 54% to $18.8 million from $12.2 million
in 2015 as the Company continues to advance its transition to more revenue that is recurring in nature from primarily perpetual
software license revenue.
History
The Company was founded in 1978, incorporated as IXI, Inc. in Minnesota in February 1987 and changed its name to Rimage
Corporation in April 1988. From 1995 to 2011, the Company focused its business on the development and sale of its CD
recordable publishing systems and DVD recordable publishing systems.
In response to declines in the disc publishing business due to technology substitutions and the rise of video as a
communication and collaboration tool, in October 2011, the Company acquired Qumu, Inc., a leader in the enterprise video
content management software market and changed its name to Qumu Corporation in September 2013. Qumu completed the
transition to enterprise video content management software company in July 2014, when the Company closed on the sale of its
disc publishing assets to Equus Holdings, Inc. and Redwood Acquisition, Inc. (now known as Rimage Corporation). As a result,
the disc publishing business was classified as held for sale and qualified for presentation as discontinued operations effective
with the reporting of the Company's financial results for the second quarter of 2014.
On October 3, 2014, the Company acquired Kulu Valley Ltd., a private limited company incorporated in England and Wales
(“Kulu Valley”). The acquisition was made to expand Qumu’s addressable market through the offering of Kulu Valley’s best-in-
class video content creation capabilities and easy-to-deploy pure cloud solution, and provides Kulu Valley’s customers with
access to industry leading video content management and delivery capability.
The results of the discontinued disc publishing business and associated financial impacts from the sale of this business have
been presented as discontinued operations for the years ended December 31, 2015, 2014 and 2013. No general corporate
charges were allocated to the discontinued business. The assets and liabilities of the discontinued business are presented on the
Consolidated Balance Sheets as assets and liabilities from discontinued operations. Other than consolidated amounts reflecting
operating results and balances for both the continuing and discontinued operations, all remaining amounts presented in the
accompanying consolidated financial statements reflect the financial results and financial position of the Company's continuing
enterprise video content management software business.
The following discussion of year-to-year changes and trends in financial statement results under "Management’s Discussion
and Analysis of Financial Condition and Results of Operations” aligns with the financial statement presentation described
above.
22
Critical Accounting Policies
The discussion of the Company's financial condition and results of operations is based upon its financial statements, which are
prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The
preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, management
evaluates its estimates and assumptions. Management bases its estimates of the carrying value of certain assets and liabilities on
historical experience and on various other assumptions that management believes to be reasonable. The Company's actual
results may differ from these estimates under different assumptions or conditions.
Management believes that of the Company's significant accounting policies, which are described in the notes to our financial
statements, the following accounting policies involve a greater degree of judgment, complexity and effect on materiality. A
critical accounting policy is one that is both material to the presentation of our financial statements and requires management to
make difficult, subjective or complex judgments for uncertain matters that could have a material effect on the Company's
financial condition and results of operations. Accordingly, these are the policies management believes are the most critical to
aid in fully understanding and evaluating the Company's financial condition and results of operations.
Revenue Recognition
The Company follows specific and detailed guidelines in determining the proper amount of revenue to be recorded; however,
certain judgments affect the application of its revenue recognition policy.
The Company commences revenue recognition when all of the following conditions are met: there is persuasive evidence of an
arrangement; the product has been delivered or the services have been provided to the customer; the collection of the fees is
reasonably assured; and the amount of fees to be paid by the customer is fixed or determinable.
Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause the Company's
operating results to vary significantly from period to period. The significant judgments for revenue recognition typically
involve allocation of revenue to multiple element arrangements, which must be analyzed to determine the fair value of each
element, the amount of revenue to be recognized for each element, if any, and the period and conditions under which deferred
revenue should be recognized. As a result, if facts and circumstances change that affect management's current judgments, the
Company's revenue could be materially different in the future.
Long-lived Assets
The Company continually monitors events and changes in circumstances that could indicate that carrying amounts of its long-
lived assets, including property and equipment and intangible assets may not be recoverable. When such events or changes in
circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of
such assets will be recovered through their undiscounted expected future cash flows. If the future undiscounted cash flows are
less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying
amount over the fair value of the assets.
Goodwill
The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible
assets and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or
more frequently if facts and circumstances warrant a review. The Company has determined that there is a single reporting unit
for the purpose of goodwill impairment tests. For purposes of assessing the impairment of goodwill, the Company annually, at
its fiscal year end, estimates the fair value of the reporting unit and compares this amount to the carrying value of the reporting
unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds its fair value.
23
During the year ended December 31, 2015, the Company’s stock price traded at levels which caused the Company’s enterprise
value, excluding any control premium, to approximate its book value, resulting in increased risk of a potential impairment of
goodwill. As of December 31, 2015, the Company’s market capitalization, without a control premium, was less than its book
value suggesting a possible goodwill impairment. The Company engaged a third party valuation firm to assist the Company
with its goodwill impairment analysis. Based on the analysis, the Company determined its enterprise value using a discounted
cash flow analysis and a comparable public company analysis, giving both equal weight, was greater than the Company’s book
value by 14%. As a result, the Company concluded there was no goodwill impairment. While not a factor used for the
December 31, 2015 goodwill impairment analysis, the Company's market capitalization increased to $48.7 million as of March
14, 2016 which was in excess of its book value at December 31, 2015 by 58%. Declines in the Company’s market
capitalization could require the Company to record goodwill and other impairment charges. While a goodwill impairment
charge is a non-cash charge, it would have a negative impact on the Company's results of operations.
Investment in Nonconsolidated Company
As of December 31, 2015 and 2014, the Company held an investment totaling $3.1 million in convertible preferred stock of
Briefcam, Ltd. ("Briefcam") a privately-held Israeli company that develops video synopsis technology to augment security and
surveillance systems to facilitate review of surveillance video. The investment is included in other non-current assets. Because
Qumu's ownership interest is less than 20% and it has no other rights or privileges that enable it to exercise significant
influence over the operating and financial policies of Briefcam, Qumu accounts for this equity investment using the cost
method. Equity securities accounted for under the cost method are reviewed quarterly for changes in circumstances or the
occurrence of events that suggest the Company’s investment may not be fully recoverable. If an unrealized loss for the
investment is considered to be other-than-temporary, the loss will be recognized in the Consolidated Statements of Operations
in the period the determination is made. Qumu monitors Briefcam's results of operations, business plan and capital raising
activities and is not aware of any events or circumstances that would indicate a decline in the carrying value of its investment.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized ratably as an
expense over the vesting period of the award. Determining the appropriate fair value model and calculating the fair value of
stock-based payment awards require the use of subjective assumptions, including the expected life of the stock-based payment
awards and stock price volatility. Management uses the Black-Scholes option pricing model to value award grants and
determine the related compensation expense. The assumptions used in calculating the fair value of stock-based payment awards
represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and management uses different assumptions, the Company's stock-based compensation
expense could be materially different in the future. The Company expects to continue to grant stock-based awards in the future,
and to the extent that the Company does, its actual stock-based compensation expense recognized in future periods will likely
increase.
Royalties for Third Party Technology
Royalties for third party technology are either paid in advance and capitalized as prepaid royalties or are accrued as incurred
and subsequently paid. These royalties are generally expensed to cost of revenue generally at the greater of the contractual rate
or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Each quarter, the
Company also evaluates the expected future realization of its prepaid royalties, as well as any minimum commitments not yet
paid to determine amounts it deems unlikely to be realized through product sales. Any impairments or losses determined before
the launch of a product are generally charged to general and administrative expense, and any impairments or losses determined
post-launch are charged to cost of revenue. Unrecognized minimum royalty-based commitments are accounted for as executory
contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is
abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
During the quarter ended December 31, 2015, the Company recognized a loss relating to a third party license agreement of $1.2
million to general and administration expense which included the write-off of a $606,000 prepaid royalty and the accrual of the
remaining $606,000 minimum royalty payments.
Income Taxes
Significant judgment is required in determining the realizability of deferred tax assets. Management must assess the likelihood
that the Company's net deferred tax assets will be recovered from future taxable income, and to the extent Management
believes that recovery is not likely, the Company must establish a valuation allowance. Considerations for determining the
realizability of the Company's deferred tax assets primarily involve cumulative pre-tax income for financial reporting purposes,
cumulative taxable income for the past three years, estimated future pre-tax income for financial reporting purposes and
24
estimated future taxable income from the Company's core business. Management also considers the expiration dates and
amounts of net operating loss carryforwards and other tax credits, and estimate the impact of future tax deductions from the
exercise of stock options. These estimates are projected through the life of the related deferred tax assets based on assumptions
which Management believes to be reasonable and consistent with current operating results.
Since 2012, the Company has maintained a full valuation allowance against the Company U.S. deferred tax assets. If pretax
results improve in future periods, the Company may be able to reverse the valuation allowance, which would positively impact
earnings.
Results of Operations
The percentage relationships to revenues of certain income and expense items for the years ended December 31, 2015, 2014
and 2013, and the percentage changes in these income and expense items between years, are contained in the following table
(all amounts presented reflect only the financial results of the Company's continuing enterprise video content management
software business):
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of purchased intangibles
Total operating expenses
Operating loss
Other expense, net
Loss before income taxes
Income tax benefit
Net loss from continuing operations
Revenues
Percentage of Revenues
2014
100.0 %
(54.6)
45.4
2015
100.0 %
(50.8)
49.2
31.0
52.2
49.0
2.3
134.5
(85.3)
(0.4)
(85.7)
(2.4)
(83.3)%
35.8
67.8
47.6
2.5
153.7
(108.3)
(0.7)
(109.0)
(24.8)
(84.2)%
2013
100.0 %
(41.4)
58.6
49.3
58.1
58.2
3.5
169.1
(110.5)
(0.1)
(110.6)
(19.1)
(91.5)%
Percent Increase (Decrease)
2013 to 2014
2014 to 2015
50%
30%
97
21
16
41
12
—
34
22
14
2
(31)
2
(87)
28%
9
75
22
4
36
47
1,408
47
93
38%
The Company generates revenue through the sale of enterprise video content management software solutions, hardware,
maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license,
a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales
of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support,
and professional and other services.
The table below describes Qumu's revenues by product category (in thousands):
Year Ended December 31,
2014
2013
2015
Software licenses and appliances
Service
Total revenues
$
$
9,456
24,998
34,454
$
$
11,363
15,158
26,521
$
$
7,269
10,467
17,736
Increase (Decrease)
2014 to 2015
$
(1,907) $
9,840
7,933
$
2013 to 2014
4,094
4,691
8,785
$
Percent Increase (Decrease)
2013 to 2014
2014 to 2015
56%
(17)%
45
65
50%
30 %
The $7.9 million increase in total revenues from 2014 to 2015 reflects a $9.8 million increase in service revenues, partially
offset by a $1.9 million decrease in software licenses and appliances revenues. The decrease in software license revenues in
2015 was largely impacted by a decrease in the value of perpetual product license contracts entered into in 2015 and converted
to revenue. Revenues can vary year to year based on the type of contract the Company enters into with each customer.
Contracts for perpetual software licenses, which are included in software licenses and appliances revenue, generally result in
revenue recognized closer to the contract commitment date, while contracts for term software licenses and SaaS, which are
included in service revenue, result in most of the revenue being recognized over the period of the contract. The $9.8 million
increase in service revenues from 2014 to 2015 resulted from a $6.6 million increase in subscription, maintenance and support
revenues to $18.8 million from $12.2 million driven primarily from growth in the customer base, including the favorable
impact of SaaS revenues from Qumu’s acquisition of Kulu Valley effective October 3, 2014. Also contributing to the growth in
25
services revenue was an approximately $3.3 million increase in professional services revenues to $6.2 million from $2.9
million as Qumu assists its customers in the deployment of its growing base of enterprise video solutions.
The $8.8 million increase in total revenues from 2013 to 2014 reflects a $4.1 million increase in software licenses and
appliances revenues and a $4.7 million increase in service revenues. The increase in software license revenues in 2014 was
largely impacted by an increase in the value of perpetual product license contracts entered into in 2014 and converted to
revenue. The increase in service revenues in 2014 resulted from a rise in maintenance and support revenues stemming primarily
from growth in the customer base and higher professional services revenues. Also contributing to the increase in service
revenues was the recognition of revenue from a large term-based arrangement closed in the first quarter of 2014 for which
revenue is being recognized over the three-year term of the contract. The growth in service revenues was also favorably
impacted by the generation in the fourth quarter of cloud-based SaaS revenues from Qumu’s acquisition of Kulu Valley
effective October 3, 2014.
Future consolidated revenues will be dependent upon many factors, including the rate of adoption of the Company's software
solutions in its targeted markets and whether arrangements with customers are structured as a perpetual software license, a term
software license or a SaaS, which impacts the timing of revenue recognition. Other factors that will influence future
consolidated revenues include the timing of customer orders, the impact of changes in economic conditions and the impact of
foreign currency exchange rate fluctuations.
Cost of Revenues and Gross Profit
A comparison of gross profit and gross margin by revenue category is as follows (dollars in thousands):
Year Ended December 31,
2014
2015
Increase (Decrease)
2013
2014 to 2015
2013 to 2014
Percent Increase (Decrease)
2013 to 2014
2014 to 2015
Gross profit:
Software licenses and appliances $
Service
Total gross profit
$
6,507
10,448
16,955
$
$
7,547
4,502
12,049
$
$
4,348
6,054
10,402
$
$
(1,040)
5,946
4,906
$
$
3,199
(1,552)
1,647
(14)%
132
41 %
74%
(26)
16%
Gross margin:
Software licenses and appliances
Service
Total gross margin
68.8%
41.8%
49.2%
66.4%
29.7%
45.4%
59.8%
57.8%
58.6%
2.4%
12.1%
3.8%
6.6 %
(28.1)%
(13.2)%
The 3.8% improvement in gross margin in 2015 compared to 2014 was primarily driven by the 12.1% improvement in service
gross margin primarily driven by improved economies of scale on increased service revenue; service margin also improved due
to cost savings initiatives in the second half of 2015. The year ended December 31, 2015 included severance expense of
$49,000 relating the cost reduction initiatives. The Company had 43 and 49 service personnel at December 31, 2015 and 2014,
respectively.
The 13.2% decline in gross margin in 2014 compared to 2013 resulted from increased investments in customer support and
professional services costs to support growth in the customer base, deployment of a growing base of software contracts and
expansion of service offerings. Additionally, the sales mix shifted in 2014 compared to 2013 to include a higher concentration
of lower margin hardware in perpetual license transactions. The overall growth in revenue volume in 2014 provided greater
absorption of fixed service costs, partially offsetting the impact of the changes described above.
For the years ended December 31, 2015, 2014 and 2013, gross margins are inclusive of the impact of approximately $1.3
million, $0.7 million and $0.6 million, respectively, in amortization expense associated with intangible assets acquired as a
result of the acquisition of Qumu, Inc. in the fourth quarter of 2011 and Kulu Valley in the fourth quarter of 2014. Cost of
software licenses and appliances revenues in 2016 are expected to include approximately $1.4 million of amortization expense
for purchased intangibles.
Future gross profit margins will fluctuate quarter to quarter and will be impacted by the rate of growth and mix of the
Company's product and service offerings and foreign currency exchange rate fluctuations.
26
Operating Expenses
The following is a summary of operating expenses:
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of purchased
intangibles
Total operating expenses
Year Ended December 31,
Increase (Decrease)
Percent Increase (Decrease)
2015
2014
2013
2014 to 2015
2013 to 2014
2014 to 2015
2013 to 2014
$
$
10,689
17,994
16,878
798
46,359
$
$
9,506
17,991
12,626
652
40,775
$
$
8,745
10,303
10,332
627
30,007
$
$
1,183
3
4,252
146
5,584
$
$
761
7,688
2,294
25
10,768
12%
—
34
22
14%
9%
75
22
4
36%
Operating expenses for the year ended December 31, 2015 included an equipment operating lease loss of $1.0 million relating
to equipment the Company no longer plans to utilize as part of it managed services offerings, a loss relating to a third party
license agreement of $1.2 million, and severance expense of $2.1 million relating the cost reduction initiatives and executive
transitions.
Research and development
Research and development expenses were as follows (dollars in thousands):
Compensation and employee-
related
Overhead and other expenses
Outside services and consulting
Depreciation and amortization
Equity-based compensation
Total research and development
expenses
Year Ended December 31,
2014
2015
Increase (Decrease)
2013
2014 to 2015
2013 to 2014
Percent Increase (Decrease)
2013 to 2014
2014 to 2015
$
$
6,738
1,067
2,349
273
262
$
5,762
749
2,403
349
243
$
6,291
540
1,300
296
318
$
976
318
(54)
(76)
19
(529)
209
1,103
53
(75)
$
10,689
$
9,506
$
8,745
$
1,183
$
761
17%
42
(2)
(22)
8
12%
(8)%
39
85
18
(24)
9 %
Total research and development expenses for the years ended December 31, 2015, 2014 and 2013 represented 31%, 36% and
49% of revenues, respectively. The increase in expenses from 2014 to 2015 was driven primarily by increased employee costs
through the addition of engineering employees from the acquisition of Kulu Valley in October 2014. The increase in expenses
from 2013 to 2014 reflect an increase in project spending to support development of expanded software functionality. The year
ended December 31, 2015 included severance expense of $136,000 relating to cost reduction initiatives. The Company had 57
and 61 research and development personnel at December 31, 2015 and 2014, respectively.
Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
Compensation and employee-
related
Overhead and other expenses
Outside services and consulting
Depreciation and amortization
Equity-based compensation
Total sales and marketing
expenses
Year Ended December 31,
2014
2015
Increase (Decrease)
2013
2014 to 2015
2013 to 2014
Percent Increase (Decrease)
2013 to 2014
2014 to 2015
$
$
14,293
1,691
1,521
130
359
$
14,487
921
2,174
135
274
$
7,690
736
1,690
67
120
(194) $
770
(653)
(5)
85
6,797
185
484
68
154
$
17,994
$
17,991
$
10,303
$
3
$
7,688
(1)%
84
(30)
(4)
31
— %
88%
25
29
101
128
75%
Total sales and marketing expenses for the years ended December 31, 2015, 2014 and 2013 represented 52%, 68% and 58% of
revenues, respectively. Expenses remained flat from 2014 to 2015, as the favorable impact of an expense reduction program
implemented in the 2015 third quarter was offset by additional employee costs and the allocation of corporate overhead
expense in connection with the Kulu Valley operations, which included a full year of expense in 2015 compared to one quarter
of expense in 2014, and severance costs incurred in 2015. The year ended December 31, 2015 included severance expense of
$550,000 relating the cost reduction initiatives. The Company had 61 and 81 sales and marketing personnel at December 31,
27
2015 and 2014, respectively. The $7.7 million increase in expenses from 2013 to 2014 was driven by an increase in sales and
marketing headcount, higher sales commissions stemming from an increase in revenues and increased spending on marketing
programs to support sales growth.
General and administrative
General and administrative expenses were as follows (dollars in thousands):
Compensation and employee-
related
Overhead and other expenses
Outside services and consulting
Depreciation and amortization
Equity-based compensation
Total general and administrative
expenses
Year Ended December 31,
2014
2015
Increase (Decrease)
2013
2014 to 2015
2013 to 2014
Percent Increase (Decrease)
2013 to 2014
2014 to 2015
$
$
7,522
3,607
4,146
549
1,054
$
6,189
1,261
3,697
210
1,269
$
6,174
692
2,302
193
971
$
1,333
2,346
449
339
(215)
15
569
1,395
17
298
$
16,878
$
12,626
$
10,332
$
4,252
$
2,294
22%
186
12
161
(17)
34%
—%
82
61
9
31
22%
Total general and administrative expenses for the years ended December 31, 2015, 2014 and 2013 represented 49%, 48% and
58% of revenues, respectively. The increase in expenses from 2014 to 2015 was driven primarily by an equipment operating
lease loss of $1.0 million relating to equipment the Company no longer plans to utilize as part of it managed services offerings,
a loss relating to a third party license agreement of $1.2 million, and severance expense of $1.4 million relating the cost
reduction and executive transition initiatives. Also contributing to the increase were non-recurring audit, legal and outside
service costs in 2015 associated with transition and reorganization activities resulting from the divestiture in 2014 of the
Company's disc publishing business. The Company had 31 general and administrative personnel at both December 31, 2015
and 2014.
The increase in expenses from 2013 to 2014 included costs to support corporate development activity associated with the
acquisition of Kulu Valley in the fourth quarter of 2014 as well as transition activities related to separating the back office
processes and systems of the Company's enterprise video content management software business from the disc publishing
business, which was sold effective July 1, 2014.
Amortization of Purchased Intangibles
Operating expenses include $798,000, $652,000 and $627,000 in 2015, 2014 and 2013, respectively, for the amortization of
intangible assets acquired as part of the Company’s acquisition of Qumu, Inc. in October 2011 and Kulu Valley in October
2014. Operating expenses in 2016 are expected to include approximately $0.9 million of amortization expense associated with
purchased intangibles, exclusive of the portion classified in cost of revenue.
Other Income, Net
The Company recognized interest income on cash and marketable securities of $7,000, $60,000 and $28,000 in 2015, 2014 and
2013, respectively. Other income also included the net losses on foreign currency transactions of $131,000, $201,000 and
$40,000 in 2015, 2014 and 2013, respectively. See “Liquidity and Capital Resources” below for a discussion of changes in cash
levels.
Income Taxes
The provision for income taxes represents federal, state, and foreign income taxes or income tax benefit on income or loss. For
the years ended December 31, 2015, 2014 and 2013, net income tax benefit amounted to $839,000, $6.6 million and $3.4
million, respectively.
Income tax benefit in 2015 is primarily attributable to UK operations, which include refundable research credits. Amounts in
2014 and 2013 primarily reflect the realization of income tax benefits on losses from continuing operations as a result of
income generated from discontinued operations, including the gain on sale of the disc publishing business recognized in the
third quarter of 2014.
Net Income from Discontinued Operations, Net of Tax
The Company closed the sale of its disc publishing business effective July 1, 2014. As a result, net income from discontinued
operations includes the financial results of the Company’s disc publishing business through June 30, 2014. Included in net
28
income from discontinued operations for the third quarter of 2014 is the recognition of a gain on sale of the disc publishing
business of $16.2 million. This amount excludes the impact of transaction related expenses which were primarily incurred and
recognized prior to the third quarter of 2014. Discontinued operations results also include non-recurring expenses incurred by
the Company as a result of the sale of the disc publishing business. These expenses included third party transaction specific
costs, one-time income tax related impacts and the acceleration of vesting of cash-based long-term incentive and stock-based
awards payable to employees of the disc publishing business upon completion of the asset sale transaction. Non-recurring
expenses and income tax related impacts amounted to approximately $9.6 million for the year ended December 31, 2014.
Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Company's liquidity and capital resources (in thousands):
Cash and cash equivalents
Marketable securities
Restricted cash
Cash, cash equivalents, marketable securities and restricted cash
Working capital
Financing obligations
December 31,
2015
2014
$
$
$
$
7,072
6,249
—
13,321
9,516
1,021
$
$
$
$
11,684
23,486
2,300
37,470
33,375
—
The Company expects it will be able to maintain current operations and anticipated capital expenditure requirements for at least
the next 12 months through its cash reserves as well as any cash flows that may be generated from current operations. Based on
revenue growth and an expense reduction program implemented in the third quarter of 2015, the Company expects that it will
be cash flow breakeven for the second half of 2016.
At December 31, 2015, the Company had aggregate working capital of $9.5 million, down $23.9 million from working capital
of $33.4 million at December 31, 2014. The primary contributors to the decrease in working capital were the generation of a net
loss adjusted for non-cash items during the year ended December 31, 2015 of $24.2 million, purchases of property and
equipment of $635,000 and principal payments on capital lease obligations of $320,000.
Financing obligations consist of capital leases related to the acquisition of computer and network equipment and furniture and
other financing obligations.
The Company's primary source of cash from operating activities has been cash collections from sales of products and services
to customers. The Company expects cash inflows from operating activities to be affected by increases or decreases in sales and
timing of collections. The Company's primary use of cash for operating activities has been for personnel costs, payment of
royalties associated with third-party software licenses and purchases of equipment to fulfill customer orders. The Company
expects cash flows from operating activities to be affected by fluctuations in revenues, personnel costs and the amount and
timing of royalty payments and equipment purchases as the Company continues to support the growth of the business. The
amount of cash, cash equivalents and marketable securities held by the Company's international subsidiaries that is not
available to fund domestic operations unless repatriated was $1.0 million as of December 31, 2015. The Company does not
currently intend to repatriate the cash and related balances held by its international subsidiaries.
Summary of Cash Flows. A summary of cash flows is as follows (in thousands):
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Net change in marketable securities and restricted cash
Operating activities
Year Ended December 31,
2014
2013
2015
$
$
$
(23,227) $
(22,644) $
18,923
(228)
(80)
(3,180)
35
(252)
(4,612) $
(26,041) $
(19,537) $
12,553
$
2,367
6,926
(129)
(83)
9,081
(8,263)
Net cash used in operating activities was $23.2 million for 2015 compared to $22.6 million for 2014. The change in operating
cash flows as compared to 2014 was favorably impacted by changes in year-over-year balances for receivables and prepaid
29
expenses and other assets offset by the unfavorable impact of a higher net loss in 2015 and unfavorable changes in year-over-
year balances for accrued compensation, deferred revenue and income tax receivable. The increase in deferred revenue for each
year was driven by increased deferrals of perpetual software licenses and corresponding maintenance contracts, primarily due
to revenue recognition criteria and contracted deliverables not being delivered or completed. Additionally, cash used in
operating activities was impacted by a $879,000 unfavorable change in cash from discontinued operations in connection with
the Company's sale of its discontinued disc publishing business effective July 1, 2014.
Investing activities
Net cash provided by investing activities totaled, in the aggregate, $18.9 million for 2015 compared to net cash used of $3.2
million in 2014. Primarily driving the generation of cash in 2015 were maturities of marketable securities, net of related
purchases, of $17.2 million, partially offset by purchases of property and equipment of $635,000. The $3.2 million cash
provided by investing activities in 2014 resulted from the Company's receipt of proceeds from the sale of the disc publishing
business of $19.7 million, significantly offset by purchases of marketable securities, net of related maturities, of $10.2 million
and purchases of property and equipment of $1.1 million.
Financing activities
Financing activities used net cash of $0.2 million during 2015 and used a minimal amount of cash in the comparable period in
2014. Primarily impacting the current period use of cash were principal payments on financing obligations of $320,000,
partially offset by $142,000 in proceeds from employee stock plans. Financing activities in 2014 consisted primarily of
proceeds from employee stock plans.
Since October 2010, the Company’s Board of Directors has approved common stock repurchases of up to 3,500,000 shares.
Shares may be purchased at prevailing market prices in the open market or in private transactions, subject to market conditions,
share price, trading volume and other factors. The repurchase program has been funded to date using cash on hand and may be
discontinued at any time. The Company did not repurchase any shares of its common stock under the repurchase program
during the years ended December 31, 2015, 2014 and 2013. As of December 31, 2015, the Company had 778,365 shares
available for repurchase under the authorizations. While the current authorization remains in effect, the Company expects its
primary use of cash will be to fund operations in support of the Company’s goals for revenue growth and operating margin
improvement.
The Company did not declare or pay any dividends during the years ended December 31, 2015, 2014 and 2013.
Contractual Obligations. The following table summarizes the Company's contractual cash obligations at December 31, 2015,
and the net effect such obligations are expected to have on liquidity and cash flow in future periods. Some of the amounts
included in this table are based on management's estimates and assumptions about these obligations, including their duration,
the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are
necessarily subjective, the amounts the Company will actually pay in future periods may vary from those reflected in the table.
(In thousands)
Payments Due by Period
Contractual Obligations
Operating leases
Capital leases and other financing obligations (1)
Purchase obligations (2)
Income tax liabilities under ASC 740 (3)
Total contractual cash obligations
_________________________________________________
2016
2017
2018
2019
2020
$
1,218
$
1,268
$
1,062
$
571
$
309
Thereafter
658
$
Total
$
5,086
561
2,733
—
375
707
—
163
128
—
—
—
—
—
—
—
—
—
1,099
3,568
—
$
4,512
$
2,350
$
1,353
$
571
$
309
$
658
$
9,753
(1) Amounts include principal and interest.
(2) Purchase obligations include all commitments to purchase goods or services that meet one or both of the following criteria: (1) they
are non-cancelable or (2) the Company must make specified minimum payments even if it does not take delivery of the contracted
products or services. If the obligation is non-cancelable, the entire value of the contract is included in the table.
(3) The Company does not currently expect any income tax liabilities accrued under ASC 740 as of December 31, 2015 to be paid to the
applicable tax authorities in 2016. The full balance of unrecognized tax benefits under ASC 740 of $1.0 million at December 31, 2015,
has been excluded from the above table as the period of payment or reversal cannot be reasonably estimated. This amount is before
reduction for deferred federal benefits of uncertain tax positions and also excludes potential interest and penalties.
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Translation. As of December 31, 2015, the Company is exposed to market risk primarily from foreign
exchange rate fluctuations of the British Pound Sterling, Japanese Yen and Singapore Dollar to the U.S. Dollar as the financial
position and operating results of the Company’s foreign subsidiaries are translated into U.S. dollars for consolidation. Resulting
translation adjustments are recorded as a separate component of stockholders’ equity.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page in Annual
Report on Form
10-K
For Year Ended
December 31,
2015
33
35
36
37
38
39
41
32
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Qumu Corporation:
We have audited the accompanying consolidated balance sheets of Qumu Corporation and subsidiaries as of December 31, 2015
and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash
flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Qumu Corporation and subsidiaries as of December 31, 2015 and 2014 and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 15, 2016 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting.
Minneapolis, Minnesota
March 15, 2016
/s/ KPMG LLP
33
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Qumu Corporation:
We have audited Qumu Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Qumu Corporation’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented
or detected on a timely basis. Material weaknesses were identified related to the adequacy of the Company’s risk assessment and
monitoring processes as well as control activities specific to manual journal entries, account reconciliations and revenue relative
to its internal control over financial reporting. These material weaknesses have been identified and included in management’s
assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Qumu Corporation and subsidiaries as of December 31, 2015 and 2014, and the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2015. These material weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report
dated March 15, 2016, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control
criteria, Qumu Corporation has not maintained effective internal control over financial reporting as of December 31, 2015, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
We do not express an opinion or any other form of assurance on management's statements referring to corrective actions taken or
to be taken after December 31, 2015, relative to the aforementioned material weaknesses in internal control over financial reporting.
Minneapolis, Minnesota
March 15, 2016
/s/ KPMG LLP
34
QUMU CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
2015
December 31,
2014
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Restricted cash
Receivables, net
Income tax receivable
Prepaid expenses and other current assets
Deferred income taxes
Current assets from discontinued operations
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred income taxes, non-current
Other assets, non-current
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrued liabilities
Accrued compensation
Deferred revenue
Deferred income taxes
Income taxes payable
Deferred rent
Financing obligations
Current liabilities from discontinued operations
Total current liabilities
Long-term liabilities:
Deferred revenue, non-current
Income taxes payable, non-current
Deferred tax liability, non-current
Deferred rent, non-current
Financing obligations, non-current
Other non-current liabilities
Total long-term liabilities
Total liabilities
Commitments and contingencies (Note 7)
Stockholders’ equity:
$
$
$
$
$
$
7,072
6,249
—
11,257
659
3,392
—
—
28,629
2,942
11,032
8,103
57
3,649
54,412
3,864
4,014
10,413
—
—
270
502
50
19,113
2,215
9
575
998
519
226
4,542
23,655
11,684
23,486
2,300
10,090
301
3,801
64
1,026
52,752
1,899
13,384
8,525
2
3,615
80,177
3,396
6,222
9,015
110
53
133
—
448
19,377
1,047
8
1,071
401
—
—
2,527
21,904
Preferred stock, $0.01 par value, authorized 250,000 shares, no shares issued and outstanding
—
—
Common stock, $0.01 par value, authorized 29,750,000 shares, issued and outstanding 9,188,682 and
9,127,425, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
92
65,484
(33,298)
(1,521)
30,757
Total liabilities and stockholders’ equity
$
54,412
$
91
63,566
(4,599)
(785)
58,273
80,177
See accompanying notes to consolidated financial statements.
35
QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
Revenues:
Software licenses and appliances
Service
Total revenues
Cost of revenues:
Software licenses and appliances
Service
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of purchased intangibles
Total operating expenses
Operating loss
Other income (expense):
Interest, net
Other, net
Total other income (expense), net
Loss before income taxes
Income tax benefit
Net loss from continuing operations
Net income (loss) from discontinued operations, net of tax
Net loss
Net income (loss) per basic and diluted share:
Net loss from continuing operations per share
Net income from discontinued operations per share
Net loss per share
Basic and diluted weighted average shares outstanding
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2014
2013
2015
$
9,456
24,998
34,454
2,949
14,550
17,499
16,955
10,689
17,994
16,878
798
46,359
(29,404)
7
(131)
(124)
(29,528)
(839)
(28,689)
(10)
(28,699) $
(3.11) $
— $
(3.11) $
9,235
$
11,363
15,158
26,521
3,816
10,656
14,472
12,049
9,506
17,991
12,626
652
40,775
(28,726)
60
(241)
(181)
(28,907)
(6,564)
(22,343)
13,823
(8,520) $
(2.53) $
1.57
$
(0.96) $
8,836
7,269
10,467
17,736
2,921
4,413
7,334
10,402
8,745
10,303
10,332
627
30,007
(19,605)
28
(40)
(12)
(19,617)
(3,396)
(16,221)
6,527
(9,694)
(1.87)
0.75
(1.12)
8,691
$
$
$
$
$
36
QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net loss
Other comprehensive income (loss):
Year Ended December 31,
2014
2013
2015
$
(28,699) $
(8,520) $
(9,694)
Net change in foreign currency translation adjustments
Change in net unrealized gain (loss) on marketable securities, net of tax
Total other comprehensive income (loss)
Total comprehensive loss
(749)
13
(736)
(29,435) $
$
(856)
5
(851)
(9,371) $
65
(19)
46
(9,648)
See accompanying notes to consolidated financial statements.
37
QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands)
Common Stock
Shares
Amount
87
—
—
—
—
—
—
—
—
87
—
—
1
1
Balance at December 31, 2012
8,654
$
Net loss
Other comprehensive income, net of taxes
Issuance of restricted stock
Stock issued in stock option exercise
Redemption of stock to cover tax
withholding for employee stock plans
Net tax reductions relating to exercise and
expiration of stock options
Stock-based compensation
Purchase of noncontrolling interest in
consolidated subsidiary
—
—
26
1
(7)
—
—
—
Balance at December 31, 2013
8,674
$
Net loss
Other comprehensive income, net of taxes
Issuance of restricted stock
Stock issued in stock option exercise
Redemption of stock to cover tax
withholding for employee stock plans
Net tax reductions relating to exercise and
expiration of stock options
Stock-based compensation
Foreign currency translation transfer related
to the sale of foreign operations
Shares issued for acquisition
Balance at December 31, 2014
Net loss
Other comprehensive income, net of taxes
Issuance of restricted stock
Stock issued in stock option exercise
Redemption of stock to cover tax
withholding for employee stock plans
Net tax reductions relating to exercise and
expiration of stock options
Stock-based compensation
Balance at December 31, 2015
—
—
156
86
(64)
(1)
—
—
—
275
9,127
$
—
—
48
20
(6)
—
—
9,189
$
—
—
—
3
91
—
—
1
—
—
—
—
92
Additional
Paid-in
Capital
$ 56,706
—
—
—
7
(66)
(13)
1,778
(1)
Retained
Earnings
(Accum
Deficit)
$ 13,615
(9,694)
—
—
—
—
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interest(1)
Total
$
116
$
103
$ 70,627
—
46
—
—
—
—
—
—
(125)
(9,819)
1
—
—
—
—
—
21
47
—
7
(66)
(13)
1,778
20
$ 58,411
$
3,921
$
162
$
— $ 62,581
—
—
(1)
192
(98)
(8)
2,039
—
3,031
(8,520)
—
—
—
—
—
—
—
—
—
(851)
—
—
—
—
—
(96)
—
$ 63,566
$ (4,599) $
(785) $
—
—
(1)
142
(50)
(7)
1,834
(28,699)
—
—
—
—
—
—
—
(736)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,520)
(851)
—
193
(99)
(8)
2,039
(96)
3,034
— $ 58,273
— (28,699)
—
—
—
—
—
—
(736)
—
142
(50)
(7)
1,834
$ 65,484
$ (33,298) $
(1,521) $
— $ 30,757
_________________________________________________
(1) Noncontrolling interest items are included in results of discontinued operations for all periods presented.
See accompanying notes to consolidated financial statements.
38
QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2014
2013
2015
Cash flows from (used in) operating activities:
Net loss
Net income (loss) from discontinued operations, net of tax
Net loss from continuing operations
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
Stock-based compensation
Loss on disposal of property and equipment
Deferred income tax expense (benefit)
Current income tax benefit resulting from income generated from discontinued operations
Changes in operating assets and liabilities:
Receivables
Income taxes receivable / payable
Prepaid expenses and other assets
Accounts payable and other accrued liabilities
Accrued compensation
Deferred revenue
Deferred rent
Other non-current liabilities
Net cash used in continuing operating activities
Net cash provided by discontinued operating activities
Net cash provided by (used in) operating activities
Cash flows from (used in) investing activities:
Purchases of marketable securities
Sales and maturities of marketable securities
Purchases of property and equipment
Proceeds from sale of property and equipment
Purchase of cost method investment
Cash paid for acquisition of business, net of cash acquired
Net cash provided by (used in) continuing investing activities
Net cash provided by (used in) discontinued investing activities, including proceeds
from sale of business
Net cash provided by (used in) investing activities
Cash flows from (used in) financing activities:
Common stock repurchases to settle employee withholding liability
Principal payments on capital lease obligations
Proceeds from employee stock plans
Net cash provided by (used in) continuing financing activities
Net cash used in discontinued financing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to consolidated financial statements.
$
(28,699) $
(8,520) $
(10)
(28,689)
13,823
(22,343)
3,118
1,834
108
(564)
—
(1,331)
(378)
748
443
(2,184)
2,729
48
226
(23,892)
665
(23,227)
(10,250)
27,465
(635)
43
—
—
16,623
2,300
18,923
(50)
(320)
142
(228)
—
(228)
(80)
(4,612)
11,684
2,049
1,841
102
(126)
(6,337)
(5,679)
1,068
(2,032)
1,189
686
5,499
(105)
—
(24,188)
1,544
(22,644)
(33,499)
23,250
(1,051)
—
—
(11,556)
(22,856)
19,676
(3,180)
(99)
—
193
94
(59)
35
(252)
(26,041)
37,725
$
7,072
$
11,684
$
(9,694)
6,527
(16,221)
1,787
1,435
6
699
(3,445)
1,614
2,493
12
745
2,144
801
—
(121)
(8,051)
10,418
2,367
(28,755)
37,000
(662)
—
(350)
—
7,233
(307)
6,926
(66)
—
7
(59)
(70)
(129)
(83)
9,081
28,644
37,725
39
QUMU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Supplemental Cash Flow Disclosures
(In thousands)
Supplemental disclosures of net cash paid (received) during the year:
Income taxes
Interest
Non-cash investing and financing activities:
$
$
Accrued liabilities and other non-current liabilities related to leasehold improvements $
$
Financing obligations related to prepaid expenses and other assets
$
Financing obligations related to property and equipment
$
Proceeds from sale of business held in escrow
$
Stock issued for acquisition of business
See accompanying notes to consolidated financial statements.
Years Ended December 31,
2014
2013
2015
(22) $
$
33
$
689
$
402
927
$
— $
— $
(1,145) $
— $
(3,243)
—
— $
— $
— $
$
$
2,300
3,034
—
—
—
—
—
40
QUMU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Qumu Corporation (the "Company") provides the tools businesses need to create, manage, secure, deliver and measure the
success of their videos. The Company's innovative solutions release the power in video to engage and empower employees,
partners and clients. Organizations around the world realize the greatest possible value from video they create and publish.
Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does video.
The Company views its operations and manages its business as one segment and one reporting unit. Factors used to identify the
Company's single operating segment and reporting unit include the financial information available for evaluation by the chief
operating decision maker in making decisions about how to allocate resources and assess performance. The Company manages
the marketing of its products and services through regional sales representatives and independent distributors in the United
States and international markets.
The Company previously conducted its operations through two businesses consisting of 1) its enterprise video content
management software business and 2) its disc publishing business. As further described in Note 3, on June 27, 2014, the
Company's shareholders approved the sale of the disc publishing assets and on July 1, 2014, the sale was completed. As a
result, effective June 27, 2014, the disc publishing business was classified as held for sale and qualified for presentation as
discontinued operations effective with the reporting of the Company's financial results for the second quarter of 2014.
Accordingly, effective June 27, 2014, the Company had one remaining reportable segment, the enterprise video content
management software business. The operational results of the disc publishing business are presented in the “Net income from
discontinued operations, net of tax” line item on the Consolidated Statements of Operations. All remaining amounts presented
in the accompanying consolidated financial statements and notes reflect the financial results and financial position of the
Company's continuing enterprise video content management software business, other than consolidated amounts reflecting
operating results and balances for both the continuing and discontinued operations.
Certain reclassifications have been made to amounts for prior years to conform to the current year's presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, cash equivalents, and marketable securities, for which the
current carrying amounts approximate fair market values based on quoted market prices or net asset value.
Revenue Recognition
The Company generates revenue through the sale of enterprise video content management software solutions, hardware,
maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license,
a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales
of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support,
and professional and other services. The Company commences revenue recognition when all of the following conditions are
met: there is persuasive evidence of an arrangement; the product has been delivered or the services have been provided to the
customer; the collection of the fees is reasonably assured; and the amount of fees to be paid by the customer is fixed or
determinable. More specifically:
41
• Revenue from perpetual software licenses and hardware are generally recognized when the product has been
delivered.
• Revenue from subscription, maintenance and support, which includes term software licenses, cloud-hosted software as
a service and maintenance and support, are generally recognized ratably over the contract term beginning on the
commencement date of each contract, which is the date the Company’s product has been delivered or service is made
available to customers.
• Revenue from professional and other services, which are not essential to the functionality of the software, are
generally recognized as the services are provided to customers.
The Company allocates revenue to the software-related and non-software elements under one arrangement based on the relative
selling price. In such circumstances, the selling price for a deliverable is based on the following hierarchy: i) vendor-specific
objective evidence (“VSOE”), if available, ii) third-party evidence (“TPE”), if VSOE is not available, or iii) estimated selling
price (“ESP”), if neither VSOE nor TPE is available. The Company determines VSOE of the selling price for software-related
elements, including professional services and software maintenance and support contracts, based on the price charged for the
deliverable when sold separately. After the arrangement consideration has been allocated to the software-related and non-
software related elements, the Company accounts for each respective element as follows:
• Revenue for each of the non-software elements is allocated based on the selling price hierarchy and recognized as
noted above provided all other criteria required for revenue recognition have been met.
• Revenue for each of the software-related elements is allocated based on the VSOE of each element and recognized as
noted above provided all other criteria required for revenue recognition have been met. In software-related
arrangements for which the Company does not have the VSOE of the fair value for all elements, revenue is deferred
until the earlier of when the VSOE is determined for the undelivered elements (residual method) or when all elements
for which the Company does not have the VSOE of the fair value have been delivered, unless the only undelivered
element is maintenance and support, in which case the entire amount of revenue is recognized over the maintenance
and support period.
Other items relating to charges collected from customers:
•
•
Shipping and handling charges collected from customers as part of the Company's sales transactions are included in
revenues and the associated costs are included in cost of revenues.
Sales taxes charged to and collected from customers as part of the Company’s sales transactions are excluded from
revenues and recorded as a liability to the applicable governmental taxing authority.
Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition and is recognized as the revenue
recognition criteria are met. The deferred revenue balance does not represent the total contract value of annual or multi-year,
non-cancelable subscription agreements. Deferred revenue that will be recognized during the succeeding 12 month period is
recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue.
Deferred Commissions
Sales commissions represent the direct incremental costs related to the acquisition of customer contracts. The Company
recognizes commissions as sales and marketing expense at the time the associated product revenue is recognized, requiring
establishment of a deferred cost in the event a commission is paid prior to recognition of revenue. The deferred commission
amounts are recoverable through the related future revenue streams under non-cancelable customer contracts and also
commission clawback provisions in the Company's sales compensation plans. Deferred commission costs included in prepaid
expenses and other assets were $954,000 and $418,000 at December 31, 2015 and 2014, respectively. Deferred commission
costs in other assets, non-current were $104,000 at December 31, 2015.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents are stated at fair value.
42
Marketable Securities
Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Currently, all marketable securities held by the Company are classified as available-
for-sale. Available-for-sale securities are carried at fair value as determined by quoted market prices with unrealized gains and
losses, net of tax, reported as a separate component of stockholders’ equity. The Company analyzes its marketable securities for
impairment on an ongoing basis. Factors considered in determining whether an unrealized loss is a temporary loss or an other-
than-temporary loss include the length of time and extent to which the securities have been in an unrealized loss position and
the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated market
recovery.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are initially recorded at a selling price, which approximates fair value upon the sale of goods or services to
customers. The Company maintains an allowance for doubtful accounts to reflect accounts receivable at net realizable value. In
judging the adequacy of the allowance for doubtful accounts, the Company considers multiple factors, including historical bad
debt experience, the general economic environment, the need for specific client reserves and the aging of the Company’s
receivables. A portion of this provision is included in operating expenses as a general and administrative expense and a portion
of this provision is included as a reduction of license revenue. A considerable amount of judgment is required in assessing these
factors. If the factors utilized in determining the allowance do not reflect future performance, then a change in the allowance for
doubtful accounts would be necessary in the period such determination has been made, which would impact future results of
operations.
Changes to the allowance for doubtful accounts consisted of the following (in thousands):
Allowance for Doubtful Accounts:
Balance at beginning of year
Write-offs
Recoveries
Change in provision
Balance at end of year
Inventories
Year Ended December 31,
2015
2014
2013
$
$
55
—
—
(31)
24
$
$
20
(8)
—
43
55
$
$
62
(25)
—
(17)
20
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company records
provisions for potential excess, obsolete and slow moving inventory. Results could be different if demand for the Company’s
products decreased because of economic or competitive conditions, or if products became obsolete because of technical
advancements in the industry or by the Company. Inventory included in prepaid expenses and other current assets was
$250,000 and $168,000 as of December 31, 2015 and 2014, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over estimated useful lives ranging from one
to seven years for most assets. Leasehold improvements are amortized using the straight-line method over the shorter of the
property’s useful life or the term of the underlying lease. Repairs and maintenance costs are charged to operations as incurred.
The asset cost and related accumulated depreciation or amortization are adjusted for asset retirement or disposal, with the
resulting gain or loss, if any, credited or charged to results of operations.
Long-lived Assets
The Company continually monitors events and changes in circumstances that could indicate that carrying amounts of its long-
lived assets, including property and equipment and intangible assets may not be recoverable. When such events or changes in
circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of
such assets will be recovered through their undiscounted expected future cash flows. If the future undiscounted cash flows are
less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying
amount over the fair value of the assets.
43
Goodwill
The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible
assets and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or
more frequently if facts and circumstances warrant a review. The Company has determined that there is a single reporting unit
for the purpose of goodwill impairment tests. For purposes of assessing the impairment of goodwill, the Company annually, at
its fiscal year end, estimates the fair value of the reporting unit and compares this amount to the carrying value of the reporting
unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds its fair value. As of December 31, 2015, the
Company completed its annual impairment test of goodwill. Based upon that evaluation, the Company determined that its
goodwill was not impaired. See Note 6–"Intangible Assets and Goodwill."
Investment in Nonconsolidated Company
As of December 31, 2015 and 2014, the Company held an investment totaling $3.1 million in convertible preferred stock of
Briefcam, Ltd. ("Briefcam") a privately-held Israeli company that develops video synopsis technology to augment security and
surveillance systems to facilitate review of surveillance video. The investment is included in other non-current assets. Because
Qumu's ownership interest is less than 20% and it has no other rights or privileges that enable it to exercise significant
influence over the operating and financial policies of Briefcam, Qumu accounts for this equity investment using the cost
method. Equity securities accounted for under the cost method are reviewed quarterly for changes in circumstances or the
occurrence of events that suggest the Company’s investment may not be fully recoverable. If an unrealized loss for the
investment is considered to be other-than-temporary, the loss will be recognized in the Consolidated Statements of Operations
in the period the determination is made. Qumu monitors Briefcam's results of operations, business plan and capital raising
activities and is not aware of any events or circumstances that would indicate a decline in the carrying value of its investment.
Stock-Based Compensation
The Company measures stock-based compensation based on the fair value of the award at the date of grant. The Company
recognizes stock-based compensation on a straight-line basis over the requisite service period for the entire awards, net of an
estimated forfeiture rate. Compensation cost is recognized for all awards over the vesting period to the extent the requisite
service requirements are met, whether or not the award is ultimately exercised. Conversely, when the requisite service
requirements are not met and the award is forfeited prior to vesting, any compensation expense previously recognized for the
award is reversed.
Research and Development Costs
Costs related to research, design and development of products are charged to research and development expense as incurred.
Software development costs are capitalized beginning when a product’s technological feasibility has been established and
ending when a product is available for general release to customers. The Company uses the working model approach to
determine technological feasibility. The Company’s products are released soon after technological feasibility has been
established. As a result, the Company has not capitalized any software development costs because such costs have not been
significant.
Royalties for Third Party Technology
Royalties for third party technology are either paid in advance and capitalized as prepaid royalties or are accrued as incurred
and subsequently paid. These royalties are generally expensed to cost of revenue generally at the greater of the contractual rate
or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Each quarter, the
Company also evaluates the expected future realization of its prepaid royalties, as well as any minimum commitments not yet
paid to determine amounts it deems unlikely to be realized through product sales. Any impairments or losses determined before
the launch of a product are generally charged to general and administrative expense, and any impairments or losses determined
post-launch are charged to cost of revenue. Unrecognized minimum royalty-based commitments are accounted for as executory
contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is
abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
During the fourth quarter 2015, the Company recognized a loss relating to a third party license agreement of $1.2 million to
general and administration expense which included the write-off of a $606,000 prepaid royalty and the accrual of the remaining
$606,000 minimum royalty payments.
44
Income Taxes
The Company provides for income taxes using the liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax
assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance when it is more likely than not that some component or all of the deferred tax assets will not
be realized. Tax rate changes are reflected in income during the period such changes are enacted.
Foreign Currency Translation
The functional currency for each of the Company’s international subsidiaries is the respective local currency. The Company
translates its financial statements of consolidated entities whose functional currency is not the U.S. dollar into U.S. dollars. The
Company translates its assets and liabilities at the exchange rate in effect as of the financial statement date and translates
statement of operations accounts using the average exchange rate for the period. Exchange rate differences resulting from
translation adjustments are accounted for as a component of accumulated other comprehensive loss. Gains or losses, whether
realized or unrealized, due to transactions in foreign currencies are reflected in the consolidated statements of operations under
the line item other income (expense). Losses on foreign currency transactions were $131,000, $201,000 and $40,000 for the
years ended December 31, 2015, 2014 and 2013, respectively, and are included in other expenses in the Consolidated
Statements of Operations.
Net Loss Per Share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares
outstanding during the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive
common shares including options and restricted stock units. Basic and diluted net loss per common share was the same for all
periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and items defined as other comprehensive income, such as unrealized gains
and losses on certain marketable securities and foreign currency translation adjustments. Such items are reported in the
consolidated statements of comprehensive income (loss).
New Accounting Pronouncements
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
which amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-
current amounts in a classified statement of financial position. This accounting guidance simplifies the presentation of deferred
income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial
position. This accounting guidance is effective for the Company beginning in the first quarter of 2017, but the Company has
elected to adopt this guidance prospectively as of December 31, 2015. As a result, all deferred tax liabilities and assets are
classified as non-current in the consolidated balance sheet at December 31, 2015.
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,
which provides guidance to customers about whether a cloud computing arrangement includes software. If a cloud computing
arrangement includes a software license, the customer should account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software
license, the customer should account for the arrangement as a service contract. The new guidance does not change the
accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for the Company on January 1, 2016,
with early adoption permitted using either of two methods: (i) prospective to all arrangements entered into or materially
modified after the effective date and represent a change in accounting principle; or (ii) retrospectively. The Company is
currently evaluating the impact of the standard on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize
the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB
voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early
adopt the standard on the original effective date. The new standard is effective for the Company on January 1, 2018 but may be
early adopted effective January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition
method. The Company is currently evaluating the timing of its adoption and the effect that ASU 2014-09 will have on its
45
consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it
determined the effect of the standard on its ongoing financial reporting.
2) Acquisition of Kulu Valley, Ltd.
On October 3, 2014, the Company entered into share purchase agreements to acquire 100% of the outstanding shares (the
"Share Purchase Transaction") of Kulu Valley Ltd., a private limited company incorporated in England and Wales (“Kulu
Valley”). The acquisition was made to expand Qumu’s addressable market through the offering of Kulu Valley’s best-in-class
video content creation capabilities and easy-to-deploy pure cloud solution, and provides Kulu Valley’s customers with access to
industry leading video content management and delivery capability.
After inclusion of working capital and other adjustments required under the share purchase agreements, the aggregate net
purchase price totaled approximately $14,591,000 consisting of a cash outlay of approximately $11,556,000, net of cash
acquired in the transaction of $2,466,000, and approximately 275,000 shares of Qumu Corporation's common stock. For
purposes of calculating the purchase price attributable to the 275,000 shares of Company common stock issuable in the Share
Purchase Transaction, the parties agreed upon a value of $13.75 per share. All of the shares of the Company’s common stock
issued in the Share Purchase Transaction were issued to shareholders of Kulu Valley who are also employees of Kulu Valley.
Pursuant to the terms of a lock-up letter agreement, the shares issued in the Share Purchase Transaction were restricted from
transfer, subject to certain exceptions. The restrictions lapsed for all of the shares issued 365 days following the closing of the
Share Purchase Transaction. Following the acquisition, Kulu Valley’s liabilities consisted of trade payables, accrued expenses,
deferred tax liabilities and deferred revenue related primarily to active software subscription agreements. Of the cash amounts
payable in the acquisition, $2,000,000 was subject to escrow for a fifteen month period to secure certain warranty and
indemnification obligations to the Company; the escrow was released in January 2016. The acquisition was funded through the
use of cash held by the Company at the acquisition date and the Company's common stock.
The acquisition was accounted for under the provisions of ASC 805, Business Combinations. The results of operations of Kulu
Valley are included in the Company’s Consolidated Statements of Operations since October 3, 2014, the date of the acquisition.
After the impact of applying fair value purchase accounting adjustments of $1.1 million to reduce the carrying value of
deferred revenues, the Company recorded revenues for Kulu Valley of approximately $464,000 during the post-acquisition
period in 2014. The acquisition of Kulu Valley’s assets and liabilities does not constitute a material business combination and
accordingly, pro forma results have not been included.
The following table summarizes the purchase accounting allocation of the total purchase price to Kulu Valley’s net tangible and
intangible assets, with the residual allocated to goodwill (in thousands):
Aggregate purchase price, net of cash acquired
Less: discount applied to Qumu Corporation stock for trade restrictions
Net transaction consideration
Current assets
Property and equipment
Intangible assets
Goodwill
Current liabilities
Net deferred tax liabilities
Total net assets acquired
$
$
$
$
15,118
(527)
14,591
1,494
140
6,663
8,795
(1,170)
(1,331)
14,591
The aggregate purchase price for purchase accounting of $14,591,000 reflects the cash consideration, net of cash acquired, plus
the valuation of issued Qumu Corporation (NASDAQ:QUMU) stock at the closing price per share of $12.95 on the date of the
acquisition. The Company is not aware of further adjustments required in the purchase price allocation.
The aggregate purchase price was allocated to the fair values of the tangible and intangible assets acquired and liabilities
assumed. The fair values assigned to intangible assets were determined through the use of forecasted cash inflows and
outflows, primarily applying a relief-from royalty and a multi-period excess earnings method. These valuation methods were
based on management’s estimates as of the acquisition date of October 3, 2014. The excess of the purchase price over the net
tangible and identifiable intangible assets acquired was recorded as goodwill, which is non-deductible for tax purposes.
Transaction costs of approximately $245,000 were expensed as incurred and were included in the Company’s general and
administrative expenses.
46
The guidance under ASC 805 provides that intangible assets with finite lives be amortized over their estimated remaining
useful lives, while goodwill and other intangible assets with indefinite lives will not be amortized, but rather tested for
impairment on at least an annual basis. Useful lives for intangible assets were determined based upon the remaining useful
economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.
In the aggregate, the identifiable intangible assets were valued at $6,663,000, of which $4,233,000 was allocated to developed
technology, $2,315,000 was allocated to customer relationships, $74,000 was allocated to trade name and $41,000 was
allocated to covenant not-to-compete agreements. The acquired intangible assets will be amortized based on estimated expected
future cash flows for a period ranging from fifteen months to nine years.
As part of the opening balance sheet purchase accounting, the Company established a net deferred tax liability of $1.3 million.
This consisted of a deferred tax liability of approximately $1.5 million for the estimated future impact of the difference in the
U.S. book vs. U.K. statutory and tax basis of the purchased intangible assets, deferred revenues and accrued compensation.
Partially offsetting this was the impact of the establishment of deferred tax assets amounting to approximately $0.2 million for
the future benefit of utilization of acquired net operating losses and the impact of cumulative temporary U.S. book to tax
differences.
3) Divestiture of Disc Publishing Business
On April 24, 2014, the Company entered into an asset purchase agreement (the “asset purchase agreement”) with Equus
Holdings, Inc. and Redwood Acquisition, Inc. (now known as Rimage Corporation, “Buyer”). Under the terms of the asset
purchase agreement, the Company agreed to sell to Buyer all of the assets primarily used or primarily held for use in
connection with its disc publishing business. Buyer also agreed to assume on the closing date certain agreements and liabilities
relating to the disc publishing business and the acquired assets.
At a special meeting of the Company's shareholders held on June 27, 2014, the Company's shareholders approved the sale of
the disc publishing assets as contemplated by the asset purchase agreement. As a result, effective June 27, 2014, the disc
publishing business was classified as held for sale and qualified for discontinued operations presentation in the Company’s
consolidated financial statements. The results of the discontinued disc publishing business have been presented as discontinued
operations effective with the reporting of financial results for the second quarter 2014. As such, financial results for the years
ended December 31, 2015, 2014 and 2013 have been reported on this basis.
On July 1, 2014, the Company’s sale of the disc publishing business was completed. The Company also entered into a mutual
transition services agreement with Buyer and entered into a lease agreement with Buyer for the lease from Buyer of a portion of
the property located at 7725 Washington Avenue South, Minneapolis, MN 55439. The Company terminated the lease
agreement in September 2015 due to the Company relocating its corporate headquarters to 510 1st Avenue North, Suite 305,
Minneapolis, MN 55403.
The adjusted purchase price paid to the Company was $22.0 million, of which $2.3 million was placed in an escrow account to
support the Company’s indemnification obligations under the asset purchase agreement for a fifteen-month escrow period. The
$2.3 million escrow was classified as restricted cash on the Consolidated Balance Sheets as of December 31, 2014 and was
released from escrow to the Company in October 2015. In the third quarter of 2014, the Company recorded a gain on sale of the
disc publishing business of $16.2 million, exclusive of the impact of transaction related expenses recorded through September
30, 2014. The gain on sale attributable to the U.S. is offset for federal income tax purposes by current or prior-year tax losses
but is subject to applicable state income taxes.
The operational results of the disc publishing business are presented in the “Net income from discontinued operations, net of
tax” line item on the Consolidated Statements of Operations. Also included in this line item for the 2014 period is the gain on
sale of the disc publishing business and non-recurring expenses incurred by the Company as a result of the sale of the disc
publishing business, including third party transaction specific costs, one-time income tax related impacts and the acceleration
of vesting of cash-based long-term incentive and stock-based awards payable to employees of the disc publishing business
upon completion of the asset sale transaction. The described non-recurring expenses and income tax related impacts amounted
to approximately $9.6 million for the year ended December 31, 2014. No general corporate charges were allocated to the
discontinued business. The assets and liabilities of the discontinued business are presented on the Consolidated Balance Sheets
as assets and liabilities from discontinued operations.
Other than consolidated amounts reflecting operating results and balances for both the continuing and discontinued operations,
all remaining amounts presented in the accompanying consolidated financial statements and notes reflect the financial results
and financial position of the Company's continuing enterprise video content management software business.
47
Revenue, operating income, gain on sale of business, income tax expense and net income from discontinued operations were as
follows (in thousands):
Net revenue
Operating income
Gain on sale of discontinued operations
Income tax expense (benefit)
Net income (loss) from discontinued operations, net of tax
Net loss from discontinued operations attributable to noncontrolling interest
Net income (loss) from discontinued operations attributable to Qumu
Year Ended December 31,
2014
2013
2015
— $
—
—
(92)
(10)
—
(10) $
29,922
4,520
16,167
6,955
13,823
—
13,823
$
$
64,736
9,918
—
3,336
6,402
125
6,527
$
$
The major classes of assets and liabilities from discontinued operations were as follows (in thousands):
Current assets from discontinued operations
Accrued compensation
Other current liabilities
Current liabilities from discontinued operations
4) Marketable Securities
Marketable securities consisted of the following (in thousands):
Certificates of deposit
Total marketable securities
Certificates of deposit
Total marketable securities
5) Property and Equipment
December 31,
2015
December 31,
2014
$
$
$
— $
— $
50
50
$
1,026
31
417
448
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair value
6,250
6,250
$
$
— $
— $
(1) $
(1) $
6,249
6,249
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair value
23,500
23,500
$
$
— $
— $
(14) $
(14) $
23,486
23,486
$
$
$
$
Property and equipment consisted of the following (in thousands):
Computer, network equipment and furniture
Leasehold improvements
Building and building improvements
Total property and equipment
Less accumulated depreciation and amortization
Total property and equipment, net
December 31,
2015
2014
$
$
3,642
1,915
—
5,557
(2,615)
2,942
$
$
2,646
1,085
10
3,741
(1,842)
1,899
Depreciation and amortization expense associated with property and equipment was $1,052,000, $747,000 and $600,000 for
the years ended December 31, 2015, 2014 and 2013, respectively.
48
6) Intangible Assets and Goodwill
Intangible Assets
The Company’s amortizable intangible assets consisted of the following (in thousands):
Customer
Relationships
Developed
Technology
December 31, 2015
Trademarks /
Trade-Names
Covenants Not
to Compete
Total
Original cost
Accumulated amortization
Net identifiable intangible assets
Weighted-average useful lives (years)
$
$
5,115
$
8,567
$
2,190
$
(1,075)
4,040
10
(3,261)
5,306
6
(528)
1,662
15
38
(14)
24
2
Original cost
Accumulated amortization
Net identifiable intangible assets
Weighted-average useful lives (years)
December 31, 2014
Customer
Relationships
5,226
$
(671)
4,555
10
$
$
Developed
Technology
8,770
(1,832)
6,938
6
Trademarks /
Trade-Names
2,193
$
(334)
1,859
15
Covenants Not
to Compete
$
40
(8)
32
2
$
$
$
$
15,910
(4,878)
11,032
9
Total
16,229
(2,845)
13,384
9
Changes to the carrying amount of net amortizable intangible assets for the year ended December 31, 2015 consisted of the
following (in thousands):
Balance, beginning of period
Amortization expense
Currency translation
Balance, end of period
Year Ended
December 31, 2015
$
$
13,384
(2,066)
(286)
11,032
Amortization expense of intangible assets consisted of the following (in thousands):
Amortization expense associated with the developed technology included in cost of
revenues
Amortization expense associated with other acquired intangible assets included in
operating expenses
Total amortization expense
$
$
1,268
$
650
$
560
798
2,066
$
652
1,302
$
627
1,187
Year Ended December 31,
2015
2014
2013
49
The Company estimates that amortization expense associated with intangible assets will be as follows (in thousands):
Year Ending December 31,
2016
2017
2018
2019
2020
Thereafter
Total
Goodwill
$
$
2,235
2,234
2,023
1,322
1,020
2,198
11,032
On October 3, 2014, the Company completed the acquisition of Kulu Valley, Ltd. and recognized $8.8 million of goodwill and
$6.7 million of intangible assets. The goodwill balance of $8.1 million at December 31, 2015 reflects the impact of foreign
currency exchange rate fluctuations since the acquisition date. See Note 2 to the Consolidated Financial Statements for
additional information on the acquisition of Kulu Valley. The gross carrying amount of goodwill related to the 2011 acquisition
of Qumu, Inc. of $22.2 million was fully impaired in 2012.
During the year ended December 31, 2015, the Company’s stock price traded at levels which caused the Company’s enterprise
value, excluding any control premium, to approximate its book value, resulting in increased risk of a potential impairment of
goodwill. As of December 31, 2015, the Company’s market capitalization, without a control premium, was less than its book
value suggesting a possible goodwill impairment. The Company engaged a third party valuation firm to assist the Company
with its goodwill impairment analysis. Based on the analysis, the Company determined its enterprise value using a discounted
cash flow analysis and a comparable public company analysis, giving both equal weight, was greater than the Company’s book
value by 14%. As a result, the Company concluded there was no goodwill impairment. While not a factor used for the
December 31, 2015 goodwill impairment analysis, the Company's market capitalization increased to $48.7 million as of March
14, 2016 which was in excess of its book value at December 31, 2015 by 58%. Declines in the Company’s market
capitalization could require the Company to record goodwill and other impairment charges. While a goodwill impairment
charge is a non-cash charge, it would have a negative impact on the Company's results of operations.
7) Commitments and Contingencies
Leases and Other Financing Obligations
During the year ended December 31, 2015, the Company acquired computer and network equipment and furniture through
capital leases. Balances for assets acquired under capital lease obligations and included in property and equipment were as
follows (in thousands):
Computer and network equipment
Furniture
Assets acquired under capital lease obligations
Accumulated depreciation
Assets acquired under capital lease obligations, net
December 31,
2015
2014
$
$
511
287
798
(123)
675
$
$
The current and long-term portions of capital leases and other financing obligations were as follows (in thousands):
Capital leases and other financing obligations, current
Capital leases and other financing obligations, noncurrent
Total capital leases and other financing obligations
December 31,
2015
2014
$
$
502
519
1,021
$
$
—
—
—
—
—
—
—
—
50
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 December 31, 2015 are as follows (in thousands):
Years ending December 31,
2016
2017
2018
2019
2020
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of net minimum lease payments
Capital leases
and other
financing
obligations
Operating
leases
Total
$
$
$
$
561
375
179
—
—
—
1,115
(94)
1,021
1,218
1,268
1,062
571
309
658
5,086
$
$
1,779
1,643
1,241
571
309
658
6,201
On March 5, 2015, the Company entered into an office facility lease agreement for space that will serve as its corporate
headquarters. The eighty-nine month lease commenced on September 1, 2015, provides the Company approximately 17,216
square feet in Minneapolis, Minnesota, with the initial term expiring January 31, 2023. Total base rent payable over the lease
period is $1,822,000. The Company has one option to extend the term of the lease for an additional five year period with
respect to the leased premises. The lease agreement allowed the Company to construct leasehold improvements to the new
space prior to the effective date of the lease. As the leasehold improvements are the property of the Company, the associated
costs, amounting to approximately $713,000, were capitalized in property and equipment as of September 30, 2015 and will be
depreciated over the term of the lease. As an incentive to enter into the lease agreement, the lessor provided the Company a
one-time tenant improvement allowance of $689,000 to apply against the cost of the leasehold improvements. The one-time
tenant improvement allowance is included in deferred rent and will be amortized as a reduction of rent expense over the term of
the lease.
During the third quarter 2015, the Company recognized an equipment operating lease loss of $1.0 million relating to equipment
the Company no longer plans to utilize as part of it managed services offerings. Under this obligation, there are six remaining
lease payments of $71,000 payable through the first quarter of 2017.
Rent expense under operating leases amounted to approximately $1.0 million, $0.7 million and $0.3 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
Contingencies
The Company is exposed to a number of asserted and unasserted legal claims encountered in the ordinary course of its
business. Although the outcome of any such legal actions cannot be predicted, management believes that there are no pending
legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its
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.
8) Stock-Based Compensation
The Company issues shares pursuant to the 2007 Stock Incentive Plan (the “2007 Plan”) which provides for the grant of stock
incentive awards in the form of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted
stock units, performance stock, performance units and other awards in stock and/or cash to certain key employees, non-
employee directors and service providers. The exercise price of stock options granted under the 2007 Plan is equal to the
market value on the date of grant. As of December 31, 2015, 2,230,320 shares are authorized under the 2007 Plan of which
337,456 were available for future grant.
51
In addition to awards granted under the 2007 Plan, the Company granted non-qualified options to purchase 200,000, 100,000,
50,000 and 130,000 shares of its common stock to newly hired senior management level employees on April 1, 2009,
November 26, 2012, January 7, 2013 and May 18, 2015, respectively, all of which were outstanding as of December 31, 2015.
The options in all cases were granted outside of any shareholder-approved plan as inducements to accept employment with the
Company. The options have an exercise price equal to the closing price of the Company’s common stock as reported by the
Nasdaq Stock Market on the date of grant, vest in four equal installments on each of the first four anniversaries of the date of
grant and have terms of seven years. In other respects, the options were structured to mirror the terms of the options granted
under the 2007 Plan and are subject to stock option agreements between the Company and the employees.
The Company recognized the following amounts related to the Company’s share-based payment arrangements (in thousands):
Stock-based compensation cost charged against loss, before income tax benefit
Stock options
Restricted stock and restricted stock units
Total expense included in continuing operations
Stock-based compensation cost included in:
Cost of revenues
Operating expenses
Total expense included in continuing operations
Year Ended December 31,
2015
2014
2013
$
$
$
$
686
1,148
1,834
159
1,675
1,834
$
$
$
$
812
1,029
1,841
55
1,786
1,841
$
$
$
$
928
507
1,435
25
1,410
1,435
As of December 31, 2015, total stock option compensation expense of $1.7 million and $1.7 million was not yet recognized
related to non-vested option awards and related to non-vested shares and share unit awards, respectively, and is expected to be
recognized over a weighted average period of 2.9 years and 2.6 years, respectively.
In addition to the stock-based compensation costs recognized in continuing operations related to the Company’s share-based
payment arrangements, stock-based compensation costs of $198,000 and $343,000 are included in discontinued operations for
the years ended December 31, 2014 and 2013, respectively.
Stock Options
The fair value of each option award is estimated at the date of grant using the Black-Scholes option pricing model. The
assumptions used to determine the fair value of stock option awards granted were as follows:
Expected life of options in years
Risk-free interest rate
Expected volatility
Expected dividend yield
2015
4.75
1.3% - 1.6%
34.5% - 53.2%
0.0%
Year Ended December 31,
2014
4.75
1.4% - 1.6%
33.1% - 34.5%
0.0%
2013
2.00 - 4.75
0.3% - 1.3%
31.5% - 43.7%
0.0%
The Company reviews these assumptions at the time of each new option award and adjusts them as necessary to ensure proper
option valuation. The expected life represents the period that the stock option awards are expected to be outstanding. Effective
April 2008, the Company’s Board of Directors approved a change in the contractual term of stock options granted to employees
from ten to seven years. Given the reduction in the contractual term of its employee stock option awards, the Company
determined it was unable to rely on its historical exercise data as a basis for estimating the expected life of stock options
granted to employees subsequent to this change. As such, the Company used the “simplified” method for determining the
expected life of stock options granted to employees in 2015, 2014 and 2013, which bases the expected life calculation on the
average of the vesting term and the contractual term of the awards. The risk-free interest rate is based on the yield of constant
maturity U.S. treasury bonds with a remaining term equal to the expected life of the awards. The Company estimated the stock
price volatility using weekly price observations over the most recent historical period equal to the expected life of the awards.
52
A summary of share option activity is presented in the table below (in thousands, except per share data):
Options outstanding at December 31, 2012
Granted
Exercised
Canceled
Options outstanding at December 31, 2013
Granted
Exercised
Canceled
Options outstanding at December 31, 2014
Granted
Exercised
Canceled
Options outstanding at December 31, 2015
Total vested and expected to vest as of December 31, 2015
Options exercisable as of:
December 31, 2013
December 31, 2014
December 31, 2015
Weighted
Average
Exercise Price
13.81
$
11.78
9.26
15.10
12.95
14.58
12.28
15.75
12.84
4.73
7.27
13.45
10.00
Shares
1,925
389
(1)
(565)
1,748
133
(86)
(160)
1,635
617
(20)
(419)
1,813
$
881
1,003
969
15.55
14.15
13.09
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value(1)
4.0
$
—
2.1
$
—
________________________________________________________________
(1) Aggregate intrinsic value includes only those options with intrinsic value (options where the exercise price is below the market value).
Other information pertaining to options is as follows (in thousands, except per share data):
Fair value of options granted
Per share weighted average fair value of options granted
Total intrinsic value of stock options exercised
Year Ended December 31,
2015
2014
2013
$
$
$
1,119
1.81
131
$
$
$
612
4.60
242
$
$
$
1,382
3.55
2
The aggregate impact of the exercise of stock options, expirations of vested stock options and lapse of restrictions on restricted
stock generated a net tax impact of $7,000, $6,000 and $13,000 in 2015, 2014 and 2013 respectively, recorded as a reduction in
additional paid-in capital.
53
Restricted Stock and Restrict Stock Units
Restricted stock and restricted stock units are valued based on the market value of the Company’s shares on the date of grant,
which was equal to the intrinsic value of the shares on that date. These awards vest and the restrictions lapse over varying
periods from the date of grant. The Company recognizes compensation expense for the intrinsic value of the restricted awards
ratably over the vesting period.
A summary of restricted stock and restricted stock units activity is presented in the table below (in thousands, except per share
data):
Nonvested at December 31, 2012
Granted
Vested
Canceled
Nonvested at December 31, 2013
Granted
Vested
Canceled
Nonvested at December 31, 2014
Granted
Vested
Canceled
Nonvested at December 31, 2015
Number of
Shares
Weighted Average
Grant-Date Fair
Value
150
55
(66)
(21)
118
184
(76)
(12)
214
129
(92)
(76)
175
$
$
11.21
10.14
10.72
11.46
10.94
14.92
10.35
10.63
14.59
9.96
14.52
12.64
12.05
Other information pertaining to restricted stock and restricted stock units is as follows (in thousands, except per share data):
Year Ended December 31,
2015
2014
2013
Per share weighted average grant-date fair value of restricted stock and restricted stock
units granted
Total fair value of restricted stock and restricted stock units vested
$
$
9.96
667
$
$
14.92
1,076
$
$
10.14
593
9) Common Stock
Since October 2010, the Company’s Board of Directors has approved common stock repurchases of up to 3,500,000 shares.
Shares may be purchased at prevailing market prices in the open market or in private transactions, subject to market conditions,
share price, trading volume and other factors. The repurchase program may be discontinued at any time. The repurchase
program has been funded to date using cash on hand. The Company repurchased no shares under the share repurchase program
during the years ended December 31, 2015, 2014 and 2013. As of December 31, 2015, 778,365 shares were available under the
Board authorizations.
10) 401(K) Savings Plan
The Company has a savings plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to contribute
up to 100% of pretax compensation. The Company matches a percentage of employees’ contributions. Matching contributions
totaled $359,000, $324,000 and $115,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
54
11) Income Taxes
The components of loss before income taxes consist of the following (in thousands):
Loss before income taxes:
Domestic
Foreign
Total loss before income taxes
Year Ended December 31,
2015
2014
2013
$
$
(26,889) $
(2,639)
(29,528) $
(26,271) $
(2,636)
(28,907) $
(18,450)
(1,167)
(19,617)
The provision for income tax expense (benefit) consists of the following (in thousands):
Current:
U.S. Federal
State
Foreign
Total current
Deferred:
U.S. Federal
State
Foreign
Total deferred
Total provision for income tax expense (benefit)
Year Ended December 31,
2015
2014
2013
$
$
(3) $
27
(817)
(793)
1
(47)
—
(46)
(839) $
(122) $
35
(96)
(183)
(5,693)
(562)
(126)
(6,381)
(6,564) $
(627)
28
—
(599)
(2,475)
(322)
—
(2,797)
(3,396)
Total income tax expense (benefit) differs from the expected income tax expense (benefit), computed by applying the federal
statutory rate of 34% to earnings before income taxes as follows (in thousands):
Expected income tax expense (benefit)
State income taxes, net of federal tax effect
Change in tax rate
Federal R&D credit
Change in valuation allowance
Foreign tax
Other, net
Total provision for income tax expense (benefit)
Year Ended December 31,
2015
2014
2013
$
$
(10,040) $
(830)
48
(82)
9,906
80
79
(839) $
(9,828) $
(347)
20
(88)
2,957
690
32
(6,564) $
(6,671)
(549)
1
(57)
3,659
108
113
(3,396)
55
The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are presented
below (in thousands):
Deferred tax assets:
Inventory provisions and uniform capitalization
Accounts receivable allowances
Non-qualified stock option and restricted stock expense
Deferred maintenance revenue
Loss and credit carryforwards of U.S. subsidiary
Loss carryforward of foreign subsidiaries
Other accruals and reserves
Other
Total deferred tax assets before valuation allowance
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Acquired intangibles
Fixed Assets
Total deferred tax liabilities
Total net deferred tax assets (liabilities)
December 31,
2015
2014
24
9
1,789
76
28,366
382
1,108
122
31,876
(28,928)
2,948
$
$
(3,067) $
(399)
(3,466) $
(518) $
35
20
2,176
221
19,153
221
907
33
22,766
(19,916)
2,850
(3,865)
(100)
(3,965)
(1,115)
$
$
$
$
$
As of December 31, 2015, the Company had net operating loss carryforwards of $68.4 million for U.S. federal tax purposes.
The Company also had $58.8 million of various state net operating loss carryforwards. The loss carryforwards for federal tax
purposes will expire between 2023 and 2035 if not utilized. The loss carryforwards for state tax purposes will expire between
2022 and 2035 if not utilized.
As of December 31, 2015, the Company had federal and state research and development credit carryforwards of $2.9 million,
net of Section 383 limitations, which will begin to expire in 2022 if not utilized.
As a result of its acquisition of Qumu, Inc. in October 2011, utilization of U.S. net operating losses and tax credits of Qumu,
Inc. are subject to annual limitations under Internal Revenue Code Sections 382 and 383, respectively.
The Company assessed that the valuation allowance against its U.S. deferred tax assets is still appropriate as of December 31,
2015, based on the consideration of all available positive and negative evidence, using the “more likely than not” standard
required by ASC 740, Income Taxes. The valuation allowance will be reviewed quarterly and will be maintained until sufficient
positive evidence exists to support the reversal of the valuation allowance.
The Company generally believes that it is more likely than not that the future results of the operations of its subsidiaries in the
U.K. will generate sufficient taxable income due to the reversal of deferred tax liabilities to realize the tax benefits related to its
deferred tax assets. As of December 31, 2015, the Company had a cumulative foreign tax loss carryforward of $2.1 million in
the U.K. This amount can be carried forward indefinitely.
The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries that are
considered to be reinvested indefinitely. Accumulated undistributed foreign earnings relate primarily to operations of the
Company's subsidiaries in Japan and the U.K. and amount to approximately $1.3 million as of December 31, 2015. The amount
of cash, cash equivalent and marketable securities held by the Company's international subsidiaries that are not available to
fund domestic operations unless repatriated was $1.0 million as of December 31, 2015. The Company currently does not intend
to repatriate the cash and related balances held by its international subsidiaries. However, if circumstances change and these
funds are needed to meet cash requirements in the U.S., the Company may be required to accrue and pay U.S. taxes, net of
related foreign tax credits, to repatriate these funds. Based on current tax laws and structures, the Company does not believe
this would have a material impact on its consolidated financial statements and cash flows.
56
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits for the years ended December 31 is
presented in the table below (in thousands):
Gross unrecognized tax benefits at beginning of year
Increases related to:
Prior year income tax positions
Current year income tax positions
Decreases related to:
Prior year income tax positions - closure of statute of limitations
Gross unrecognized tax benefits at end of year
Year Ended December 31,
2015
2014
900
$
1,036
2
68
—
970
$
—
64
(200)
900
$
$
Included in the balance of unrecognized tax benefits at December 31, 2015 are potential benefits of $9,000 that if recognized,
would affect the effective tax rate. The Company does not anticipate that the total amount of unrecognized tax benefits as of
December 31, 2015 will change significantly by December 31, 2016.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax
expense. Total accrued interest and penalties amounted to $4,000 and $1,000 on a gross basis at December 31, 2015 and 2014,
respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above. Interest and penalties
recognized in the Consolidated Statements of Operations related to uncertain tax positions amounted to a net tax benefit in
2015 of $3,000 and net tax expense in 2014 of $18,000.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of
December 31, 2015, the Company was no longer subject to income tax examinations for taxable years before 2013 in the case
of U.S. federal taxing authorities, and taxable years generally before 2011 in the case of state taxing authorities, consisting
primarily of Minnesota and California.
12) Computation of Net Loss From Continuing Operations Per Share of Common Stock
The following table identifies the components of net loss from continuing operations per basic and diluted share (in thousands,
except for per share data):
Shares outstanding at end of year
Basic weighted average shares outstanding
Dilutive effect of stock options and restricted stock units
Total diluted weighted average shares outstanding
Net loss from continuing operations
Net loss from continuing operations per basic and diluted share
Year Ended December 31,
2014
2013
2015
9,189
9,235
—
9,235
(28,689) $
(3.11) $
9,127
8,836
—
8,836
(22,343) $
(2.53) $
8,674
8,691
—
8,691
(16,221)
(1.87)
$
$
Stock options and restricted stock units to acquire weighted average common shares of 1,676,000, 1,724,000 and 1,921,000 for
the years ended December 31, 2015, 2014 and 2013, respectively, have been excluded from the computation of diluted
weighted average shares outstanding for each respective period as their effect is anti-dilutive.
13) Significant Customers and Geographic Data
Customers accounting for more than 10% of the Company’s total revenue are as follows (in thousands):
Revenues
Customer A
_________________________________________________
* Sales did not exceed 10%
Years Ended December 31,
2014
2013
2015
$
4,375
*
$
1,941
57
Customers accounting for more than 10% of the Company’s accounts receivable are as follows (in thousands):
Accounts Receivable
Customer A
Customer B
_________________________________________________
* Accounts receivable balance did not exceed 10%
December 31,
2015
2014
2013
$
$
1,144
1,173
$
*
*
294
*
The Company’s revenues from each of its principal geographic regions are presented based on customer location as follows (in
thousands):
Years Ended December 31,
2014
2013
2015
North America
Europe
Asia
Total
$
$
25,254
8,128
1,072
34,454
Net property and equipment of the Company were located as follows (in thousands):
North America
Europe
Asia
Total
14) Supplemental Quarterly Data – Unaudited (In thousands, except per share data)
$
$
$
$
22,634
2,712
1,175
26,521
$
$
13,273
4,463
—
17,736
December 31,
2015
2014
2,715
209
18
2,942
$
$
1,748
132
19
1,899
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of intangibles
Total operating expenses
Operating loss
Other income (expense):
Interest, net
Other, net
Total other income (loss), net
Loss before income taxes
Income tax benefit
Net loss from continuing operations
Net income (loss) from discontinued operations, net
of tax
Net income (loss)
Net income (loss) per basic and diluted share
2014
2015
First
$ 3,929
2,539
1,390
Second
$ 8,404
4,242
4,162
Third
$ 5,853
3,223
2,630
Fourth
$ 8,335
4,468
3,867
First
$ 5,969
3,775
2,194
Second
$ 8,764
4,492
4,272
Third
$ 9,602
4,870
4,732
Fourth
$10,119
4,362
5,757
2,024
3,759
2,758
157
8,698
(7,308)
12
(27)
(15)
(7,323)
(1,150)
(6,173)
2,264
4,601
2,820
156
9,841
(5,679)
10
(6)
4
(5,675)
(296)
(5,379)
2,321
4,157
3,316
157
9,951
(7,321)
11
(61)
(50)
(7,371)
(4,492)
(2,879)
2,897
5,474
3,732
182
12,285
(8,418)
27
(147)
(120)
(8,538)
(626)
(7,912)
2,802
4,828
4,364
199
12,193
(9,999)
16
(64)
(48)
(10,047)
(174)
(9,873)
2,858
4,740
3,558
200
11,356
(7,084)
15
(4)
11
(7,073)
(146)
(6,927)
2,848
4,706
4,353
200
12,107
(7,375)
(10)
(89)
(99)
(7,474)
(163)
(7,311)
2,181
3,720
4,603
199
10,703
(4,946)
(14)
26
12
(4,934)
(357)
(4,577)
(67)
(542)
—
$ (8,454) $ (9,940) $ (6,949) $ (7,232) $ (4,577)
$ (0.93) $ (1.08) $ (0.75) $ (0.78) $ (0.50)
(22)
79
562
2,244
11,559
$ (3,929) $ (4,817) $ 8,680
0.99
$ (0.45) $ (0.55) $
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer, Vern Hanzlik, and our Chief Financial Officer, Peter J. Goepfrich, have evaluated the Company’s
disclosure controls and procedures as of December 31, 2015. Our Chief Executive Officer and our Chief Financial Officer used
the definition of “disclosure controls and procedures” as set forth in Rule 13a-15(e) under the Exchange Act in making their
conclusion as to the effectiveness of such controls and procedures.
Based upon such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures were not effective as of December 31, 2015 because of material weaknesses in internal control over
financial reporting described below in “Management’s Report on Internal Control Over Financial Reporting.” Notwithstanding
the identified material weaknesses, management believes the consolidated financial statements included in this Annual Report
on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for
the periods presented in accordance with U.S. generally accepted accounting principles.
b) Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision of our Chief Executive Officer and our Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that:
(i)
(ii)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company;
and
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there
is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
Based on our assessment and those criteria, management believes that our internal control over financial reporting as of
December 31, 2015 was not effective due to the material weaknesses described as follows:
• Risk Assessment and Monitoring. We did not maintain effective risk assessment and monitoring processes.
Specifically, with respect to our risk assessment process, we did not adequately identify and analyze changes in the
business and personnel and implement effective process level controls and monitoring activities that are responsive to
those changes and aligned with our financial reporting objectives. Additionally, our risk assessment process did not
adequately evaluate the impact of information technology control deficiencies that affect the design and operating
effectiveness of controls related to the completeness and accuracy of underlying data included in system generated
reports. With respect to our monitoring process, we did not design and maintain effective controls for the timely
identification, evaluation, communication and remediation of internal control deficiencies.
59
• Control Activities - Manual Journal Entries. The design of our controls were inadequate to ensure that a complete
population of manual journal entries had been appropriately identified and subjected to appropriate levels of review
and approval.
• Control Activities - Account Reconciliations. The design and operating effectiveness of our controls were inadequate
to ensure that account reconciliations were consistently performed, that support was retained, and that reconciliations
were approved to ensure the balances were complete and accurate.
• Control Activities - Revenue Review. We did not maintain effective controls over the accuracy and appropriateness of
revenue entries recorded to the general ledger. Specifically, we did not maintain adequate documentation to ensure that
all entries had been subject to an appropriate level of review and approval.
Although no material misstatements were identified in our consolidated financial statements, these control deficiencies create a
reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on
a timely basis. We concluded that the deficiencies represent material weaknesses in our internal control over financial reporting
and our internal control over financial reporting was not effective as of December 31, 2015.
The Company’s internal control over financial reporting as of December 31, 2015 was audited by KPMG LLP, an independent
registered public accounting firm, who has issued an adverse report which is included in Item 8 of this Form 10-K.
c) Remediation Plan for Material Weakness in Internal Control over Financial Reporting
We are in the process of implementing our remediation plans. During 2015, we hired a new chief financial officer and corporate
controller, created and hired for the new role of SEC reporting and compliance manager, and hired additional accounting
personnel over the past six months. Additionally, the Company is expecting to complete the implementation of new financial
reporting software by the end of the third quarter of 2016. With the oversight of senior management and our audit committee,
the new accounting and finance team has begun to further develop a plan to remediate the underlying causes of the material
weaknesses.
The remediation plan will involve a review of our risk assessment process and monitoring activities, to ensure that our internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles;
and enhancing the design of existing controls and implementing additional controls to ensure journal entries and account
reconciliations are appropriately prepared, reviewed and approved, including the validation of the completeness and accuracy
of underlying data used in the performance of the redesigned controls. Management expects that a substantial portion of its
remediation efforts will be completed by the end of the third quarter of 2016, with final testing of the effectiveness of the new
and enhanced controls occurring at the end of 2016.
d) Changes in Internal Control Over Financial Reporting
There were no material changes in our internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) of the Exchange Act that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
60
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the following sections of the Company’s Proxy
Statement for its 2016 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed (the “Proxy
Statement”):
Ownership of Voting Securities by Principal Holders and Management;
Proposal 1—Election of Directors;
Executive Officers;
Executive Compensation;
Section 16(a) Beneficial Ownership Reporting Compliance;
Corporate Governance; and
Code of Ethics.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the sections of the Company’s Proxy Statement
entitled “Executive Compensation” and “Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the section of the Company’s Proxy Statement
entitled “Ownership of Voting Securities by Principal Holders and Management,” and is incorporated herein by reference to
Part II, Item 5 entitled “Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of
this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the sections of the Company’s Proxy Statement entitled
“Certain Relationships and Related Person Transactions” and “Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section of the Company’s Proxy Statement
entitled “Relationship with Independent Registered Public Accounting Firm.”
61
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) Financial Statements. See Part II, Item 8 of this report
(2) Exhibits. See Index to Exhibits on page 64 of this report
(b)
See Index to Exhibits on page 64 of this report
62
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
SIGNATURES
Dated: March 15, 2016
QUMU CORPORATION
By:
/s/ Vern Hanzlik
Vern Hanzlik
Chief Executive Officer
By:
/s/ Peter J. Goepfrich
Peter J. Goepfrich
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Vern Hanzlik and Peter J. Goepfrich as his or her true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature
/s/ Vern Hanzlik
Vern Hanzlik
/s/ Peter J. Goepfrich
Peter J. Goepfrich
/s/ Daniel R. Fishback
Daniel R. Fishback
/s/ Thomas F. Madison
Thomas F. Madison
/s/ Kimberly K. Nelson
Kimberly K. Nelson
/s/ Donald T. Netter
Donald T. Netter
/s/ Robert F. Olson
Robert F. Olson
/s/ Justin A. Orlando
Justin A. Orlando
Title
Date
Chief Executive Officer
March 15, 2016
(Principal Executive Officer), Director
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
Chief Financial Officer (Principal
Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
63
INDEX TO EXHIBITS
Exhibit
No.
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Description
Asset Purchase Agreement dated April 24, 2014 by and among Equus Holdings, Inc., as Parent, Redwood Acquisition, Inc. as
Buyer and Qumu Corporation as Seller (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated April 24, 2014).
Majority Share Purchase Agreement dated October 3, 2014 by and among Qumu Corporation and Sellers identified therein
(Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 3, 2014).
Form of Minority Share Purchase Agreement dated October 3, 2014 by and among Qumu Corporation and Sellers identified
therein (Incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated October 3, 2014).
1992 Restated Articles of Incorporation of Rimage Corporation (Incorporated by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form SB-2 (File No. 33-22558)).
Articles of Amendment to 1992 Restated Articles of Incorporation of Rimage Corporation (Incorporated by reference to Exhibit
4.2 to the Company’s Registration Statement on Form S-8 (File No. 333-69550)).
Amended and Restated Bylaws of Rimage Corporation, as amended (Incorporated by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K dated March 7, 2007).
Articles of Amendment to Articles of Incorporation of Rimage Corporation as filed with the Minnesota Secretary of State
effective as of September 16, 2013 (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
dated September 16, 2013).
Amendments effective March 2, 2016 to Bylaws of Qumu Corporation (Incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K dated March 2, 2016).
Rights Agreement dated as of September 17, 2003 between Rimage Corporation and Wells Fargo Bank, as Rights Agent
(Incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A (File No. 000-20728)).
Amendment No. 1 dated September 11, 2013 to Rights Agreement by and between Rimage Corporation and Wells Fargo Bank
Minnesota, N.A., as Rights Agent (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
dated September 11, 2013).
Amendment No. 2 dated March 10, 2014 to Rights Agreement by and between Rimage Corporation and Wells Fargo Bank
Minnesota, N.A., as Rights Agent, as amended by Amendment No. 1 dated September 11, 2013 (Incorporated by reference to
Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 10, 2014).
Rimage Corporation Amended and Restated 1992 Stock Option Plan (as amended through May 17, 2005) * (Incorporated by
reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-127244)).
Rimage Corporation 2001 Stock Option Plan for Non-Employee Directors * (Incorporated by reference to Exhibit 10.2 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
Second Amended and Restated 2007 Stock Incentive Plan * (Incorporated by reference to Appendix A to the Company’s Proxy
Statement for the 2014 Annual Meeting of Shareholders held on May 20, 2014).
Letter from Rimage Corporation to Sherman L. Black regarding offer of employment, accepted on January 29, 2009 *
(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January 29, 2009).
Restricted Stock Agreement dated April 1, 2009 by and between Sherman L. Black and the Company * (Incorporated by
reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated January 29, 2009).
Stock Option Agreement dated April 1, 2009 by and between Sherman L. Black and the Company * (Incorporated by reference
to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).
Letter Agreement dated November 4, 2009 by and between Rimage Corporation and Sherman L. Black * (Incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated November 4, 2009).
Form of Non-Employee Director Restricted Stock Unit Agreement with Deferral Election *(Incorporated by reference to Exhibit
10.18 of the Company’s Annual Report on Form 10-K dated March 12, 2010).
Letter from Rimage Corporation to James R. Stewart regarding offer of employment, accepted on July 7, 2010 * (Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated July 7, 2010).
Long Term Incentive Bonus Agreement dated February 21, 2013 by and between Rimage Corporation and Sherman L. Black *
(Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated February 21, 2013).
Long Term Incentive Bonus Agreement dated February 21, 2013 by and between Rimage Corporation and James R. Stewart *
(Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated February 21, 2013).
Amended and Restated Form of Severance/Change in Control Letter Agreement dated February 21, 2013, between the Company
and certain executive officers * (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K dated
February 21, 2013).
Agreement dated March 18, 2013 among Rimage Corporation and Dolphin Limited Partnership III, L.P., Dolphin Associates III,
LLC, and Dolphin Holdings Corp. III (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
dated March 18, 2013.
Amendment No. 1 to Agreement dated October 23, 2013 by and among Qumu Corporation, Dolphin Limited Partnership III,
L.P., Dolphin Associates III, LLC, and Dolphin Holdings Corp. III (Incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K dated October 23, 2013).
Agreement dated March 18, 2015 among Qumu Corporation and Dolphin Limited Partnership III, L.P., Dolphin Associates III,
LLC, and Dolphin Holdings Corp. III (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated March 18, 2015).
64
Exhibit
No.
10.16
10.17
10.18
10.19
10.20
10.21
Description
Form of Lock-Up Letter Agreement dated October 3, 2014 by each Recipient of Qumu Corporation Common Stock in the Share
Purchase Transaction (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated October 3,
2014).
Transition Agreement dated March 4, 2015 by and between Qumu Corporation and James R. Stewart * (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 4, 2015).
Building Lease dated March 5, 2015 by and between Qumu Corporation, as Tenant, and Butler North, LLC, as Landlord
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 5, 2015).
Letter Agreement effective April 27, 2015 regarding Offer of Employment by Qumu Corporation and Peter J. Goepfrich *
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 27, 2015).
Stock Option Agreement dated May 18, 2015 by and between Qumu Corporation and Peter J. Goepfrich * (Incorporated by
reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-206270)).
Separation Letter Agreement dated October 19, 2015 by and between Qumu Corporation and Sherman L. Black * (Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 29, 2015).
Subsidiaries of Qumu Corporation.
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
Certificate of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
Certificate of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
Certification pursuant to 18 U.S.C. §1350.
21.1
23.1
31.1
31.2
32
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
* Indicates a management contract or compensatory plan or arrangement
Effective September 16, 2013, Rimage Corporation changed its corporate name to Qumu Corporation.
65