QUMU CORPORATION The following discussion and analysis of our financial condition and results of operations should be read together with the section titled "Financial Information" and our audited financial statements and related notes which are included in our most recent 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 our most recent Annual Report on Form 10-K and the those additional factors discussed in Part II. Other Information, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. OverviewQumu Corporation ("Qumu" or the "Company") provides the software solutions to create, manage, secure, distribute and measure the success of live and on-demand video for enterprises.Qumu's platform enables global organizations to drive employee engagement, increase access to video, and modernize the workplace by providing a more efficient and effective way to share knowledge. Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to be spread throughout theU.S. and the world. The COVID-19 pandemic has changed the businesses ofQumu's customers and prospective customers in a number of ways. As part of these changes, enterprises of all sizes are implementing technology plans to virtualize customer meetings, employee communications and major events - as well as record and store video assets for on-demand viewing. Widespread adoption and use of video in the enterprise is critical to our future growth and success.Qumu believes that the COVID-19 crisis will act as a tipping point for the use and acceptance of video as a primary communication channel within the enterprise. As video content and software to manage video content achieve high levels of acceptance within the enterprise, we believe this will drive demand and market adoption for Qumu's video platform and tools. During the first quarter endedMarch 31, 2020 ,Qumu received early evidence of this expected increase in adoption and use of video in the enterprise due to COVID-19: • Beginning inMarch 2020 ,Qumu's prospective customers cited COVID-19
travel restrictions, work-from-home requirements and social distancing
protocols as factors motivating their consideration of Qumu's live and
on-demand video for the enterprise software solutions. During the last
weeks of March 2020 , Qumu received customer orders of $9.7 million total
contract value, which were directly attributable to the new working
environment caused by the pandemic COVID-19. Other customer orders and
sales opportunities have also accelerated due to the customers'
COVID-19-driven video needs.
• During the last week of
video solution increased over 30 times normal levels during peak business
hours. This dramatic increase is the result of
base mobilizing to support thousands of concurrent video users, as they
operate under travel restrictions and mandatory work-at-home policies due
to COVID-19. Into the month of
experience higher than average usage among its customers and anticipates
this will continue at least for the duration of widespread travel
restrictions and mandatory work-at-home policies due to COVID-19, as well
as generally following this period as customers increase their use of
video as a primary communication channel in the enterprise.
While Qumu has not given annual financial guidance for 2020 in consideration of
the proposed merger with Synacor, Qumu expects to capture additional revenue
opportunities presented by the widespread adoption and use of video in the
enterprise. Given Qumu's current visibility to customer contracts and pipeline
activity, Qumu expects 2020 revenue to be approximately $28 million as compared
to 2019 revenue of $25.4 million .
Qumu is continuing to adapt to the COVID-19 pandemic environment, with a focus
on mitigating the near-term impact while positioning Qumu's business for success
during and coming out of the crisis. Actions being taken include:
• Protecting Employees: Since the March 2020 shelter-in-place and
stay-at-home executive orders and similar requirements,
in each of its locations -
continuing to support
any layoffs or furloughs and, due to expected revenue performance in 2020,
does not expect future layoffs or furloughs.
• Prioritizing Services and Supplies: For the significant majority of
customers, Qumu is able to provide remote support and service. Due to
customer demand, Qumu has and may in the future rely upon outsourced
professional services,
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which generally will negatively impact margins. For customers that require on-site performance of support and services,Qumu has been working with the customers to defer on-site activities until mutually agreed with primary consideration for the health and safety of employees. Given the role ofQumu's products in global communications,Qumu believes that its products are essential in the support of the world's critical infrastructure under the CISA (Cybersecurity and Infrastructure Security Agency ) guidelines from theU.S. Department of Homeland Security .Qumu's operations team has been working closely with our suppliers to secure hardware to fulfill customer orders and with our logistics partners to manage and mitigate any potential disruption to supply. To date,Qumu has not experienced supply or personnel issues that have materially impactedQumu's ability to maintain service levels and deliver on our commitments toQumu customers. • Enhanced Financial Diligence: Considering the scale of the COVID-19
pandemic and the corresponding economic crisis it has created,
continued to diligently evaluate the nature and extent of the financial
impact of COVID-19 on
any material collections issues stemming from COVID-19 impacts on
customers. At this time,
collection risk given its Global 2000 customer base and given that
non-payment may lead to termination of access to cloud or hybrid deployed
solutions or termination of technical support and updates for on-premise
solutions.
In the second quarter 2020 and second half of 2020,Qumu expects cash flows from operating activities to be affected by those factors that have historically impacted operating cash flows - fluctuations in revenues, timing of customer payments, personnel costs, outside service providers, and the amount and timing of royalty payments and equipment purchases asQumu continues to support the growth of its business. Other than to the extent COVID-19 impacts these factors as described in this discussion and analysis of our financial condition and results of operations,Qumu does not expect cash flows from operating activities to be specifically affected by COVID-19 impacts.Qumu has not applied for any loan program under the CARES Act, such as the Paycheck Protection Program, which requires an applicant to certify that the loan is necessary to support its ongoing operations. Due toQumu's current and expected future financial performance,Qumu does not believe a Paycheck Protection Program loan is necessary to support its ongoing operations. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion of the impact of COVID-19 as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" included our most recent Annual Report on Form 10-K and those additional factors discussed in Part II. Other Information, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. 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 inthe United States of America , or GAAP. The preparation of the Company's 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 utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company's accounting policies. The accounting policies considered by management to be the most critical to the presentation of the condensed consolidated financial statements because they require the most difficult, subjective and complex judgments include revenue recognition, accounting for leases, and derivative liabilities for outstanding warrants. Our significant accounting policies applicable to the three months endedMarch 31, 2020 are discussed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 17
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Results of Operations The percentage relationships to revenues of certain income and expense items for the three months endedMarch 31, 2020 and 2019, and the percentage changes in these income and expense items relative to the prior year period, are contained in the following table: Three Months Ended March 31, Percent Increase Percentage of Revenues (Decrease) 2019 to 2020 2019 2020 Revenues 100.0 % 100.0 % (12 )% Cost of revenues (33.5 ) (21.7 ) 36 Gross profit 66.5 78.3 (26 ) Operating expenses: Research and development 28.6 23.6 6 Sales and marketing 35.6 33.1 (6 ) General and administrative 41.7 24.6 49 Amortization of purchased intangibles 2.6 3.0 (25 ) Total operating expenses 108.5 84.3 13 Operating loss (42.0 ) (6.0 ) 510 Other income (expense), net (1.7 ) (7.4 ) (80 ) Loss before income taxes (43.7 ) (13.4 ) 185 Income tax benefit (0.8 ) - 1,150 Net loss (42.9 )% (13.4 )% 181 % Revenues The Company generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a cloud-hosted software as a service (SaaS) or a term software license. Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes SaaS, term software licenses, maintenance and support, and professional and other services. The table below describesQumu's revenues by product category (dollars in thousands): Three
Months Ended
Percent
Increase Increase
(Decrease) (Decrease)
2019 to
2020 2019 2019 to 2020 2020
Software licenses and appliances $ 1,540 $ 1,005 $ 535 53 %
Service
Subscription, maintenance and support 4,160 5,563 (1,403 ) (25 ) Professional services and other 527 530 (3 ) (1 ) Total service 4,687 6,093 (1,406 ) (23 ) Total revenues$ 6,227 $ 7,098 $ (871 ) (12 )% Revenues can vary year to year based on the type of contract the Company enters into with each customer. The quarterly software licenses and appliances revenues are also subject to the timing of fulfillment of products, which can result in large fluctuations when compared to the prior quarters. The increase in software licenses and appliances revenues in the three months endedMarch 31, 2020 , compared to the corresponding 2019 period, was driven by an increase in perpetual software license and appliance sales to both new and existing customers. Of the$6.2 million in revenue for the first quarter endedMarch 31, 2020 , approximately$0.5 million in revenue was attributable to a large customer order received at the end of the quarter, which the customer identified as specifically driven by COVID-19. The decrease in subscription, maintenance and support revenues in the three months endedMarch 31, 2020 , compared to the corresponding 2019 period, primary resulted from significant first quarter 2019 term software license sales for which revenue is recognized up front in accordance with the revenue recognition provisions of ASC 606. 18
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Professional services revenues for the three months endedMarch 31, 2020 were generally consistent with the corresponding 2019 period. 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, term or SaaS licenses, which impacts the timing of revenue recognition. Other factors that will influence future consolidated revenues include the timing of customer orders and renewals, the product and service mix of customer orders, the impact of changes in economic conditions and the impact of foreign currency exchange rate fluctuations. Due to the impact of COVID-19,Qumu generally expects increased demand forQumu's enterprise video as a service andQumu's other video software offerings both in the short-term and in the long-term, as well as increased usage of its video platform among existing and future customers. With respect to the large customer order that was driven by COVID-19,Qumu expects to recognize revenue from this order of approximately$3.8 million in the second quarter 2020, subject toQumu's fulfillment of its delivery and deployment obligations. WhileQumu has not given annual financial guidance for 2020 in consideration of the proposed merger with Synacor,Qumu expects to capture additional revenue opportunities presented by the widespread adoption and use of video in the enterprise. GivenQumu's current visibility to customer contracts and pipeline activity,Qumu expects 2020 revenue to be approximately$28 million as compared to 2019 revenue of$25.4 million . Gross Profit and Gross Margin A comparison of gross profit and gross margin by revenue category is as follows (dollars in thousands): Three Months Ended March 31, Percent Increase Increase (Decrease) (Decrease) 2019 to 2020 2019 2019 to 2020 2020 Gross profit: Software licenses and appliances$ 892 $ 694 $ 198 29 % Service 3,248 4,867 (1,619 ) (33 ) Total gross profit$ 4,140 $ 5,561 $ (1,421 ) (26 )% Gross margin: Software licenses and appliances 57.9 % 69.1 % (11.2 )% Service 69.3 % 79.9 % (10.6 )% Total gross margin 66.5 % 78.3 % (11.8 )% The total gross margin percentage decreased 11.8% in the three months endedMarch 31, 2020 , compared to the corresponding 2019 period, resulting from decreases in both software licenses and appliances gross margin and service gross margin. The 11.2% decrease in software licenses and appliances gross margin in the three months endedMarch 31, 2020 , compared to the corresponding 2019 period, was due primarily to sales mix that included a proportionately higher amount of appliances revenue, which generally has lower margins. The 10.6% decrease in service gross margin in the three months endedMarch 31, 2020 , compared to the corresponding 2019 period, was primarily due to a decrease in higher margin term software license revenue, partially offset by decreased amortization expense as certain purchased intangible assets became fully amortized at the end of 2019. Gross profit includes$72,000 and$117,000 for the three months endedMarch 31, 2020 and 2019, respectively, for the amortization of intangible assets acquired as a result of the acquisition ofQumu, Inc. in the fourth quarter of 2011 and the acquisition ofKulu Valley in the fourth quarter of 2014. Cost of revenues for the full year 2020 is expected to include approximately$0.3 million of amortization expense for purchased intangibles, compared to$0.5 million for the full year 2019. Included in cost of revenues are the costs related to the Company's service personnel, of which there were 21 and 19 atMarch 31, 2020 and 2019, respectively. Future gross profit margins are expected fluctuate quarter to quarter and will be impacted by the rate of growth and mix of the Company's product and service offerings, utilization of service personnel, fixed and variable royalty expense, and foreign currency exchange rate fluctuations. 19
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Operating Expenses
The following is a summary of operating expenses (dollars in thousands):
Three
Months Ended
Percent
Increase Increase
(Decrease) (Decrease)
2019 to
2020 2019 2019 to 2020 2020
Operating expenses:
Research and development $ 1,780 $ 1,674 $ 106 6 %
Sales and marketing 2,218 2,352 (134 ) (6 )
General and administrative 2,593 1,746 847 49
Amortization of purchased intangibles 164 218 (54 ) (25 )
Total operating expenses $ 6,755 $ 5,990 $ 765 13 %
Total operating expenses as a percent of revenues increased to 109% for the
three months ended March 31, 2020 , compared to the 84% for the comparable 2019
period, with the increase primarily driven by transaction-related expenses
totaling $811,000 related to the Company's merger agreement with Synacor, Inc.
that were included in general and administrative expense for the three months
ended March 31, 2020 . Qumu anticipates additional merger-related expenses in the
second quarter 2020 and thereafter until the merger is completed or the merger
agreement is terminated. The Company had 84 and 80 personnel in operating
activities at March 31, 2020 and 2019, respectively.
Research and development
Research and development expenses were as follows (dollars in thousands):
Three
Months Ended
Increase Percent Increase
(Decrease) (Decrease)
2020 2019 2019 to 2020 2019 to 2020
Compensation and employee-related $ 1,248 $ 1,197 $ 51 4 %
Overhead and other expenses 394 335 59 18
Outside services and consulting 113 108 5 5
Depreciation and amortization - 1 (1 ) (100 )
Equity-based compensation 25 33 (8 ) (24 )
Total research and development expenses $ 1,780 $ 1,674 $ 106 6 %
Total research and development expenses as a percent of revenues were 29% and
24% for the three months ended March 31, 2020 and 2019, respectively. The
Company had 35 research and development personnel as of both March 31, 2020 and
March 31, 2019 .
The increase in total research and development expenses of $106,000 in the three
months ended March 31, 2020 , compared to the corresponding 2019 period, was
primarily due to increased costs for cloud hosting-related projects included in
overhead and other expenses. Qumu may incur increased research and development
expenses in the second quarter 2020 for additional projects to support
customers' increased usage of Qumu's cloud-based enterprise video solution due
to COVID-19.
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Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
Three
Months Ended
Percent
Increase Increase
(Decrease) (Decrease)
2019 to
2020 2019 2019 to 2020 2020
Compensation and employee-related $ 1,771 $ 1,826 $ (55 ) (3 )%
Overhead and other expenses 237 291 (54 ) (19 )
Outside services and consulting 172 209 (37 ) (18 )
Depreciation and amortization 11 1 10 1,000
Equity-based compensation 27 25 2 8
Total sales and marketing expenses $ 2,218 $ 2,352 $ (134 ) (6 )%
Total sales and marketing expenses as a percent of revenues were 36% and 33% for
the three months ended March 31, 2020 and 2019, respectively. The Company had 32
and 27 sales and marketing personnel at March 31, 2020 and 2019, respectively.
The decrease in sales and marketing expenses of $134,000 in the three months
ended March 31, 2020 compared to the corresponding 2019 period was primarily
driven by decreased compensation and employee-related costs due to lower
commissions expense, partially offset by costs associated with an increase in
sales and marketing personnel. Additionally, expenses for the three months ended
March 31, 2020 were favorably impacted by cost reductions in overhead and other
expenses in connection with the Company's consolidation of cloud hosting
providers. Qumu expects higher sales and marketing expense for the full year
2020 as compared to the full year 2019 driven primarily by expected increased
compensation and employee-related costs due to higher commissions expense,
consistent with Qumu's higher expected revenue in 2020 due to COVID-19.
General and administrative
General and administrative expenses were as follows (dollars in thousands):
Three
Months Ended
Percent
Increase Increase
(Decrease) (Decrease)
2019 to
2020 2019 2019 to 2020 2020
Compensation and employee-related $ 698 $ 719 $ (21 ) (3 )%
Overhead and other expenses 308 341 (33 ) (10 )
Outside services and consulting 522 450 72 16
Depreciation and amortization 66 71 (5 ) (7 )
Equity-based compensation 188 165 23 14
Transaction-related expenses 811 - 811 n/m
Total general and administrative expenses $ 2,593 $ 1,746 $ 847 49 %
Total general and administrative expenses as a percent of revenues were 42% and
25% for the three months ended March 31, 2020 and 2019, respectively. The
Company had 17 and 18 general and administrative personnel at March 31, 2020 and
2019, respectively.
The increase in expenses of $847,000 in the three months ended March 31, 2020
compared to the corresponding 2019 period was driven primarily by
transaction-related expenses related to the Company's merger agreement with
Synacor, Inc. totaling $811,000 . Additionally, outside services costs increased
due to higher expenses associated with professional services and shareholder
relations activities in the three months ended March 31, 2020 . Qumu anticipates
additional merger-related expenses in the second quarter 2020 and thereafter
until the merger is completed or the merger agreement is terminated.
Amortization of Purchased Intangibles
Operating expenses include $164,000 and $218,000 for the three months ended
March 31, 2020 and 2019, respectively, for the amortization of intangible assets
acquired as part of the Company's acquisition of Qumu, Inc. in October 2011 and
the acquisition of Kulu Valley in October 2014 . Operating expenses for the full
year 2020 are expected to include approximately
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$0.7 million of amortization expense associated with purchased intangibles, exclusive of the portion classified in cost of revenue, compared to$0.8 million for the full year 2019. Other Income (Expense), Net Other income (expense), net was as follows (dollars in thousands): Three Months Ended March 31, 2020 2019 Interest income (expense), net$ 17 $ (205 ) Decrease (increase) in fair value of warrant liability 36 (289 ) Other, net (160 ) (31 ) Total other income (expense), net$ (107 ) $
(525 )
The Company recognized interest income of$17,000 and interest expense of$205,000 for the three months endedMarch 31, 2020 and 2019, respectively, which in 2019 included the accrual of interest on the Company's term loan, as well as the amortization of deferred financing costs. Additionally, interest expense was lower in the three months endedMarch 31, 2020 , compared to the corresponding 2019 period, due to the Company's$4.0 million payoff on its term loan principal balance inNovember 2019 . The Company recorded non-cash income of$36,000 and non-cash expense of$289,000 for the three months endedMarch 31, 2020 and 2019, respectively, resulting from the change in the fair value of the Company's warrant liability. Other expense included net losses on foreign currency transactions of$159,000 and$94,000 for the three months endedMarch 31, 2020 and 2019, 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. Net income tax benefit was$50,000 and$4,000 for the three months endedMarch 31, 2020 and 2019, respectively. The net income tax benefit for the three months endedMarch 31, 2020 and 2019, was impacted by the tax benefit for refundable research credits fromUnited Kingdom operations offset by an increase in reserves for unrecognized tax benefits. Liquidity and Capital Resources The following table sets forth certain relevant measures of the Company's liquidity and capital resources (in thousands): March 31, December 31, 2020 2019 Cash and cash equivalents$ 8,365 $ 10,639 Working capital$ (1,711 ) $ 829 Financing obligations$ 194 $ 240 Operating lease liabilities 1,926 2,174
Financing obligations and operating lease liabilities
2,414
Management expects the Company 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. Management also expects that the Company's financial resources will allow it to manage the anticipated impact of COVID-19 on its business operations for the foreseeable future, which could include delays in payments from customers and partners. The challenges posed by COVID-19 to the Company are expected to evolve rapidly. Consequently, management will continue to evaluate its financial position in light of future developments, particularly those relating to COVID-19. AtMarch 31, 2020 , the Company had aggregate negative working capital of$1.7 million , compared to positive working capital of$829,000 atDecember 31, 2019 . Working capital includes current deferred revenue of$10.3 million and$10.1 million atMarch 31, 2020 andDecember 31, 2019 , respectively. The primary contributor to the change in working capital was the cash used to fund the Company's operating loss during the three months endedMarch 31, 2020 , including$811,000 of transaction-related expenses related to the Company's merger agreement with Synacor, Inc.Qumu anticipates additional merger-related expenses in the second quarter 2020 and thereafter until the merger is completed or the merger agreement is terminated. 22
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Financing obligations as ofMarch 31, 2020 andDecember 31, 2019 primarily consist of finance leases related to the acquisition of computer and network equipment and furniture. Operating lease liabilities consists of liabilities primarily related to the Company's office leases. 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 and outside service providers, 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, outside service providers, 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 and cash equivalents held by the Company's international subsidiaries that is not available to fund domestic operations unless repatriated was$3.1 million as ofMarch 31, 2020 . The repatriation of cash and cash equivalents held by the Company's international subsidiaries would not result in an adverse tax impact on cash given that the future tax consequences of repatriation are expected to be insignificant. Summary of Cash Flows A summary of cash flows is as follows (in thousands):
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