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 in our most recent Annual Report on Form 10-K. OverviewQumu Corporation ("Qumu", "Company" or "we") generates revenue through the sale of enterprise video content management software, hardware, maintenance and support, and professional and services. Software sales may take the form of a cloud-hosted software as a service (SaaS) license, recurring term software license or perpetual software license. Software licenses and appliances revenue includes sales of perpetual software licenses, recurring term software licenses and hardware. Service revenue includes SaaS subscriptions and support, maintenance and support, and professional services.
Impact of COVID-19
Qumu expects to capture additional revenue opportunities presented by the widespread adoption and use of video in the enterprise. Widespread adoption and use of video in the enterprise is critical to our future growth and success.Qumu believes that the COVID-19 crisis is 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, management believes this will drive demand and market adoption for Qumu's video platform and tools, with product development, sales and marketing, and engineering resources increasingly focused on delivering cloud-based solutions over on-premises solutions, consistent with our strategic plan and customer preferences. We expect that even as some businesses return to conducting some portion of their work in-person, many businesses will continue long-term remote and flexible work models including hybrid work in which video is a business-critical communication tool. We believe that enterprises are accelerating their cloud and technology plans to address the challenges and complexities of these mixed work environments. With more companies transitioning to either a complete remote or hybrid work environment, having employees working in different location at different times, we foresee enterprises leveraging large-scale synchronous and asynchronous video. However, these trends in distributed remote and hybrid work have had varying impacts on enterprise technology adoption and procurement timeframes due in part to uncertainty and lack of definitive decisions on when and if our customers' workforce may return to the office. This uncertainty in the timing and extent of transition to video in the enterprise contributes to our currently limited visibility to our sales pipeline and creates additional challenges in forecasting timing and extent of customer sales in any particular quarter.Qumu believes the increase in hybrid and remote work due to COVID-19 is going to remain permanent for many enterprises, driving a large amount of future usage in the cloud.
Critical Accounting Estimates and Significant Accounting Policies
There have been no material changes to our discussion of critical accounting estimates and significant accounting policies from those set forth in our 2021 Annual Report on Form 10-K for the year endedDecember 31, 2021 . See Note 1 "Nature of Business and Basis of Presentation" of the accompanying condensed consolidated financial statements for a discussion of the impact of the adoption of ASU 2020-06 and ASU 2021-10 on our unaudited condensed financial statements. 15
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Results of Operations
The percentage relationships to revenues of certain income and expense items for the three months endedMarch 31, 2022 and 2021, and the percentage changes in these income and expense items relative to the prior year periods, are contained in the following table:
Three Months Ended
Percent Increase
Percentage of Revenues (Decrease)
2022 2021 2021 to 2022
Revenues 100.0 % 100.0 % (15) %
Cost of revenues (28.5) (26.9) (10)
Gross profit 71.5 73.1 (17)
Operating expenses:
Research and development 36.9 34.9 (10)
Sales and marketing 77.1 76.8 (15)
General and administrative 49.5 43.4 (3)
Amortization of purchased intangibles 3.2 2.8 (4)
Total operating expenses 166.7 157.9 (10)
Operating loss (95.2) (84.8) (5)
Other income (expense), net (0.6) 6.9 n/a
Loss before income taxes (95.8) (77.9) 4
Income tax benefit (1.9) (1.5) 4
Net loss (93.9) % (76.4) % 4 %
Revenues
The Company generates revenue through the sale of enterprise video content
management software, hardware, maintenance and support, and professional and
services. Software sales may take the form of a cloud-hosted SaaS license,
recurring term software license or perpetual software license. Software licenses
and appliances revenue includes sales of perpetual software licenses, recurring
term software licenses and hardware. Service revenue includes SaaS subscriptions
and support, maintenance and support, and professional services.
The table below describes Qumu's revenues by product category (dollars in
thousands):
Three Months Ended March 31,
Increase Percent Increase
(Decrease) (Decrease)
2022 2021 2021 to 2022 2021 to 2022
Software licenses and appliances $ 111 $ 108 $ 3 3 %
Service
Subscription and support 2,655 2,315 340 15
Maintenance and support 1,793 2,664 (871)
(33)
Subscription, maintenance and support 4,448 4,979 (531)
(11)
Professional services and other 381 733 (352) (48) Total service 4,829 5,712 (883) (15) Total revenues$ 4,940 $ 5,820 $ (880) (15) % Revenues can vary period to period based on the type of contract the Company enters into with each customer. The$880,000 , or 15%, decrease in total revenues from 2021 to 2022 was primarily driven by the Company's accelerated shift to a SaaS-first revenue model initiated in late 2020 and the expected end of certain on-premise customer relationships, primarily impacting maintenance and support revenue. The increase in total subscription, maintenance and support revenues in the three months endedMarch 31, 2022 , compared to the corresponding 2021 period, was due to on-premise to cloud conversions, incremental cloud customer expansion, new customers, and recurring revenue attributable to SaaS sales orders in recent quarters. The 48% decrease in professional services revenues for the three months endedMarch 31, 2022 , compared to the corresponding 2021 period, was related lower beginning of quarter backlog and lower utilization in the three months endedMarch 31, 2022 . For the quarter endedMarch 31, 2022 , SaaS recurring revenue, which is comprised of subscription and support revenue, was approximately 60% of overall recurring revenue, which is comprised of total subscription, maintenance and support revenue, as 16
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compared to 46% for the three months endedMarch 31, 2021 . The improvement in SaaS recurring revenue as a percentage of total recurring revenue is due to new cloud customers, incremental cloud customer expansion, and customer on-premise to cloud conversions consistent with the Company's implementation of its SaaS-focused strategic plan. 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.Qumu's management currently anticipates SaaS recurring revenue to comprise approximately 65% of its overall recurring revenue mix by the end of 2022, with targeted growth to approximately 75% by the end of 2023. 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.
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,
Increase Percent Increase
(Decrease) (Decrease)
2021 to
2022 2021 2021 to 2022 2022
Gross profit:
Software licenses and appliances $ 80 $ 44 $ 36 82 %
Service 3,450 4,209 (759) (18)
Total gross profit $ 3,530 $ 4,253 $ (723) (17) %
Gross margin:
Software licenses and appliances 72.1 % 40.7 % 31.4 %
Service 71.4 % 73.7 % (2.3) %
Total gross margin 71.5 % 73.1 % (1.6) %
Total gross margin was 71.5% and 73.1% for the three months ended March 31, 2022
and 2021, respectively. Services margin is lower mainly due to lower
professional services revenues, which resulted from lower beginning of quarter
backlog and lower utilization in the three months ended March 31, 2022 .
Included in cost of revenues are the costs related to the Company's service
personnel, of which there were 21 and 24 at March 31, 2022 and 2021,
respectively. Gross profit for the three months ended March 31, 2021 includes
$27,000 for the amortization of intangible assets. No amortization expense is
included in cost of revenues for the three months ended March 31, 2022 , as
intangible assets related to cost of revenues were fully amortized in 2021.
Future gross profit margins will fluctuate quarter to quarter and will be impacted by the Company's continued expansion into new market opportunities as well as the rate of growth and mix of the Company's product and service offerings and foreign currency exchange rate fluctuations.
Operating Expenses
The following is a summary of operating expenses (dollars in thousands):
Three Months Ended March 31,
Percent
Decrease Decrease
2022 2021 2021 to 2022 2021 to 2022
Operating expenses:
Research and development $ 1,825 $ 2,030 $ (205) (10) %
Sales and marketing 3,808 4,476 (668) (15)
General and administrative 2,443 2,527 (84) (3)
Amortization of purchased intangibles 156 162 (6) (4)
Total operating expenses $ 8,232 $ 9,195 $ (963) (10) %
Total operating expenses decreased $963,000 , or 10%, for the three months ended
March 31, 2022 , compared to the corresponding 2021 period, as a result of the
Company's cost-optimization program initiated in the third quarter 2021 to
reduce
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the Company's cash burn rate, slow hiring and implement other cost-control measures. As a percent of revenues, expenses were 167% for the three months endedMarch 31, 2022 , compared to 158% for the three months endedMarch 31, 2021 , due to a year-over-year decrease in revenues. The Company had 78 and 114 personnel in operating activities atMarch 31, 2022 and 2021, respectively, and incurred severance expense within operating expenses of$373,000 and$102,000 for the three months endedMarch 31 , 2022and 2021, respectively.
Research and development
Research and development expenses were as follows (dollars in thousands):
Three Months Ended March 31,
Increase Percent Increase
(Decrease) (Decrease)
2022 2021 2021 to 2022 2021 to 2022
Compensation and employee-related $ 1,117 $ 1,268 $ (151) (12) %
Overhead and other expenses 476 464 12 3
Outside services and consulting 205 274 (69) (25)
Depreciation and amortization - 1 (1) (100) Equity-based compensation 27 23 4 17 Total research and development expenses$ 1,825 $ 2,030 $ (205)
(10) %
Total research and development expenses as a percent of revenues were 37% and 35% for the three months endedMarch 31, 2022 and 2021, respectively. The Company had 23 and 36 research and development personnel as ofMarch 31, 2022 and 2021, respectively. The$205,000 decrease in total research and development expenses in the three months endedMarch 31, 2022 , compared to the corresponding 2021 period, was primarily due to decreased compensation and employee-related costs due to lower headcount. Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
Three Months Ended March 31,
Increase Percent Increase
(Decrease) (Decrease)
2022 2021 2021 to 2022 2021 to 2022
Compensation and employee-related $ 2,805 $ 2,655 $ 150 6 %
Overhead and other expenses 296 242 54 22
Outside services and consulting 652 1,485 (833) (56)
Depreciation and amortization 14 7 7 100
Equity-based compensation 41 87 (46) (53)
Total sales and marketing expenses $ 3,808 $ 4,476 $ (668) (15) %
Total sales and marketing expense as a percent of revenues was 77% for both the three months endedMarch 31, 2022 and 2021. The Company had 38 and 55 sales and marketing personnel atMarch 31, 2022 and 2021, respectively. Sales and marketing expenses decreased$668,000 in the three months endedMarch 31, 2022 , compared to the corresponding 2021 period, as the 2021 period included outside services and consulting expenses associated with the continued implementation of the Company's strategic plan, which included costs the Company incurred honing its updated sales enablement and messaging, launching new products and expanding its go-to-market motions. Partially offsetting the decrease in outside services and consulting expense was a$150,000 increase in compensation costs driven by an increase of$288,000 in severance expense for the three months endedMarch 31, 2022 , compared to the corresponding 2021 period. 18
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General and administrative
General and administrative expenses were as follows (dollars in thousands):
Three Months Ended March 31,
Increase Percent Increase
(Decrease) (Decrease)
2022 2021 2021 to 2022 2021 to 2022
Compensation and employee-related $ 896 $ 913 $ (17) (2) %
Overhead and other expenses 398 305 93 30
Outside services and consulting 834 799 35 4
Depreciation and amortization 46 46 - -
Equity-based compensation 269 464 (195) (42)
Total general and administrative expenses $ 2,443 $ 2,527 $ (84) (3) %
Total general and administrative expenses as a percent of revenues were 50% and 43% for the three months endedMarch 31, 2022 and 2021, respectively. The Company had 17 and 23 general and administrative personnel atMarch 31, 2022 and 2021, respectively. The$84,000 decrease in expenses in the three months endedMarch 31, 2022 , compared to the corresponding 2021 period, was primarily driven by a decrease of$195,000 in equity compensation costs, partially offset by increased costs of$93,000 for overhead and other expenses related to additional software licenses and$35,000 for outside services and consulting associated with the continued implementation of the Company's strategic plan in 2021.
Amortization of purchased intangibles
Operating expenses include
Other Income (Expense), Net
Other income (expense), net was as follows (dollars in thousands):
Three Months Ended
March 31,
2022 2021
Interest expense, net $ (70) $ (54)
Decrease in fair value of derivative liability - 37
Decrease in fair value of warrant liability 66 357
Other, net (28) 62
Total other income (expense), net $ (32) $ 402 The Company recorded non-cash income of
Other income (expense) included a net loss on foreign currency transactions of$28,000 and a net gain on foreign currency transactions of$62,000 for the three months endedMarch 31, 2022 and 2021, respectively. See "Liquidity and Capital Resources" below for a discussion of changes in cash and cash equivalents.
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$94,000 and$90,000 for the three months endedMarch 31, 2022 and 2021, respectively. The net income tax benefit for the three months endedMarch 31, 2022 and 2021, was impacted by the tax benefit for refundable research credits fromUnited Kingdom operations. 19
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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,
2022 2021
Cash and cash equivalents $ 15,464 $ 20,563
Working capital $ 863 $ 5,229
Line of credit $ 5,000 $ 5,000
Other financing obligations 450 615
Operating lease liabilities 435 618
Line of credit, other financing obligations and operating lease
liabilities $ 5,885 $ 6,233
Going concern considerations
The Company's principal source of liquidity consists of cash and cash
equivalents and potential availability under its revolving line of credit with
Silicon Valley Bank ("SVB Agreement"). As disclosed in the Company's
consolidated financial statements for the year ended December 31, 2021 ,
management concluded that the Company's history of losses and its cash resources
available to execute its business plan over the next twelve months raised
substantial doubt about the Company's ability to continue as a going concern.
While management continues to execute the plans noted below, the execution of
those plans has not yielded sufficient results for management to conclude that
substantial doubt has been alleviated.
Management's plans to address the doubt regarding the Company's ability to
continue as a going concern include positioning the targeted channel-led
strategy for success through efforts to expand the number of high quality
channel partners, educating channel partners on the Company's platform, tools
and differentiated features, and providing performance-based incentives to
channel partners to accelerate customer deals, as well as continuous assessment
of the sales pipeline to forecast SaaS revenue growth driven by new customer and
expansion bookings sourced through the channel. Additionally, management will
actively monitor eligible accounts for the purposes of the SVB Agreement
borrowing base calculation and monitor doubtful accounts and write-offs of
accounts receivable, which have historically been minimal. To the extent that
increasing traction in the channel-led strategy is not realized, management
would continue to manage its cost optimization program to further align
expenditures with the timing and amount of cash receipts from new sales and
renewals of existing sales contracts. These cost optimization measures may
include reductions in the Company's personnel, reduced utilization of
contractors, and decreases in other discretionary spend.
The Company may also increase its cash resources by drawing on the SVB line of
credit to the extent of any availability. To the extent the Company requires
additional capital, it may seek capital by refinancing its existing line of
credit or from offering of the Company's equity securities or both. If the
Company experiences a significant shortfall in performance as compared to plan
and also is unable to secure additional capital in a sufficient amount or on
acceptable terms, management may be required to implement more significant cost
reduction and other cash-focused measures to manage liquidity and the Company
may have to significantly delay, scale back, or cease operations, in part or in
full.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis of accounting, which contemplates continuity of
operations, realization of assets, and satisfaction of liabilities and
commitments in the normal course of business. The consolidated financial
statements do not include any adjustments that might result from the outcome of
the going concern uncertainty. If the Company cannot continue as a going
concern, adjustments to the carrying values and classification of its assets and
liabilities and the reported amounts of income and expenses could be required
and could be material.
Cash and cash equivalents
The Company's primary sources of cash and cash equivalents during the three
months ended March 31, 2022 were cash generated from operations. The Company's
cash generated from operations has been cash collections from sales of products
and services to customers. The Company expects cash inflows from operations to
be affected by increases or decreases in sales and timing of collections.
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The Company's primary use of cash has been for personnel costs and outside service providers, other operating expenses, payment of royalties associated with third-party software licenses and purchases of equipment to fulfill customer orders. The Company expects its use of cash to be affected by fluctuations in revenues, personnel costs and outside service providers as the Company continues to support the growth of the business, which is expected to be positively impacted in the future by the Company's cost-optimization program initiated in the third quarter 2021. The Company additionally expects to use cash to renew internal-use software subscriptions of approximately$682,000 in 2022 as well as to remit in the fourth quarter of 2022 approximately$160,000 of payroll tax withholdings deferred under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The amount of cash and cash equivalents held by the Company's international subsidiaries that is available to fund domestic operations upon repatriation was$698,000 as ofMarch 31, 2022 . 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.
Working capital
AtMarch 31, 2022 , the Company had aggregate working capital of$863,000 , compared to$5.2 million atDecember 31, 2021 . Working capital includes current deferred revenue of$10.1 million and$10.9 million atMarch 31, 2022 andDecember 31, 2021 , respectively. The decrease in working capital as ofMarch 31, 2022 , as compared toDecember 31, 2021 , is primarily due to cash used to fund the Company's operations during the three months endedMarch 31, 2022 .
Line of credit, other financing obligations and operating lease liabilities
As ofMarch 31, 2022 andDecember 31, 2021 , the Company maintained an outstanding principal balance on its revolving line of$5.0 million with Wells Fargo and was in compliance with its covenants. OnApril 12, 2022 , the Company repaid the outstanding balance on the revolving line and terminated its Loan and Security Agreement with Wells Fargo. OnApril 15, 2022 , the Company entered into a Loan and Security Agreement withSilicon Valley Bank providing for a$7.5 million revolving line of credit as described in Note 3-"Commitments and Contingencies" of the accompanying condensed consolidated financial statements. No amounts were outstanding under the SVB line of credit as ofApril 15, 2022 or subsequently through the date of filing this Form 10-Q. Financing obligations as ofMarch 31, 2022 andDecember 31, 2021 primarily consist of finance leases related to the acquisition of computer and network equipment. Operating lease liabilities consists of liabilities the Company is still contractually obligated to pay despite the surrender of the office leases.
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