NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Qumu Corporation ("Qumu" or the "Company") provides the tools to create, manage, secure, distribute and measure the success of live and on-demand video for the enterprise. The Qumu 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. The world’s largest organizations leverage the Qumu platform for a variety of cloud, on-premise and hybrid deployments. Use cases including self-service webcasting, sales enablement, internal communications, product training, regulatory compliance and customer engagement. The Company markets its products to customers primarily in North America, Europe and Asia.
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 markets 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. 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. The results of the discontinued disc publishing business and associated financial impacts from the sale of this business have been presented as discontinued operations in the statement of cash flows for the year ended December 31, 2016; there were no such financial impacts to the consolidated financial statements for the years ended December 31, 2018 and 2017. Accordingly, effective June 27, 2014, the Company had one remaining reportable segment, the enterprise video content management software business. 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.
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 and cash equivalents, for which the current carrying amounts approximate fair market values based on quoted market prices or net asset value; warrant liabilities, for which the fair value of
$2.8 million
at December 31, 2018 is based on the Company's estimates of assumptions that market participants would use in pricing the liabilities (Level 3 inputs; see Note 6–"Fair Value Measurements"); and a term loan having a carrying value of
$3.4 million
at December 31, 2018, for which the fair value of
$3.4 million
at December 31, 2018 is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate and the contractual terms of the loan (Level 2 inputs; see Note 4–"Commitments and Contingencies").
Revenue Recognition
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. An individual sale can range from single year agreements for thousands of dollars to multi-year agreements for over a million dollars.
The Company follows a five-step model to assess each contract of a sale or service to a customer: identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time.
Revenue is recognized upon transfer of control of promised products or services (i.e., performance obligations) to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time (for cloud-hosted software as a service, maintenance and support, and other services) or at a point in time (for software licenses and hardware).
The Company enters into contracts that can include various combinations of software licenses, appliances, maintenance and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each distinct performance obligation, on a relative basis using its standalone selling price.
The Company determines the standalone 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.
With the adoption of Topic 606 (defined herein under "Recently Adopted Accounting Standards") beginning January 1, 2018, the Company had a change in the accounting for revenue of its on-premise term software license arrangements. Under the Company's previous revenue accounting, the term software license and technical support elements of the combined bundle were recognized over time. In contrast, Topic 606 requires the Company to identify the performance obligations in the contract – that is, those promised goods and services (or bundles of promised goods or services) that are distinct – and allocate the transaction price of the contract to those performance obligations on the basis of standalone selling prices. The transaction price allocated to each performance obligation is then recognized either at a point in time or over time using an appropriate measure of progress. Under Topic 606, the Company has concluded that its on-premise term software licenses and technical support for its on-premise term software licenses are distinct from each other. As a result, the software license is now recognized upon transfer of control, which is at fulfillment, resulting in earlier revenue recognition. The revenue allocable to technical support continues to be recognized ratably over the non-cancellable committed term of the agreement.
Other items relating to charges collected from customers include shipping and handling charges and sales taxes charges. 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-cancellable 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 Sales 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-cancellable customer contracts and commission clawback provisions in the Company's sales compensation plans. Deferred commission costs included in prepaid expenses and other assets were
$527,000
and
$309,000
at
December 31, 2018
and
2017
, respectively. Deferred commission costs in other assets, non-current were
$33,000
and
$46,000
at
December 31, 2018
and
2017
, respectively. The Company recognized commissions expense of
$1.3 million
and
$1.7 million
during the years ended
December 31, 2018
and
2017
, respectively.
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. As of December 31, 2017, cash and cash equivalents included certain funds required to be segregated for debt repayment. Such funds were under the Company’s control as of December 31, 2017 and were subsequently released from such requirement upon the Company’s refinancing of its term loan on January 12, 2018, as described in Note 5–“Commitments and Contingencies.”
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Allowance for Doubtful Accounts:
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
|
$
|
21
|
|
|
$
|
34
|
|
|
$
|
24
|
|
Write-offs
|
|
—
|
|
|
(11
|
)
|
|
(11
|
)
|
Change in provision
|
|
40
|
|
|
(2
|
)
|
|
21
|
|
Balance at end of year
|
|
$
|
61
|
|
|
$
|
21
|
|
|
$
|
34
|
|
Inventories
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
$191,000
and
$227,000
as of
December 31, 2018
and
2017
, 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.
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, 2018
, the Company completed its annual impairment test of goodwill. Based upon that evaluation, the Company determined that its goodwill was not impaired. See Note 3–"Intangible Assets and Goodwill."
Derivatives Liability
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued
two
warrants for the purchase of up to an aggregate of
1,239,286
shares of the Company's common stock, which remained unexercised and outstanding at
December 31, 2018
. The warrant issued in conjunction with the October 21, 2016 debt financing (Hale warrant) for the purchase of up to
314,286
shares of the Company's common stock expires on October 21, 2026, has an exercise price of
$2.80
per share and is transferable. The warrant issued in conjunction with the January 12, 2018 debt financing (ESW warrant) for the purchase of up to
925,000
shares of the Company's common stock expires on January 12, 2028, has an exercise price of
$1.96
per share and is transferable. Additionally, the Company issued a warrant to a sales partner, iStudy Co., Ltd., for the purchase of up to
100,000
shares of the Company's common stock; the warrant expires on August 31, 2028, has an exercise price of
$2.43
per share and is transferable. The Hale warrant and ESW warrant contain a cash settlement feature upon the occurrence of a certain events, essentially the sale of the Company as defined in the warrant agreements. Upon a sale of the Company, the holder of the iStudy warrant may exercise the warrant or may elect to receive the same consideration as it would have been entitled to receive upon the occurrence of such transaction if it had been the holder of the shares then issuable upon such exercise of the warrant. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the dates of issuance was recorded in the Company’s consolidated balance sheets as a liability.
The Company estimates the fair value of this liability using option pricing models that are based on the individual characteristics of the warrants on the valuation date, which include assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions used could have a material impact on the resulting fair value. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.
Stock-Based Compensation
The Company measures stock-based compensation based on the fair value of the award at the date of grant. For awards subject to time-based vesting, the Company recognizes stock-based compensation on a straight-line basis over the requisite service period for the entire award. Compensation cost is recognized 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.
For awards subject to performance conditions, the Company accounts for compensation expense based upon the grant-date fair value of the awards applied to the best estimate of ultimate performance against the respective targets on a straight-line basis over the requisite vesting period of the awards. The performance conditions require management to make assumptions regarding the likelihood of achieving certain performance goals. Changes in these performance assumptions, as well as differences in actual results from management’s estimates, could result in estimated or actual values different from previously estimated fair values.
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 at the greater of a rate based on the contractual or estimated term 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.
Income Taxes
The Company provides for income taxes using the asset and 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). The net gains (losses) on foreign currency transactions for the years ended
December 31, 2018
,
2017
and
2016
were
$(55,000)
,
$(356,000)
and
$162,000
, respectively, and are included in other income (expense) 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 share is calculated by adjusting both the numerator (net loss) and the denominator (weighted-average number of shares outstanding), giving effect to all potentially dilutive common shares from warrants, options and restricted stock units. The treasury stock method is used for computing potentially dilutive common shares. Under this method, consideration that would be received upon exercise (as well as remaining compensation cost to be recognized for awards not yet vested) is assumed to be used to repurchase shares of stock in the market, with the net number of shares assumed to be issued added to the denominator. In addition, the numerator is adjusted to exclude the changes in the fair value of the warrants that are classified as a liability but may be settled in shares. For the years ended December 31, 2018 and 2016, the Company reported diluted net loss as the impact of excluding the warrant income and related potentially dilutive shares was dilutive. Basic and diluted net loss per common share was the same for the year ended December 31, 2017 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 foreign currency translation adjustments. Such items are reported in the consolidated statements of comprehensive income (loss).
Recently Adopted Accounting Standards
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
and the related amendments ("Topic 606") using the modified retrospective transition method. Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606. The Company did not evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting. A cumulative catch up adjustment was recorded to beginning accumulated deficit to reflect the impact of all existing arrangements under Topic 606.
At the adoption date, the Company adjusted accumulated deficit by
$939,000
, primarily driven by uncompleted contracts for which revenue will not be recognized in future periods under Topic 606, partially offset by the incremental originating costs associated with those contracts. The cumulative effect of the changes made to our January 1, 2018 consolidated balance sheet from the modified retrospective adoption of Topic 606 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
Adjustments
|
|
January 1,
2018
|
Assets:
|
|
|
|
|
|
Contract assets
|
$
|
—
|
|
|
$
|
550
|
|
|
$
|
550
|
|
Prepaid expenses and other current assets
|
1,830
|
|
|
(99
|
)
|
|
1,731
|
|
Other assets, non-current
|
4,398
|
|
|
(10
|
)
|
|
4,388
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred revenue
|
8,923
|
|
|
(493
|
)
|
|
8,430
|
|
Deferred revenue, non-current
|
141
|
|
|
—
|
|
|
141
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Accumulated deficit
|
(56,197
|
)
|
|
939
|
|
|
(55,258
|
)
|
Accumulated other comprehensive loss
|
(2,740
|
)
|
|
(5
|
)
|
|
(2,745
|
)
|
The most significant impact of the adoption of Topic 606 was on the Company's term software licenses that, under the Company's previous revenue accounting ("Topic 605"), would have continued to be recognized into revenue ratably in 2018 and beyond. However, under Topic 606 the standalone selling price attributable to the license is recognized upon transfer of control resulting in up-front recognition, typically upon fulfillment. The timing of revenue recognition for perpetual software licenses, hardware, and professional services remains substantially unchanged. See Note 8–"Revenue" for the Company's revenue recognition policy after the adoption of Topic 606.
Revenue generated under Topic 606 was
$201,000
higher than revenue would have been under Topic 605 for the year ended December 31, 2018. The following table summarizes the effects of adopting Topic 606 on the Company’s consolidated statement of operations and comprehensive income (loss) for the
year ended December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
As reported under Topic 606
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
Revenues
|
$
|
25,013
|
|
|
$
|
(201
|
)
|
|
$
|
24,812
|
|
Cost of revenues
|
8,493
|
|
|
33
|
|
|
8,526
|
|
Sales and marketing
|
8,394
|
|
|
62
|
|
|
8,456
|
|
Net loss
|
(3,617
|
)
|
|
(296
|
)
|
|
(3,913
|
)
|
Net change in foreign currency translation adjustments
|
(543
|
)
|
|
15
|
|
|
(528
|
)
|
Total comprehensive loss
|
(4,160
|
)
|
|
(281
|
)
|
|
(4,441
|
)
|
The following table summarizes the effects of adopting Topic 606 on the Company’s consolidated balance sheet as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
As reported under Topic 606
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
Assets:
|
|
|
|
|
|
Contract assets
|
485
|
|
|
(485
|
)
|
|
—
|
|
Prepaid expenses and other current assets
|
2,192
|
|
|
13
|
|
|
2,205
|
|
Other assets, non-current
|
544
|
|
|
1
|
|
|
545
|
|
Liabilities:
|
|
|
|
|
|
|
Deferred revenue
|
9,672
|
|
|
768
|
|
|
10,440
|
|
Deferred revenue, non-current
|
1,672
|
|
|
(24
|
)
|
|
1,648
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Accumulated deficit
|
(58,875
|
)
|
|
(1,235
|
)
|
|
(60,110
|
)
|
Accumulated other comprehensive loss
|
(3,288
|
)
|
|
20
|
|
|
(3,268
|
)
|
The Company’s net cash used in operating activities for the
year ended December 31, 2018
did not change due to the adoption of Topic 606. The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s consolidated statement of cash flows for the
year ended December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
As reported under Topic 606
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
Operating activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(3,617
|
)
|
|
$
|
(296
|
)
|
|
$
|
(3,913
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Contract assets
|
65
|
|
|
(65
|
)
|
|
—
|
|
Prepaid expenses and other assets
|
449
|
|
|
95
|
|
|
544
|
|
Deferred revenue
|
3,092
|
|
|
266
|
|
|
3,358
|
|
Financial Instruments
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall
, which the Company adopted on January 1, 2018, modifying its accounting and required disclosures for its equity investment previously accounted for under the cost basis method of accounting.
The Company’s equity investment consisted of its investment totaling
$3.1 million
in convertible preferred stock of privately-held BriefCam, Ltd. (“BriefCam”), as described in Note 4–"Investment in Software Company," which is included in other assets in the consolidated balance sheets as of December 31, 2017. The new standard eliminated the cost method of accounting for investments in equity securities that do not have readily determinable fair values and permits the election of a measurement alternative that allows such securities to be recorded at cost, less impairment, if any, plus or minus changes resulting from observable price changes in market-based transactions for an identical or similar investment of the same issuer. The Company adopted the provisions of the new standard applicable to its investment in BriefCam on a prospective basis and elected the measurement alternative for non-marketable investments previously accounted for under the cost method of accounting.
On July 6, 2018, the Company sold its investment in BriefCam, which had a carrying value of
$3.1 million
as of
December 31, 2017
, resulting in a gain on sale of
$6.6 million
during the
year ended December 31, 2018
. From the date of adoption of the new accounting standard on January 1, 2018 to the sale of BriefCam, there were no observable price changes or impairments related to the Company’s non-marketable investment in the equity security.
Income Taxes
In March 2018, the Company adopted ASU 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
, which updates the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act of 2017 was signed into law. Additional information regarding the adoption of this standard is contained in Note 11–"Income Taxes."
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13,
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)
, which changes the fair value measurement disclosure requirements of ASC 820. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements disclosures.
In February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220)
, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings (accumulated deficit) for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 and requires certain disclosures regarding stranded tax effects in accumulated other comprehensive income (loss). This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted during interim or annual periods. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment
by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. The FASB subsequently issued ASU 2018-10 and ASU 2018-11 in July 2018, which provide clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”). ASU 2018-11 also provides the optional transition method, which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented.
The new lease standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted and requires using the modified retrospective approach. The Company plans to use the alternative modified retrospective method of adoption permitted pursuant to ASU 2018-11, whereby financial information will not be updated, and the disclosure required under the new lease standard will not be provided, for dates and periods before January 1, 2019. In addition, the Company expects to elect the “package of practical expedients,” which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. However, the Company does not expect to adopt the hindsight practical expedient, and therefore expects to continue to utilize lease terms determined under existing lease guidance.
To date, the Company has developed a project plan to guide the implementation of the new lease standard and has made progress on this plan, including assessing the Company’s portfolio of leases and compiling information on active leases. Additionally, the Company implemented a lease accounting software to facilitate adoption of the standard, and is currently installing, configuring and testing the software.
While the Company is still evaluating the impact on its consolidated financial statements of adopting this standard, it expects to recognize, upon adoption, right-of-use assets of approximately
$1.0 million
to
$1.3 million
and lease liabilities of
$1.6 million
and
$1.9 million
. The difference between the assets and liabilities will primarily be attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets. The Company does not expect the adjustment under the modified retrospective approach to accumulated deficit as of January 1, 2019 to be material. Additionally, the Company does not expect the adoption of the new lease guidance to have a material impact on its consolidated statements of operations or cash flows, or compliance with debt covenants.
2) Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Computer, network equipment and furniture
|
$
|
2,565
|
|
|
$
|
3,681
|
|
Leasehold improvements
|
789
|
|
|
1,908
|
|
Total property and equipment
|
3,354
|
|
|
5,589
|
|
Less accumulated depreciation and amortization
|
(2,809
|
)
|
|
(4,678
|
)
|
Total property and equipment, net
|
$
|
545
|
|
|
$
|
911
|
|
Depreciation and amortization expense associated with property and equipment was
$438,000
,
$944,000
and
$1.2 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
3) Intangible Assets and Goodwill
Intangible Assets
The Company’s amortizable intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Customer Relationships
|
|
Developed Technology
|
|
Trademarks / Trade-Names
|
|
Total
|
Original cost
|
$
|
4,818
|
|
|
$
|
8,023
|
|
|
$
|
2,180
|
|
|
$
|
15,021
|
|
Accumulated amortization
|
(2,721
|
)
|
|
(7,110
|
)
|
|
(943
|
)
|
|
(10,774
|
)
|
Net identifiable intangible assets
|
$
|
2,097
|
|
|
$
|
913
|
|
|
$
|
1,237
|
|
|
$
|
4,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Customer Relationships
|
|
Developed Technology
|
|
Trademarks / Trade-Names
|
|
Total
|
Original cost
|
$
|
4,928
|
|
|
$
|
8,225
|
|
|
$
|
2,184
|
|
|
$
|
15,337
|
|
Accumulated amortization
|
(2,194
|
)
|
|
(6,043
|
)
|
|
(805
|
)
|
|
(9,042
|
)
|
Net identifiable intangible assets
|
$
|
2,734
|
|
|
$
|
2,182
|
|
|
$
|
1,379
|
|
|
$
|
6,295
|
|
Amortization expense of intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Amortization expense associated with the developed technology included in cost of revenues
|
$
|
1,024
|
|
|
$
|
1,197
|
|
|
$
|
1,251
|
|
Amortization expense associated with other acquired intangible assets included in operating expenses
|
904
|
|
|
904
|
|
|
891
|
|
Total amortization expense
|
$
|
1,928
|
|
|
$
|
2,101
|
|
|
$
|
2,142
|
|
The Company estimates that amortization expense associated with intangible assets will be as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
2019
|
$
|
1,210
|
|
2020
|
938
|
|
2021
|
732
|
|
2022
|
539
|
|
2023
|
298
|
|
Thereafter
|
530
|
|
Total
|
$
|
4,247
|
|
Goodwill
On October 3, 2014, the Company completed the acquisition of Kulu Valley, Ltd., subsequently renamed Qumu Ltd, and recognized
$8.8 million
of goodwill and
$6.7 million
of intangible assets. The goodwill balance of
$7.0 million
at
December 31, 2018
reflects the impact of foreign currency exchange rate fluctuations since the acquisition date.
As of
December 31, 2018
, the Company’s market capitalization, without a control premium, was greater than its book value and, as a result, the Company concluded there was
no
goodwill impairment. Declines in the Company’s market capitalization or a downturn in its 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 the Company's results of operations.
4) Investment in Software Company
As of
December 31, 2017
, the Company held an investment reported in other assets, non-current, totaling
$3.1 million
in convertible preferred stock of BriefCam, Ltd., a privately-held Israeli company that develops video synopsis technology to augment security and surveillance systems to facilitate review of surveillance video. On May 7, 2018, BriefCam, Canon Inc. (“Canon”), and the shareholders of BriefCam, including the Company, entered into a stock purchase agreement by which Canon would acquire all of the outstanding shares of BriefCam. On July 3, 2018, BriefCam announced that Canon had completed its acquisition of BriefCam and, on July 6, 2018, the Company received
$9,678,000
from the closing proceeds for its shares of BriefCam, as well as received
$100,000
on October 31, 2018 following the satisfaction of a contingency, resulting in a gain on sale of
$6.6 million
during the
year ended December 31, 2018
.
Prior to its sale, the investment did not have a readily determinable fair value and was recorded at cost, less impairment, if any, plus or minus changes resulting from observable price changes in market-based transactions for an identical or similar investment of the same issuer and is included in other non-current assets. The Company's ownership interest was less than
20%
. From the date of the Company's adoption of ASU 2016-01,
Financial Instruments – Overall
, on January 1, 2018 to the sale of BriefCam, there were no observable price changes or impairments related to the Company’s non-marketable investment in the equity security. The gain on sale is taxable in the U.S. and is offset for federal income tax purposes by current or prior-year tax losses but is subject to applicable state income taxes. The gain on sale is not taxable in Israel.
5) Commitments and Contingencies
Leases and Other Financing Obligations
Balances for assets acquired under capital lease obligations and included in property and equipment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Computer and network equipment
|
$
|
609
|
|
|
$
|
511
|
|
Furniture
|
287
|
|
|
287
|
|
Assets acquired under capital lease obligations
|
896
|
|
|
798
|
|
Accumulated depreciation
|
(763
|
)
|
|
(613
|
)
|
Assets acquired under capital lease obligations, net
|
$
|
133
|
|
|
$
|
185
|
|
The current and long-term portions of capital leases and other financing obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Capital leases and other financing obligations, current
|
$
|
152
|
|
|
$
|
1,047
|
|
Capital leases and other financing obligations, noncurrent
|
57
|
|
|
3
|
|
Total capital leases and other financing obligations
|
$
|
209
|
|
|
$
|
1,050
|
|
The Company leases certain of its facilities and some of its equipment under non-cancellable operating lease arrangements. The rental payments under these leases are charged to expense on a straight-line basis over the non-cancellable term of the lease. Future minimum payments under capital lease obligations, other financing obligations, and non-cancellable operating leases, excluding property taxes and other operating expenses as of
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases and other financing obligations
|
|
Operating leases
|
|
Total
|
Years ending December 31,
|
|
|
|
|
|
2019
|
$
|
156
|
|
|
$
|
564
|
|
|
$
|
720
|
|
2020
|
37
|
|
|
433
|
|
|
470
|
|
2021
|
26
|
|
|
441
|
|
|
467
|
|
2022
|
—
|
|
|
399
|
|
|
399
|
|
2023
|
—
|
|
|
21
|
|
|
21
|
|
Thereafter
|
—
|
|
|
—
|
|
|
—
|
|
Total minimum lease payments
|
219
|
|
|
$
|
1,858
|
|
|
$
|
2,077
|
|
Less amount representing interest
|
(10
|
)
|
|
|
|
|
Present value of net minimum lease payments
|
$
|
209
|
|
|
|
|
|
Rent expense under operating leases was
$899,000
,
$1.3 million
and
$1.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Lease Contract Termination
The Company determined that it had excess capacity at its Minneapolis, Minnesota headquarters and effective May 1, 2018 ceased using a portion of its leased space, subsequently making it available for occupancy by a sublessee. The Company entered into a sublease agreement having a term beginning May 1, 2018 and extending through January 2023. Accordingly, the Company recorded a liability at fair value of
$224,000
for the future contractual lease payments, net of expected sublease receipts. Included in other income (expense) for 2018 is the loss related to the leasing-related exit activity of
$177,000
, which is net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity. Subsequent to December 31, 2018, on January 17, 2019, the Company terminated the sublease agreement, effective February 15, 2019, and contemporaneously modified the Company's head lease agreement to relinquish to the lessor, and be relieved of future lease payments for, the previously sublet space, effective March 1, 2019.
During 2017, the Company determined that
one
of its
two
office spaces in London, England was no longer needed and, in December 2017, ceased using the leased space, subsequently making it available for occupancy by a sublessee. Also in December 2017, the Company entered into a sublease agreement, having a term beginning January 1, 2018 and extending through September 2019, and received the first year’s sublease payment of
$122,000
. Accordingly, the Company recorded a liability at fair value of
$194,000
, which is reported in accrued liabilities as of December 31, 2017, for the future contractual lease payments, net of expected sublease receipts. The Company also recorded a loss related to the exit activity of
$72,000
, which is included in other income (expense) for the year ended December 31, 2017.
A reconciliation of the beginning and ending contract termination obligation balances is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
London, England
|
|
Minneapolis, Minnesota
|
|
Total
|
Contract termination obligation, January 1, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Lease termination costs incurred
|
|
72
|
|
|
—
|
|
|
72
|
|
Sublease payment received
|
|
122
|
|
|
—
|
|
|
122
|
|
Contract termination obligation, December 31, 2017
|
|
194
|
|
|
—
|
|
|
194
|
|
Lease termination costs incurred
|
|
—
|
|
|
224
|
|
|
224
|
|
Accretion expense
|
|
14
|
|
|
19
|
|
|
33
|
|
Payments on obligations
|
|
(189
|
)
|
|
(40
|
)
|
|
(229
|
)
|
Change in currency exchange rate
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Contract termination obligation, December 31, 2018
|
|
$
|
15
|
|
|
$
|
203
|
|
|
$
|
218
|
|
The contract termination obligation is included in other accrued liabilities in the Company's consolidated balance sheets.
Term Loans
The Company's term loans are reported in the consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
Term loan, at face value
|
$
|
4,000
|
|
|
$
|
8,000
|
|
Unamortized original issue discount
|
(481
|
)
|
|
(121
|
)
|
Unamortized debt issuance costs
|
(88
|
)
|
|
(274
|
)
|
Term loan
|
$
|
3,431
|
|
|
$
|
7,605
|
|
Credit Agreement – ESW Holdings, Inc.
On January 12, 2018, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into a term loan credit agreement (the “ESW credit agreement”) with ESW Holdings, Inc. as lender and administrative agent pursuant to which the Company borrowed
$10.0 million
in the form of a term loan. Proceeds from the ESW credit agreement were used to pay the remaining outstanding balance of
$8.0 million
on the Hale term note plus a
10%
prepayment penalty of
$800,000
on January 12, 2018.
On July 19, 2018, the Company paid
$6.5 million
on its outstanding term loan from ESW Holdings, Inc. under its term loan credit agreement dated January 12, 2018. The payment was comprised of principal of
$6.0 million
and accrued interest of
$463,000
for the period January 12, 2018 to the payment date of July 19, 2018. The Company used a portion of the
$9.8 million
in net proceeds from the sale of its investment in BriefCam to fund the prepayment. Under the term loan credit agreement, any
voluntary prepayment by the Company from the net proceeds received from the disposition of the Company’s investment in BriefCam will not trigger a prepayment fee. The Company determined that the prepayment of principal constituted a partial extinguishment of debt and, as such, recognized a
$1.2 million
loss related to the write down of unamortized debt discount and issuance costs.
The term loan is scheduled to mature on January 10, 2020. Interest accrues and compounds monthly at a variable rate per annum equal to the prime rate plus
4.0%
. As of December 31, 2018, interest was payable at
9.50%
. The Company may prepay the term loan at any time with the payment of a prepayment fee of
10%
of the amount prepaid. However, no prepayment fee will be incurred for any prepayment made from the proceeds of the Company’s sale of its investment in BriefCam.
The term loan had an estimated fair value of
$3.4 million
as of
December 31, 2018
. The fair value of the term loan is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate. As the contractual terms of the loan provide all the necessary inputs for this calculation, the term loan is classified as Level 2 within the fair value hierarchy. The estimated fair value is not necessarily indicative of the amount that would be realized in a current market exchange.
In conjunction with this debt financing, the Company issued a warrant for the purchase of up to
925,000
shares of the Company's common stock, which remained unexercised and outstanding at
December 31, 2018
. See Note 6–"Fair Value Measurements" for further discussion of the warrant.
Credit Agreement – Hale Capital Partners, LP
The term loan balance as of December 31, 2017 consisted of a term loan credit agreement (the “Hale credit agreement”) with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent, under which the Company borrowed
$8.0 million
as a term loan on October 21, 2016. The term loan was scheduled to mature on October 21, 2019 and required payment of interest monthly at the prime rate plus
6.0%
. The term loan required a prepayment fee of
10%
of the amount prepaid.
On January 12, 2018, the Company repaid all outstanding obligations under the Hale credit agreement using
$8.8 million
of the
$10.0 million
term loan proceeds provided through the ESW credit agreement. Concurrently, the Hale credit agreement terminated effective January 12, 2018.
In conjunction with this debt financing, the Company issued a warrant for the purchase of up to
314,286
shares of the Company's common stock, which remained unexercised and outstanding at
December 31, 2018
. See Note 6–"Fair Value Measurements" for further discussion of the warrant.
Covenant Compliance
The ESW credit agreement contains affirmative and negative covenants and requirements relating to the Company and its operations. The negative covenants of the ESW credit agreement require the Company to meet financial covenants beginning with the quarter ended September 30, 2018 relating to minimum core bookings, maximum non-current deferred revenue, minimum subscription, and maintenance and support revenue, and minimum subscription and maintenance and support dollar renewal rates. The Company was in compliance with all financial covenants during the year ended
December 31, 2018
.
The Company’s monthly, quarterly and annual results of operations are subject to significant fluctuations due to a variety of factors, many of which are outside of the Company’s control. These factors include the number and mix of products and solutions sold in the period, timing of customer purchase commitments, including the impact of long sales cycles and seasonal buying patterns, and variability in the size of customer purchases and the impact of large customer orders on a particular period. The foregoing factors are difficult to forecast, and these, as well as other factors, could adversely affect the Company’s monthly, quarterly and annual results of operations. Failure to achieve its monthly, quarterly or annual forecasts may result in the Company being out of compliance with covenants or projecting noncompliance in the future. Management actively monitors its opportunity pipeline, forecast, and projected covenant compliance on an ongoing basis.
Contingencies
The Company is exposed to a number of asserted and unasserted claims encountered in the normal course of business. Legal costs related to loss contingencies are expensed as incurred. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.
The Company’s standard arrangements include provisions indemnifying customers against liabilities if the Company's products infringe a third-party’s intellectual property rights. The Company has not incurred any costs in its continuing operations as a result of such indemnifications and has not accrued any liabilities related to such contingent obligations in the accompanying consolidated financial statements.
6) Fair Value Measurements
A hierarchy for inputs used in measuring fair value is in place that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. The hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. Three levels within the hierarchy may be used to measure fair value:
|
|
•
|
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities.
|
|
|
•
|
Level 2: Inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly.
|
|
|
•
|
Level 3: Inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect an entity’s own estimates of assumptions that market participants would use in pricing the asset or liability.
|
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued
two
warrants for the purchase of up to an aggregate of
1,239,286
shares of the Company's common stock, which remained unexercised and outstanding at
December 31, 2018
. The warrant issued in conjunction with the October 21, 2016 debt financing (Hale warrant) for the purchase of up to
314,286
shares of the Company's common stock expires on October 21, 2026, has an exercise price of
$2.80
per share and is transferable. The warrant issued in conjunction with the January 12, 2018 debt financing (ESW warrant) for the purchase of up to
925,000
shares of the Company's common stock expires on January 12, 2028, has an exercise price of
$1.96
per share and is transferable. Additionally, on August 31, 2018, the Company issued a warrant to a sales partner, iStudy Co., Ltd., (iStudy warrant) for the purchase of up to
100,000
shares of the Company's common stock; the warrant expires on August 31, 2028, has an exercise price of
$2.43
per share and is transferable. The Hale warrant and ESW warrant contain a cash settlement feature upon the occurrence of a certain events, essentially the sale of the Company as defined in the warrant agreements. Upon a sale of the Company, the holder of the iStudy warrant may exercise the warrant or may elect to receive the same consideration as it would have been entitled to receive upon the occurrence of such transaction if it had been the holder of the shares then issuable upon such exercise of the warrant. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the dates of issuance was recorded in the Company’s consolidated balance sheets as a liability.
The warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the respective dates of issuance and is revalued on each subsequent balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded as other income or expense. During
2018
,
2017
and
2016
, the Company recorded a non-cash gain from the change in fair value of the warrant liability of
$368,000
,
$74,000
and
$137,000
, respectively. These gains resulted from changes in inputs for expected volatility, expected life and risk-free interest rates, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable, along with management's assumptions including the probability and timing of certain events, such as a change in control or future equity offerings.
The Company estimates the fair value of this liability using option pricing models that are based on the individual characteristics of the warrants on the valuation date, which include assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions used could have a material impact on the resulting fair value. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.
The Company’s liabilities measured at fair value on a recurring basis and the fair value hierarchy utilized to determine such fair values is as follows at
December 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Total Fair
Value at
December 31, 2018
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative warrant liability - ESW warrant
|
$
|
2,015
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,015
|
|
Derivative warrant liability - Hale warrant
|
750
|
|
|
—
|
|
|
—
|
|
|
750
|
|
Derivative warrant liability - iStudy
|
33
|
|
|
—
|
|
|
—
|
|
|
33
|
|
Derivative warrant liability
|
$
|
2,798
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Total Fair
Value at
December 31, 2017
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative warrant liability - Hale warrant
|
$
|
819
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
819
|
|
The Company classified the warrant liability as Level 3 due to the lack of relevant observable market data over fair value inputs such as the probability-weighting of the various scenarios in the arrangements. The following table represents a rollforward of the fair value of the Level 3 instruments (significant unobservable inputs):
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
819
|
|
Additions to warrant liability
|
|
2,347
|
|
Change in fair value
|
|
(368
|
)
|
Balance at December 31, 2018
|
|
$
|
2,798
|
|
7) Stockholders' Equity
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, 2018
,
2017
and
2016
. As of
December 31, 2018
,
778,365
shares were available under the Board authorizations. Under the ESW credit agreement, the Company is prohibited from repurchasing or redeeming its stock, subject to certain exceptions relating to the exercise or vesting of equity awards.
8) Revenue
Nature of Products and Services
Perpetual software licenses
The Company’s perpetual software license arrangements grant customers the right to use the software indefinitely as it exists at the time of purchase. The Company recognizes revenue for distinct software licenses once the license period has begun and the software has been made available to the customer. Payments for perpetual software license contracts are generally received upon fulfillment of the software product.
Term software licenses
The Company's term software licenses differ from perpetual software licenses in that the customer's right to use the licensed product has a termination date. Prior to the adoption of Topic 606, these licenses were recognized ratably over the contractual term, beginning on the commencement date of each contract, which is typically the date the Company’s product has been fulfilled. Under the provisions of Topic 606, term software licenses are now recognized upon transfer of control, which is
typically at fulfillment, resulting in up-front revenue recognition. The Company categorizes revenue from term software licenses as subscription, maintenance and support revenue in service revenues. Payments are generally received quarterly or annually in equal or near equal installments over the term of the agreement.
Cloud-hosted software as a service
Cloud-hosted software as a service (SaaS) arrangements grant customers the right to access and use the licensed products at the outset of an arrangement via third-party cloud providers. Updates are generally made available throughout the entire term of the arrangement, which is generally
one
to
three
years. The Company provides an online library and technical support resources in these cloud-hosted SaaS arrangements, which in conjunction with the SaaS license constitute a single, combined performance obligation, and revenue is recognized over the term of the license. Payments are generally received annually in advance of the service period.
Hardware
The Company sells appliances that are typically drop shipped from third-party suppliers selected by the Company. The transaction price allocated to the appliance is generally recognized as revenue at fulfillment when the customer obtains control of the product. Payments for appliances are generally received upon delivery of the hardware product.
Maintenance and support
Maintenance and support arrangements grant customers the right to software updates and technical support over the term of the maintenance and support contract. Revenue from maintenance and support is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is upon fulfillment of the software obligation. Payments are generally received annually in advance of the service period.
Professional services and training
Professional services and training generally consist of software implementation, on-boarding services and best practices consulting. Revenue from professional services contracts is typically recognized as performed, generally using hours expended to measure progress. Services are generally invoiced monthly for work performed.
Revenues by product category and geography
The Company combines its products and services into
three
product categories and
three
geographic regions, based on customer location, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Software licenses and appliances
|
$
|
5,814
|
|
|
$
|
5,982
|
|
|
$
|
5,839
|
|
Service
|
|
|
|
|
|
Subscription, maintenance and support
|
17,132
|
|
|
19,374
|
|
|
21,443
|
|
Professional services and other
|
2,067
|
|
|
2,811
|
|
|
4,400
|
|
Total service
|
19,199
|
|
|
22,185
|
|
|
25,843
|
|
Total revenues
|
$
|
25,013
|
|
|
$
|
28,167
|
|
|
$
|
31,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
North America
|
$
|
16,639
|
|
|
$
|
20,494
|
|
|
$
|
23,089
|
|
Europe
|
6,453
|
|
|
6,914
|
|
|
7,924
|
|
Asia
|
1,921
|
|
|
759
|
|
|
669
|
|
Total
|
$
|
25,013
|
|
|
$
|
28,167
|
|
|
$
|
31,682
|
|
Significant Judgments
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
Our contracts with customers typically contain promises to transfer multiple products and services to a customer. Judgment is required to determine whether each product and/or service is considered to be a distinct performance obligation that should be accounted for separately under the contract. We allocate the transaction price to the distinct performance obligations based on relative standalone selling price (“SSP”). We estimate SSP by maximizing use of observable prices such as the prices charged to customers on a standalone basis, established prices lists, contractually stated prices, profit margins and other entity-specific factors, or by using information such as market conditions and other observable inputs. However, the selling prices of the Company's software licenses and cloud-hosted SaaS arrangements are highly variable. Thus, we estimate SSP for software licenses and cloud-hosted SaaS arrangements using the residual approach, determined based on total transaction price less the SSP of other goods and services promised in the contract.
Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of the Company’s license arrangements, the Company has concluded that the licenses and associated services are distinct from each other. In others, like the Company’s cloud-hosted SaaS arrangements, the license and certain services are not distinct from each other and therefore the Company has concluded that these promised goods and services are a single, combined performance obligation.
If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
The Company is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on the Company’s expectations of the term of the contract. Generally, the Company has not experienced significant returns from or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on its results of operations during the periods involved.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables or contract liabilities (deferred revenue) on the Company’s consolidated balance sheet. The Company records deferred revenue when revenue is recognized subsequent to invoicing.
The Company’s balances for contract assets totaled
$550,000
and
$485,000
as of January 1, 2018 and
December 31, 2018
, respectively. The Company’s balances for contract liabilities, which are included in current and non-current deferred revenue, totaled
$8.6 million
and
$11.3 million
as of January 1, 2018 and
December 31, 2018
, respectively.
During the
year ended December 31, 2018
, the Company recognized
$8.2 million
of revenue that was included in the deferred revenue balance, as adjusted for Topic 606, at the beginning of the period. All other activity in deferred revenue is due to the timing of invoices in relation to the timing of revenue as described above.
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately
$21.6 million
as of
December 31, 2018
, of which the Company expects to recognize
$12.8 million
of revenue over the next 12 months and the remainder thereafter.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within
30 to 60 days
. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.
9) 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 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,
2018
,
3,230,320
shares are authorized under the 2007 Plan, of which
527,988
were available for future grant.
In addition to awards granted under the 2007 Plan, the Company granted a non-qualified option to purchase
100,000
shares of its common stock to a newly hired senior management level employee on
November 26, 2012
, which remained outstanding as of December 31,
2018
. The option was granted outside of any shareholder-approved plan as an inducement to accept employment with the Company. The option has 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, vests in
four
equal installments on each of the first
four
anniversaries of the date of grant and has a term of
seven
years. In other respects, the option was structured to mirror the terms of options granted under the 2007 Plan and is subject to a stock option agreement between the Company and the employee.
The Company recognized the following amounts related to the Company’s share-based payment arrangements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Stock-based compensation cost charged against loss, before income tax benefit
|
|
|
|
|
|
Stock options
|
$
|
326
|
|
|
$
|
366
|
|
|
$
|
554
|
|
Restricted stock and restricted stock units
|
566
|
|
|
765
|
|
|
867
|
|
Performance stock units
|
190
|
|
|
59
|
|
|
—
|
|
Total stock-based compensation costs
|
$
|
1,082
|
|
|
$
|
1,190
|
|
|
$
|
1,421
|
|
Stock-based compensation cost included in:
|
|
|
|
|
|
Cost of revenues
|
$
|
34
|
|
|
$
|
39
|
|
|
$
|
49
|
|
Operating expenses
|
1,048
|
|
|
1,151
|
|
|
1,372
|
|
Total stock-based compensation costs
|
$
|
1,082
|
|
|
$
|
1,190
|
|
|
$
|
1,421
|
|
As of
December 31, 2018
, total stock option compensation expense of
$369,000
and
$582,000
was not yet recognized related to non-vested option awards and related to non-vested shares and restricted share unit awards, respectively, and is expected to be recognized over a weighted average period of
3.1
years and
2.5
years, 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:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Expected life of options in years
|
4.54 - 4.75
|
|
4.75
|
|
4.75
|
Risk-free interest rate
|
2.6% - 2.9%
|
|
1.7% - 2.0%
|
|
1.1% - 1.4%
|
Expected volatility
|
69.6% - 70.5%
|
|
64.2% - 66.2%
|
|
57.4% - 63.7%
|
Expected dividend yield
|
—%
|
|
—%
|
|
—%
|
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 and a lack of exercise history or other means to reasonably estimate future exercise behavior, 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
2018
,
2017
and
2016
, 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.
A summary of share option activity is presented in the table below (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted
Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(1)
|
Options outstanding at December 31, 2015
|
1,813
|
|
|
$
|
10.00
|
|
|
|
|
|
|
Granted
|
374
|
|
|
2.86
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Canceled
|
(679
|
)
|
|
12.66
|
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
1,508
|
|
|
7.03
|
|
|
|
|
|
Granted
|
165
|
|
|
2.16
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Canceled
|
(385
|
)
|
|
7.81
|
|
|
|
|
|
Options outstanding at December 31, 2017
|
1,288
|
|
|
6.18
|
|
|
|
|
|
Granted
|
758
|
|
|
2.24
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Canceled
|
(604
|
)
|
|
7.60
|
|
|
|
|
|
|
Options outstanding at December 31, 2018
|
1,442
|
|
|
3.51
|
|
|
4.9
|
|
$
|
—
|
|
Total vested and expected to vest as of December 31, 2018
|
1,442
|
|
|
3.51
|
|
|
4.9
|
|
$
|
—
|
|
Options exercisable as of:
|
|
|
|
|
|
|
|
December 31, 2016
|
703
|
|
|
$
|
10.06
|
|
|
|
|
|
December 31, 2017
|
838
|
|
|
7.85
|
|
|
|
|
|
December 31, 2018
|
572
|
|
|
5.29
|
|
|
3.0
|
|
$
|
—
|
|
________________________________________________________________
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Fair value of options granted
|
$
|
982
|
|
|
$
|
193
|
|
|
$
|
556
|
|
Per share weighted average fair value of options granted
|
$
|
1.30
|
|
|
$
|
1.17
|
|
|
$
|
1.49
|
|
Total intrinsic value of stock options exercised
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted Stock and Restricted 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):
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant-Date Fair Value
|
Nonvested at December 31, 2015
|
175
|
|
|
$
|
12.05
|
|
Granted
|
120
|
|
|
4.00
|
|
Vested
|
(76
|
)
|
|
11.27
|
|
Canceled
|
(29
|
)
|
|
13.03
|
|
Nonvested at December 31, 2016
|
190
|
|
|
7.13
|
|
Granted
|
213
|
|
|
2.44
|
|
Vested
|
(146
|
)
|
|
5.67
|
|
Canceled
|
(39
|
)
|
|
5.21
|
|
Nonvested at December 31, 2017
|
218
|
|
|
3.87
|
|
Granted
|
279
|
|
|
2.17
|
|
Vested
|
(186
|
)
|
|
3.66
|
|
Canceled
|
(3
|
)
|
|
14.78
|
|
Nonvested at December 31, 2018
|
308
|
|
|
$
|
2.38
|
|
Other information pertaining to restricted stock and restricted stock units is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Per share weighted average grant-date fair value of restricted stock and restricted stock units granted
|
$
|
2.17
|
|
|
$
|
2.44
|
|
|
$
|
4.00
|
|
Total fair value of restricted stock and restricted stock units vested
|
$
|
377
|
|
|
$
|
392
|
|
|
$
|
294
|
|