Commitments and Contingencies

12 Months Ended

Dec. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Leases

The Company is obligated under finance leases covering certain IT equipment that expire at various dates over the next three years. The Company also has non-cancellable operating leases, primarily for office space, that expire over the next three years. The Company has two leases that each contain a renewal option for a period of five years. Because at the inception of the leases the Company was not reasonably certain to exercise the options, the options were not considered in determining the lease terms under Topic 842, which was adopted January 1, 2019. In December 2020, the Company notified landlords for the two leases that it was surrendering its right to occupy the office spaces and thereby would not be exercising its option to renew and would be exercising the leases early termination clauses allowing the lease terms to end in May 2022 and August 2022. The impact of the reduction of the lease terms reduced the Company's operating lease liabilities by $433,000.

During December 2020, the Company transitioned to permanent remote work for all of its personnel as part of its “Work from Wherever, Forever” policy. The Company closed three of its four offices due to its new remote work policy. As part of the policy, the Company’s management determined that, effective December 31, 2020, the Company will no longer occupy the leased office space in Minneapolis, Minnesota, and London, England, which were primarily used for engineering, service, sales, marketing and administration, and the leased office space in Hyderabad, India, which was primarily used for software development and testing. The Company will continue to occupy its leased space in Burlingame, California, primarily for technology storage and research and development. Given the transition to permanent remote work, the Company recorded in the fourth quarter of 2020 a non-cash expense of approximately $637,000 related to the right of use assets–operating leases for the three surrendered office leases. Additionally, the Company incurred a non-cash expense of $280,000 in the fourth quarter of 2020 related to the surrender of certain leasehold improvements, office and computer equipment, and furniture at the leased premises.

During December 2020, the Company also entered into lease agreements associated with flexible shared workspace arrangements in Minneapolis, Minnesota, and London, England, and Hyderabad, India. The flexible shared workspace arrangement in Minneapolis, Minnesota has a lease term of 18 months and therefore is considered a lease under Topic 842. The other two flexible shared workspace arrangements are 12 months or less, and thus the Company has elected the practical expedient method and recognize the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term.

The Company intends to continue to pay all rental payments due and payable by the Company pursuant to the leases governing the leased premises.

Many of the Company's leases include escalation clauses, renewal options and/or termination options that are factored into its determination of lease payments under Topic 842 when reasonably certain. These options to extend or terminate a lease are at the Company's discretion. The Company has elected to take the practical expedient and not separate lease and non-lease components of contracts. The Company estimates its incremental borrowing rate to discount the lease payments based on information available at lease commencement under Topic 842. The Company's lease agreements do not contain any material residual value guarantees.

The components of lease cost were as follows (in thousands):

	December 31,
	2020		2019
Operating lease cost	$	1,041	$	526
Finance lease cost:
Amortization of right of use assets	112		106
Interest on lease liabilities	7		11
Total finance cost	119		117
Total lease cost	$	1,160	$	643

The Company's ROU assets and lease liabilities were reported in the consolidated balance sheet as follows (in thousands):

		December 31,
Leases	Classification on Balance Sheet	2020		2019
Assets
Operating	Right of use assets – operating leases	$	332	$	1,746
Finance	Property and equipment	124		130
Total lease assets		$	456	$	1,876
Liabilities
Current
Operating	Operating lease liabilities	$	735	$	587
Finance	Financing obligations	110		83
Non-current
Operating	Operating lease liabilities, non-current	554		1,587
Finance	Financing obligations, non-current	75		83
Total lease liabilities		$	1,474	$	2,340

Other information related to leases is as follows (in thousands):

	December 31,
	2020			2019
Supplemental cash flow information:
Reduction in operating lease right of use assets and lease liabilities due to reassessment of lease terms	$	433		$	—
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flow from operating leases	$	522		$	432
Financing cash flow from finance leases	83			77
ROU assets obtained in exchange for new lease obligations
Operating leases	$	47		$	—
Finance leases	106			148
Weighted-average remaining lease term:
Operating leases	1.7 years			3.8 years
Finance leases	2.2 years			2.0 years
Weighted-average discount rate:
Operating leases	10.0		%	10.0		%
Finance leases	6.2		%	6.2		%

Future payments used in the measurement of lease liabilities on the consolidated balance sheet as of December 31, 2020 are as follows (in thousands):

	Operating leases		Finance leases
2021	$	811	$	117
2022	552		42
2023	—		37
2024	—		—
2025	—		—
Thereafter	—		—
Total undiscounted lease payments	1,363		196
Less amount representing interest	(74)		(11)
Present value of lease liabilities	$	1,289	$	185

Subleases

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 also recorded a loss related to the exit activity of $177,000 (net of adjustments for the derecognition of leasehold improvement and deferred rent balances related to the exit activity), which is included in other income (expense) for the year ended December 31, 2018.

Sublease income from the Company's subleases was $105,000 and $160,000 for the years ended December 31, 2019 and 2018. No sublease income was recognized for the year ended December 31, 2020.

Credit Agreement – ESW Holdings, Inc.

During 2020, the Company entered into a secured promissory note to ESW Holdings, Inc. ("note payable") as consideration for cancellation of its outstanding warrant to ESW Holdings, Inc. ("ESW warrant"), On May 1, 2020, the Company canceled the ESW warrant, which was for the purchase of up to 925,000 shares of Qumu's common stock at an exercise price of $1.96 per share and expiring January 2028. Additionally, the terms of the warrant provided for a cash settlement in the event of a change of control transaction referred to as a Fundamental Transaction, computed using a Black-Scholes option pricing model with specified inputs stipulated in the warrant agreement. The fair value of the warrant instrument has historically been reported as a liability in Qumu's consolidated financial statements, and, for certain historical reporting periods since its issuance, the shares underlying the warrant instrument were dilutive in the calculation of earnings per share.

As consideration for the warrant cancellation, the Company entered into a note payable, having a face amount of $1,833,000, which was less than the cash settlement amount of $1,983,000 computed under the terms of the warrant agreement, due on April 1, 2021 and bearing no interest. The payment obligation of the note would be accelerated upon a Fundamental Transaction, and Qumu would be required to pay an additional $150,000 to ESW Holdings, Inc. upon the closing of a Fundamental Transaction. The note payable provided for prepayment at any time without penalty. The Company paid the note payable on January 12, 2021 (see Note 15–"Subsequent Events.")

The note payable was recorded at its present value of future cash flows of $1,833,000 discounted at 7.25% (prime plus 4.00%), which was $1,715,000 at May 1, 2020. The value of the note payable will be accreted up to its face value at maturity. As of December 31, 2020, the carrying value of the note payable was $1,800,000, which also approximated its fair value.

The note payable contains a $150,000 contingent payment obligation due upon the closing of a Fundamental Transaction on or prior to the April 1, 2021 maturity date. This contingent payment obligation qualifies as an embedded derivative in accordance with ASC Topic 815, Derivatives and Hedging. The embedded derivative is measured at fair value and is remeasured at fair value each subsequent reporting period and reported on the Company's consolidated balance sheet as a derivative liability. Changes in fair value are recognized in other income (expense) in the consolidated statement of operations as "Decrease (increase) in fair value of derivative liability." See Note 5–"Fair Value Measurements."

In connection with the note, the Company and ESW Holdings, Inc. entered into a security agreement dated May 1, 2020 providing for a future security interest in certain assets of the Company that would not attach unless and until the occurrence of the Triggering Event specified therein. The termination of the merger agreement with Synacor, Inc. represented a Triggering Event, resulting in ESW Holdings, Inc. securing an interest in certain of Qumu's cash deposit accounts.

Contingencies

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.