Fair Value Measurements

12 Months Ended

Dec. 31, 2020

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.

As of December 31, 2020 and 2019, the following warrants for the purchase of Qumu's common stock were outstanding and exercisable:


	Number of underlying warrant shares		Warrant exercise price (per share)
	December 31,				Warrant expiration date
Description	2020	2019
Warrant issued in conjunction with October 2016 debt financing ("Hale warrant")	314,286	314,286	$	2.80	October 21, 2026
Warrant issued in conjunction with January 2018 debt financing ("ESW warrant")	—	925,000	$	1.96	January 12, 2028
Warrant issued to sales partner, iStudy Co., Ltd. ("iStudy warrant")	100,000	100,000	$	2.43	August 31, 2028
Total warrants outstanding	414,286	1,339,286

On May 1, 2020, the Company canceled the ESW warrant in exchange for a note payable (see Note 4–"Commitments and Contingencies") which contained an embedded derivative liability that is measured on a recurring basis at fair value. The Company recorded non-cash income of $103,000 for the year ended December 31, 2020 resulting from the change in fair value of the derivative liability.

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. All warrants are transferable. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, a warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the respective dates of the warrants' 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 (expense) in the consolidated statement of operations as "Decrease (increase) in fair value of warrant liability." During 2020 and 2019, the Company recorded non-cash expense of $1,826,000 and $141,000, respectively, and during 2018 the Company recorded non-cash income of $368,000, resulting from the change in fair value of the warrant 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 the Company’s stock price and 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 of each warrant. 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, 2020 and 2019 (in thousands):


			Fair Value Measurements Using
	Total Fair Value at December 31, 2020		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities:
Warrant liability - Hale	$	2,245	$	—	$	—	$	2,245
Warrant liability - iStudy	665		—		—		665
Warrant liability	$	2,910	$	—	$	—	$	2,910
Derivative liability	$	37	$	—	$	—	$	37
Total	$	2,947	$	—	$	—	$	2,947


			Fair Value Measurements Using
	Total Fair Value at December 31, 2019		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities:
Derivative warrant liability - ESW warrant	$	2,149	$	—	$	—	$	2,149
Derivative warrant liability - Hale warrant	645		—		—		645
Derivative warrant liability - iStudy	145		—		—		145
Derivative warrant liability	$	2,939	$	—	$	—	$	2,939

The Company's evaluation of the probability and timing of a change in control represents an unobservable input (Level 3) that shortens or lengthens the expected term input of the option pricing model for all warrants, and generally correspondingly increases or decreases, respectively, the discounted value of the minimum cash payment component of the Hale warrant and, prior to its cancellation, the ESW warrant. Consequently, as of December 31, 2020 and 2019, the liability related to each warrant was classified as a Level 3 liability.

The Company's evaluation of the probability and timing of a change in control represents an unobservable input (Level 3) that increases or decreases the likelihood of triggering the note payable agreement's Fundamental Transaction contingency, resulting in Level 3 classification of the derivative liability.

The following table represents the significant unobservable input used in the fair value measurement of Level 3 warrant liability instruments:


			December 31, 2020
Probability-weighted timing of change in control			4.9 years

The following table summarizes the changes in fair value measurements for the year ended December 31, 2020:


	Warrant liability		Derivative liability		Total
Balance at December 31, 2019	$	2,939	$	—	$	2,939
Cancellation of ESW warrant liability (Note 4)	(1,855)		—		(1,855)
Issuance of derivative liability upon cancellation of ESW warrant	—		140		140
Change in fair value	1,826		(103)		1,723
Balance at December 31, 2020	$	2,910	$	37	$	2,947

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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