NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Qumu Corporation (the "Company") provides the software applications businesses use to create, manage, secure, deliver and measure the success of their videos. The Company's innovative solutions release the power in video to engage and empower employees, partners and clients, allowing organizations around the world to realize the greatest possible value from video they create and publish. Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does video.
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 manages the marketing of 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. As further described in Note 2, 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. As a result, effective June 27, 2014, the disc publishing business was classified as held for sale and qualified for presentation as discontinued operations effective with the reporting of the Company's financial results for the second quarter of 2014. Accordingly, effective June 27, 2014, the Company had one remaining reportable segment, the enterprise video content management software business. The operational results of the disc publishing business are presented in the “Net income from discontinued operations, net of tax” line item on the consolidated statements of operations. 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, other than consolidated amounts reflecting operating results and balances for both the continuing and discontinued operations.
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.
Liquidity
The Company has experienced recurring operating losses and negative cash flows from operating activities, and was unable to project future compliance with certain covenants in its credit agreement under certain financial scenarios. If the Company is not able to maintain compliance with its covenants that results in an Event of Default, the lender may accelerate the repayment of outstanding principal, which could negatively impact the Company’s ability to fund its working capital requirements, capital expenditures and general corporate expenses. Subsequent to year end, the Company amended its credit agreement and is projecting future compliance with the amended covenants with an operating plan that, when combined with its expense reduction program, further aligns resources with revenue.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, cash equivalents and marketable securities, for which the current carrying amounts approximate fair market values based on quoted market prices or net asset value; the warrant liability, for which the fair value is based on the Company's estimates of assumptions that market participants would use in pricing the liability; and the term loan, for which the fair value is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate and the contractual terms of the loan.
Revenue Recognition
The Company generates revenue through the sale of enterprise video content management software solutions, hardware, maintenance and support, and professional and other services. Software sales may take the form of a perpetual software license, a term software license or a cloud-hosted software as a service (SaaS). Software licenses and appliances revenue includes sales of perpetual software licenses and hardware. Service revenue includes term software licenses, SaaS, maintenance and support, and professional and other services. The Company commences revenue recognition when all of the following conditions are met: there is persuasive evidence of an arrangement; the product has been delivered or the services have been provided to the customer; the collection of the fees is reasonably assured; and the amount of fees to be paid by the customer is fixed or determinable. More specifically:
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•
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Revenue from perpetual software licenses and hardware are generally recognized when the product has been delivered.
|
|
|
•
|
Revenue from subscription, maintenance and support, which includes term software licenses, cloud-hosted software as a service and maintenance and support, are generally recognized ratably over the contract term beginning on the commencement date of each contract, which is the date the Company’s product has been delivered or service is made available to customers.
|
|
|
•
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Revenue from professional and other services, which are not essential to the functionality of the software, are generally recognized as the services are provided to customers.
|
The Company allocates revenue to the software-related and non-software elements under one arrangement based on the relative selling price. In such circumstances, the selling price for a deliverable is based on the following hierarchy: i) vendor-specific objective evidence (“VSOE”), if available, ii) third-party evidence (“TPE”), if VSOE is not available, or iii) estimated selling price (“ESP”), if neither VSOE nor TPE is available. The Company determines VSOE of the 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. After the arrangement consideration has been allocated to the software-related and non-software related elements, the Company accounts for each respective element as follows:
|
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•
|
Revenue for each of the non-software elements is allocated based on the selling price hierarchy and recognized as noted above provided all other criteria required for revenue recognition have been met.
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|
•
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Revenue for each of the software-related elements is allocated based on the VSOE of each element and recognized as noted above provided all other criteria required for revenue recognition have been met. In software-related arrangements for which the Company does not have the VSOE of the fair value for all elements, revenue is deferred until the earlier of when the VSOE is determined for the undelivered elements (residual method) or when all elements for which the Company does not have the VSOE of the fair value have been delivered, unless the only undelivered element is maintenance and support, in which case the entire amount of revenue is recognized over the maintenance and support period.
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Other items relating to charges collected from customers:
|
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•
|
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.
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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-cancelable 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 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-cancelable customer contracts and also commission clawback provisions in the Company's sales compensation plans. Deferred commission costs included in prepaid expenses and other assets were
$411,000
and
$954,000
at
December 31, 2016
and
2015
, respectively. Deferred commission costs in other assets, non-current were
$148,000
and
$104,000
at
December 31, 2016
and
2015
, 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.
Marketable Securities
Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable securities held by the Company are classified as available-for-sale. Available-for-sale securities are carried at fair value as determined by quoted market prices with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The Company analyzes its marketable securities for impairment on an ongoing basis. Factors considered in determining whether an unrealized loss is a temporary loss or an other-than-temporary loss include the length of time and extent to which the securities have been in an unrealized loss position and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated market recovery.
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):
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Year Ended December 31,
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Allowance for Doubtful Accounts:
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
|
$
|
24
|
|
|
$
|
55
|
|
|
$
|
20
|
|
Write-offs
|
|
(11
|
)
|
|
—
|
|
|
(8
|
)
|
Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in provision
|
|
21
|
|
|
(31
|
)
|
|
43
|
|
Balance at end of year
|
|
$
|
34
|
|
|
$
|
24
|
|
|
$
|
55
|
|
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
$204,000
and
$250,000
as of
December 31, 2016
and
2015
, 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, 2016, the Company completed its annual impairment test of goodwill. Based upon that evaluation, the Company determined that its goodwill was not impaired. See Note 5–"Intangible Assets and Goodwill."
Investment in Nonconsolidated Company
As of
December 31, 2016
and
2015
, the Company held an investment totaling
$3.1 million
in convertible preferred stock of BriefCam, Ltd. ("BriefCam") a privately-held Israeli company that develops video synopsis technology to augment security and surveillance systems to facilitate review of surveillance video. The investment is included in other non-current assets. Because Qumu's ownership interest is less than
20%
and it has no other rights or privileges that enable it to exercise significant influence over the operating and financial policies of BriefCam, Qumu accounts for this equity investment using the cost method. Equity securities accounted for under the cost method are reviewed quarterly for changes in circumstances or the occurrence of events that suggest the Company’s investment may not be fully recoverable. If an unrealized loss for the investment is considered to be other-than-temporary, the loss will be recognized in the consolidated statements of operations in the period the determination is made. Qumu monitors BriefCam's results of operations, business plan and capital raising activities and is not aware of any events or circumstances that would indicate a decline in the fair value below the carrying value of its investment.
Derivative Liability
In conjunction with debt financing completed in October 2016, the Company issued a warrant for the purchase of up to
314,286
shares of the Company's common stock, the entire portion of which remained unexercised and outstanding at December 31, 2016. The Company accounts for the warrant, a derivative financial instrument issued in conjunction with the Company's 2016 debt financing, as a current liability based upon the characteristics and provisions of the instrument. The warrant was determined to be ineligible for equity classification because of provisions that allow the holder under certain circumstances, essentially the sale of the Company as defined in the warrant agreement, to elect to receive a minimum cash payment in lieu of the Company's common shares. The warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the date 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. The Company estimates the fair value of this liability using an option pricing model that is based on the individual characteristics of the warrant on the valuation date, which includes 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. Changes in the assumptions used could have a material impact on the resulting fair value. The primary input affecting the value of the warrant liability is the Company’s stock price. Generally, increases (decreases) in the fair value of the underlying stock would result in a corresponding increase (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. The Company recognizes stock-based compensation on a straight-line basis over the requisite service period for the entire award, net of an estimated forfeiture rate. Compensation cost is recognized for all awards 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.
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 generally 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.
During the quarter ended December 31, 2015, the Company recognized a loss relating to a third-party license agreement of
$1.2 million
to general and administration expense which included the write-off of a
$606,000
prepaid royalty and the accrual of the remaining
$606,000
minimum royalty payments.
Income Taxes
The Company provides for income taxes using the 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 gain on foreign currency transactions was
$162,000
for the year ended
December 31, 2016
and net losses on foreign currency transactions were
$131,000
and
$201,000
for the years ended
December 31, 2015
and
2014
, respectively, and are included in other expenses 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 the warrant, 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 year ended
December 31, 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 years ended
December 31, 2015
and
2014
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 certain marketable securities and foreign currency translation adjustments. Such items are reported in the consolidated statements of comprehensive income (loss).
New Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which will simplify the income tax consequences, accounting for forfeitures and classification on the statements of consolidated cash flows. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 effective January 1, 2017 and does not expect the adoption to have a material impact to the consolidated financial statements and related disclosures.
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. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this standard, which will require right-of-use assets and lease liabilities be recorded in the consolidated balance sheet for operating leases.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall
, which requires entities to measure equity instruments at fair value and recognize any changes in fair value in net income (loss). Entities may estimate the fair value of certain equity securities that do not have readily determinable fair value or may choose a practical expedient. If the practical expedient is elected, these investments would be recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also updates certain presentation and disclosure requirements. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this standard, which could be material to its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05,
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
, which provides guidance to customers about whether a cloud computing arrangement includes software, which the Company adopted prospectively as of January 1, 2016. The adoption had no impact on the Company's financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. The new standard is effective for the Company on January 1, 2018 but may be early adopted effective January 1, 2017.
The new revenue standard may be applied using either of the following transition methods: a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company will adopt the standard in the first quarter of 2018 and preliminarily expects to use the modified retrospective method. However, the Company is continuing to evaluate the impact of the standard, and its adoption method is subject to change.
Currently, the Company is in the process of reviewing its historical contracts to quantify the impact that the adoption of the standard will have on specific performance obligations. The Company is also continuing to evaluate the impact of the standard on its recognition of costs related to obtaining customer contracts (namely, sales commissions). While the Company continues to assess all potential impacts of this new standard, it currently believes the most significant impacts relate to the accounting for the timing of revenue recognition of subscription, or term-based, software license arrangements. Specifically, under the new standard:
|
|
•
|
Software revenue associated with non-cancellable subscription or, term-based, software license arrangements will generally be recognized upon delivery of the license. Historically, these arrangements have been material, and the Company currently recognizes this revenue ratably over the term of the software license; and
|
|
|
•
|
The Company expects that the accounting for software revenue derived from perpetual based licensing arrangements and associated services revenues will not be materially impacted.
|
The adoption of the standard will require the implementation of new accounting processes, which will change the Company's internal controls over revenue recognition, contract acquisition costs and financial reporting. The Company is designing and implementing these controls in anticipation adopting the new standard January 1, 2018.
2) Divestiture of Disc Publishing Business
On April 24, 2014, the Company entered into an asset purchase agreement (the “asset purchase agreement”) with Equus Holdings, Inc. and Redwood Acquisition, Inc. (now known as Rimage Corporation, “Buyer”). Under the terms of the asset purchase agreement, the Company agreed to sell to Buyer all of the assets primarily used or primarily held for use in connection with its disc publishing business. Buyer also agreed to assume on the closing date certain agreements and liabilities relating to the disc publishing business and the acquired assets.
At a special meeting of the Company's shareholders held on June 27, 2014, the Company's shareholders approved the sale of the disc publishing assets as contemplated by the asset purchase agreement. As a result, effective June 27, 2014, the disc publishing business was classified as held for sale and qualified for discontinued operations presentation in the Company’s consolidated financial statements. The results of the discontinued disc publishing business have been presented as discontinued operations effective with the reporting of financial results for the second quarter 2014. As such, financial results for the years ended December 31, 2016, 2015 and 2014 have been reported on this basis.
On July 1, 2014, the Company’s sale of the disc publishing business was completed. The Company also entered into a mutual transition services agreement with Buyer and entered into a lease agreement with Buyer for the lease from Buyer of a portion of the property located at 7725 Washington Avenue South, Minneapolis, MN 55439. The Company terminated the lease agreement in September 2015 due to the Company relocating its corporate headquarters to 510 1st Avenue North, Suite 305, Minneapolis, MN 55403.
The adjusted purchase price paid to the Company was
$22.0 million
, of which
$2.3 million
was placed in an escrow account to support the Company’s indemnification obligations under the asset purchase agreement for a
fifteen
-month escrow period. In the third quarter of 2014, the Company recorded a gain on sale of the disc publishing business of
$16.2 million
, exclusive of the impact of transaction related expenses recorded through September 30, 2014. The gain on sale attributable to the U.S. is offset for federal income tax purposes by current or prior-year tax losses but is subject to applicable state income taxes.
The operational results of the disc publishing business are presented in the “Net income from discontinued operations, net of tax” line item in the consolidated statements of operations. Also included in this line item for the 2014 period is the gain on sale of the disc publishing business and non-recurring expenses incurred by the Company as a result of the sale of the disc publishing business, including third-party transaction specific costs, one-time income tax related impacts and the acceleration of vesting of cash-based long-term incentive and stock-based awards payable to employees of the disc publishing business upon completion of the asset sale transaction. The described non-recurring expenses and income tax related impacts amounted to approximately
$9.6 million
for the year ended December 31, 2014. No general corporate charges were allocated to the discontinued business. The assets and liabilities of the discontinued business are presented on the consolidated balance sheets as assets and liabilities from discontinued operations.
Other than consolidated amounts reflecting operating results and balances for both the continuing and discontinued operations, 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.
Revenue, operating income, gain on sale of business, income tax expense and net income from discontinued operations were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29,922
|
|
Operating income
|
|
—
|
|
|
—
|
|
|
4,520
|
|
Gain on sale of discontinued operations
|
|
—
|
|
|
—
|
|
|
16,167
|
|
Income tax expense (benefit)
|
|
—
|
|
|
(92
|
)
|
|
6,955
|
|
Net income (loss) from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
13,823
|
|
As of
December 31, 2015
, assets and liabilities from discontinued operations consisted of
$50,000
of other current liabilities. The Company had
no
assets and liabilities from discontinued operations as of
December 31, 2016
.
3) Marketable Securities
No marketable securities were outstanding as of December 31,
2016
. Marketable securities as of December 31,
2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair value
|
Certificates of deposit
|
$
|
6,250
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
6,249
|
|
Total marketable securities
|
$
|
6,250
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
6,249
|
|
4) Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Computer, network equipment and furniture
|
$
|
3,639
|
|
|
$
|
3,642
|
|
Leasehold improvements
|
1,899
|
|
|
1,915
|
|
Total property and equipment
|
5,538
|
|
|
5,557
|
|
Less accumulated depreciation and amortization
|
(3,711
|
)
|
|
(2,615
|
)
|
Total property and equipment, net
|
$
|
1,827
|
|
|
$
|
2,942
|
|
Depreciation and amortization expense associated with property and equipment was
$1,161,000
,
$1,052,000
and
$747,000
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
5) Intangible Assets and Goodwill
Intangible Assets
The Company’s amortizable intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Customer Relationships
|
|
Developed Technology
|
|
Trademarks / Trade-Names
|
|
Covenants Not to Compete
|
|
Total
|
Original cost
|
$
|
4,759
|
|
|
$
|
7,917
|
|
|
$
|
2,178
|
|
|
$
|
31
|
|
|
$
|
14,885
|
|
Accumulated amortization
|
(1,577
|
)
|
|
(4,509
|
)
|
|
(658
|
)
|
|
(31
|
)
|
|
(6,775
|
)
|
Net identifiable intangible assets
|
$
|
3,182
|
|
|
$
|
3,408
|
|
|
$
|
1,520
|
|
|
$
|
—
|
|
|
$
|
8,110
|
|
Weighted-average useful lives (years)
|
10
|
|
|
6
|
|
|
15
|
|
|
2
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Customer Relationships
|
|
Developed Technology
|
|
Trademarks / Trade-Names
|
|
Covenants Not to Compete
|
|
Total
|
Original cost
|
$
|
5,115
|
|
|
$
|
8,567
|
|
|
$
|
2,190
|
|
|
$
|
38
|
|
|
$
|
15,910
|
|
Accumulated amortization
|
(1,075
|
)
|
|
(3,261
|
)
|
|
(528
|
)
|
|
(14
|
)
|
|
(4,878
|
)
|
Net identifiable intangible assets
|
$
|
4,040
|
|
|
$
|
5,306
|
|
|
$
|
1,662
|
|
|
$
|
24
|
|
|
$
|
11,032
|
|
Weighted-average useful lives (years)
|
10
|
|
|
6
|
|
|
15
|
|
|
2
|
|
|
9
|
|
Changes to the carrying amount of net amortizable intangible assets for the year ended
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
Year Ended
December 31, 2016
|
Balance, beginning of period
|
$
|
11,032
|
|
Amortization expense
|
(2,142
|
)
|
Currency translation
|
(780
|
)
|
Balance, end of period
|
$
|
8,110
|
|
Amortization expense of intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Amortization expense associated with the developed technology included in cost of revenues
|
$
|
1,251
|
|
|
$
|
1,268
|
|
|
$
|
650
|
|
Amortization expense associated with other acquired intangible assets included in operating expenses
|
891
|
|
|
798
|
|
|
652
|
|
Total amortization expense
|
$
|
2,142
|
|
|
$
|
2,066
|
|
|
$
|
1,302
|
|
The Company estimates that amortization expense associated with intangible assets will be as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
2017
|
$
|
2,059
|
|
2018
|
1,861
|
|
2019
|
1,188
|
|
2020
|
922
|
|
2021
|
722
|
|
Thereafter
|
1,358
|
|
Total
|
$
|
8,110
|
|
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
$6.7 million
at December
31, 2016 reflects the impact of foreign currency exchange rate fluctuations since the acquisition date. The gross carrying amount of goodwill related to the 2011 acquisition of Qumu, Inc. of
$22.2 million
was fully impaired in 2012.
As of December 31, 2016, 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.
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.
|
The Company’s assets and 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, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Total Fair
Value at
December 31, 2016
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative warrant liability
|
$
|
893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
893
|
|
In conjunction with the October 21, 2016 debt financing, the Company issued a warrant for the purchase of up to
314,286
shares of the Company's common stock, the entire portion of which remained unexercised and outstanding at December 31, 2016. The warrant, which expires on October 21, 2026, has an exercise price of
$2.80
per share and is transferrable. The warrant contains a cash settlement feature contingent upon the occurrence of certain events defined in the warrant agreement. As a result of this cash settlement feature, the warrant is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrant on the date 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 date 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 the year ended December 31, 2016, the Company recorded a non-cash gain from the change in fair value of the warrant liability of
$137,000
. The decrease in fair value of the warrant liability during the year ended December 31, 2016 was primarily driven by a decrease in the Company’s stock price.
The Company estimates the fair value of this liability using an option pricing model that is based on the individual characteristics of the warrant on the valuation date, which includes 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. Changes in the assumptions used could have a material impact on the resulting fair value. The primary input affecting the value of the warrant liability is the Company’s stock price. Generally, increases (decreases) in the fair value of the underlying stock would result in a corresponding increase (decrease) in the fair value of the warrant liability.
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 arrangement. The following table represents a rollforward of the fair value of the Level 3 instrument (significant unobservable inputs):
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
—
|
|
Issuance of warrant instrument
|
|
1,030
|
|
Change in fair value
|
|
(137
|
)
|
Balance at December 31, 2016
|
|
$
|
893
|
|
The Company had
no
assets and liabilities measured at fair value on a recurring basis at December 31, 2015.
7) 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,
|
|
2016
|
|
2015
|
Computer and network equipment
|
$
|
511
|
|
|
$
|
511
|
|
Furniture
|
287
|
|
|
287
|
|
Assets acquired under capital lease obligations
|
798
|
|
|
798
|
|
Accumulated depreciation
|
(372
|
)
|
|
(123
|
)
|
Assets acquired under capital lease obligations, net
|
$
|
426
|
|
|
$
|
675
|
|
The current and long-term portions of capital leases and other financing obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Capital leases and other financing obligations, current
|
$
|
508
|
|
|
$
|
502
|
|
Capital leases and other financing obligations, noncurrent
|
170
|
|
|
519
|
|
Total capital leases and other financing obligations
|
$
|
678
|
|
|
$
|
1,021
|
|
The Company leases certain of its facilities and some of its equipment under non-cancelable operating lease arrangements. The rental payments under these leases are charged to expense on a straight-line basis over the non-cancelable term of the lease.
Future minimum payments under capital lease obligations, other financing obligations, and non-cancelable operating leases, excluding property taxes and other operating expenses as of December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases and other financing obligations
|
|
Operating leases
|
|
Total
|
Years ending December 31,
|
|
|
|
|
|
2017
|
$
|
545
|
|
|
$
|
1,185
|
|
|
$
|
1,730
|
|
2018
|
171
|
|
|
978
|
|
|
1,149
|
|
2019
|
3
|
|
|
522
|
|
|
525
|
|
2020
|
—
|
|
|
298
|
|
|
298
|
|
2021
|
—
|
|
|
300
|
|
|
300
|
|
Thereafter
|
—
|
|
|
332
|
|
|
332
|
|
Total minimum lease payments
|
719
|
|
|
$
|
3,615
|
|
|
$
|
4,334
|
|
Less amount representing interest
|
(41
|
)
|
|
|
|
|
Present value of net minimum lease payments
|
$
|
678
|
|
|
|
|
|
On March 5, 2015, the Company entered into an office facility lease agreement for space that serves as its corporate headquarters. The eighty-nine month lease commenced on September 1, 2015, provides the Company approximately
17,216
square feet in Minneapolis, Minnesota, with the initial term expiring January 31, 2023. Total base rent payable over the lease period is
$1.8 million
. The Company has one option to extend the term of the lease for an additional five year period with respect to the leased premises. The lease agreement allowed the Company to construct leasehold improvements to the new space prior to the effective date of the lease. As the leasehold improvements are the property of the Company, the associated
costs, amounting to approximately
$713,000
, were capitalized in property and equipment as of September 30, 2015 and will be depreciated over the term of the lease. As an incentive to enter into the lease agreement, the lessor provided the Company a one-time tenant improvement allowance of
$689,000
to apply against the cost of the leasehold improvements. The one-time tenant improvement allowance is included in deferred rent and will be amortized as a reduction of rent expense over the term of the lease.
During the third quarter 2015, the Company recognized an equipment operating lease loss of
$1.0 million
relating to equipment the Company no longer utilizes as part of it managed services offerings.
Rent expense under operating leases amounted to approximately
$1.3 million
,
$1.0 million
and
$743,000
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Term Loan
On October 21, 2016, Qumu Corporation (the “Company”) and its wholly-owned subsidiary, Qumu, Inc., entered into a term loan credit agreement (the “credit agreement”) with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent (the “Administrative Agent”). HCP-FVD, LLC is an affiliate of Hale Capital Partners, LP.
Pursuant to the credit agreement, the Company borrowed
$8.0 million
as a term loan on October 21, 2016. The term loan is scheduled to mature on October 21, 2019, requires payment of interest monthly at the prime rate plus
6.0%
. As of
December 31, 2016
, interest was payable at
9.75%
and the effective interest rate, which includes the impact of accreting the original issue discount and debt issuance costs noted below to interest expense over the term of the loan, was
16.5%
.
Upon issuance, the term loan was recorded in the Company's consolidated balance sheet net of an original issue discount of
$1.0 million
, which represented the fair value of the warrant issued in connection with the debt financing. Also upon issuance, the Company recorded debt issuance costs of
$440,000
, which are net of
$65,000
of costs allocated to the warrant liability and are recorded as a reduction to the carrying value of the term loan.
The term loan is reported in the Company's consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Term loan, at face value
|
$
|
8,000
|
|
|
$
|
—
|
|
Unamortized original issue discount
|
(967
|
)
|
|
—
|
|
Unamortized debt issuance costs
|
(416
|
)
|
|
—
|
|
Term loan
|
$
|
6,617
|
|
|
$
|
—
|
|
The term loan had an estimated fair value of
$7.2 million
as of
December 31, 2016
. 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. The estimated fair value is not necessarily indicative of the amount that would be realized in a current market exchange.
The Company may prepay the term loan at any time with the payment of the applicable pre-payment fee. The Company is obligated to prepay the term loan, with the payment of the applicable pre-payment fee, with the net proceeds from certain dispositions, issuances of equity or debt securities, extraordinary transactions or upon a change of control.
The credit agreement contains affirmative and negative covenants and requirements relating to the Company and its operations. The negative covenants prohibit the Company from incurring debt, encumbering its assets, exceeding operating lease expense amounts, making dividends, distributions or payments on the Company’s capital stock, being a party to any acquisition or any merger or consolidation or similar transaction, modifying its organizational documents, entering into certain transactions with affiliates, making certain transfers to or conducting certain business through foreign subsidiaries, and incentivizing accelerated customer payments. The negative covenants of the credit agreement also require the Company to meet various financial covenants relating to a maximum cumulative net cash operating amount, minimum eligible accounts receivable and cash, minimum cash, minimum core bookings, maximum deferred revenue non-current, minimum subscription, maintenance and support revenue, and minimum subscription and maintenance and support dollar renewal rates. The Company was in compliance with all its covenants as of December 31, 2016.
While the Company was in compliance with all its covenants at December 31, 2016, the Company’s 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 quarterly and annual results of operations. Failure to achieve its 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. Subsequent to year end, the Company amended its credit agreement to reduce the minimum core bookings covenant requirement for any computation period ending prior to June 30, 2018 while also increasing the ratio of minimum eligible accounts receivable and cash to outstanding obligations. The amendments also modified certain prepayment terms.
If at any time the Company's operating forecast projects non-compliance with its cash-related financial covenants, the Company would reduce its operating costs, including but not limited to headcount reductions, to achieve projected compliance. The Company has no legal or other restrictions that would materially limit its ability to execute on such operating cost reductions, nor does the Company believe that such reductions would materially impact the long-term prospects of the Company. However, there can be no assurance that any future expense reduction measures will result in the expected reductions in the timeframes necessary to achieve compliance with any cash-related financial covenant.
In connection with the credit agreement, the Company granted a first priority security interest in substantially all of its properties, rights and assets and in the stock of Qumu, Inc. Pursuant to a charge over shares by deed by Qumu Corporation as Chargor and the Administrative Agent, the Company pledged to the Administrative Agent
65%
of its shares in Qumu UK Holdings Ltd.
Warrant
In conjunction with the October 21, 2016 debt financing, the Company issued a warrant for the purchase of up to
314,286
shares of the Company's common stock, the entire portion of which remained unexercised and outstanding at December 31, 2016. The warrant, which expires on October 21, 2026, has an exercise price of
$2.80
per share and is transferrable. The warrant contains a cash settlement feature contingent upon the occurrence of certain events, essentially the sale of the Company as defined in the warrant agreement. As a result of this cash settlement feature, the warrant is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrant on the date of issuance was recorded in the Company’s consolidated balance sheets as a liability.
Contingencies
The Company is exposed to a number of asserted and unasserted legal claims encountered in the ordinary course of its business. Although the outcome of any such legal actions cannot be predicted, management believes that there are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its 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.
8) 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 and/or cash 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,
2016
,
2,730,320
shares are authorized under the 2007 Plan, of which
741,831
were available for future grant.
In addition to awards granted under the 2007 Plan, the Company granted non-qualified options to purchase
200,000
,
100,000
,
50,000
and
130,000
shares of its common stock to newly hired senior management level employees on
April 1, 2009
,
November 26, 2012
,
January 7, 2013
and
May 18, 2015
, respectively, of which
230,000
were outstanding as of December 31,
2016
. The options in all cases were granted outside of any shareholder-approved plan as inducements to accept employment with the Company. The options have 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, vest in four equal installments on each of the first four anniversaries of the date of grant and have terms of
seven
years. In other respects, the options were structured to mirror the terms of the options granted under the 2007 Plan and are subject to stock option agreements between the Company and the employees.
The Company recognized the following amounts related to the Company’s share-based payment arrangements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Stock-based compensation cost charged against loss, before income tax benefit
|
|
|
|
|
|
Stock options
|
$
|
554
|
|
|
$
|
686
|
|
|
$
|
812
|
|
Restricted stock and restricted stock units
|
867
|
|
|
1,148
|
|
|
1,029
|
|
Total expense included in continuing operations
|
$
|
1,421
|
|
|
$
|
1,834
|
|
|
$
|
1,841
|
|
Stock-based compensation cost included in:
|
|
|
|
|
|
Cost of revenues
|
$
|
49
|
|
|
$
|
159
|
|
|
$
|
55
|
|
Operating expenses
|
1,372
|
|
|
1,675
|
|
|
1,786
|
|
Total expense included in continuing operations
|
$
|
1,421
|
|
|
$
|
1,834
|
|
|
$
|
1,841
|
|
As of
December 31, 2016
, total stock option compensation expense of
$1.3 million
and
$894,000
was not yet recognized related to non-vested option awards and related to non-vested shares and share unit awards, respectively, and is expected to be recognized over a weighted average period of
3.0
years and
1.6
years, respectively.
In addition to the stock-based compensation costs recognized in continuing operations related to the Company’s share-based payment arrangements, stock-based compensation costs of
$198,000
are included in discontinued operations for the year ended December 31, 2014.
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,
|
|
2016
|
|
2015
|
|
2014
|
Expected life of options in years
|
4.75
|
|
4.75
|
|
4.75
|
Risk-free interest rate
|
1.1% - 1.4%
|
|
1.3% - 1.6%
|
|
1.4% - 1.6%
|
Expected volatility
|
57.4% - 63.7%
|
|
34.5% - 53.2%
|
|
33.1% - 34.5%
|
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, 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
2016
,
2015
and
2014
, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted
Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(1)
|
Options outstanding at December 31, 2013
|
1,748
|
|
|
$
|
12.95
|
|
|
|
|
|
|
Granted
|
133
|
|
|
14.58
|
|
|
|
|
|
|
Exercised
|
(86
|
)
|
|
12.28
|
|
|
|
|
|
|
Canceled
|
(160
|
)
|
|
15.75
|
|
|
|
|
|
|
Options outstanding at December 31, 2014
|
1,635
|
|
|
12.84
|
|
|
|
|
|
Granted
|
617
|
|
|
4.73
|
|
|
|
|
|
Exercised
|
(20
|
)
|
|
7.27
|
|
|
|
|
|
Canceled
|
(419
|
)
|
|
13.45
|
|
|
|
|
|
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
|
|
|
4.7
|
|
$
|
—
|
|
Total vested and expected to vest as of December 31, 2016
|
1,501
|
|
|
7.05
|
|
|
4.7
|
|
—
|
|
Options exercisable as of:
|
|
|
|
|
|
|
|
December 31, 2014
|
1,003
|
|
|
$
|
14.15
|
|
|
|
|
|
December 31, 2015
|
969
|
|
|
13.09
|
|
|
|
|
|
December 31, 2016
|
703
|
|
|
10.06
|
|
|
3.1
|
|
$
|
—
|
|
________________________________________________________________
|
|
(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,
|
|
2016
|
|
2015
|
|
2014
|
Fair value of options granted
|
$
|
556
|
|
|
$
|
1,119
|
|
|
$
|
612
|
|
Per share weighted average fair value of options granted
|
$
|
1.49
|
|
|
$
|
1.81
|
|
|
$
|
4.60
|
|
Total intrinsic value of stock options exercised
|
$
|
—
|
|
|
$
|
131
|
|
|
$
|
242
|
|
The aggregate impact of the exercise of stock options, expirations of vested stock options and lapse of restrictions on restricted stock generated a net tax impact of
$15,000
,
$7,000
and
$6,000
in
2016
,
2015
and
2014
respectively, recorded as a reduction in additional paid-in capital.
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, 2013
|
118
|
|
|
$
|
10.94
|
|
Granted
|
184
|
|
|
14.92
|
|
Vested
|
(76
|
)
|
|
10.35
|
|
Canceled
|
(12
|
)
|
|
10.63
|
|
Nonvested at December 31, 2014
|
214
|
|
|
14.59
|
|
Granted
|
129
|
|
|
9.96
|
|
Vested
|
(92
|
)
|
|
14.52
|
|
Canceled
|
(76
|
)
|
|
12.64
|
|
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
|
|
Other information pertaining to restricted stock and restricted stock units is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Per share weighted average grant-date fair value of restricted stock and restricted stock units granted
|
$
|
4.00
|
|
|
$
|
9.96
|
|
|
$
|
14.92
|
|
Total fair value of restricted stock and restricted stock units vested
|
$
|
294
|
|
|
$
|
667
|
|
|
$
|
1,076
|
|
9) 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, 2016
,
2015
and
2014
. As of
December 31, 2016
,
778,365
shares were available under the Board authorizations. Under the 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.
10) 401(K) Savings Plan
The Company has a savings plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to contribute up to
100%
of pretax compensation. The Company matches a percentage of employees’ contributions. Matching contributions totaled
$428,000
,
$359,000
and
$324,000
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
11) Income Taxes
The components of loss before income taxes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Loss before income taxes:
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
(10,834
|
)
|
|
$
|
(26,889
|
)
|
|
$
|
(26,271
|
)
|
Foreign
|
(593
|
)
|
|
(2,639
|
)
|
|
(2,636
|
)
|
Total loss before income taxes
|
$
|
(11,427
|
)
|
|
$
|
(29,528
|
)
|
|
$
|
(28,907
|
)
|
The provision for income tax expense (benefit) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
|
|
U.S. Federal
|
$
|
(6
|
)
|
|
$
|
(3
|
)
|
|
$
|
(122
|
)
|
State
|
50
|
|
|
27
|
|
|
35
|
|
Foreign
|
(249
|
)
|
|
(817
|
)
|
|
(96
|
)
|
Total current
|
(205
|
)
|
|
(793
|
)
|
|
(183
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
U.S. Federal
|
—
|
|
|
1
|
|
|
(5,693
|
)
|
State
|
12
|
|
|
(47
|
)
|
|
(562
|
)
|
Foreign
|
(59
|
)
|
|
—
|
|
|
(126
|
)
|
Total deferred
|
(47
|
)
|
|
(46
|
)
|
|
(6,381
|
)
|
Total provision for income tax benefit
|
$
|
(252
|
)
|
|
$
|
(839
|
)
|
|
$
|
(6,564
|
)
|
Total income tax benefit differs from the expected income tax benefit, computed by applying the federal statutory rate of
34%
to earnings before income taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Expected income tax benefit
|
$
|
(3,885
|
)
|
|
$
|
(10,040
|
)
|
|
$
|
(9,828
|
)
|
State income taxes, net of federal tax effect
|
(789
|
)
|
|
(830
|
)
|
|
(347
|
)
|
Change in tax rate
|
(162
|
)
|
|
48
|
|
|
20
|
|
Foreign tax
|
(105
|
)
|
|
80
|
|
|
690
|
|
Non-deductible stock issuance costs
|
(24
|
)
|
|
—
|
|
|
—
|
|
Federal R&D credit
|
(17
|
)
|
|
(82
|
)
|
|
(88
|
)
|
Foreign unremitted earnings
|
58
|
|
|
—
|
|
|
—
|
|
Change in valuation allowance
|
4,566
|
|
|
9,906
|
|
|
2,957
|
|
Other, net
|
106
|
|
|
79
|
|
|
32
|
|
Total provision for income tax benefit
|
$
|
(252
|
)
|
|
$
|
(839
|
)
|
|
$
|
(6,564
|
)
|
The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
Inventory provisions and uniform capitalization
|
$
|
—
|
|
|
$
|
24
|
|
Accounts receivable allowances
|
12
|
|
|
9
|
|
Non-qualified stock option and restricted stock expense
|
961
|
|
|
1,789
|
|
Deferred revenue
|
408
|
|
|
76
|
|
Loss and credit carryforwards of U.S. subsidiary
|
33,673
|
|
|
28,366
|
|
Loss carryforward of foreign subsidiaries
|
1
|
|
|
382
|
|
Other accruals and reserves
|
674
|
|
|
1,108
|
|
Other
|
(349
|
)
|
|
122
|
|
Total deferred tax assets before valuation allowance
|
35,380
|
|
|
31,876
|
|
Less valuation allowance
|
(32,930
|
)
|
|
(28,928
|
)
|
Total deferred tax assets
|
$
|
2,450
|
|
|
$
|
2,948
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Acquired intangibles
|
$
|
(2,526
|
)
|
|
$
|
(3,067
|
)
|
Fixed Assets
|
(148
|
)
|
|
(399
|
)
|
Total deferred tax liabilities
|
$
|
(2,674
|
)
|
|
$
|
(3,466
|
)
|
Total net deferred tax assets (liabilities)
|
$
|
(224
|
)
|
|
$
|
(518
|
)
|
As of December 31,
2016
, the Company had
$78.1 million
of net operating loss carryforwards for U.S. federal tax purposes and
$63.9 million
of net operating loss carryforwards for various states. The loss carryforwards for federal tax purposes will expire
between 2022 and 2036 if not utilized. The loss carryforwards for state tax purposes will expire between 2022 and 2036 if not utilized.
As of December 31,
2016
, the Company had federal and state research and development credit carryforwards of
$3.0 million
, net of Section 383 limitations, which will begin to expire in 2022 if not utilized.
As a result of its acquisition of Qumu, Inc. in October 2011, utilization of U.S. net operating losses and tax credits of Qumu, Inc. are subject to annual limitations under Internal Revenue Code Sections 382 and 383, respectively.
The Company assessed that the valuation allowance against its U.S. deferred tax assets is still appropriate as of December 31, 2016, based on the consideration of all available positive and negative evidence, using the “more likely than not” standard required by ASC 740,
Income Taxes
. The valuation allowance will be reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance.
The Company generally believes that it is more likely than not that the future results of the operations of its subsidiaries in the U.K. will generate sufficient taxable income due to the reversal of deferred tax liabilities to realize the tax benefits related to its deferred tax assets. As of December 31, 2016, the Company had a cumulative foreign tax loss carryforward of
$1.7 million
in the U.K. This amount can be carried forward indefinitely.
As of December 31, 2016, the Company has accrued a
$58,000
deferred tax liability on unremitted earnings attributable to its international subsidiaries that are no longer considered to be reinvested indefinitely. Accumulated undistributed foreign earnings relate primarily to operations of the Company's subsidiaries in Japan and the U.K. and amount to approximately
$1.1 million
as of December 31, 2016. The amount of cash and cash equivalents held by the Company's international subsidiaries that are not available to fund domestic operations unless repatriated was
$1.4 million
as of December 31, 2016. The repatriation of cash and cash equivalents held by the Company's international subsidiaries would not result in an adverse tax impact on cash due to the Company's net operating loss position with respect to income taxes.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
Gross unrecognized tax benefits at beginning of year
|
$
|
970
|
|
|
$
|
900
|
|
Increases related to:
|
|
|
|
|
|
Prior year income tax positions
|
58
|
|
|
2
|
|
Current year income tax positions
|
14
|
|
|
68
|
|
Gross unrecognized tax benefits at end of year
|
$
|
1,042
|
|
|
$
|
970
|
|
Included in the balance of unrecognized tax benefits at December 31,
2016
are potential benefits of
$6,000
that if recognized, would affect the effective tax rate. The Company does not anticipate that the total amount of unrecognized tax benefits as of December 31,
2016
will change significantly by December 31, 2017.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to
$3,000
and
$4,000
on a gross basis at December 31,
2016
and
2015
, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above. Interest and penalties recognized in the consolidated statements of operations related to uncertain tax positions amounted to a net tax expense in
2016
of
$1,000
and net tax benefit in
2015
of
$3,000
.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31,
2016
, the Company was no longer subject to income tax examinations for taxable years before 2014 in the case of U.S. federal taxing authorities, and taxable years generally before 2012 in the case of state taxing authorities, consisting primarily of Minnesota and California.
12) Computation of Net Loss From Continuing Operations Per Share of Common Stock
The following table identifies the components of net loss from continuing operations per basic and diluted share (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net loss per share from continuing operations – basic
|
|
|
|
|
|
Net loss from continuing operations
|
$
|
(11,175
|
)
|
|
$
|
(28,689
|
)
|
|
$
|
(22,343
|
)
|
Weighted average shares outstanding – basic
|
9,232
|
|
|
9,235
|
|
|
8,836
|
|
Net loss per share from continuing operations – basic
|
$
|
(1.21
|
)
|
|
$
|
(3.11
|
)
|
|
$
|
(2.53
|
)
|
|
|
|
|
|
|
Net loss per share from continuing operations – diluted
|
|
|
|
|
|
Loss from continuing operations attributable to common shareholders:
|
|
|
|
|
|
Net loss from continuing operations
|
$
|
(11,175
|
)
|
|
$
|
(28,689
|
)
|
|
$
|
(22,343
|
)
|
Numerator effect of dilutive securities
|
|
|
|
|
|
Warrant
|
(137
|
)
|
|
—
|
|
|
—
|
|
Loss from continuing operations attributable to common shareholders
|
$
|
(11,312
|
)
|
|
$
|
(28,689
|
)
|
|
$
|
(22,343
|
)
|
Weighted averages shares outstanding – diluted:
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
9,232
|
|
|
9,235
|
|
|
8,836
|
|
Denominator effect of dilutive securities
|
|
|
|
|
|
Stock options and restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
Warrant
|
—
|
|
|
—
|
|
|
—
|
|
Diluted potential common shares
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares outstanding – diluted
|
9,232
|
|
|
9,235
|
|
|
8,836
|
|
Net loss per share from continuing operations – diluted
|
$
|
(1.23
|
)
|
|
$
|
(3.11
|
)
|
|
$
|
(2.53
|
)
|
Stock options and restricted stock units to acquire weighted average common shares of
1,511,000
,
1,676,000
and
1,724,000
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, have been excluded from the computation of diluted weighted average shares outstanding for each respective period as their effect is anti-dilutive.
13) Significant Customers and Geographic Data
Customers accounting for more than
10%
of the Company’s total revenue are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Revenues
|
|
2016
|
|
2015
|
|
2014
|
Customer A
|
|
$
|
4,402
|
|
|
$
|
4,375
|
|
|
*
|
_________________________________________________
* Sales did not exceed
10%
Customers accounting for more than
10%
of the Company’s accounts receivable are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Accounts Receivable
|
|
2016
|
|
2015
|
|
2014
|
Customer A
|
|
$
|
1,099
|
|
|
*
|
|
|
*
|
Customer B
|
|
$
|
748
|
|
|
*
|
|
|
*
|
Customer C
|
|
*
|
|
|
$
|
1,144
|
|
|
*
|
Customer D
|
|
*
|
|
|
$
|
1,173
|
|
|
*
|
_________________________________________________
* Accounts receivable balance did not exceed
10%
The Company’s revenues from each of its principal geographic regions are presented based on customer location as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
North America
|
|
$
|
23,089
|
|
|
$
|
25,254
|
|
|
$
|
22,634
|
|
Europe
|
|
7,924
|
|
|
8,128
|
|
|
2,712
|
|
Asia
|
|
669
|
|
|
1,072
|
|
|
1,175
|
|
Total
|
|
$
|
31,682
|
|
|
$
|
34,454
|
|
|
$
|
26,521
|
|
Net property and equipment of the Company were located as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
North America
|
|
$
|
1,732
|
|
|
$
|
2,715
|
|
Europe
|
|
95
|
|
|
209
|
|
Asia
|
|
—
|
|
|
18
|
|
Total
|
|
$
|
1,827
|
|
|
$
|
2,942
|
|
14) Supplemental Quarterly Data – Unaudited (In thousands, except per share data)
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2015
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2016
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First
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Second
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Third
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Fourth
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First
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Second
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Third
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Fourth
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Revenues
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$
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5,969
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$
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8,764
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$
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9,602
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$
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10,119
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$
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8,736
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$
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6,515
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$
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7,110
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$
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9,321
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Cost of revenues
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3,775
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4,492
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4,870
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4,362
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3,818
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2,954
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2,857
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2,731
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Gross profit
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2,194
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4,272
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4,732
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5,757
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4,918
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3,561
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4,253
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6,590
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Operating expenses:
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Research and development
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2,802
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2,858
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2,848
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2,181
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2,350
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2,410
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1,986
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1,795
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Sales and marketing
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4,828
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4,740
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4,706
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3,720
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3,532
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2,978
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2,435
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2,584
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General and administrative
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4,364
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3,558
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4,353
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4,603
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2,970
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2,265
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2,109
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2,378
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Amortization of intangibles
|
199
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200
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200
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199
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226
|
|
|
227
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|
|
221
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|
|
217
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Total operating expenses
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12,193
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|
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11,356
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12,107
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10,703
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9,078
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7,880
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6,751
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6,974
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Operating loss
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(9,999
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)
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(7,084
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)
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(7,375
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)
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(4,946
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)
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(4,160
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)
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(4,319
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)
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(2,498
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)
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(384
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)
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Other income (expense):
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Interest income (expense), net
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16
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15
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(10
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)
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(14
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)
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(12
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)
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(15
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)
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(13
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)
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(247
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)
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Change in fair value of warrant liability
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—
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—
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|
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—
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—
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—
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|
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—
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—
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|
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137
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Other, net
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(64
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)
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(4
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)
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(89
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)
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26
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|
|
36
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|
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(47
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)
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(13
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)
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|
108
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Total other income (loss), net
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(48
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)
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11
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(99
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)
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12
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24
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(62
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)
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(26
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)
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(2
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)
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Loss before income taxes
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(10,047
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)
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(7,073
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)
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(7,474
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)
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(4,934
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)
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(4,136
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)
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(4,381
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)
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(2,524
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)
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(386
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)
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Income tax benefit
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(174
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)
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(146
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)
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(163
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)
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(357
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)
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(4
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)
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(90
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)
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(39
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)
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(119
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)
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Net loss from continuing operations
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(9,873
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)
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(6,927
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)
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(7,311
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)
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(4,577
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)
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(4,132
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)
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(4,291
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)
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(2,485
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)
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(267
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)
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Net income (loss) from discontinued operations, net of tax
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(67
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)
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(22
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)
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79
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—
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—
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|
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—
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|
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—
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|
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—
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Net income (loss)
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$
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(9,940
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)
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$
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(6,949
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)
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$
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(7,232
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)
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$
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(4,577
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)
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$
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(4,132
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)
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$
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(4,291
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)
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$
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(2,485
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)
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$
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(267
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)
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Net income (loss) per share – basic
(1)
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$
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(1.08
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)
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$
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(0.75
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)
|
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$
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(0.78
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)
|
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$
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(0.50
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)
|
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$
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(0.45
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)
|
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$
|
(0.46
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)
|
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$
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(0.27
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)
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$
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(0.03
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)
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Net income (loss) per share – diluted
(1)
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$
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(1.08
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)
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$
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(0.75
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)
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$
|
(0.78
|
)
|
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$
|
(0.50
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)
|
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$
|
(0.45
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)
|
|
$
|
(0.46
|
)
|
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$
|
(0.27
|
)
|
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$
|
(0.04
|
)
|
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(1)
|
Due to the averaging of shares, quarterly earnings per share may not add to the total for the full year.
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