Dolphin Limited Partnership III, L.P. and another entity
(“Dolphin“) currently hold approximately 3.5% of the outstanding
common stock of Qumu Corporation, a Minnesota corporation (NASDAQ:
QUMU). Given Qumu’s modest revenue and market capitalization and
long record of significant operating losses, even during favorable
demand environments, Dolphin now seeks a strategic sale process to
benefit all shareholders.
Dolphin sent a letter dated July 26, 2021 to Mr. Neil E. Cox,
Qumu’s Non-Executive Chairman of the Board (the “Dolphin Letter”),
which is attached. The Dolphin Letter, generally sets forth: (i)
Dolphin’s Qumu involvement since 2013, (ii) Dolphin’s initial 6.5%
ownership and prior Schedule 13D filings, (iii) Dolphin’s sponsored
directors from 2013-2018, (iv) Qumu’s apparent $150 million
purchase and investment in its video conferencing platform, (v)
Qumu’s episodes of excessive cash burn, (vi) Qumu’s equity capital
raises and subsequent performance, (vii) Qumu’s board rotation, and
(viii) Qumu’s rollercoaster share price and public disclosures. The
Dolphin Letter concluded by asking Qumu for correction of any
material fact contained therein. By way of letter of July 28, 2021,
Qumu indicated the Dolphin Letter was shared with the board and
senior management but did not offer any correction.
Qumu previously disclosed that a virtual shareholder meeting was
held May 6, 2021 with a March 23, 2021 record date. The 2021
shareholder meeting proxy states that the date for inclusion of
proposals on the Company’s proxy statement or to nominate directors
to the board, in each case at the 2022 annual shareholders meeting,
is December 7, 2021.
A spokesperson for Dolphin stated—“given Qumu’s modest annual
revenue and market capitalization—if the Company can’t make the
‘grade’ in the public markets, the board must pursue a strategic
sale process.”
The July 26, 2021 Dolphin Letter to Qumu’s Non-Executive
Chairman of the Board is attached to this release.
The Dolphin Partnerships are private investments entities
established in or about 1995 that have worked with managements and
boards to generate value for all shareholders.
Contact DataScott R. Wilson, Esq., Miles & Stockbridge P.C.,
410-385-3515
Via Federal Express–Signature Required
July 26, 2021
Mr. Neil E. CoxNon-Executive Chairman of the BoardQumu
Corporation 400 South 4th StreetSuite 401-412Minneapolis, MN
55415612.638.9100
Dear Neil:
While we appreciate the July 14, 2021 discussion, Dolphin
Limited Partnership III, LP (“Dolphin”), since its
sponsored director exited the Board May 2018, wrote letters of
September 24, 2019 (an exhibit to Dolphin’s Amendment No. 5 to its
Schedule 13D, November 14, 2019), qualified in its entirety by
letter of October 18, 2019 (an exhibit to Dolphin’s Amendment No. 4
to its Schedule 13D, October 21, 2019). Now, we write to you and
the Qumu Corporation (Nasdaq ticker symbol: QUMU)
Board, as Dolphin (and another entity) is again very sizable Qumu
shareholder and what has transpired in 2021 is very unusual by
itself and certainly for a public company. This letter, in much
greater detail, outlines the discussion of July 14, 2021 and
concerns raised by Dolphin and incorporates by reference in its
entirety Dolphin’s letters filed as Amendment to No.’s 4 and 5 to
its prior Schedule 13D.
Dolphin’s Involvement
Dolphin file a Schedule 13D in March 2013 holding approximately
6.5% of Qumu’s common stock. At the time of Dolphin’s initial
filing, Qumu had acquired in 2011 its enterprise video content
software management business for an announced $52 million, cash and
stock, and near $80 million of cash and assets later converted in
cash (about $9.25 per share). In connection with a
private nominee notice, Dolphin sponsored a director from Dolphin
and a non-affiliated observer to the Board in 2013. Qumu’s proxy
indicated the Dolphin sponsored director was no longer affiliated
with Dolphin at 2013 FYE. On March 31, 2014, the Qumu share price
closed above $16.00 per share–in July 2014, Qumu
closed the sale of its disk publishing business. When Dolphin did
not have a director on the Board and by July 2015, Qumu had
expended approximately $51 million in connection with its
enterprise video platform and acquisition of Kulu Valley (requiring
$11.6 million cash and $3.8 million stock), the
value of which was and is elusive. By August 2015, the
share price was in the $4.00 range.
On July 22, 2015, I joined the Board and its corporate
governance and compensation committees. Until May 2018, $25
million of run-rate costs were eliminated to achieve near cash flow
break-even and urgent debt financings with warrants were
consummated to support an ailing capital structure required, in
Dolphin’s view, from management’s repeatedly demonstrated unique
inability to sell the Company’s offerings and make internal
projections and public guidance. As a result, we believe prior
management and Board also suffered from a lack of credibility with
the investment community, its customers and sagging employee
morale. We hope the new CEO and Board are not headed in similar
direction. As a renewed very sizable shareholder we, and we
believe, other members of the investment community don’t want a
repeat of the prior adverse operating and financial experience to
the extent the board waivers in its most recent
investment.
Qumu Background and Board Rotation
In October 2019, Qumu added two independent Board members,
retained the former Non-executive Chairman of the Board (until
April 6, 2020), Robert F. Olson, a director since January
2012, and Daniel R. Fishback, a director since
December 2013. As contained in Qumu’s proxy statements,
both appear to have extensive software enterprise technology
experience. On April 6, 2020, you became the Non-executive Chairman
of the Board. On November 7, 2019, 3,652,000 shares were sold at
$2.50 per share in a secondary offering for net proceeds
approximating $8.2 million. On January 29, 2021,
3,708,750 shares were sold at $6.75 per share in a secondary
offering for net proceeds approximating $23.1 million. These two
equity financings generated aggregate net proceeds
approximating $31.3 million. The 2021 prospectus indicates
use of proceeds for “working capital and general corporate
purposes.” In addition, as of January 15, 2021, the Company closed
a $10 million Loan and Security Agreement with a
major US commercial bank for a revolving line of credit with a
borrowing base derived from the prior quarter’s recurring
revenue.
On January 25, 2021, Qumu announced preliminary
financial results for 2020 Q1 and FYE and preliminary 2021
revenue guidance, including:
–2020 revenue is expected to be $29.1 million, a 14.6%
YOY increase. –“Our outlook for 2021 demonstrates our
confidence that investments in our long term strategic roadmap
will accelerate the evolution of Qumu’s SaaS-based business
model…”–Adjusted EBITDA loss for Q4 2020 is expected to be
between $(1.2) millions and $(1.0) million.
Adjusted EBITDA loss for 2020 is expected to be between
$(2.5) million and $(2.3)million. –Cash and cash
equivalents totaled approximately $11.9 million at 2020
FYE vs. $10 million at 2020 FYE, the increase derived
from positive operating cash flow. –“Based on the
Company’s fourth quarter 2020 financial results, pipeline of
business and progress toward implementation of the Company’s
road-map, Qumu’s management expects at least 20% revenue
growth in 2021…”
The share price on this day closed at $8.10; Qumu closed
its January 29, 2021 secondary offering at $6.75 per share and the
share price rose above $10 in February 2021.
36 days later, on March 4, 2021, Qumu publicly released
its 2020 financial results and 2021 guidance
including:
–2020 revenue up 15% to $29.1 million and an adjusted
EBITDA loss of $(2.3) million; 2020 FYE cash and
equivalents of $11.9 million–2021 revenue guidance up “at
least 20% or approximately $35 million”The share
price on this day closed at $7.87.
On April 29, 2021, Qumu issued its Q1 2021
financial and operating results and reiterated its FY 2021
prior strong guidance:
–“Based on the Company’s Q1 2021 financial results,
business pipeline, and strategic road-map implementation progress,
Qumu management reiterates its expectation for at least 20% revenue
growth as compared to 2020, or total revenue of approximately $35
million in 2021.”
The share price on this day closed at $6.00, below the
$6.75 secondary offering price.
Qumu’s Complete 60-Day Reversal
Only 60 days later, on June 29, 2021, Qumu preannounced
its second quarter results and strikingly changed its outlook and
withdrew prior 2021 guidance.
–“…the Company expects revenue for Q2 2021 to range between $5.7
million and $5.9 million. This compares to revenue of $9.3 million
in Q2 2020 and $5.8 million in Q1 2021. –“Net loss for Q2 2021 is
expected to range between $(4.9) million and $(4.3) million as
compared to $(692,000) in Q2 2020 and $(4.5) million in Q1 2021.
–“…these transformation challenges have pushed our
anticipated growth inflection point likely into early next year and
impacted our ability to achieve the desired overall revenue growth
in 2021.”–“…we believe our overall revenue will be
flat or decreased modestly over the next several quarters as we
work to gain full sales traction in building the recurring SaaS
revenue stream.”–“We are rightsizing our burn rate, slowed
our hiring and made other cost-cutting measures to ensure adequate
working capital that supports our longer transition to
SaaS.”–“This new business outlook approach supersedes
Qumu’s revenue guidance for 2021 issued on April 29, 2021, which
was withdrawn, effective today.”
The share price on this day closed at $3.85 and was
preceded by relatively massive volume.
The Company’s underwriter and principal analyst
coverage, as of June 11 and 29, 2021, lowered its target share
price to $6.00 from $11.00 and now Qumu at 2021 revenue of $23.2
million and an adjusted EBITDA loss of -$(15.9) million. They are
also projecting 2022 revenue of $24.8 million and an adjusted
EDITDA loss of -$(3.1) million. The above unfavorably compares to
2020 revenue and an adjusted EBITDA loss of $29.1 million and
-$(2.3) million, respectively.
Summary
If Qumu, after expending near $150 million purchasing
and investing in the video conferencing platform, can’t make the
grade in the public markets, especially in a favorable demand
environment and fresh equity capital than, in our view, Qumu must
very quickly become part of a significantly larger company with a
fully developed sales force and engineering and where there are
public and other cost synergies. Qumu’s value must now
approach $300 million to generate a satisfactory risk adjusted IRR.
Dolphin also does not believe a Rule 13e-3 transaction is
appropriate or maximizes value.
At the end of Q1 2021, Qumu had net cash of
approximately $25.2 million and analyst coverage suggests
a burn of over $5.0 million in Q2 2021. Given the prior
eight years, how could the Board allow a six-month cash burn
exceeding $10 million of fresh equity capital with declining
revenue and so adversely surprise new Qumu investors with 60 days
of guidance? Even if results materially improve, there was
no need to expend so much newly raised equity capital and at the
expense of the credibility of the CEO and Board. Given where the
Company is and the financial environment, the Board must
not permit net cash to drop below $18 million, or approximately
$1.00 per share, without certainty immediate economic
reward. Qumu is neither a start-up nor suffered from under
investment. It is currently operating in a favorable demand
environment and having recently raised material equity capital and
jeopardized the credibility of new CEO and a reconfigured Board,
what has transpired can’t be acceptable – the current share
price is about $2.60.
How long will the Board give its most recent relatively massive
investment to generate meaningful recurring profitable revenue and
how much more is the Board prepared expend? We believe these
questions and others will need to be clearly answered in the next
100–days.
If Qumu believes any statement of fact made herein is materially
inaccurate, please contact Dolphin or its counsel in writing within
10-business days of receipt of this letter, so correction can be
made. If we don’t hear from Qumu in writing, Dolphin shall assume
no correction is required or offered. As a very large and growing
shareholder, Dolphin and another entity hopes the Board’s $10
million+ and apparently growing wager yields a near-term favorable
result for all constituents. Accordingly, Dolphin looks forward to
continuing the discussion. In the interim, the Board may consider
replacing directors that have been on the board approaching a
decade with one or more knowledgeable, independent and sizable
shareholders. Dolphin requests that you distribute this letter
promptly to all Board members.
Very Truly Yours, By: Dolphin Associates III, L.L.C., General
Partner By: Dolphin Holdings Corp. III, Managing Member By:
/s/
Donald T. Netter,Senior Managing Director
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