Dolphin Seeks Qumu Strategic Sale Consideration

GREENWICH, Conn., Oct. 27, 2021 (GLOBE NEWSWIRE) -- 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 Data
Scott R. Wilson, Esq., Miles & Stockbridge P.C., 410-385-3515

Via Federal Express–Signature Required

July 26, 2021

Mr. Neil E. Cox
Non-Executive Chairman of the Board
Qumu Corporation
400 South 4th Street
Suite 401-412
Minneapolis, MN 55415
612.638.9100

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