10-K 1 d756514d10k.htm 10-K 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 1-13449

 

 

QUANTUM CORPORATION

(Exact name of Registrant as specified in its Charter)

 

 

 

Delaware   94-2665054

( State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

224 Airport Parkway, Suite 550

San Jose, California

  95510
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (408) 944-4000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock   QMCO   OTC Markets

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ☐    NO  ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ☐    NO  ☒

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☐    NO  ☒

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    YES  ☐    NO  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the New York Stock Exchange (on which Registrant was listed) on September 28, 2018, the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $64,344,842. For purposes of this disclosure, shares of common stock held or controlled by executive officers and directors of the Registrant and by persons who held more than 5% of the outstanding shares of common stock as of September 28, 2018, have been treated as shares held by affiliates. However, such treatment should not be construed as an admission that such person is an “affiliate” of the Registrant.

The number of shares of Registrant’s Common Stock outstanding as of September 28, 2018 was 35,551,570

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 


Table of Contents

Table of Contents

 

       Page  

Explanatory Note

  

PART I

  

Item 1.

 

Business

     3  

Item 1A.

 

Risk Factors

     12  

Item 1B.

 

Unresolved Staff Comments

     30  

Item 2.

 

Properties

     31  

Item 3.

 

Legal Proceedings

     31  

Item 4.

 

Mine Safety Disclosures

     32  

PART II

  

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     33  

Item 6.

 

Selected Financial Data

     34  

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     59  

Item 8.

 

Financial Statements and Supplementary Data

     60  

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     126  

Item 9A.

 

Controls and Procedures

     127  

Item 9B.

 

Other Information

     131  

PART III

  

Item 10.

 

Directors, Executive Officers and Corporate Governance

     131  

Item 11.

 

Executive Compensation

     147  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     185  

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     190  

Item 14.

 

Principal Accounting Fees and Services

     191  

PART IV

  

Item 15.

 

Exhibits, Financial Statement Schedules

     192  


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Forward-Looking and Cautionary Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Quantum Corporation and its consolidated subsidiaries (“Quantum”) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, the impact of the U.S. Tax Cuts and Job Act of 2017, including the effect on deferred tax assets, net earnings, net earnings per share, cash flows, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, as well as the execution of transformation and restructuring plans and any resulting cost savings, revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Quantum and its financial performance; any statements regarding pending investigations, claims or disputes; the resolution of pending investigations; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing Quantum’s businesses; the competitive pressures faced by Quantum’s businesses; risks associated with executing Quantum’s strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Quantum’s products and the delivery of Quantum’s services effectively; the protection of Quantum’s intellectual property assets, including intellectual property licensed from third parties; risks associated with Quantum’s international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Quantum and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; and the execution, timing and results of any transformation or restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of Quantum’s business) and the anticipated benefits of the transformation and restructuring plans; the outcome of any claims and disputes; and other risks that are described herein, including but not limited to the items discussed in “Risk Factors” in Item 1A of Part I of this report and that are otherwise described or updated from time to time in Quantum’s other filings with the Securities and Exchange Commission. Quantum assumes no obligation and does not intend to update these forward-looking statements.

Explanatory Note

This Annual Report on Form 10-K for the fiscal year ended March 31, 2019 includes Quantum Corporation’s (“Quantum”, the “Company”, “us” or “we”) audited consolidated financial statements for the fiscal years ended March 31, 2019, 2018 and 2017. The consolidated financial statements for the fiscal year ended March 31, 2017 and selected financial data for the fiscal years ended March 31, 2017, 2016 (unaudited) and 2015 (unaudited) are restated.

Background of Special Committee Investigation and Subsequent Management Review

On January 11, 2018, we received a subpoena from the Securities and Exchange Commission (“SEC”) regarding our accounting practices and internal controls related to revenue recognition for transactions commencing April 1, 2016. As a result, we postponed the release of our financial results for the third quarter of fiscal 2018. In February 2018, the Audit Committee (“Audit Committee”) of our Board of Directors (“Board”), and subsequently a special committee of the Board (the “Special Committee”) consisting of two members of the Audit Committee, conducted an internal investigation, with the assistance of independent accounting and legal advisors, into matters related to our accounting practices and internal control over financial reporting related to revenue recognition for transactions occurring between January 1, 2016 and March 31, 2018.

In September 2018, the Special Committee substantially completed and finalized its principal findings with respect to its investigation. The principal findings included a determination that we engaged in certain business and sales practices that may have undermined our historical accounting treatment for transactions with several key distributors and at least one end customer. The Special Committee found that the identified transactions potentially affected by such practices commenced at least in the fourth quarter of fiscal 2015 and continued at least through the fourth quarter of fiscal 2018. The

 

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Special Committee also found that these business and sales practices may have resulted in the Company recognizing revenue for certain transactions prior to satisfying the criteria for revenue recognition required under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”).

Upon the recommendation of the Audit Committee and as a result of the investigation by the Special Committee and after consultation with our management, on September 14, 2018, our Board of Directors concluded that our previously issued consolidated financial statements and other financial data for the fiscal years ended March 31, 2015, 2016 and 2017 contained in our Annual Reports on Form 10-K, and our condensed consolidated financial statements for each of the quarterly and year-to-date periods ended June 30, 2015, September 30, 2015, December 31, 2015, June 30, 2016, September 30, 2016, December 31, 2016, June 30, 2017 and September 30, 2017 (collectively, the “Non-Reliance Periods”) should not be relied upon and required restatement. Our Board also determined that our disclosures related to these financial statements and related communications issued by or on behalf of the Company with respect to the Non-Reliance Periods, including management’s assessment of internal control over financial reporting and disclosure controls and procedures, should not be relied upon.

In response to the findings of the Special Committee, we conducted a thorough review of our financial records for fiscal years ended March 31, 2015, 2016, 2017 and 2018 to determine whether further restatement adjustments were necessary. We concluded that there were material misstatements in the consolidated financial statements for the fiscal years ending March 31, 2015, 2016 and 2017, as well as in the unaudited condensed consolidated financial statements for the quarterly periods June 30, 2016, September 30, 2016, December 31, 2016, June 30, 2017, and September 30, 2017, in accordance with Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections.

We have not amended, and do not intend to amend, our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods prior to September 30, 2017. The consolidated financial statements and related financial information contained in any of our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q filed during the period commencing with the fourth quarter of fiscal 2015 and prior to this Annual Report on Form 10-K for the fiscal year ended March 31, 2019 should no longer be relied upon. We have restated our consolidated financial statements for the fiscal year ended March 31, 2017 and included restated financial data and discussion related to the three months ended June 30, 2017 and the three- and six-month periods ended September 30, 2017 that would typically be disclosed in a Quarterly Report on Form 10-Q. Additionally, because we have failed to file Quarterly Reports on Form 10-Q for the fiscal quarter and year to date periods ended December 31, 2017, June 30, 2018, September 30, 2018 and December 31, 2018, we have included the financial data and discussion typically disclosed in a Quarterly Report on Form 10-Q for these periods. The restatement also affects the fiscal years ended March 31, 2015 and 2016 and the impact of the restatement on those fiscal years is included in Item 6 Selected Financial Data included in this Annual Report on Form 10-K.

Note 2: Restatement and Note 13: Quarterly Financial Data (unaudited) to our consolidated financial statements in this Annual Report on Form 10-K disclose the nature of the restatement matters and adjustments and shows the impact of the restatement matters on revenues, expenses, income, assets, liabilities, equity, and cash flows from operating activities, investing activities, and financing activities, and the cumulative effects of these adjustments.

Internal Control over Financial Reporting

As part of our review of our financial records for the Non-Reliance Periods, management, including our Chief Executive Officer and our Chief Financial Officer, assessed our internal control over financial reporting as of March 31, 2019. Based upon this assessment, we identified material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of March 31, 2019. In addition, our Chief Executive Officer and Chief Financial Officer have evaluated the findings and conclusions of the Special Committee’s investigation, as well as the review of our financial records, and based on this evaluation, taken together with the identified material weaknesses, have concluded that our disclosure controls and procedures were not effective at March 31, 2019. We have identified and implemented actions to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures. We intend to continue these remediation activities, including ongoing efforts to enhance our resources and train our employees on financial reporting and disclosure responsibilities, and the periodic review of such actions with the Audit Committee. For more information about management’s determinations related to our internal control over financial reporting, including the identified material weaknesses, and our disclosure controls and procedures, as well as our remediation activities, please see Item 9A Controls and Procedures of this Annual Report on Form 10-K.

 

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Our independent auditors, Armanino LLP, have audited management’s assessment of internal control over financial reporting as of March 31, 2019 and in their opinion concluded that we did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) because of the identified material weaknesses in our internal control over financial reporting existed as of March  31, 2019.

PART I

 

ITEM 1.

BUSINESS

Business Description

Quantum, founded in 1980 and reincorporated in Delaware in 1987, is a leader in storing and managing video and video-like data. We deliver top streaming performance for video and rich media applications, along with low cost, high density massive-scale data protection and archive systems. We help customers capture, create and share digital data and preserve and protect it for decades. Our software-defined storage solutions span from non-volatile memory express (“NVMe”), to solid state drives (“SSD”), hard disk drives (“HDD”), tape and the cloud and are tied together leveraging a single view of the entire data environment. Our software-defined approach to storage management that combines storage, compute, and virtualization in one physical unit is broadly known in our industry as an example of “hyperconverged storage.” We work closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving needs. The world’s leading entertainment companies, sports franchises, researchers, government agencies, enterprises, and cloud providers make the world happier, safer, and smarter on our systems.

Our high-performance shared storage systems enable accelerated and collaborative access to critical data. Powered by our StorNext software, our systems provide high performance and availability to enable movie and TV production, analysis of patient records, analysis of video and image data for government and military applications, and more. We sell our StorNext software with hyperconverged storage infrastructures that are built using a combination of NVMe, SSD, HDD, tape, and cloud storage technologies. We have recently refreshed this entire product line, and introduced the Quantum F-Series, an ultra-fast, highly available NVMe storage array for editing, rendering, and processing of video content and other large unstructured data sets.

Our tape storage provides low cost, long-term data storage for archiving and retention, as well as offline storage to protect against ransomware. Tape storage is a critical technology for long-term off-line storage of data, both in the cloud and on-premise, and is a critical component of enterprise data protection strategies. We continue to be a market leader in tape storage utilizing industry-leading performance, reliability, scalability, and manageability.

We also recently released the Quantum VS-Series and Quantum R-Series. The Quantum VS-Series is a hyperconverged platform designed for surveillance and industrial applications for the Internet of Things, (“IoT”), and enables security and facilities departments to efficiently record and store surveillance footage and run an entire security infrastructure on a single, software-defined platform. Our Quantum R-Series is removable storage

 

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designed to capture data in vehicles where the storage device must be more rugged. We describe the Quantum R-Series as “ruggedized” to emphasize the additional physical protection we build into the product so that it operates as intended in the air, on the road, on rails, and in battlefield environments. The Quantum R-Series addresses use cases such as the development of advanced driver-assistance systems, (“ADAS”), and mobile military and surveillance applications. This product can capture data in real world environments, and then makes this data quickly available for processing and use.

We are a member of the consortium that develops, patents, and licenses Linear Tape-Open, (or “LTO® tape”) technology to media manufacturing companies. We receive royalty payments for LTO media technology sold under licensing agreements. We have also entered into various licensing agreements with respect to our technology, patents and similar intellectual property which provide licensing revenues in certain cases and may expand the market for products and solutions using these technologies.

We are focused on driving profitable revenue growth and long-term shareholder value by capitalizing on the growth in video and high-resolution image data across industries and verticals.

Industry Background

For the markets and customers that we serve, storing and managing large amounts of video, image and sensor data has become a key challenge. Video and other imaging data is becoming increasingly prevalent in every industry. Some examples of this ever-growing trend include:

 

 

The media and entertainment industry producing more high-resolution content for movies and TV shows;

 

 

Large corporations producing video content for marketing and advertising, and for internal training and communication purposes;

 

 

Surveillance cameras for city surveillance, critical infrastructure, higher education, retail, restaurants, and more;

 

 

Military and defense applications that manage images and video from drones and satellites;

 

 

High-resolution MRI images and genome sequencing data generated by medical research institutions;

 

 

Video, image, and sensor data captured on the manufacturing floor;

 

 

Video, image, and sensor data produced by cars as part of ADAS and autonomous vehicle development.

This video and imaging data is growing exponentially, and in the next few years, this video data will represent the vast majority of the data on the planet. This class of data presents a unique set of challenges for our customers. These datasets are exponentially larger than the average corporate database, they are costly and technically difficult to store and process in the cloud, and many of the data services designed for databases and other corporate applications do not work with this data. Video and image data is very difficult to search, and yet it is the data that has the most value to the business lines of many of our customers. This presents both a challenge and an opportunity. Lastly, these datasets typically have a lifecycle that initially requires very high performance for creation, intake, cataloging, analysis and collaboration, and then needs to be archived and protected for decades at a low cost. Our products have been designed to address these needs.

 

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Products

High-Performance Shared Storage Systems

At the core of our high-performance shared storage product line is our Quantum StorNext software that enables high-performance video editing and management of large video and image datasets. Major broadcasters, studios, post-production companies, sports franchises, and corporate video entities around the world use StorNext.

Our StorNext software is a parallel file processing system that provides fast streaming performance and data access, a shared file storage environment for Apple Macintosh, Microsoft Windows, and Linux workstations, and intelligent data management to protect data across its lifecycle. StorNext runs on standard servers and is sold with storage arrays that are used within the StorNext environment. These storage arrays include:

 

 

The Quantum F-Series: A line of ultra-fast, highly available NVMe SSD flash storage arrays for editing, rendering, and processing of video content and other large unstructured datasets.

 

 

Quantum QXS-Series: A line of high performance, reliable hybrid storage arrays, offered with either HDDs, SSDs, or some combination of the two.

Customers are now deploying the StorNext file system with a combination of NVMe storage and more traditional SSD and HDD storage to balance cost and performance. Our StorNext software can also manage data across different types, or pools, of storage, such as public cloud object stores and disk-based object storage systems. StorNext supports a broad range of both private and public object stores to meet customer needs. For customers that archive video and image data for years, StorNext is also integrated with our tape storage, and can assign infrequently-used but important data to tape to create a large-scale active archive.

Tape Storage

Our Scalar® tape systems are low-cost, long-term data storage used by the biggest clouds and leading enterprises to archive and preserve digital content for decades. The product line scales from entry-level libraries for small backup environments up to massive petabyte and even exabyte scale archive libraries.

Our tape systems provide storage density, offline secure storage to protect against ransomware and malware, and an intelligent, advanced diagnostics engine designed to reduce downtime and operational expense relative to other tape systems. Quantum tape systems are used by thousands of enterprises around the world as well as by large cloud service providers. In addition to the Quantum Scalar tape systems, we also sell LTO tape cartridges as well as standalone LTO tape drives for small business and desktop use.

Backup Storage Systems

Our DXi backup systems provide high-performance, scalable storage for backup and multi-site disaster recovery. Our variable-length de-duplication technology maximizes data reduction, our replication engine enables multi-site protection and data recovery, and our high-efficiency design enables customers to maximize backup performance while minimizing data center footprint.

Surveillance and Industrial IoT Storage Systems

Our Quantum VS-Series is the latest addition to our high-performance video platform portfolio. Our VS-Series product line is a hyperconverged surveillance platform that enables security departments and facilities departments to retain more surveillance footage at low cost and converge and run entire building operations on a single box.

At the core of our VS-Series product line is the Quantum Cloud Storage Platform software. This software provides software-defined, high-performance block storage to record and store video, but also is a hyperconverged software platform for running video management system, or VMS applications, as well as other building and security applications, such as access control, lighting, and HVAC applications.

 

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We offer our VS-Series in a wide range of appliance configurations, including small mini-towers ideal for five to ten camera environments such as a restaurant, retail chain, or gas station, and rackmount-able servers that can scale out to handle hundreds and thousands of cameras for large security deployments.

Ruggedized Storage Systems

We recently introduced our Quantum R-Series, a line of ruggedized, removable storage systems for in-vehicle data capture, mobile surveillance and military applications. Our R-Series has a more physically rugged design and low power requirements, so that it can be deployed in the trunk of a self-driving car, as well as in a bus, train, airplane, and even military vehicles. Our R-Series includes a removable storage magazine so that data generated in the vehicle can be easily uploaded to a shared storage environment, such as our Quantum StorNext file system, for processing and analytics.

Quantum Services

We offer a broad range of services to complement our systems and technology. Our services have historically included maintenance, implementation and training services to provide the best overall customer experience.

We recently introduced a new line of Distributed Cloud Services, a suite of services offered to complement more traditional implementation and maintenance services. Our Distributed Cloud Services are designed to provide the benefits of our products and technology with a cloud-like user experience, either via fully managed Operational Services, or via Storage-as-a-Service, (“STaaS”) offerings. At the core of our Distributed Cloud Services is our Cloud-Based Analytics, (“CBA software”). Quantum products can connect to our CBA software to send log files and other telemetry data about our customers’ environments to this central hub, making them part of our distributed cloud. Our global services team can then proactively manage each customer’s environment in a manner customized to that customer’s needs.

Global Services and Warranty

Our global services strategy is an integral component of our total customer solution. Service is typically a significant purchase factor for customers considering long-term storage for archiving and retention or data protection storage solutions. Consequently, our ability to provide comprehensive installation and integration services as well as maintenance services can be a noteworthy competitive advantage to attract new customers and retain existing customers. In addition, we believe that our ability to retain long-term customer relationships and secure repeat business is frequently tied directly to our comprehensive service capabilities and performance.

Our extensive use of technology and innovative product intelligence allows us to scale our global services operations to meet the needs of our customers. We are currently able to provide service to customers in more than 100 countries, supported by 24-hour, multi-language technical support centers located in North America, Europe and Asia. We provide our customers with warranty coverage on our products. Customers with high availability requirements may also purchase additional service to obtain faster response times on our high-performance shared storage systems, tape systems, and disk backup systems. We offer this additional support coverage at a variety of response levels up to 24-hours a day, seven-days-a-week, 365-days-a-year, for customers with stringent high-availability needs. We provide support ranging from repair and replacement to 24-hour rapid exchange to on-site service support for our midrange and enterprise-class products. In addition to these traditional installation and maintenance services, we also provide project management, managed services and other value-add services to enhance our customer’s experience and engagement. These incremental services create a deeper relationship with customers that enables them to maximize the value of their Quantum solution and better positions us to retain our customers through technology transitions.

 

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We generally warrant our hardware products against defects for periods ranging from one to three years from the date of sale. We provide warranty and non-warranty repair services through our service team and third-party service providers. In addition, we utilize various other third-party service providers throughout the world to perform repair and warranty services for us to reach additional geographic areas and industries in order to provide quality services in a cost-effective manner.

Research and Development

We compete in an industry characterized by rapid technological change and evolving customer requirements. Our success depends, in part, on our ability to introduce new products and features to meet end user needs. Our research and development teams are focused on technology and services to make our storage systems smarter and easier to manage at scale; software enhancements to make our storage more searchable and accessible, software-defined hyperconverged storage technology, next generation solid-state and hard-drive storage system software, data deduplication and other data reduction technologies, and making tape even more efficient as a storage medium for long term archival storage.

We continue to invest in research and development to improve and expand our product lines and introduce new product lines such as the Quantum F-Series, Quantum VS-Series and Quantum R-Series. Our research and development costs were $32.1 million, $38.6 million, and $44.4 million for fiscal 2019, 2018 and 2017, respectively.

Sales and Distribution Channels

Quantum Product Sales Channels

For our products, we utilize distributors, VARs and DMRs. Our integrated reseller program provides our channel partners the option of purchasing products directly or through distribution channels and provides them access to a more comprehensive product line. Additionally, we sell directly to a number of large corporate entities and government agencies.

OEM Relationships

We sell our products to several OEM customers that resell our hardware products under their own brand names and typically assume responsibility for product sales, end user service and support. We also license our software to certain OEM customers that include this software in their own brand name products. These OEM relationships enable us to reach end users not served by our branded distribution channels or our direct sales force. They also allow us to sell to select geographic or vertical markets where specific OEMs have exceptional strength.

Customers

Our sales are typically concentrated with several key customers, as we sell to OEMs, distributors, VARs and DMRs to reach end user customers. Sales to our top five customers represented 33%, 29%, 28% revenue in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. During the fiscal years ended March 31, 2019, March 31, 2018 and March 31, 2017 no customers represented 10% or more of the Company’s total revenue.

 

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Competition

The markets in which we participate are highly competitive, characterized by rapid technological change and changing customer requirements. In some cases, our competitors in one market area are customers or suppliers in another. Our competitors often have greater financial, technical, manufacturing, marketing or other resources than we do. Additionally, the competitive landscape continues to change due to merger and acquisition activity as well as new entrants into the market.

Our high-performance shared storage systems primarily face competition from the EMC business unit of Dell Inc., (“Dell”), International Business Machines Corporation, (“IBM”), NetApp, Inc., (“NetApp”), and other content storage vendors in the media and entertainment industry as well as government agencies and departments.

Our tape storage primarily compete in the midrange and enterprise reseller and end user markets with IBM, Oracle Corporation and SpectraLogic Corporation as well as Hewlett-Packard Enterprise Company, (“HPE”), through its OEM relationship with other tape system suppliers. Competitors for entry-level and OEM tape systems include BDT Products, Inc. and several others that supply or manufacture similar products. In addition, disk backup products and cloud storage are an indirect competitive alternative to tape storage.

Our backup storage systems primarily compete with products sold by Dell, HPE and Veritas Technologies LLC. Additionally, several software companies that have traditionally been partners with us have deduplication features in their products and will, at times, compete with us. A number of our competitors also license technology from other competing companies.

For standalone LTO tape drives, our main competitor is IBM, which develops and sells its own LTO tape drives. We also face competition from disk alternatives, including removable disk drives in the entry-level market.

Manufacturing and Supply Chain

We are in the process of transitioning our supply chain and manufacturing operations to deliver a variable cost model while improving customer delivered quality and service. This process includes the transition to a multi-geographical manufacturing model using a configure-to-order methodology; a redesign of our service and supplier network; and talent acquisition and development. Our supply chain and manufacturing strategy minimizes geo- political and environmental causal risks and provides flexibility to support demand fluctuations by region, further enhancing our variable cost structure.

Manufacturing of our tape systems is performed in the U.S. and Mexico with supporting third-party logistics companies in the Europe, Middle East and Africa region, or (“EMEA”), and the Asia-Pacific region, or (“APAC”). Our backup storage systems are integrated in the U.S. with supporting third-party logistics companies in EMEA and APAC. The value of utilizing well-run logistics companies and supply chain solutions is that our product logistics is optimized for cost reductions with a competitive advantage allowing the physical flow and information flow to work together seamlessly.

Our tape media is manufactured in Japan and distributed globally.

 

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Intellectual Property and Technology

We generally rely on patent, copyright, trademark and trade secret laws and contract rights to establish and maintain our proprietary rights in our technology and products. As of March 31, 2019, we hold approximately 332 U.S. patents and have 46 pending U.S. patent applications. In general, these patents have a 20-year term from the first effective filing date for each patent. We also hold a number of foreign patents and patent applications for certain of our products and technologies. Although we believe that our patents and applications have significant value, rapidly changing technology in our industry means that our future success may also depend heavily on the technical competence and creative skills of our employees.

From time to time, third parties have asserted that the manufacture and sale of our products have infringed on their patents. We are not knowingly infringing any third-party patents. Should it ultimately be determined that licenses for third-party patents are required, we will undertake best efforts to obtain such licenses on commercially reasonable terms. See Item 3 Legal Proceedings for additional disclosures regarding lawsuits alleging patent infringement.

On occasion, we have entered into various patent licensing and cross-licensing agreements with other companies. We may enter into patent cross-licensing agreements with other third parties in the future as part of our normal business activities. These agreements, when and if entered into, would enable these third parties to use certain patents that we own and enable us to use certain patents owned by these third parties. We have also sold certain patents, retaining a royalty-free license for these patents.

We, along with HPE and IBM, belong to the LTO Consortium, an organization that licenses the Consortium members’ patents covering the LTO specifications. Media manufacturers and other parties take licenses to the LTO Consortium patent pool in exchange for a royalty payment to the Consortium, which then distributes the royalties to each of the three Consortium members. More details regarding the Consortium and participants in the licensing arrangements available to manufacturers and other parties are available at www.lto.org.

Segment Information

We operate as a single reporting unit and operating segment for business and operating purposes. Information about revenue attributable to each of our product groups is included in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and information about revenue and long-lived assets attributable to certain geographic regions is included in Note 15 Geographic Information to the consolidated financial statements and risks attendant to our foreign operations is set forth below in Item 1A Risk Factors.

Seasonality

As is typical in our industry, we generally have the greatest demand for our products and services in the fourth quarter of each calendar year, or our fiscal third quarter. We usually experience the lowest demand for our products and services in the first and second quarters of each calendar year, or our fiscal fourth quarter and fiscal first quarter, respectively.

Backlog

We believe that product backlog has not been a meaningful indicator of net revenue that can be expected for any period. Our products are manufactured based on forecasts of customer demand and we work with our manufacturers and suppliers to support increases and decreases in demand. Orders are generally placed by customers on an as-needed basis. Product orders are confirmed and, in most cases, shipped to customers within four to six weeks. More complex systems and product configurations often have longer lead times, sometimes as much as 26 weeks. The majority of the product backlog is from these more complex systems and typically increases at the end of each fiscal quarter, with these products typically being shipped in the following quarter. Product backlog at any point in time may not translate into net revenue in any subsequent period, as unfilled orders can generally be canceled at any time by the customer.

 

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Executive Officers

Following are the names and positions of our executive officers as of July 31, 2019, including a brief account of the business experience of each.

 

Name

  

Position with Quantum

James J. Lerner

  

President, Chief Executive Officer and Chairman of the Board

J. Michael Dodson

  

Chief Financial Officer

Elizabeth King

  

Chief Revenue Officer

Lewis Moorehead

  

Chief Accounting Officer

Don Martella

  

Senior Vice President, Engineering

James Lerner, 49, was appointed as President and CEO of the Company, effective July 1, 2018, and was appointed Chairman of the Board on August 7, 2018. He also serves on the Company’s Board. Mr. Lerner has previously served as Vice President and Chief Operating Officer at Pivot3 Inc. from March 2017 to June 2018, and Chief Revenue Officer from November 2016 to March 2017. Prior to Pivot3, from March 2014 to August 2015, Mr. Lerner served as President of Cloud Systems and Solutions at Seagate Technology Public Limited Company. Prior to Seagate, Mr. Lerner served in various executive roles at Cisco Systems, Inc., including most recently as Senior Vice President and General Manager of the Cloud & Systems Management Technology Group. Before beginning his career as a technology company executive, Mr. Lerner was a Senior Consultant at Andersen Consulting. Mr. Lerner earned a Bachelor of Arts in Quantitative Economics and Decision Sciences from U.C. San Diego.

 

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J. Michael Dodson, 58, was appointed Chief Financial Officer effective May 31, 2018. He was also appointed interim Chief Executive Officer, a position in which he served until Jamie Lerner joined the Company on July 1, 2018. From August 2017 to May 2018, Mr. Dodson served as the Chief Financial Officer of Greenwave Systems. Prior to joining Greenwave Systems, Mr. Dodson served as the Chief Operating Officer and Chief Financial Officer at Mattson Technology, Inc. from 2012 to 2017. He joined Mattson as Executive Vice President, Chief Financial Officer and Secretary in 2011. Prior to joining Mattson, Mr. Dodson served as Chief Financial Officer at four global public technology companies and Chief Accounting Officer for an S&P 500 company. Mr. Dodson started his career with Ernst & Young in San Jose, California. Since July 2013, he has served on the Board of Directors of Sigma Designs, Inc., a publicly-traded provider of system-on-chip solutions, including as Lead Independent Director since January 2014 and Chairman of the Audit Committee since 2015. Mr. Dodson currently serves as a director of two private entities: a charitable organization and a privately-held for-profit company. He holds a B.B.A. degree with dual majors in Accounting and Information Systems Analysis and Design from the University of Wisconsin-Madison.

Elizabeth King, 61, has served as Quantum’s Chief Revenue Officer since March 2019. Prior to Quantum, from January 2017 to February 2019, she was Vice President, Go-to-Market & Enablement, HPC & AI at HPE. She joined HPE as part of HPE’s acquisition of SGI, where she served as SVP of worldwide sales from January 2014 through 2016. Prior to HPE/SGI, she was vice president of strategic alliances for IBM and global systems integrators at Juniper Networks from June 2010 to January 2014. Prior to Juniper, she was vice president and general manager of the Hitachi Server Group of Hitachi Data Systems. She also held key senior sales, business development and operations roles at Nokia (formerly Alcatel-Lucent), Oracle (formerly Sun Microsystems), Raytheon, and Texas Instruments. Ms. King holds an MBA with honors from the University of Dallas and a Bachelors of Science in mechanical engineering from Lehigh University.

Lewis Moorehead, 47, has served as our Chief Accounting Officer since November 2018. Prior to joining Quantum, Mr. Moorehead was the Director of Finance, Accounting and Tax at Carvana, Co., a publicly traded on-line retailer, from November 2016 to October 2018. From September 2004 to October 2016, he served as Managing Partner at Quassey, an investment firm. While at Quassey, he also served as Vice President of Finance and Principal Accounting Officer at Limelight Networks, a NASDAQ-listed global content delivery network and SaaS provider, from March 2010 to August 2013. He has also held finance and accounting positions at eTelecare Global Solutions, Rivers and Moorehead PLLC, Intelligentias, Inc., American Express and PricewaterhouseCoopers. He holds a Bachelor of Business Administration (B.B.A.), cum laude, in Accounting from the University of Wisconsin-Whitewater.

Don Martella, 51, joined Quantum in August 2006 as Vice President, Tape Automation Engineering in connection with Quantum’s acquisition of ADIC. In April 2011, he assumed his current role as Senior Vice President of Engineering. In that capacity he is responsible for our research and development and advanced manufacturing activities. Before joining Quantum, Mr. Martella held leadership positions in R&D and Quality at ADIC; and engineering and management roles at Oracle (formerly StorageTek) in the tape business. Mr. Martella holds a Masters in Business Administration and a Bachelor of Science in electrical and computer engineering from the University of Colorado.

Employees

We had approximately 800 employees worldwide as of March 31, 2019.

 

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Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at https://www.quantum.com generally when such reports are available on the SEC website. The contents of our website are not incorporated into this Annual Report on Form 10-K.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy, and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

ITEM 1A.

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING QUANTUM. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE ARE INSIGNIFICANT MAY ALSO IMPAIR OUR BUSINESS AND OPERATIONS. THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. PLEASE SEE PART 1 OF THIS REPORT FOR ADDITIONAL DISCUSSION OF THESE FORWARD-LOOKING STATEMENTS.

Risks Related to Our Special Committee Investigation, SEC Investigation, Restatement of Our Consolidated Financial Statements, Internal Controls and Related Matters

We are currently subject to an SEC investigation, the resolution of which could require significant management time and attention, result in significant legal expenses, and result in government enforcement actions, including penalties or fines, any of which could have a material and adverse impact on our results of operations, financial condition, liquidity and cash flows.

As previously disclosed, the SEC is investigating the Company regarding its accounting practices and internal controls related to revenue recognition for transactions commencing on April 1, 2016. Following the receipt of an initial subpoena from the SEC, our Audit Committee began an independent investigation of our accounting practices and internal control over financial reporting related to revenue recognition for transactions commencing on January 1, 2016 with the assistance of independent advisors. Subsequently, the Special Committee of our Board, undertook to continue the investigation. To date, we have incurred significant costs in connection with the Special Committee’s investigation and the SEC investigation, and our management team has devoted significant time to these investigations. We expect these costs and demands on our management team to continue potentially into 2020 or longer. We are continuing to cooperate with the SEC in its investigation, but we cannot predict the outcome of this investigation. If the SEC or other governmental agencies that become involved in the future bring an enforcement or other action against us, we could face material penalties or fines, any of which could have a material and adverse impact on our results of operations, financial condition, liquidity and cash flows.

We have entered into indemnification agreements with our current and former directors and certain of our officers, and our amended and restated certificate of incorporation requires us, to the fullest extent permitted by Delaware law, to indemnify each of our directors and officers who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was a director or officer of the Company. Although we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations, our insurance coverage may not cover all claims that may be brought against us

 

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or our current and former directors and officers, and insurance coverage may not continue to be available to us at a reasonable cost. As a result, we have been and may continue to be exposed to substantial uninsured liabilities, including pursuant to our indemnification obligations, which could materially and adversely affect our business, prospects, results of operations and financial condition.

We may receive additional inquiries from the SEC and other regulatory authorities regarding our restated financial statements or matters relating to our restatement, and we and our current and former directors and officers may be subject to future claims, investigations or proceedings. Any future inquiries from the SEC or other regulatory authorities, or future claims or proceedings as a result of the restatement or any related regulatory investigation will, regardless of the outcome, likely consume a significant amount of our internal resources and result in additional costs.

Matters relating to or arising from the restatement, the Special Committee’s investigation and the SEC investigation, including adverse publicity and potential concerns from our customers, have had and could continue to have an adverse effect on our business and financial condition.

We have been and could continue to be the subject of negative publicity focusing on the restatement and adjustment of our financial statements, and we may be adversely impacted by negative reactions from our customers or others with whom we do business. Concerns include the perception of the effort required to address our accounting and control environment, the impact of the SEC investigation, and the ability for us to be a long-term provider to our customers, particularly in light of the outstanding principal amount of our debt obligations and our ability to continue to comply with the financial covenants contained within our debt agreements. Continued adverse publicity and potential concerns from our customers could harm our business and have an adverse effect on our financial condition.

We have identified deficiencies in our control environment and financial reporting process that resulted in material weaknesses in our internal control over financial reporting and have concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of March 31, 2019. If we fail to properly remediate these or any future deficiencies or material weaknesses or to maintain proper and effective internal controls, material misstatements in our financial statements could occur and impair our ability to produce accurate and timely financial statements and could adversely affect investor confidence in our financial reports, which could negatively affect our business.

We have concluded that our internal control over financial reporting and disclosure controls and procedures was not effective as of March 31, 2019 due to the existence of material weaknesses in our control environment, financial reporting process and internal control over financial reporting, as described in Item 9A Controls and Procedures of this Annual Report on Form 10-K. While we completed meaningful remediation efforts during fiscal 2019 and to date in fiscal 2020 to address the identified weaknesses, we were not able to fully remediate them as of March 31, 2019, and we cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that our controls are effective as of March 31, 2020, the end of our current fiscal year. We also cannot provide assurance that the material weaknesses and deficiencies identified in this Annual Report on Form 10-K will not recur, or that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future. We intend to continue our control remediation activities and to continue to improve the tone at the top of our organization, our financial reporting process, and our operational, information technology, financial systems, compliance and infrastructure procedures and controls. We also intend to continue to expand, train, retain and manage our personnel who are essential to effective internal control and compliance. In doing so, we will continue to incur expenses and expend management time.

If our remediation measures are insufficient to address the identified deficiencies, or if additional deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results in the future. Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all. If we are unable to provide reliable and timely financial reports in

 

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the future, our business and reputation may be further harmed. Restated financial statements and failures in internal control may also cause us to fail to meet reporting obligations or debt covenants, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to further regulatory investigations and penalties or stockholder litigation, and materially and adversely impact our business and financial condition.

The filing of this Form 10-K may not make us “current” in our Exchange Act filing obligations, which means we retain certain potential liability and may not be eligible to use certain forms or rely on certain rules of the SEC.

We followed previously issued guidance from the staff of the SEC’s Division of Corporation Finance, (“Staff”), with respect to filing a comprehensive annual report on Form 10-K where issuers have been delinquent in meeting their periodic reporting requirements with the SEC. In accordance with such guidance, our filing of this Form 10-K does not necessarily mean that the Staff will conclude that we have complied with all applicable financial statement requirements or complied with all reporting requirements of the Exchange Act, nor does it foreclose any enforcement action by the SEC with respect to our disclosure, filings or failures to file reports under the Exchange Act.

This Form 10-K for the fiscal year ended March 31, 2019 includes our audited consolidated financial statements for the fiscal years ended March 31, 2019, 2018 and 2017. The consolidated financial statements for the fiscal year ended March 31, 2017 and selected financial data for fiscal years ended March 31, 2017, 2016 (unaudited) and 2015 (unaudited) are restated. We have not amended, and do not intend to amend, our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods prior to September 30, 2017 that were previously filed with the SEC. We have restated our consolidated financial statements for the fiscal year ended March 31, 2017 and included restated financial data and discussion related to the three months ended June 30, 2017 and the three- and six-month periods ended September 30, 2017 that would typically be disclosed in a Quarterly Report on Form 10-Q. Additionally, because we have failed to file the Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and Quarterly Reports on Form 10-Q for the fiscal quarter and year to date periods ended December 31, 2017, June 30, 2018, September 30, 2018 and December 31, 2018 and do not intend to file a separate Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for those periods, we have included the financial data and a discussion typically disclosed in an Annual Report on Form 10-K and a Quarterly Report on Form 10-Q for those respective periods.

Without the missing reports, investors may not be able to review certain financial and other disclosures that would have been contained in those reports, which would have provided an additional source of information for their evaluation of their investment in us. As a result of our failure to maintain current filings with the SEC in the past, our use of this format of the Form 10-K and any potential enforcement action from the SEC or other regulatory agencies, we may not be eligible to use certain short-form registration statements or rely on certain rules of the SEC. This could increase our transaction costs and adversely impact our ability to raise capital in a timely manner.

Risks Related to our Business Operations

We derive significant revenue from products incorporating tape technology. Our future results of operations depend in part on continued market acceptance and use of products incorporating tape technology; in the past, decreases in the market have materially and adversely impacted our business, financial condition and results of operations. In addition, if we are unable to compete with the introduction of new storage technologies by other companies, our business, financial condition and results of operations could be materially and adversely affected.

 

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We currently derive significant revenue from products that incorporate some form of tape technology, and we expect to continue to derive significant revenue from these products in the next several years. As a result, our future results of operations depend in part on continued market acceptance and use of products employing tape technology. We believe that the storage environment is changing, including reduced demand for tape products. Decreased market acceptance or use of products employing tape technology has materially and adversely impacted our business, financial condition and results of operations, and we expect that our revenues from certain types of tape products could continue to decline, which could materially and adversely impact our business, financial condition and results of operations in the future.

Disk and solid state products, as well as various software solutions and alternative technologies such as crystal and organic material-based storage have been announced by other companies. We expect that, over time, many of our tape customers could migrate toward our other products and solutions and that revenue from these other products and solutions will generate a greater proportion of our revenue in the future. While we are making targeted investments in software, disk backup systems and other alternative technologies, these markets are characterized by rapid innovation, evolving customer demands and strong competition, including competition with several companies who are also significant customers. If we are not successful in our efforts, we may not be able to retain customers or attract new customers, and our business, financial condition and results of operations could be materially and adversely affected.

We have significant indebtedness, which imposes upon us debt service obligations, and our credit facility contains various operating and financial covenants that limit our discretion in the operation of our business. If we are unable to generate sufficient cash flows from operations and overall results of operations to meet these debt obligations or remain in compliance with the covenants, our business, financial condition and results of operations could be materially and adversely affected.

Our level of indebtedness presents significant risks to our business and investors, both in terms of the constraints that it places on our ability to operate our business and because of the possibility that we may not generate sufficient cash and results of operations to remain in compliance with our covenants and pay the principal and interest on our indebtedness as it becomes due. For further description of our outstanding debt, see the section captioned “Liquidity and Capital Resources” in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As a result of our indebtedness:

 

   

Our ability to invest in growing our business is constrained by the financial covenants contained in our credit facility, which require us to maintain a minimum fixed charge coverage ratio and liquidity levels;

 

   

We must dedicate a portion of our cash flow from operations and other capital resources to debt service, thereby reducing our ability to fund working capital, capital expenditures, research and development and other cash requirements;

 

   

Our flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete may be limited, including our ability to engage in mergers and acquisitions activity, which may place us at a competitive disadvantage;

 

   

We are subject to mandatory field audits and control of cash receipts by the lenders if we do not maintain liquidity above certain thresholds;

 

   

We may be more vulnerable to adverse economic and industry conditions; and

 

   

We may be unable to make payments on other indebtedness or obligations.

Our credit facility contains restrictive covenants that require us to comply with and maintain certain liquidity levels and a minimum fixed charge coverage ratio, as well as restrict our ability, subject to certain thresholds, to:

 

   

Incur debt;

 

   

Incur liens;

 

   

Make acquisitions of businesses or entities or sell certain assets;

 

   

Make investments, including loans, guarantees and advances;

 

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Engage in transactions with affiliates;

 

   

Pay dividends or engage in stock repurchases; and

 

   

Enter into certain restrictive agreements.

The weakness we experienced for several years in the market for our storage, back up and data protection business, which is the primary driver of our overall cash flow and operating income, placed increased pressure on our ability to meet our liquidity and fixed charge coverage ratio covenants. We took steps, including several restructurings, to ensure that our results of operations are sufficient to meet these covenants, but if those changes do not result in longer-term improvements to the business, or our results turn out to be lower than expected, we may breach a covenant, which could result in a default under our credit facility agreements.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the convertible notes, or to make cash payments in connection with our convertible notes or our credit facility, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Further, as our indebtedness reaches maturity, we will be required to make large cash payments or adopt one or more alternatives, such as restructuring indebtedness or obtaining additional debt or equity financing on terms that may be onerous or highly dilutive. Our ability to restructure or refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may be unable to incur additional debt or refinance our existing debt on acceptable terms, if at all.

Our credit facility is collateralized by a pledge of all of our assets. If we were to default and were unable to obtain a waiver for such a default, the lenders would have a right to foreclose on our assets in order to satisfy our obligations under these agreements. Any such action on the part of the lenders against us could have a materially adverse impact on our business, financial condition and results of operations.

In connection with entering into our credit facilities and certain amendments to our prior credit facilities, we were required to issue warrants to purchase our common stock to our lenders. When exercised, these warrants will result in significant dilution to our stockholders. As a result, the issuance of common stock upon the exercise of our outstanding warrants may cause our stock price to decline.

We rely on indirect sales channels to market and sell our branded products. Therefore, the loss of or deterioration in our relationship with one or more of our resellers or distributors, or our inability to establish new indirect sales channels to drive growth of our branded revenue, especially for disk backup systems and scale-out tiered storage, could negatively affect our results of operations.

We sell the majority of our branded products to distributors such as Arrow Electronics, Inc. and other VARs and DMRs such as CDW Corporation, who in turn sell our products to end users. We use different distributors, VARs and DMRs in different countries and regions in the world. The success of these sales channels is hard to predict, particularly over time, and we have no purchase commitments or long-term orders from them that assure us of any baseline sales through these channels. Several of our resellers carry competing product lines that they may promote over our products. A reseller might not continue to purchase our products or market them effectively, and each reseller determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to end user customers. Establishing new indirect sales channels is an important part of our strategy to drive growth of our branded revenue and as our business shifts toward our branded products, these indirect sales channels will have increasing importance to our business.

When we introduce new products and solutions, as we did in the last half of our fiscal year 2019, our relationship with channel partners that historically have sold other products and solutions and that now compete with our new offerings could be adversely impacted. For example, we introduced our new F-Series all-flash array and R-Series ruggedized products in fiscal year 2019, causing us in some cases to more directly compete for primary storage sales with channel partners that sell other primary storage products.

 

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Our results of operations could be adversely affected by any number of factors related to our channel partners, including:

 

   

A change in competitive strategy that adversely affects a distributor’s or reseller’s willingness or ability to distribute our products;

 

   

The reduction, delay or cancellation of orders or the return of a significant amount of products;

 

   

Our inability to gain traction in developing new indirect sales channels for our branded products;

 

   

The loss of one or more of our distributors or resellers;

 

   

Any financial difficulties of our distributors or resellers that result in their inability to pay amounts owed to us; or

 

   

Changes in requirements or programs that allow our products to be sold by third parties to government customers.

If our products fail to meet our or our customers’ specifications for quality and reliability, we may face liability and reputational or financial harm which may adversely impact our results of operations and our competitive position may suffer.

Although we place great emphasis on product quality, we may from time to time experience problems with the performance of our products, which could result in one or more of the following:

 

   

Increased costs related to fulfillment of our warranty obligations;

 

   

The reduction, delay or cancellation of orders or the return of a significant amount of products;

 

   

Failure analysis causing distraction of the sales, operations and management teams; or

 

   

The loss of reputation in the market and customer goodwill.

These factors could cause our business, financial condition and results of operations to be materially and adversely affected.

In addition, we face potential liability for performance problems of our products because our end users employ our storage technologies for the storage and backup of important data and to satisfy regulatory requirements. Loss of this data could cost our customers significant amounts of money, directly and indirectly as a result of lost revenues, intellectual property, proprietary business information or other harm to their business. We could also potentially face claims for product liability from our customers if our products cause property damage or bodily injury. Although there are limitations of liability in our commercial agreements and we maintain technology errors and omissions liability and general liability insurance, our insurance may not cover potential claims of these types or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability or litigation costs that are not covered by insurance or is in excess of our limitation of liability or our insurance coverage could harm our business.

A large percentage of our sales are to a few customers, some of which are also competitors, and these customers generally have no minimum or long-term purchase commitments. The loss of, or a significant reduction in demand from, one or more key customers could materially and adversely affect our business, financial condition and results of operations.

Our product sales have been and continue to be concentrated among a small number of our direct end-user customers and channel partners as a result of how we sell our products. Under our business model, we sell directly to end user customers, through distributors, VARs and DMRs (which we collectively call our “channel partners”), as well as to OEMs. We sell to many end-user customers and channel partners on purchase orders, not under the terms of a binding long-term procurement agreement. Accordingly, they generally are not obligated to purchase any minimum product volume, and our relationships with them are terminable at will. In addition, recently we have focused our direct-sales business on the largest users of hierarchical storage architectures, the so-called “Hyper-scalers;” there are very few of these extremely large storage customers. During the fiscal years ended March 31, 2019 and March 31, 2018 no customers represented 10% or more of the Company’s total revenue. A significant reduction in orders from, or a loss of, one or more large customers would have a material adverse effect on our results of operations.

 

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Some of our tape and disk products are incorporated into larger storage systems or solutions that are marketed and sold to end users by large OEM customers as well as channel partners. Because of this, we have limited market access to the end users who purchase from the OEMs and channel partners, which limits our ability to influence the end users’ purchasing decisions and to forecast their future purchases of our products. Revenue from OEM customers has decreased in recent years. Certain of our large OEM customers are also our competitors, and such customers could decide to reduce or terminate their purchases of our products for competitive reasons. These market conditions increase our reliance on these OEM and channel partners. Thus, a significant reduction, delay or cancellation of their orders with us would materially and adversely affect our results of operations.

A portion of our sales are to various agencies and departments of the U.S. federal government, and funding cuts to federal spending can adversely impact our revenue. In the past, we have experienced the impact of reduced government spending and temporary government shutdowns on our sales to government agencies. Future spending cuts by the U.S. federal government, temporary shutdowns of the U.S. federal government or changes in its procurement processes or criteria could decrease our sales to the federal government and could materially and adversely affect our results of operations.

Our results of operations depend on continuing and increasing market acceptance of our existing limited number of products and on new product introductions, which may not be successful, in which case our business, financial condition and results of operations may be materially and adversely affected.

A limited number of products comprise a significant majority of our sales, and due to rapid technological change in the industry, our future results of operations depend on our ability to develop and successfully introduce new products. To compete effectively, we must continually improve existing products and introduce new ones. We have devoted and expect to continue to devote considerable management and financial resources to these efforts. Since July 2018, we have introduced several new products that are designed to solve a variety of our customers’ pressing needs. Those products include:

 

 

F-Series: an all-flash NVMe storage array – designed for the most demanding media workloads;

 

 

R-Series: a ruggedized in-vehicle storage array purpose-built for autonomous vehicle development (to ingest large number of data streams) or for transportation surveillance applications;

 

 

VS-Series: a highly resilient, hyper-converged surveillance storage system that meets all the needs of security teams; and

 

 

Distributed Cloud Services: a set of Quantum services that offers cloud-like simplicity and economics for on-prem environments.

We have seen market interest in each of these new product lines; however, we cannot provide assurance that:

 

   

Our new products will achieve market acceptance and significant market share, or that the markets for these products will continue or grow as we have anticipated;

 

   

Our new products will be successfully or timely qualified with our customers by meeting customer performance and quality specifications which must occur before customers will place large product orders;

 

   

We will achieve high volume production of these new products in a timely manner, if at all.

 

   

We will introduce additional new products in the time frame we are forecasting; or

 

   

We will not experience technical, quality, performance-related or other difficulties that could prevent or delay the introduction and market acceptance of new products;

If we are not successful in timely completion of our new product qualifications and then ramping sales to our key customers, our revenue and results of operations could be adversely impacted. In addition, if the quality of our products is not acceptable to our customers, this could result in customer dissatisfaction, lost revenue and increased warranty and repair costs.

 

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We continue to face risks related to economic uncertainty and slow economic growth.

Uncertainty about economic conditions poses a risk as businesses may further reduce or postpone spending in response to reduced budgets, tightening of credit markets, negative financial news and declines in income or asset values which could adversely affect our business, financial condition and results of operations. The volatile economic conditions in recent years along with periods of economic uncertainty in various countries around the world has made planning more difficult for us. We continue to face risks related to uncertain tariff levels between countries where our products are manufactured and where they are sold, unstable political and economic conditions in Europe, including concerns about sovereign debt, and uncertainty related to the United Kingdom’s exit from the European Union and related political matters, which could negatively impact the U.S. and global economies and adversely affect our financial results. In addition, our ability to access capital markets may be restricted, which could have an impact on our ability to react to changing economic and business conditions and could also materially and adversely affect our results of operations and financial condition.

Competition is intensifying in the data storage and protection market as a result of competitors introducing products based on new technology standards and merger and acquisition activity, which could materially and adversely affect our business, financial condition and results of operations.

Our competitors in the data storage and protection market are aggressively trying to advance and develop new technologies and products to compete against our technologies and products; consequently, we face the risk that customers could choose competitor products over ours. Competition in our markets is characterized by technological innovation and advancement. As a result of competition and new technology standards, our sales or gross margins could decline, which could materially and adversely affect our business, financial condition and results of operations. Some of those competitors, such as IBM, HPE, Seagate Technology and others, are much larger and have more diverse product offerings, and aggressively compete based on their reputations and greater size.

Technological developments and competition over the years in the tape automation market, and in the storage market in general, have resulted in decreased prices for tape automation products and our other product offerings. Pricing pressure is more pronounced in the tape automation market for entry-level products and less pronounced for enterprise products. Over time, the prices of our products and competitor products have decreased, but such products often incorporate new and/or different features and technologies from what we offered in prior years. We face risks that customers could choose competitors’ products over ours due to these features and technologies or due to pricing differences. We address pricing pressure in three ways: first, by reducing production costs; second, by adding features to increase value to maintain a certain level of gross margin for our tape automation systems; and third, by selling the overall value of our technologies in solving the customer’s business challenges thereby changing the conversation from a pricing negotiation to a value discussion. However, short term cost reduction efforts, and the value discussions may not yield new sales. In addition, if competition further intensifies, or if there is additional industry consolidation, our sales and gross margins for tape automation systems could decline, which could materially and adversely affect our business, financial condition and results of operations.

Industry consolidation and competing technologies with device products, which include tape drives and removable hard drives, have resulted in decreased prices and increasingly commoditized device products. Additionally, the competitive landscape in the data storage and protection market could continue to change due to merger and acquisition activity. Such transactions may impact us in a number of ways. For instance, they could result in:

 

   

Competitors consolidating, having greater resources and becoming more competitive with us;

 

   

Companies that we have not historically competed against entering into one or more of our primary markets and increasing competition in such markets;

 

   

Customers that are also competitors becoming more competitive with us and/or reducing their purchase of our products; and

 

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Competitors acquiring our current suppliers or business partners and negatively impacting our business model.

These transactions also create uncertainty and disruption in the market because the timing of such a transaction and its degree of impact, or whether it will happen at all, are often unknown. Given these factors and others, such merger and acquisition activity may materially and adversely impact our business, financial condition and results of operations.

A significant decline in our media royalty or branded software revenues could materially and adversely affect our business, financial condition and results of operations.

Our media royalties and branded software revenues generate relatively greater profit margins than some of our other products, and can significantly impact our overall profitability. We receive media royalty revenue based on tape media cartridges sold by various tape media manufacturers and resellers. Under our patent and technology license agreements with these companies, each of the licensees determines the pricing and number of units of tape media cartridges that it sells. Our media royalty revenue varies depending on the level of sales of the various media cartridge offerings sold by the licensees and other factors, including:

 

   

The continued use by our customers of tape media for storage;

 

   

The size of the installed base of devices and similar products that use tape media cartridges;

 

   

The performance of our strategic licensing partners, which sell tape media cartridges;

 

   

The relative growth in units of newer device products, since the associated media cartridges for newer products typically sell at higher prices than the media cartridges associated with older products;

 

   

The media consumption habits and rates of end users;

 

   

The pattern of device retirements;

 

   

The level of channel inventories; and

 

   

Agreement on standards for newer generations of the tape media that generates our royalty revenue.

Our media royalties depend on royalty rates and the quantity of media consumed in the market. We do not control licensee sales of these tape media cartridges. Since 2017, we have seen royalty revenues decline substantially. Those declines are due, in part, to legal disputes between the two media manufacturers that supply our LTO tape media. For instance, litigation in Japan and in the U.S. International Trade Commission has resulted in supply of LTO being halted in the U.S. in 2019. The disputes between the two tape manufacturers were recently resolved. Continued reduced royalty rates, a reduced installed device base using tape media cartridges, or any renewed legal disputes between the manufacturers would result in further reductions in our media royalty revenue and could reduce gross margins. This could materially and adversely affect our business, financial condition and results of operations.

Our branded software revenues are also dependent on many factors, including the success of competitive offerings, our ability to execute on our product roadmap and our effectiveness at marketing and selling our branded software solutions directly or through our channel partners. Disruptions to any one of these factors could reduce our branded software revenues, which could materially and adversely affect our business, financial condition and results of operations.

Some of our products contain licensed, third-party technology that provides important product functionality and features. The loss or inability to obtain any such license could have a material adverse effect on our business.

Certain of our products contain technology licensed from third parties that provides important product functionality and features. We may not have continued access to this technology, for instance, if the licensing company ceased to exist, either from bankruptcy, dissolution or purchase by a competitor. In some cases, we may seek to enforce our contractual protections via litigation against the licensing company itself, which may cause us to incur significant legal or other costs and may not be resolved in our favor. Other legal actions, such as intellectual property actions, brought against the licensing company could also impact our future access to the technology. We also have limited

 

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visibility or control of the technology roadmap at the licensing company and cannot ensure that the licensing company will advance the roadmap of the licensed technology in the manner best for us. Any of these actions could negatively impact our technology licensing, thereby reducing the functionality or features of our products, and could materially and adversely affect our business, financial condition and results of operations. We also face the risk of not being able to quickly implement a replacement technology or otherwise mitigate the risks associated with not having access to this licensed technology, which may also materially and adversely affect our business, financial condition and results of operations.

We have taken considerable steps towards reducing our cost structure. The steps we have taken may not reduce our cost structure to a level appropriate in relation to our future sales and therefore, these cost reductions may be insufficient to achieve profitability.

In the last several years, we have recorded significant restructuring charges and made cash payments to reduce our cost of sales and operating expenses to respond to adverse economic and industry conditions, to execute strategic management decisions and to rationalize our operations following acquisitions. During fiscal years 2016 through 2019 we have implemented restructuring plans to eliminate certain positions in the U.S. and internationally and to exit certain locations. These restructuring plans may result in decreases to our revenues or adversely affect our ability to grow our business in the future. Workforce reductions may also adversely affect employee morale and our ability to retain our employees. We may take future steps to further reduce our operating costs, including future cost reduction steps or restructurings in response to strategic decisions, adverse changes in our business or industry or future acquisitions. We may be unable to reduce our cost of sales and operating expenses at a rate and to a level appropriate in relation to our future sales, which may materially and adversely affect our business, financial condition and results of operations.

In addition, our ability to achieve the anticipated cost savings and other benefits from these restructuring plans within the expected time frame is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business, financial condition and results of operations could be adversely affected.

Since mid-2018, we have hired almost an entirely new executive team, including a new CEO and new CFO. In addition, prior year restructurings and the events that led to our restatement have caused a significant loss of employees. If we are unable to integrate our new executives, as well as retain skilled executives and other employees, our business could be materially and adversely impacted.

In June of 2018, we hired a new CFO, and the following month, we hired a new CEO. Since that time we have hired several other new senior executives in many areas of our business, including sales, supply chain management, finance and legal. These changes were due in part to the events that caused us to restate our financial statements for the past several years. In addition, in fiscal 2016, 2017 and 2018, we laid off employees in order to reduce costs in response to declining sales. All of these factors have increased the possibility that employees may decide to leave our company to pursue their careers elsewhere.

We may not be able to integrate all of our new executives successfully. Further, we may be subject to continued turnover in our employee base or the inability to fill open headcount requisitions due to competition, concerns about our operational performance, business culture or other factors. In addition, we may need to rely on the performance of employees whose skill sets are not sufficiently developed to fulfill their expected job responsibilities. Any of these situations could disrupt our business, prevent us from implementing the policy and process changes advocated by new management, and otherwise impair or delay our ability to realize operational and strategic objectives and cause increased expenses and lost sales opportunities.

The loss of the services of any of our key employees, the inability to attract or retain qualified talent in the future, or delays in hiring required talent, particularly sales and engineering talent, could delay the development and introduction of our products or services and/or negatively affect our ability to sell our products or services.

 

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If we do not successfully manage the changes that we have made and may continue to make to our infrastructure and management, our business could be disrupted, and that could adversely impact our results of operations and financial condition.

Managing change is an important focus for us. In recent years, we have implemented several significant initiatives involving our sales and marketing, engineering and operations organizations, aimed at increasing our efficiency and better aligning these groups with our corporate strategy. In addition, we have reduced headcount to streamline and consolidate our supporting functions as appropriate in response to market or competitive conditions and following past acquisitions and have increased our reliance on certain third-party business relationships. If we are unable to successfully manage the changes that we implement and detect and address issues as they arise, our business could be disrupted and our results of operations and financial condition could be materially and adversely impacted.

Third party intellectual property infringement claims could result in substantial liability and significant costs, and, as a result, our business, financial condition and result of operations may be materially and adversely affected.

From time to time, third parties allege that our products infringe their patented or proprietary technology and demand that we purchase a license from them. For example, we are currently in patent litigation with Realtime Data LLC d/b/a IXO, which has been stayed, described in Part II, Item 1 Legal Proceedings. The ultimate outcome of any license discussion or litigation, including the Realtime litigation, is uncertain. Adverse resolution of any third party infringement claim could subject us to substantial liabilities and require us to refrain from manufacturing and selling certain products. In addition, the costs incurred in intellectual property litigation can be substantial, regardless of the outcome. As a result, our business, financial condition and results of operations could be materially and adversely affected.

If we fail to protect our intellectual property or if others use our proprietary technology without authorization, our competitive position may suffer.

Our future success and ability to compete depends in part on our proprietary technology. We rely on a combination of copyright, patent, trademark and trade secrets laws and nondisclosure agreements to establish and protect our proprietary technology. However, we cannot provide assurance that patents will be issued with respect to pending or future patent applications that we have filed or plan to file or that our patents will be upheld as valid or will prevent the development of competitive products or that any actions we have taken will adequately protect our intellectual property rights. We generally enter into confidentiality agreements with our employees, consultants, customers, potential customers, contract manufacturers and others as required, in which we strictly limit access to, and distribution of, our software and further limit the disclosure and use of our proprietary information.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. Enforcing our intellectual property rights can sometimes only be accomplished through the use of litigation. Our competitors may also independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S.

We license certain of our software under “open source” licenses. Because of the characteristics of open source software licenses, it may be relatively easy for competitors, some of whom have greater resources than we have, to enter our markets and compete with us.

One of the characteristics of open source software is that the source code for our open source projects is publicly available, and anyone who obtains copies has a license under certain of our intellectual property rights, which, depending on the license, may include certain of our patents, to modify and redistribute the software and use it to compete in the marketplace. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for competitors to use our open source project software to develop their own software, potentially reducing the demand for our solution and putting price pressure on our subscription offerings. We cannot guarantee that competitive pressure or the availability of new open source software will not result in price reductions, reduced operating margins and loss of market share, any one of which could harm our business, financial condition, results of operations and cash flows.

 

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In addition, we use our own open source project software in our proprietary products. As a result, there is a risk that we may inadvertently release as open source certain code that was intended to be kept as proprietary, that reveals confidential information regarding the inner workings of our proprietary products, or that could enable competitors to more readily reverse engineer or replicate aspects of our proprietary technology that we would otherwise protect as trade secrets. We may also accept contributions from third parties to our open source projects, and it may be difficult for us to accurately determine the origin of the contributions and whether their use, including in our proprietary products, infringes, misappropriates or violates third party intellectual property or other rights. The availability of certain of our own software in source code form may also enable others to detect and exploit security vulnerabilities in our products.

Our products contain “open source” software and failure to comply with the terms of the open source license could have a material adverse effect on our competitive positions and financial results.

Certain products or technologies acquired or developed by us include “open source” software. Open source software is typically licensed for use at no initial charge. Certain open source software licenses, however, require users of the open source software to license to others any software that is based on, incorporates or interacts with, the open source software under the terms of the open source license. Although we endeavor to comply fully with such requirements, third parties could claim that we are required to license larger portions of our software than we believe we are required to license under open source software licenses. If such claims were successful, they could adversely impact our competitive position and financial results by providing our competitors with access to sensitive information that may help them develop competitive products. In addition, our use of open source software may harm our business and subject us to intellectual property claims, litigation or proceedings in the future because:

 

   

Open source license terms may be ambiguous and may subject us to unanticipated obligations regarding our products, technologies and intellectual property;

 

   

Open source software generally cannot be protected under trade secret law; and

 

   

It may be difficult for us to accurately determine the origin of the open source code and whether the open source software infringes, misappropriates or violates third party intellectual property or other rights.

As a result of our global manufacturing and sales operations, we are subject to a variety of risks related to our business outside of the U.S., any of which could, individually or in the aggregate, have a material adverse effect on our business.

A significant portion of our manufacturing and sales operations and supply chain occurs in countries other than the U.S. We also have sales outside the U.S. We utilize contract manufacturers to produce and fulfill orders for our products and have suppliers for various components, several of which have operations located in foreign countries including China, Hungary, Japan, Malaysia, Singapore, Mexico, the Philippines and Thailand. Because of these operations, we are subject to a number of risks including:

 

   

Import and export duties and value-added taxes;

 

   

Import, export and trade regulation changes that could erode our profit margins or restrict our ability to transport our products;

 

   

Reduced or limited protection of our intellectual property;

 

   

Compliance with multiple and potentially conflicting regulatory requirements and practices;

 

   

Commercial laws that favor local businesses;

 

   

Exposure to economic fluctuations including inflationary risk and continuing sovereign debt risk;

 

   

Shortages in component parts and raw materials;

 

   

The burden and cost of complying with foreign and U.S. laws governing corporate conduct outside the U.S. including the Foreign Corrupt Practices Act, the United Kingdom Bribery Act and other similar regulations;

 

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Adverse movement of foreign currencies against the U.S. dollar (the currency in which our results are reported) and uncertain global economic conditions generally;

 

   

Inflexible employee contracts and employment laws that may make it difficult to terminate or change the compensation structure for employees in some foreign countries in the event of business downturns;

 

   

Recruiting employees in highly competitive markets and wage inflation in certain markets;

 

   

Potential restrictions on the transfer of funds between countries;

 

   

Political instability, military, social and infrastructure risks, especially in emerging or developing economies;

 

   

Natural disasters, including earthquakes, flooding, typhoons and tsunamis; and

 

   

Cultural differences that affect the way we do business.

Any or all of these risks could have a material adverse effect on our business.

Our quarterly results of operations have fluctuated significantly, and past quarterly results of operations should not be used to predict future performance.

Our quarterly results of operations have fluctuated significantly in the past and could fluctuate significantly in the future. As a result, our quarterly results of operations should not be used to predict future performance. Quarterly results of operations could be materially and adversely affected by a number of factors, including, but not limited to:

 

   

Fluctuations in spending by IT departments as a result of economic conditions or fluctuations in U.S. federal government and in foreign spending;

 

   

Failure by our contract manufacturers to complete shipments in the last month of a quarter during which a substantial portion of our products are typically shipped;

 

   

Changes in product mix;

 

   

New product announcements by us or our competitors which may cause delays in purchasing;

 

   

Customers canceling, reducing, deferring or rescheduling significant orders as a result of excess inventory levels, weak economic conditions or other factors;

 

   

Seasonality, including customer fiscal year-ends and budget availability impacting customer demand for our products;

 

   

Declines in large customer orders;

 

   

Declines in royalty or software revenues;

 

   

Product development and ramp cycles and product performance or quality issues of ours or our competitors;

 

   

Poor execution of and performance against expected sales and marketing plans and strategies;

 

   

Reduced demand from our OEM or distribution, VAR, DMR and other large customers;

 

   

Increased competition which may, among other things, increase pricing pressure or reduce sales;

 

   

Restructuring actions or unexpected costs; and

 

   

Foreign exchange fluctuations.

If we fail to meet our projected quarterly results, our business, financial condition and results of operations may be materially and adversely affected.

Our manufacturing, component production and service repair are outsourced to third party contract manufacturers, component suppliers and service providers. We recently shifted some of our production from one contract manufacturer to another in order to reduce manufacturing costs. If we do not realize the cost savings we anticipate, or cannot obtain products, parts and services from these third parties in a cost effective and timely manner that meets our customers’ expectations, this could materially and adversely impact our business, financial condition and results of operations.

Many aspects of our supply chain and operational results are dependent on the performance of third-party business partners. In mid-2019, we moved some of our manufacturing from one contract manufacturer to a different one located in Mexico. We did so in order to realize substantial cost savings. After we made this decision, the U.S. Government threatened to impose tariffs on products imported from Mexico, which could result in our inability to recognize the cost savings we anticipated in making the decision to shift to a contract manufacturer in Mexico.

 

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Consequently, we face a number of risks as a result of these relationships, including, among others:

 

   

Sole source of product supply

In many cases, our business partner may be the sole source of supply for the products or parts they manufacture, or the services they provide, for us. Because we are relying on one supplier, we are at greater risk of experiencing shortages, reduced production capacity or other delays in customer deliveries that could result in customer dissatisfaction, lost sales and increased expenses, each of which could materially damage customer relationships and result in lost revenue.

 

   

Costs and purchase commitments

We may not be able to control the costs for the products our business partners manufacture for us or the services they provide to us. They procure inventory to build our products based upon a forecast of customer demand that we provide. We could be responsible for the financial impact on the contract manufacturer, supplier or service provider of any reduction or product mix shift in the forecast relative to materials that they had already purchased under a prior forecast. Such a variance in forecasted demand could require us to pay them for finished goods in excess of current customer demand or for excess or obsolete inventory and generally incur higher costs. As a result, we could experience reduced gross margins and operating losses based on these purchase commitments. With respect to service providers, although we have contracts for most of our third-party repair service vendors, the contract period may not be the same as the underlying service contract with our customer. In such cases, we face risks that the third-party service provider may increase the cost of providing services over subsequent periods contracted with our customer. In addition, the cost benefits we expect to obtain from using certain contract manufacturers outside the U.S. may not be realized due to increased import-export costs, including tariffs and other taxes.

 

   

Financial condition and stability

Our third-party business partners may suffer adverse financial or operational results or may be negatively impacted by global and local economic conditions. Therefore, we may face interruptions in the supply of product components or service as a result of financial or other volatility affecting our supply chain. We could suffer production downtime or increased costs to procure alternate products or services as a result of the possible inadequate financial condition of one or more of our business partners.

 

   

Quality and supplier conduct

We have limited control over the quality of products and components produced and services provided by our supply chain and third-party contract manufacturing and service business partners. Therefore, the quality of the products, parts or services may not be acceptable to our customers and could result in customer dissatisfaction, lost revenue and increased warranty costs. In addition, we have limited control over the manner in which our business partners conduct their business. Sub-tier suppliers selected by the primary third party could have process control issues or could select components with latent defects that manifest over a longer period of time. We may face negative consequences or publicity as a result of a third party’s failure to comply with applicable compliance, trade, environmental or employment regulations. Any or all of these risks could have a material adverse effect on our business.

Because we may order components from suppliers in advance of receipt of customer orders for our products that include these components, we could face a material inventory risk if we fail to accurately forecast demand for our products or manage production, which could have a material and adverse effect on our results of operations and cash flows.

 

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Although we use third parties to manufacture our products, in some cases we may retain the responsibility to purchase component inventory to support third party manufacturing activities, which presents a number of risks that could materially and adversely affect our financial condition. For instance, as part of our component planning, we may place orders with or pay certain suppliers for components in advance of receipt of customer orders. We may occasionally enter into negotiated orders with vendors early in the manufacturing process of our products to ensure that we have sufficient components for our products to meet anticipated customer demand. Because the design and manufacturing process for these components can be complicated, it is possible that we could experience a design or manufacturing flaw that could delay or even prevent the production of the components for which we previously committed to pay. We also face the risk of ordering too many components, or conversely, not enough components, since supply orders are generally based on forecasts of customer orders rather than actual customer orders. In addition, in some cases, we may make non-cancelable order commitments to our suppliers for work-in-progress, supplier’s finished goods, custom sub-assemblies, discontinued (end-of-life) components and Quantum-unique raw materials that are necessary to meet our lead times for finished goods. If we cannot change or be released from supply orders, we could incur costs from the purchase of unusable components, either due to a delay in the production of the components or other supplies or as a result of inaccurately predicting supply orders in advance of customer orders. These same risks exist with our third-party contract manufacturing partners. Our business and results of operations could be materially and adversely affected if we incur increased costs or are unable to fulfill customer orders.

Because we rely heavily on distributors and other resellers to market and sell our products, if one or more distributors were to experience a significant deterioration in its financial condition or its relationship with us, this could disrupt the distribution of our products and reduce our revenue, which could materially and adversely affect our business, financial condition and results of operations.

We heavily utilize distributors and VARs to perform the functions necessary to market and sell our products in certain product and geographic segments. To fulfill this role, the distributor must maintain an acceptable level of financial stability, creditworthiness and the ability to successfully manage business relationships with the customers it serves directly. Under our distributor agreements with these companies, each of the distributors determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to its customers. If the distributor is unable to perform in an acceptable manner, we may be required to reduce the amount of sales of our product to the distributor or terminate the relationship. We may also incur financial losses for product returns from distributors or for the failure or refusal of distributors to pay obligations owed to us. Either scenario could result in fewer of our products being available to the affected market segments, reduced levels of customer satisfaction and/or increased expenses, which could in turn have a material and adverse impact on our business, results of operations and financial condition.

Our stock price has been affected by the Company’s lack of current financial statements, de-listing from a national exchange, and the perceived issues related to the recently-concluded restatement of our financial statements for fiscal years 2015-2017. In addition, there are other factors and events that could cause the trading price of our common stock to decline.

The Company’s lack of public financial information since November 2017 has had a number of negative effects: investors have not had any detailed information on which to base an investment decision; we have been delisted from the New York Stock Exchange; institutional investors’ investment policies prohibit them from purchasing our stock; all of which we believe has had a negative effect on our stock price.

In addition to these factors, which we believe has caused our stock price to trade lower than it would if we had widely known financial information, the trading price of our common stock may fluctuate in response to a number of events and factors, such as:

 

   

Quarterly variations in our results of operations;

 

   

Failure to meet our expectations or the expectations of securities analysts and investors;

 

   

Failure to comply with applicable regulatory requirements or any investigations or enforcement actions related to a potential failure to comply with applicable regulations;

 

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Significant changes in our brand or reputation;

 

   

New products, services, innovations and strategic developments by our competitors or us, or business combinations and investments by our competitors or us;

 

   

Changes in our capital structure, including issuance of additional debt or equity to the public, and the issuance of common stock upon exercise of our outstanding warrants;

 

   

Large or sudden purchases or sales of stock by existing or new investors; and

 

   

The result of any litigation or governmental investigation, which could result in liabilities and reputational harm.

Other macro-economic forces also could affect our stock price, including:

 

   

Changes in interest rates;

 

   

Fluctuations in the stock market in general and market prices for technology companies in particular;

 

   

Tariffs imposed by the U.S. Government on sales originating in or being shipped to countries with which we have on-going trade or other political conflicts;

Any of these events and factors may cause our stock price to rise or fall and may adversely affect our business and financing opportunities.

Our operation and design processes are subject to safety and environmental regulations which could lead to increased costs, or otherwise adversely affect our business, financial condition and results of operations.

We are subject to a variety of laws and regulations relating to, among other things, the use, storage, discharge and disposal of materials and substances used in our facilities as well as the safety of our employees and the public. Current regulations in the U.S. and various international jurisdictions restrict the use of certain potentially hazardous materials used in electronic products and components (including lead and some flame retardants), impose a “take back” obligation on manufacturers for the financing of the collection, recovery and disposal of electrical and electronic equipment and require extensive investigation into and disclosure regarding certain minerals used in our supply chain. We have implemented procedures and will likely continue to introduce new processes to comply with current and future safety and environmental legislation. However, measures taken now or in the future to comply with such legislation may adversely affect our costs or product sales by requiring us to acquire costly equipment or materials, redesign processes or to incur other significant expenses in adapting our supply chain, waste disposal and emission management processes. Furthermore, safety or environmental claims or our failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against us or the suspension of affected operations, which could have an adverse effect on our business, financial condition and results of operations.

We are subject to many laws and regulations, and violation of or changes in those requirements could materially and adversely affect our business.

We are subject to numerous U.S. and international laws and requirements regarding corporate conduct, fair competition, corruption prevention and import and export practices, including laws applicable to U.S. government contractors. In addition, the SEC has adopted disclosure rules related to the supply of certain minerals originating from the conflict zones of the Democratic Republic of the Congo or adjoining countries, and we have incurred costs to comply with such regulations and may realize other costs relating to the sourcing and availability of minerals used in our products. While we maintain a rigorous corporate ethics and compliance program, we may be subject to increased regulatory scrutiny, significant monetary fines or penalties, suspension of business opportunities or loss of jurisdictional operating rights as a result of any failure to comply with those requirements. If we were to be subject to a compliance investigation, we may incur increased personnel and legal costs. Our supply and distribution models may be reliant upon the actions of our third-party business partners and we may also be exposed to potential liability resulting from their violation of these or other compliance requirements. Further, our U.S. and international business models are based on currently applicable regulatory requirements and exceptions. Changes in those requirements or exceptions could necessitate changes to our business model. Any of these consequences could materially and adversely impact our business and results of operations.

 

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A cybersecurity breach into our products when used by our customers could adversely affect our ability to conduct our business, harm our reputation, expose us to significant liability or otherwise damage our financial results.

A cybersecurity breach into a system we have sold to a customer could negatively affect our reputation as a trusted provider of large-scale storage, archive and data protection products by adversely affecting the market’s perception of the security or reliability of our products and services. Many of our customers and partners store sensitive data on our products, and a cybersecurity breach related to our products could harm our reputation and potentially expose us to significant liability.

We also maintain sensitive data related to our employees, strategic partners and customers, including intellectual property, proprietary business information and personally identifiable information on our own systems. We employ sophisticated security measures; however, we may face threats across our infrastructure including unauthorized access, security breaches and other system disruptions.

It is critical to our business that our employees’, strategic partners’ and customers’ sensitive information remains secure and that our customers perceive that this information is secure. A cybersecurity breach could result in unauthorized access to, loss of, or unauthorized disclosure of such information. A cybersecurity breach could expose us to litigation, indemnity obligations, government investigations and other possible liabilities. Additionally, a cyber-attack, whether actual or perceived, could result in negative publicity which could harm our reputation and reduce our customers’ confidence in the effectiveness of our solutions, which could materially and adversely affect our business and results of operations. A breach of our security systems could also expose us to increased costs including remediation costs, disruption of operations or increased cybersecurity protection costs that may have a material adverse effect on our business. Although we maintain technology errors and omissions liability insurance, our insurance may not cover potential claims of these types or may not be adequate to indemnify us for inability that may be imposed. Any imposition or liability or litigation costs that are not covered by insurance or in excess of our insurance coverage could harm our business.

Our actual or perceived failure to adequately protect personal data could adversely affect our business, financial condition and results of operations.

A variety of state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of personally identifiable information. These privacy- and data protection-related laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. Compliance with these laws and regulations can be costly and can delay or impede the development of new products.

For example, in 2016, the European Parliament enacted the General Data Protection Regulation (or “GDPR”) which governs the collection, storage and use of personal information gathered in the European Union, regardless of where such information is stored.In 2018, California enacted the Consumer Privacy Act (“CCPA”), which regulates information stored by companies doing business in California. The regulations implementing the CCPA have not yet been published, and the implementation of standards for GDPR compliance continue to evolve. Our products’ and internal systems’ actual or alleged failure to comply with applicable laws and regulations, or to protect personal data, could result in enforcement actions and significant penalties against us, which could result in negative publicity, increase our operating costs, subject us to claims or other remedies and have a material adverse effect on our business, financial condition, and results of operations.

We must maintain appropriate levels of service parts inventories. If we do not have sufficient service parts inventories, we may experience increased levels of customer dissatisfaction. If we hold excessive service parts inventories, we may incur financial losses.

 

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We maintain levels of service parts inventories to satisfy future warranty obligations and also to earn service revenue by providing enhanced and extended warranty and repair service during and beyond the warranty period. We estimate the required amount of service parts inventories based on historical usage and forecasts of future warranty and extended warranty requirements, including estimates of failure rates and costs to repair, and out of warranty revenue. Given the significant levels of judgment inherently involved in the process, we cannot provide assurance that we will be able to maintain appropriate levels of service parts inventories to satisfy customer needs and to avoid financial losses from excess service parts inventories. If we are unable to maintain appropriate levels of service parts inventories, our business, financial condition and results of operations may be materially and adversely impacted.

From time to time we have made acquisitions. The failure to successfully integrate future acquisitions could harm our business, financial condition and results of operations.

As a part of our business strategy, we have in the past and may make acquisitions in the future, subject to certain debt covenants. We may also make significant investments in complementary companies, products or technologies. If we fail to successfully integrate such acquisitions or significant investments, it could harm our business, financial condition and results of operations. Risks that we may face in our efforts to integrate any recent or future acquisitions include, among others:

 

   

Failure to realize anticipated synergies from the acquisition;

 

   

Difficulties in assimilating and retaining employees;

 

   

Potential incompatibility of business cultures or resistance to change;

 

   

Coordinating geographically separate organizations;

 

   

Diversion of management’s attention from ongoing business concerns;

 

   

Coordinating infrastructure operations in a rapid and efficient manner;

 

   

The potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services;

 

   

Failure of acquired technology or products to provide anticipated revenue or margin contribution;

 

   

Insufficient revenues to offset increased expenses associated with the acquisition;

 

   

Costs and delays in implementing or integrating common systems and procedures;

 

   

Reduction or loss of customer orders due to the potential for market confusion, hesitation and delay;

 

   

Impairment of existing customer, supplier and strategic relationships of either company;

 

   

Insufficient cash flows from operations to fund the working capital and investment requirements;

 

   

Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

 

   

The possibility that we may not receive a favorable return on our investment, the original investment may become impaired, and/or we may incur losses from these investments;

 

   

Dissatisfaction or performance problems with the acquired company;

 

   

The assumption of risks of the acquired company that are difficult to quantify, such as litigation;

 

   

The cost associated with the acquisition, including restructuring actions, which may require cash payments that, if large enough, could materially and adversely affect our liquidity; and

 

   

Assumption of unknown liabilities or other unanticipated adverse events or circumstances.

Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of any transaction. We cannot provide assurance that we will be able to successfully integrate any business, products, technologies or personnel that we may acquire in the future, and our failure to do so could negatively impact our business, financial condition and results of operations.

If the future outcomes related to the estimates used in recording tax liabilities to various taxing authorities result in higher tax liabilities than estimated, then we would have to record tax charges, which could be material.

 

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We have provided amounts and recorded liabilities for probable and estimable tax adjustments required by various taxing authorities in the U.S. and foreign jurisdictions. If events occur that indicate payments of these amounts will be less than estimated, then reversals of these liabilities would create tax benefits recognized in the periods when we determine the liabilities have reduced. Conversely, if events occur which indicate that payments of these amounts will be greater than estimated, then tax charges and additional liabilities would be recorded. In particular, various foreign jurisdictions could challenge the characterization or transfer pricing of certain intercompany transactions. In the event of an unfavorable outcome of such challenge, there exists the possibility of a material tax charge and adverse impact on the results of operations in the period in which the matter is resolved or an unfavorable outcome becomes probable and estimable.

Certain changes in stock ownership could result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. Should we undergo such a change in stock ownership, it would severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges, which could be material.

We are exposed to fluctuations in foreign currency exchange rates, and an adverse change in foreign currency exchange rates relative to our position in such currencies could have a material adverse impact on our business, financial condition and results of operations.

We do not currently use derivative financial instruments for speculative purposes. We have used in the past, and may use in the future, foreign currency forward contracts and derivative instruments to hedge our exposure to foreign currency exchange rates. To the extent that we have assets or liabilities denominated in a foreign currency that are inadequately hedged or not hedged at all, we may be subject to foreign currency losses, which could be significant.

Our international operations can act as a natural hedge when both operating expenses and sales are denominated in local currencies. In these instances, although an unfavorable change in the exchange rate of a foreign currency against the U.S. dollar would result in lower sales when translated to U.S. dollars, operating expenses would also be lower in these circumstances. An increase in the rate at which a foreign currency is exchanged for U.S. dollars would require more of that particular foreign currency to equal a specified amount of U.S. dollars than before such rate increase. In such cases, and if we were to price our products and services in that particular foreign currency, we would receive fewer U.S. dollars than we would have received prior to such rate increase for the foreign currency. Likewise, if we were to price our products and services in U.S. dollars while competitors priced their products in a local currency, an increase in the relative strength of the U.S. dollar would result in our prices being uncompetitive in those markets. Such fluctuations in currency exchange rates could materially and adversely affect our business, financial condition and results of operations.

Our securities are currently traded over-the-counter, not on a national exchange. We currently plan to seek a listing on a national exchange; however, there is no assurance that we will qualify for listing on that exchange. Our failure to do so would severely limit the types of institutional investors whose policies permit them to purchase our stock, would restrict our liquidity, and likely would have a negative effect on our stock price.

As a consequence of our having to restate our prior year financials, we have not been able to maintain current financial filings with the SEC. In January 2019, due to our lack of current financials, we were delisted from the New York Stock Exchange. We anticipate applying for listing on the NASDAQ market as soon as is practical after our financial reporting is current with the SEC. We understand the new listing criteria on NASDAQ and believe we will satisfy those criteria shortly after our financial statements are up to date. However, we cannot assure that the NASDAQ will accept our listing application. If they do not, and we remain an over-the-counter traded company, many institutional investors’ investment policies will bar them from trading in our securities. In addition, the trading volume in the over-the-counter market is significantly lower than trading on NASDAQ, thus making it more difficult for investors to buy or sell shares at a favorable price. Consequently, our stock price could be negatively impacted by our continued trading on the over-the-counter market.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

 

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ITEM 2.

PROPERTIES

Our headquarters is located in San Jose, California. We lease facilities in North America, Europe and Asia Pacific. We believe our facilities are adequate for our current needs. The following is a summary of the significant locations and primary functions of those facilities as of March 31, 2019:

 

Location

  

Function

North America   

San Jose, CA

  

Corporate headquarters, research and development

Irvine, CA

  

Administration, research and development, sales, service

Englewood, CO

  

Administration, research and development, sales, service

Mendota Heights, MN

  

Research and development

Richardson, TX

  

Research and development

Bellevue, WA

  

Administration, sales

New York, NY

  

Sales

Europe

  

Paris, France

  

Sales, service

Boehmenkirch, Germany

  

Administration, service

Munich, Germany

  

Sales, service

Zurich, Switzerland

  

Administration, operations management

Bracknell, UK

  

Sales, service

London, UK

  

Sales

Asia Pacific   

Adelaide, Australia

  

Research and development

Kuala Lumpur, Malaysia

  

Customer service

Singapore City, Singapore

  

Administration, operations management, sales

Seoul, Korea

  

Sales, service

Tokyo, Japan

  

Sales

 

ITEM 3.

LEGAL PROCEEDINGS

On July, 22 2016, Realtime Data LLC d/b/a IXO (“Realtime Data”) filed a patent infringement lawsuit against Quantum in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patents Nos. 7,161,506, 7,378,992, 7,415,530, 8,643,513, 9,054,728, and 9,116,908. The lawsuit has been transferred to the U.S. District Court for the Northern District of California for further proceedings. Realtime Data asserts that we have incorporated Realtime Data’s patented technology into our compression products and services. Realtime Data seeks unspecified monetary damages and other relief that the Court deems appropriate. On July 31, 2017, the District Court stayed proceedings in this litigation pending decision in Inter Partes Review proceedings currently before the Patent Trial and Appeal Board relating to the Realtime patents. That stay remains pending. We believe the probability that this lawsuit will have a material adverse effect on our business, operating results or financial condition is remote.

 

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In February 2018, two putative class action lawsuits were filed in the U.S. District Court for the Northern District of California against the Company and two former executive officers (the “Class Action”). The lawsuits were consolidated on May 16, 2018. The Class Action plaintiffs sought unspecified damages for certain alleged material misrepresentations and omissions made by us in connection with our financial statements for its fiscal year 2017. On September 25, 2018, the Court granted permission to plaintiffs in the action to file an Amended Consolidated Complaint. Before the plaintiffs filed their amended consolidated complaint, the parties met with a mediator to discuss a potential settlement of the case. On February 20, 2019, the parties reached a settlement in principal; under the terms of the settlement, we agreed to pay $8.2 million to the plaintiffs. The amount includes all of plaintiffs’ attorneys’ fees, and the full amount will be paid by our directors and officers liability insurance carriers. A Stipulation of Settlement was signed by the Parties on June 28, 2019, and the Court entered preliminary approval of the settlement on July 26, 2018. In its order granting preliminary approval, the Court set the date for final approval of the settlement to take place on November 14, 2019.

In May 2018, two shareholders filed litigation in California Superior Court for Santa Clara County on behalf of Quantum against several current and former officers and directors of the Company. A third action brought by a shareholder on behalf of Quantum was filed on March 4, 2019. These three lawsuits (the “Derivative Litigation”), which were consolidated by the Court, alleged, inter alia, that the board members and certain of the senior officers breached their fiduciary duties to the Company and its shareholders by causing the Company to make materially false and misleading statements concerning the Company’s financial health, business operations, and growth prospects in its public filings and communications with investors, including misrepresentations regarding the Company’s disclosure controls and procedures, revenue recognition, and internal controls over financial reporting. After extensive negotiations, the parties reached a definitive agreement to settle the Derivative Litigation in late February 2019. The settlement requires us to adopt a number of corporate governance reforms and to pay plaintiffs’ attorneys’ fees of $800,000, which will be paid by our directors and officers liability insurance carriers. A hearing on final approval of the Derivative Litigation settlement has been set for September 6, 2019.

In January 2018, we received a document subpoena from the SEC requesting information pertaining to our financial statements for the period April 1, 2017 through the date of the subpoena. We responded to that subpoena. In August 2018, we received a second subpoena requesting similar documents for the period April 1, 2015 through the date of the subpoena. We understand that the SEC’s investigation relates to the facts and circumstances regarding the financial statements included in the restatement presented in this Annual Report on Form 10-K. We have produced a substantial volume of documents to the SEC and are cooperating with the SEC staff. The investigation is ongoing.

Additionally, from time to time, we are a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, we do not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on our results of operations, cash flows or financial position.

 

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

 

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PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock was traded on the New York Stock Exchange under the symbol “QTM.” On January 15, 2019, we were delisted from the NYSE. On January 16, 2019, we started trading under the symbol “QMCO” on the OTC Pink, which is operated by OTC Markets Group Inc. As of July 19, 2019, the closing price of our common stock was $3.13 per share. The per share prices reflected in the following table represent the range of high and low sales prices of our common stock for the quarters indicated. The OTC Pink quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.

 

Fiscal 2019    High      Low  

First quarter ended June 30, 2018

   $ 4.04      $ 2.06  

Second quarter ended September 30, 2018

     2.58        1.63  

Third quarter ended December 31, 2018

     2.97        1.21  

Fourth quarter ended March 31, 2019

     2.65        1.40  
Fiscal 2018    High      Low  

First quarter ended June 30, 2017

   $ 8.97      $ 6.82  

Second quarter ended September 30, 2017

     8.60        4.96  

Third quarter ended December 31, 2017

     6.21        4.23  

Fourth quarter ended March 31, 2018

     6.40        3.62  

Historically, we have not paid cash dividends on our common stock and do not intend to pay dividends in the foreseeable future. Our ability to pay dividends is restricted by the covenants in our senior secured revolving credit agreement unless we meet certain defined thresholds. See the section captioned “Liquidity and Capital Resources” in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and also Note 5: Long-Term Debt to the consolidated financial statements.

As of July 31, 2019, there were 358 Quantum stockholders of record, including the Depository Trust Company, which holds shares of Quantum common stock on behalf of an indeterminate number of beneficial owners. We derived the number of stockholders by reviewing the listing of outstanding common stock recorded by our transfer agent as of July 31, 2019. The information required by this item regarding equity compensation plans is provided in Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Performance Graph

The following graph compares the total stockholder return from March 31, 2014 through March 31, 2019 of (i) our Class A common stock; (ii) the NASDAQ Composite Index; and (iii) the S&P Computer Storage & Peripherals Index, assuming an investment of $100 on March 31, 2014, including reinvestment of dividends where applicable. The results presented below are not necessarily indicative of future performance.

 

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LOGO

Copyright©2019 Standard & Poor’s, a division of S&P Global. All rights reserved.

 

ITEM 6.

SELECTED FINANCIAL DATA

The selected consolidated financial information below is derived from our audited consolidated financial statements for the three-year period ended March 31, 2019. As described below, the selected financial data as of and for the years ended March 31, 2016 and 2015 are unaudited, have been derived from our unaudited consolidated financial statements, which were prepared on the same basis as our audited consolidated financial statements, and reflect the impact of adjustments to, or restatement of, our previously furnished or filed financial information, including an April 1, 2014 cumulative effect adjustment to stockholders’ deficit for the impact of accounting errors that affected periods prior to April 1, 2014. The selected financial data set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related Notes thereto included in this Annual Report on Form 10-K under the caption Item 8 Financial Statements and Supplementary Data. As indicated, the information presented in the following tables for the years ended March 31, 2017, 2016, and 2015 has been adjusted to reflect the restatement of our financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2: Restatement to consolidated financial statements of this Annual Report on Form 10-K (and, with respect to 2016 and 2015, in this Item 6). The selected consolidated financial data in this section is not intended to replace the consolidated financial statements.

 

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     For the years ended March 31,  
(In thousands, except per share data)    2019     2018     2017 (As Restated)(1)     2016 (As Restated)
(Unaudited)(2)
    2015 (As Restated)
(Unaudited)(3)
 

Statement of Operations Data:

          

Total revenue

   $            402,680     $            437,684     $ 493,054     $ 479,843     $ 543,742  

Total cost of revenue

     235,066       264,900       287,782       276,524       300,412  

Gross profit

     167,614       172,784       205,272       203,319       243,330  

Income (loss) from operations

     (4,746     (28,622     6,681       (67,040     12,578  

Net income (loss)

   $ (42,797   $ (43,346   $ (2,408   $ (75,626   $ 15,404  

Basic net income (loss) per share

   $ (1.20   $ (1.25   $ (0.07   $ (2.30 )      $ 0.48  

Diluted net income (loss) per share

   $ (1.20   $ (1.25   $ (0.07   $ (2.30 )      $ 0.47  
     As of March 31,  
     2019     2018     2017 (As Restated)(1)     2016 (As Restated)
(Unaudited)(2)
    2015 (As Restated)
(Unaudited)(3)
 

Balance Sheet Data:

          

Total assets

   $ 172,871     $ 202,639     $ 221,242     $ 230,812     $ 359,130  

Short-term debt

     1,650       7,500       62,827       3,000       83,345  

Long-term debt

   $ 145,621     $ 115,986     $ 66,676     $ 131,961     $ 68,793  

 

(1) 

For further details regarding the restatement, see Note 2: Restatement in the Notes to our consolidated financial statements included in this Annual Report on Form 10-K under the caption Item 8: Financial Statements and Supplementary Data.

(2) 

We restated our financial results for the year ended March 31, 2016. The adjustments identified include:

  1.

Increases to total revenue and cost of revenue associated with prematurely recognizing product revenue sold to certain distributors, resellers and end-user customers of $2.2 million and $3.9 million, respectively. Impact to pre-tax earnings was a $0.9 million reduction for the year-ended March 31, 2016.

  2.

Increase in total assets of $1.3 million primarily driven by the correction of an accounting error of reflecting employee contributions within restricted cash and the associated obligation to fund disability claims as incurred for its employee funded disability plan.

(3) 

We restated our financial results for the year ended March 31, 2015. The adjustments identified include:

  1.

Change relates primarily to decreases to total revenue and cost of revenue associated with prematurely recognizing product revenue sold to certain distributors, resellers and end-user customers of $10.1 million and $8.0 million, respectively. Impact to pre-tax earnings was a $1.4 million reduction for the year-ended March 31, 2016.

  2.

Increase in total assets of $0.4 million primarily associated with investigation related revenue misstatements as noted in Note 2: Restatement under the caption Item 8 Financial Statements and Supplementary Data and change in method of accounting for capitalized third party contracts.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) regarding industry outlook, our expectations regarding the performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A Risk Factors. The following MD&A provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following MD&A together with the sections entitled “Forward-Looking and Cautionary Statements” Item 1A Risk Factors, Item 6 Selected Financial Data and our consolidated financial statements and related notes included in this Annual Report under the caption Item 8 Financial Statements and Supplementary Data.

OVERVIEW

Quantum is a leader in storing and managing video and video-like data. We deliver top streaming performance for video and rich media applications, along with low cost, high density massive-scale data protection and archive systems. We help customers capture, create and share digital data and preserve and protect it for decades. We work closely with a broad network of distributors, VARs, DMRs, OEMs and other suppliers to meet customers’ evolving needs.

BUSINESS

We earn our revenue from the sale of products and services through our channel partners and our sales force. Our products are sold under both the Quantum brand name and the names of various OEM customers.

 

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Our high-performance shared storage systems are powered by our StorNext software that provides high-performance and availability to enable movie and TV production, analysis of patient records, analysis of video and image data for government and military applications, and more. Our tape storage provide low cost, long-term data storage for archiving and retention, as well as offline storage to protect against ransomware. Our DXi backup systems provide high-performance, scalable storage for backup and multi-site disaster recovery.

We offer a broad range of services including maintenance, implementation and training. We recently introduced a new line of Distributed Cloud Services designed to provide the benefits of our products and technology with a cloud-like user experience, either via fully managed Operational Services, or via Storage-as-a-Service, or STaaS offerings.

We are also a member of the consortium that develops, patents, and licenses LTO® tape technology to media manufacturing companies. We receive royalty payments for LTO media technology sold under licensing agreements.

RESULTS

We had total revenue of $402.7 million in fiscal 2019, a $35.0 million or 8% decrease from fiscal 2018, primarily due to decreased product and royalty revenue. This was partially offset by a slight increase in our service revenue. Our fiscal 2019 gross profit decreased by $5.2 million, or less than normally expected given the magnitude of the revenue decline. The decrease in gross profit was not as large relative to the total revenue decline primarily due to the year-over-year improvement in the gross margin by 2% in fiscal 2019. Despite a decrease in the high margin royalty revenue in fiscal 2019, the year-over-year increase in gross margin from 40% in fiscal 2018 to 42% in fiscal 2019 was primarily due to higher gross margin for both product and service revenue.

Our operating expenses of $172.4 million decreased $29.0 million in fiscal 2019, or 14% from the prior year. The decrease was primarily due to decreases in on-going operating expenses of $43.4 million and restructuring charges of $2.9 million offset by increases in professional fees associated with the financial restatement activities and related civil ligation defense costs of $21.0 million.

The net loss for fiscal 2019 was impacted by interest expenses of $21.1 million or an increase of $9.4 million over the fiscal 2018 and a loss on debt extinguishment of $17.5 million or an increase of $10.5 million from the prior year.

We had a $42.8 million net loss in fiscal 2019 compared to $43.3 million net loss in fiscal 2018. The Adjusted EBITDA, as defined below, increased $37.0 million to $32.5 million in fiscal 2019 from negative $4.5 million in fiscal 2018.

RESTATEMENT

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement adjustments made to the previously reported consolidated financial statements for the fiscal year ended March 31, 2017. For additional information and a detailed discussion of the restatement, see Note 2: Restatement to the Notes to our consolidated financial statements included in this Annual Report under the caption Item 8 Financial Statements and Supplementary Data. Restatement adjustments have also been made to the previously reported consolidated financial statements for the quarterly period ended June 30, 2017 and the quarterly and year to date period ended September 30, 2017. For additional information related to the quarterly restatement, see Note 13: Quarterly Financial Information (Unaudited) to the Notes to our consolidated financial statements included in this Annual Report on Form 10-K under the caption Item 8 Financial Statements and Supplementary Data.

 

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NON-U.S. GAAP FINANCIAL MEASURES

To provide investors with additional information regarding our financial results, we have presented Adjusted EBITDA and Adjusted Net Income (Loss), non-U.S. GAAP financial measures defined below.

Adjusted EBITDA is a non-U.S. GAAP financial measure defined by us as net loss before interest expense, net, provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring charges, loss on extinguishment of debt, cost related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: Restatement to our consolidated financial statements and other non-recurring expenses.

Adjusted Net Income (Loss) is a non-U.S. GAAP financial measure defined by us as net loss before, restructuring charges, loss on extinguishment of debt, cost related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: Restatement to our consolidated financial statements and other non-recurring expenses. The Company calculates Adjusted Net Income (Loss) per Basic and Diluted share using the Company’s above-referenced definition of Adjusted Net Income (Loss).

The Company considers non-recurring expenses to be expenses that have not been incurred within the prior two years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses.

We have provided below a reconciliation of Adjusted EBITDA and Adjusted Net Income (Loss) to net loss, the most directly comparable U.S. GAAP financial measure. We have presented Adjusted EBITDA because it is a key measure used by our management and the board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operating plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business performance. The Company believes Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Basic and Diluted Share serve as appropriate measures to be used in evaluating the performance of its business and help its investors better compare the Company’s operating performance over multiple periods. Accordingly, we believe that Adjusted EBITDA and Adjusted Net Income (Loss) provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and our board of directors.

Our use of Adjusted EBITDA and Adjusted Net Income (Loss) have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows:

 

   

although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

Adjusted EBITDA does not reflect: (1) interest and tax payments that may represent a reduction in cash available to us; (2) capital expenditures, future requirements for capital expenditures or contractual commitments; (3) changes in, or cash requirements for, working capital needs; (4) the potentially dilutive impact of stock-based compensation; (5) potential future restructuring activities; (6) potential future losses on extinguishment of debt; (7) potential ongoing costs related to the financial restatement and related activities; (8) potential future strategic and financial restructuring expenses; or (9) other non-recurring expenses

 

   

Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) potential future losses on extinguishment of debt; (3) potential ongoing costs related to the financial restatement and related activities; or (4) potential future strategic and financial restructuring expenses; and

 

   

other companies, including companies in our industry, may calculate Adjusted EBITDA, Adjusted Net Income or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider Adjusted EBITDA and Adjusted Net Income (Loss) along with other U.S. GAAP-based financial performance measures, including various cash flow metrics, net loss and net loss per share. The following is a reconciliation of Adjusted EBITDA and Adjusted Net Income (Loss) to net loss, the most directly comparable financial measure calculated in accordance with U.S. GAAP, for each of the periods indicated:

 

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RECONCILIATION OF NON-GAAP TO US GAAP

 

     For the years ended March 31,  
(in thousands, except per share amounts)    2019      2018      2017
(As Restated)
 

U.S. GAAP Net loss

   $ (42,797    $ (43,346    $ (2,408

Interest expense, net

     21,095        11,670        7,993  

Income tax (benefit) expense

     2,376        (3,113      1,656  

Depreciation and amortization expense

     4,266        4,970        5,635  

Stock based compensation expense

     3,409        5,394        6,698  

Restructuring charges

     5,570        8,474        2,095  

Loss on extinguishment of debt

     17,458        6,934        41  

Cost related to financial restatement and related activities

     19,664        1,709        —    

Non-recurring other

     1,500        2,848        —    
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 32,541      $ (4,460    $ 21,710  
  

 

 

    

 

 

    

 

 

 
     For the years ended March 31,  
     2019      2018      2017
(As Restated)
 

U.S. GAAP Net loss

   $ (42,797    $ (43,346    $ (2,408

Restructuring charges

     5,570        8,474        2,095  

Loss on extinguishment of debt

     17,458        6,934        41  

Cost related to financial restatement and related activities

     19,664        1,709        —    

Non-recurring other

     1,500        2,848        —    
  

 

 

    

 

 

    

 

 

 

Adjusted net income (loss)

   $ 1,395      $ (23,381    $ (272
  

 

 

    

 

 

    

 

 

 

Adjusted net income (loss) per share:

        

Basic

     0.04        (0.67      (0.01

Diluted

     0.03        (0.67      (0.01

Weighted average shares outstanding:

        

Basic

     35,551        34,687        33,742  

Diluted

     40,515        34,687        33,742  

RESULTS OF OPERATIONS

(dollars in thousands)

Revenue

 

     For the Year Ended March 31,            Change  
     2019     % of
revenue
    2018     % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018      2018 vs 2017  

Revenue

                      

Product revenue

   $ 244,654       61   $ 268,582       61   $ 308,318        62   $  (23,928     (9%    $  (39,736     (13%

Service revenue

     134,696       33     136,523       31     145,938        30     (1,827     (1%      (9,415     (6%

Royalty revenue

     23,330       6     32,579       8     38,798        8     (9,249     (28%      (6,219     (16%
  

 

 

     

 

 

     

 

 

      

 

 

      

 

 

   

Total revenue

   $  402,680       $  437,684       $  493,054        $  (35,004     (8%    $  (55,370     (11%
  

 

 

     

 

 

     

 

 

      

 

 

      

 

 

   

Fiscal 2019 compared to fiscal 2018

We had total revenue of $402.7 million in fiscal 2019, a $35.0 million or 8% decrease from fiscal 2018, primarily due to decreased product and royalty revenue.

Product revenue decreased $23.9 million, or 9% in fiscal 2019 from fiscal 2018. This year-over-year decrease was primarily due to decreases in high performance shared storage systems and devices and media. Service revenue decreased $1.8 million, or 1% in fiscal 2019 compared to fiscal 2018. Royalty revenue decreased $9.2 million, or 28%, in fiscal 2019 compared to fiscal 2018 due to lower overall market volume and our sales mix being weighted towards older generation LTO technology.

Fiscal 2018 compared to fiscal 2017

We had total revenue of $437.7 million in fiscal 2018, a $55.4 million or 11% decrease from fiscal 2017, driven from declines across product, service, and royalty revenue. Product revenue decreased $39.7 million, or 13% in fiscal 2018 from fiscal 2017 due to decreases in all product revenues except an increase in high-performance shared storage systems. Service revenue decreased $9.4 million, or 6% in fiscal 2018 compared to fiscal 2017 primarily due to decreases in service revenue for our tape storage and disk backup storage systems. Royalty revenue decreased $6.2 million, or 16%, in fiscal 2018 compared to fiscal 2017 due to lower overall market volume and our sales mix being weighted towards older generation LTO technology.

 

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Product revenue

 

     For the Years Ended March 31,     Change  
     2019      % of
revenue
    2018      % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018     2018 vs 2017  

Revenue

                       

Primary storage systems

   $ 64,797        16   $ 80,064        18   $ 71,323        14   $ (15,267     (19 %)    $ 8,741       12

Secondary storage systems

     120,542        30     119,314        27     151,245        31     1,228       1     (31,931     (21 %) 

Device and media

     59,315        15     69,204        16     85,750        17     (9,889     (14 %)      (16,546     (19 %) 
  

 

 

      

 

 

      

 

 

      

 

 

     

 

 

   

Total product revenue

   $ 244,654        61   $ 268,582        61   $ 308,318        63   $ (23,928     (9 %)    $ (39,736     (13 %) 
  

 

 

      

 

 

      

 

 

      

 

 

     

 

 

   

Fiscal 2019 compared to fiscal 2018

Product revenue decreased $23.9 million, or 9% in fiscal 2019 from fiscal 2018. This year-over-year decrease was primarily due to decreases in primary storage systems of $15.3 million or 19% and devices and media of $9.9 million or 14%. The year-over-year decrease in primary storage systems was primarily due to shifting away from lower margin resell products towards more profitable products. The year over year decrease in devices and media was primarily due to lower media revenues driven by lower market volume and our sales mix being weighted towards older generation LTO technology. These media market conditions were primarily due to supply constraints as a result of legal disputes between the two principal suppliers of LTO tape.

Fiscal 2018 compared to fiscal 2017

Product revenue decreased $39.7 million, or 13% in fiscal 2018 from fiscal 2017. Revenue from secondary storage systems decreased $31.9 million or 21%, primarily driven by declines in our OEM tape business and domestic market sales. Revenue from devices and media declined $16.5 million, or 19% primarily due to overall device volume declines resulting from pressure from cloud technologies at the low end of the backup market and lower overall media market volume and our sale mix being weighted towards older generation LTO technology. Partially offsetting these declines was an increase in revenue of $8.7 million, or 12% from primary storage systems.

Service revenue

We offer a broad range of services including maintenance, implementation and training. Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware. Standard service contracts may be extended or include enhanced service, such as faster service response times.

Fiscal 2019 compared to fiscal 2018

Service revenue slightly decreased $1.8 million, or 1% in fiscal 2019 compared to fiscal 2018 due to decreased service revenue for our secondary storage systems.

Fiscal 2018 compared to fiscal 2017

Service revenue decreased $9.4 million, or 6% in fiscal 2018 compared to fiscal 2017 due to decreased service revenue for our secondary storage systems.

Royalty Revenue

Fiscal 2019 compared to fiscal 2018

Royalty revenue decreased $9.2 million, or 28% in fiscal 2019 compared to fiscal 2018 due to lower overall market volume and our sales mix being weighted towards older generation LTO technology. During fiscal 2019 supply constraints on the latest generation LTO technology, which carries a higher royalty rate, impacted overall royalty revenue. The supply constraints resulted from legal disputes between the two principal suppliers of LTO tape as described under the “Risks Related to our Business Operations” Section of Item 1A Risk Factors. Those disputes were recently resolved.

 

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Table of Contents

Fiscal 2018 compared to fiscal 2017

Royalty revenue decreased $6.2 million, or 16% in fiscal 2018 compared to fiscal 2017 due to lower overall market volume and our sales mix being weighted towards older generation LTO technology, which carry a lower royalty rate.

Gross profit

 

     For the Years Ended March 31,     Change  
                                            2019 vs 2018      2018 vs 2017  
(dollars in thousands)    2019      Margin     2018      Margin     2017
(As Restated)
     Margin     Profit     Basis
points
     Profit     Basis
points
 

Gross profit

                        

Product profit

   $ 64,808        26   $ 62,471        23   $ 81,658        26   $ 2,337       324      $ (19,187     (319

Service profit

     79,476        59     77,734        57     84,816        58     1,742       206        (7,082     (118

Royalty profit

     23,330        100     32,579        100     38,798        100     (9,249     —          (6,219     —    
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Total gross profit

   $ 167,614        42   $ 172,784        39   $ 205,272        42   $ (5,170    

214

     $ (32,488    

(215)

 
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Fiscal 2019 compared to fiscal 2018

Despite a decrease in the high margin royalty revenue in fiscal 2019, the year over year increase in gross margin from 39% in fiscal 2018 to 42% in fiscal 2019 was driven by higher gross margin for both product and service revenue.

Fiscal 2018 compared to fiscal 2017

The year over year decrease in gross margin from 42% in fiscal 2017 to 39% in fiscal 2018 was primarily due to lower product and service gross margins.

Product margin

Fiscal 2019 compared to fiscal 2018

Product gross margin increased from 23% in fiscal 2018 compared to 26% in fiscal 2019. By product, the gross margin increased for back-up storage systems, high-performance shared storage systems, devices and media.

Fiscal 2018 compared to fiscal 2017

Product gross margin decreased in 2018 compared to 2017 by 3%. The year over year gross margin for tape storage, high-performance shared storage systems and backup storage systems decreased by 2%, 2% and 4%, respectively. These decreases were primarily due to lower average selling prices due to competition.

Service margin

Fiscal 2019 compared to fiscal 2018

The year over year improvement in the service gross margin of 2% from 57% in fiscal 2018 to 59% in fiscal 2019 is primarily due to a decrease in the service spending of $3.6 million or 6% in fiscal 2019. This decrease in spending in fiscal 2019 was primarily due to a decrease in the related average service headcount of 19%.

 

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Fiscal 2018 compared to fiscal 2017

The slight decrease of 1% in service gross margin in fiscal 2018 compared to 2017 is primarily due to a year over year decrease in service spending of $2.3 million or 4% offset by a decrease in service revenue of $9.4 million or 6%.

Royalty margin

Royalties do not have significant related cost of sales and therefore are considered to have a 100% gross margin. Therefore, royalty gross margin dollars vary directly with royalty revenue.

Research and development

 

     For the Years Ended March 31,     Change  
(dollars in thousands)    2019      % of
revenue
    2018      % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018     2018 vs 2017  

Research and development

   $ 32,113        8   $ 38,562        9   $ 44,379        9   $ (6,449     (17 )%    $ (5,817     (13 )% 

Fiscal 2019 compared to fiscal 2018

Research and development expense decreased $6.4 million or 17%. This decrease was primarily due to a $6.3 million or 17% decrease in compensation and benefits largely related to a lower average year over year research and development headcount of 21%.

Fiscal 2018 compared to fiscal 2017

Research and development expense decreased $5.8 million or 13%. This decrease was primarily due to a $4.1 million decrease in compensation and benefits largely related to a lower average year over year research and development headcount of 14%. Additionally, we had a year over year decrease of $0.8 million in project materials.

Sales and marketing

 

     For the Years Ended March 31,     Change  
(dollars in thousands)    2019      % of
revenue
    2018      % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018     2018 vs
2017
 

Sales and marketing

   $ 69,400        17   $ 102,242        23   $ 100,527        20   $ (32,842     (32 )%    $ 1,715        2

Fiscal 2019 compared to fiscal 2018

Sales and marketing expense decreased $32.8 million or 32%. This decrease was driven by our continuing efforts to optimize resources around strategic areas of our business. There was a decrease in compensation and benefits of $25.5 million largely related to a lower average year over year sales and marketing headcount of 36%. Marketing program spending was also reduced in fiscal 2019 by $5.7 million compared to the previous fiscal year.

Fiscal 2018 compared to fiscal 2017

Sales and marketing expense increased $1.7 million or 2%. This increase was primarily due to a net increase of $4.4 million in salary and software application expense from the reclassification of sales operations and associated information technology programs to the sales organization. This was largely offset by decreases in expense for marketing programs and sales compensation.

 

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General and administrative

 

     For the Years Ended March 31,     Change  
(dollars in thousands)    2019      % of
revenue
    2018      % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018     2018 vs
2017
 

General and administrative

   $ 65,277        16   $ 52,128        12     $51,590        10   $ 13,149        25   $ 538        1

Fiscal 2019 compared to fiscal 2018

General and administrative expenses increased $13.1 million or 25%. This increase was primarily due to a $18.0 million increase in professional fees associated with the financial restatement activities and related civil ligation defense costs. This is partially offset by a $3.8 million decrease in compensation and benefits largely related to a lower average year over year general and administrative headcount of 17%, and a $1.1 million decrease in infrastructure costs related to facility consolidation activities.

Fiscal 2018 compared to fiscal 2017

General and administrative expenses increased by $0.5 million or 1%. This increase was primarily due to a $1.4 million increase in contingent fees. This increase was largely offset by decreases in compensation and benefits largely related to lower average general and administrative headcount of 20%.

Restructuring charges

 

     For the Years Ended March 31,     Change  
(dollars in thousands)    2019      % of
revenue
    2018      % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018     2018 vs 2017  

Restructuring charges

   $ 5,570        1   $ 8,474        2   $ 2,095        0   $ (2,904     (34 %)    $ 6,379        304

Fiscal 2019 compared to fiscal 2018

Restructuring charges decreased by $2.9 million or 34%. This decrease was primarily due to the higher level of headcount reductions that occurred during 2018. In fiscal 2018, plans were announced to reduce the workforce which led to the elimination of 207 positions compared to 84 position eliminated in fiscal 2019.

Fiscal 2018 compared to fiscal 2017

Restructuring charges increased $6.4 million or 304%. This increase was primarily due to a $6.8 million increase in severance and benefits related to restructuring activities that occurred in fiscal 2018 offset by a change in estimate related to certain restructuring activities.

For additional information on our restructuring plans and disclosure of restructuring charges refer to Note 6: Restructuring Charges to the consolidated financial statements. Until we achieve consistent and sustainable levels of profitability, we may incur restructuring charges in the future from additional strategic cost reduction efforts, and efforts to align our cost structure with our business model.

 

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Table of Contents

Interest expense, net

 

     For the Years Ended March 31,     Change  
(dollars in thousands)    2019      % of
revenue
    2018      % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018     2018 vs 2017  

Interest expense, net

   $ 21,095        5   $ 11,670        3   $ 7,993        2   $ 9,425        81   $ 3,677        46

Fiscal 2019 compared to fiscal 2018

Interest expense increased by $9.4 million or 81%. This increase was primarily due to a higher interest rate and principal balance during fiscal 2019 on our long term debt.

For further information, refer to Note 5: Long-Term Debt to the consolidated financial statements.

Fiscal 2018 compared to fiscal 2017

Interest expense increased by $3.7 million or 46%. This increase was primarily due to higher interest rates on our term loan and revolving line of credit in fiscal 2018 compared to fiscal 2017.

Interest expense includes the amortization of debt issuance costs. For further information, refer to Note 5 Long-Term Debt to the consolidated financial statements.

Loss on debt extinguishment

 

     For the Years Ended March 31,     Change  
(dollars in thousands)    2019      % of
revenue
    2018      % of
revenue
    2017
(As Restated)
     % of
revenue
    2019 vs 2018     2018 vs 2017  

Loss on debt extinguishment

   $ 17,458        4   $ 6,934        2   $ 41        0   $ 10,524        152   $ 6,893        nm  

Fiscal 2019 compared to fiscal 2018

Loss on debt extinguishment increased $10.5 million or 152%. The fiscal 2019 loss on debt extinguishment included $14.9 million related to the August 2018 modification of our TCW Term Loan and $1.8 million related to the August 2018 amendment to the PNC Credit Facility and $0.8 million related to the December 2018 amendment to the PNC credit Facility. During fiscal 2018, we recorded a loss on extinguishment of $6.9 million related to the February 2018 amendment to our TCW Term Loan.

 

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Table of Contents

Fiscal 2018 compared to fiscal 2017

Loss on debt extinguishment was $6.9 million in fiscal 2018. The fiscal 2018 loss on debt extinguishment related to the February 2018 amendment to our TCW Term Loan which was accounted for as an extinguishment. The loss on debt extinguishment in fiscal 2017 was less than $0.1 million.

For further information, refer to Note 5: Long-Term Debt to the consolidated financial statements.

Other income, net

 

     For the Years Ended March 31,           Change  
(dollars in thousands)    2019     % of
revenue
    2018     % of
revenue
    2017
(As Restated)
    % of
revenue
    2019 vs 2018      2018 vs 2017  

Other income, net

   $ (2,878     (1 %)    $ (767     0   $ (601     0   $ (2,111     (275%)      $ (166     (28 %) 

Fiscal 2019 compared to fiscal 2018

Other income increased $2.1 million or 275%. This increase was primarily due to a gain of $2.8 million on the disposal of an investment offset by a $0.6 million reduction in foreign exchange gain as compared to fiscal 2018.

Fiscal 2018 compared to fiscal 2017

Other income increased $0.2 million or 28%. This increase was primarily due to a decrease in other expenses of $0.2 million as compared to fiscal 2017.

Income tax expense (benefit)

 

     For the Years Ended March 31,     Change  
(dollars in thousands)    2019      % of pre-tax
income
    2018     % of pre-tax
income
    2017
(As Restated)
     % of pre-tax
income
    2019 vs 2018     2018 vs 2017  

Income tax expense (benefit)

   $ 2,376        6   $ (3,113     7   $ 1,656        220   $ 5,489        176   $ (4,769     (288 %) 

Fiscal 2019 compared to fiscal 2018

Income tax expense (benefit) increased $5.5 million. The increase was primarily due to fiscal 2018 benefiting from a $2.1 million reserve release resulting from an audit settlement with the German tax authorities and a $2.9 million refundable tax credit resulting from the repeal of the Corporate Alternative Minimum Tax enacted as part of the Tax Cuts and Jobs Act of 2017.

Fiscal 2018 compared to fiscal 2017

Income tax expense (benefit) decreased $4.8 million. This decrease was primarily due to fiscal 2018 benefiting from a $2.1 million reserve release resulting from an audit settlement with the German tax authorities and a $2.9 million refundable tax credit resulting from the repeal of the Corporate Alternative Minimum Tax enacted as part of the Tax Cuts and Jobs Act of 2017.

For additional information, including a reconciliation of the effective tax rate, refer to Note 8: Income Taxes to the consolidated financial statements.

QUARTERLY DISCUSSION AND ANALYSIS

Selected Quarterly Financial Data

The following table sets forth selected financial data for each of the periods indicated. Amounts are computed independently each quarter; therefore, the sum of the quarterly amounts may not equal the total amount for the respective year due to rounding.

 

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Table of Contents
    For the Quarters Ended                          
    As Restated                                         Percentage Increase/(Decrease)  
   

June 30,
2017

(Q1)

   

September 30,
2017

(Q2)

   

December 31,
2017

(Q3)

   

March 31,
2018

(Q4)

   

June 30,
2018

(Q1)

   

September 30,
2018

(Q2)

   

December 31,
2018

(Q3)

   

March 31,
2019

(Q4)

   

Q1 2019

vs.

Q1 2018

   

Q2 2019

vs.

Q2 2018

   

Q3 2019

vs.

Q3 2018

   

Q4 2019

vs.

Q4 2018

 

Revenue

                       

Product revenue

  $ 69,483     $ 67,596     $ 75,343     $ 56,160     $ 66,869     $ 51,622     $ 62,986     $ 63,177       (4%     (24%     (16%     12%  

Service revenue

    35,117       34,910       34,875       31,621       33,564       33,352       34,097       33,683       (4%     (4%     (2%     7%  

Royalty revenue

    9,995       9,280       5,776       7,528       7,079       4,938       4,896       6,417       (29%     (47%     (15%     (15%
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    114,595       111,786       115,994       95,309       107,512       89,912       101,979       103,277       (6%     (20%     (12%     8%  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

                       

Product cost of revenue

    50,680       51,602       58,119       45,710       45,438       41,319       45,819       47,270       (10%     (20%     (21%     3%  

Service cost of revenue

    15,077       14,865       14,915       13,932       15,735       13,066       13,078       13,341       4%       (12%     (12%     (4%
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    65,757       66,467       73,034       59,642       61,173       54,385       58,897       60,611       (7%     (18%     (19%     2%  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    48,838       45,319       42,960       35,667       46,339       35,527       43,082       42,666       (5%     (22%     0%       20%  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

                       

Research and development

    10,605       10,190       9,162       8,605       8,261       7,862       7,907       8,083       (22%     (23%     (14%     (6%

Sales and marketing

    27,078       25,824       26,711       22,629       19,125       16,682       16,990       16,603       (29%     (35%     (36%     (27%

General and administrative

    12,424       11,506       12,416       15,782       19,391       14,072       13,481       18,333       56%       22%       9%       16%  

Restructuring charges

    1,631       70       4,239       2,534       3,907       294       1,227       142       140%       320%       (71%     (94%
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    51,738       47,590       52,528       49,550       50,684       38,910       39,605       43,161       (2%     (18%     (25%     (13%
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain (loss) from operations

    (2,900     (2,271     (9,568     (13,883     (4,345     (3,383     3,477       (495     50%       49%       (136%     (96%

Other expenses and losses, net:

                       

Interest expense, net

    2,579       2,638       2,968       3,485       3,935       4,636       6,238       6,286       53%       76%       110%       80%  

Loss on debt extinguishment

    —         39       —         6,895       —         12,425       5,033       —         0%       31759%       —         (100%

Other expenses (income)

    (98     (77     (210     (382     (220     196       (3,846     992       124%       (355%     1731%       (360%
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (5,381     (4,871     (12,326     (23,881     (8,060     (20,640     (3,948     (7,773     50%       324%       (68%     (67%

Income tax expense (benefit)

    (1,262     228       (2,127     48       (575     977       337       1,637       (54%     329%       (116%     3310%  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (4,119   $ (5,099   $ (10,199   $ (23,929   $ (7,485   $ (21,617   $ (4,285   $ (9,410     82%       324%       (58%     (61%
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For further details regarding the restatement see Note 2: Restatement and Note 13: Quarterly Financial Information (Unaudited) to the Notes to our consolidated financial statements included in this Annual Report on Form 10-K under the caption Item 8: Financial Statements and Supplementary Data.

Revenue

Quarter ended June 30, 2018 compared to the quarter ended June 30, 2017

We had total revenue of $107.5 million in fiscal Q1 2019, a $7.1 million or 6% decrease from fiscal Q1 2018, this was due to decreased revenues across product, service, and royalties.

Product revenue decreased $2.6 million, or 4% in fiscal Q1 2019 compared to fiscal Q1 2018. This year over year decrease was primarily due to decreases in high performance shared storage systems and tape storage. Service revenue decreased $1.6 million, or 4% in fiscal Q1 2019 compared to fiscal Q1 2018 due to decreased service contract revenue from our tape storage. Royalty revenue decreased $2.9 million, or 29%, in fiscal Q1 2019 compared to fiscal Q1 2018 due to lower overall market volume and mix weighted towards older generation LTO technology.

Quarter ended September 30, 2018 compared to the quarter ended September 30, 2017

We had total revenue of $89.9 million in fiscal Q2 2019, a $21.9 million or 20% decrease compared to fiscal Q2 2018, this was due to decreased revenues across product, service, and royalties.

 

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Product revenue decreased $16.0 million, or 24% in fiscal Q1 2019 compared to fiscal Q1 2018. This year over year decrease was primarily due to decreases in revenue from tape storage and devices and media. Service revenue decreased $1.6 million, or 4% in fiscal Q2 2019 compared to fiscal Q2 2018 due to decreased service contract revenue from our tape storage. Royalty revenue decreased $4.3 million, or 47%, in fiscal Q2 2019 compared to fiscal Q2 2018 due to lower overall market volume and mix weighted towards older generation LTO technology.

Quarter ended December 31, 2018 compared to the quarter ended December 31, 2017

We had total revenue of $102.0 million in fiscal Q3 2019, a $14.0 million or 12% decrease compared to fiscal Q3 2018, this was due to decreased revenues across product, service, and royalties.

Product revenue decreased $12.4 million, or 16% in fiscal Q3 2019 compared to fiscal Q3 2018. This year over year decrease was primarily due to decreases in high performance shared storage systems and devices and media. Service revenue decreased $0.8 million, or 2% in fiscal Q3 2019 compared to fiscal Q3 2018 due to decreased service contract revenue from our tape storage. Royalty revenue decreased $0.9 million, or 15%, in fiscal Q3 2019 compared to fiscal Q3 2018 due to lower overall market volume and mix weighted towards older generation LTO technology.

Quarter ended March 31, 2019 compared to the quarter ended March 31, 2018

We had total revenue of $103.3 million in fiscal Q4 2019, a $8.0 million or 8% increase compared to fiscal Q4 2018, primarily due to increases in product and service revenue. This was partially offset by a decrease in royalty revenue.

Product revenue increased $7.0 million, or 12% in fiscal Q4 2019 compared to fiscal Q4 2018. This year over year increase was primarily due to an increase in tape storage. Service revenue increased $2.1 million, or 7% in fiscal Q4 2019 compared to fiscal Q4 2018 due to increased service contract revenue from our Xcellis Workflow Storage product lines. Royalty revenue decreased $1.1 million, or 15%, in fiscal Q4 2019 compared to fiscal Q4 2018 due to lower overall market volume and mix weighted towards older generation LTO technology.

Gross margin

Quarter ended June 30, 2018 compared to the quarter ended June 30, 2017

Year over year gross margin remained relatively flat at 43% in fiscal Q1 2018 and fiscal Q1 2019.

Product gross margin increased from 27% in fiscal Q1 2018 to 32% in fiscal Q1 2019. By product, the gross margin decreased for back up storage systems which was more than offset by improvements in gross margin for high-performance shared storage systems, tape storage, devices and media.

Year over year service gross margin decreased from 57% in fiscal Q1 2018 to 53% in fiscal Q1 2019. This is primarily due to an increase in the service spending of $0.7 million or 4% in fiscal Q1 2019 combined with an decrease in service revenues of $1.6 million or 4%.

Royalties do not have significant related cost of sales and therefore are considered to have a 100% gross margin. Therefore, royalty gross margin dollars vary directly with royalty revenue.

Quarter ended September 30, 2018 compared to the quarter ended September 30, 2017

The year over year decrease in gross margin from 41% in fiscal Q2 2018 to 40% in fiscal Q2 2019 was primarily due to lower product gross margins.

 

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Product gross profit decreased from 24% in fiscal Q2 2018 to 20% in fiscal Q2 2019. By product, the gross profit decreased for tape storage and devices and media, which was partially offset by improvements in gross profit for high-performance shared storage systems and back up storage systems.

The year over year improvement in the service gross profit of four points from 57% in fiscal Q2 2018 to 61% in fiscal Q2 2019 is primarily due to a decrease in the service spending of $1.8 million or 12% in fiscal Q2 2019 combined with an decrease in service revenues of $1.4 million or 4%. This decrease in spending in fiscal Q2 2019 was primarily due to a decrease in the related average service headcount of 23%.

Royalties do not have significant related cost of sales and therefore are considered to have a 100% gross profit. Therefore, royalty gross profit dollars vary directly with royalty revenue.

Quarter ended December 31, 2018 compared to the quarter ended December 31, 2017

The year over year increase in gross profit from 37% in fiscal Q3 2018 to 42% in fiscal Q3 2019 was primarily due to higher product and service gross margins.

Product gross profit increased by four points in fiscal Q3 2019 compared to fiscal Q3 2018. By product, the gross margin decreased for tape storage which was more than offset by improvements in gross margin for high-performance shared storage systems, back up storage systems, devices and media.

The year over year improvement in the service gross profit of five points from 57% in fiscal Q3 2018 to 62% in fiscal Q3 2019 is primarily due to a decrease in the service spending of $1.8 million or 12% in fiscal Q3 2019 combined with an decrease in service revenues of $0.4 million or 2%. This decrease in spending in fiscal Q3 2019 was primarily due to a decrease in the related average service headcount of 21%.

Royalties do not have significant related cost of sales and therefore are considered to have a 100% gross profit. Therefore, royalty gross margin dollars vary directly with royalty revenue.

Quarter ended March 31, 2019 compared to the quarter ended March 31, 2018

The year over year increase in gross profit from 37% in fiscal Q4 2018 to 41% in fiscal Q4 2019 was primarily due to higher product and service gross profits.

Product gross margin increased six points in fiscal Q4 2019 compared to fiscal Q4 2018. By product, the gross profit decreased for tape storage, back up storage systems, devices and media, which was more than offset by improvements in gross margin for high-performance shared storage systems.

The year over year improvement in the service gross profit of four points from 56% in fiscal Q4 2018 to 60% in fiscal Q4 2019 is primarily due to a decrease in the service spending of $0.6 million or 4% in fiscal Q4 2019 combined with an increase in service revenues of $2.1 million or 7%. This decrease in spending in fiscal 2019 was primarily due to a decrease in the related average service headcount of 8%.

Royalties do not have significant related cost of sales and therefore are considered to have a 100% gross margin. Therefore, royalty gross profit dollars vary directly with royalty revenue.

Research and development

Quarter ended June 30, 2018 compared to the quarter ended June 30, 2017

Research and development expense decreased $2.3 million or 22% in fiscal Q1 2019 compared to fiscal Q1 2018. This decrease was primarily due to a $2.0 million decrease or 24% in compensation and benefits largely related to a lower average year over year research and development headcount of 26%.

 

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Quarter ended September 30, 2018 compared to the quarter ended September 30, 2017

Research and development expense decreased $2.3 million or 23% in fiscal Q2 2019 compared to fiscal Q2 2018. This decrease was primarily due to a $2.1 million or 26% decrease in compensation and benefits largely related to a lower average year over year research and development headcount of 26%.

Quarter ended December 31, 2018 compared to the quarter ended December 31, 2017

Research and development expense decreased $1.3 million or 14% in fiscal Q3 2019 compared to fiscal Q3 2018. This decrease was primarily due to a $1.1 million or 15% decrease in compensation and benefits largely related to a lower average year over year research and development headcount of 22%.

Quarter ended March 31, 2019 compared to the quarter ended March 31, 2018

Research and development expense decreased $0.5 million or 6% in fiscal Q4 2019 compared to fiscal Q4 2018. This decrease was primarily due to a $1.1 million or 15% decrease in compensation and benefits largely related to a lower average year over year research and development headcount of 5%.

Sales and marketing

Quarter ended June 30, 2018 compared to the quarter ended June 30, 2017

Sales and marketing expense decreased $8.0 million or 29% in fiscal Q1 2019 compared to fiscal Q1 2018. This decrease was driven by our continuing efforts to optimize resources around strategic areas of our business. There was a decrease in compensation and benefits of $5.3 million in fiscal 2019 compared to fiscal 2018 largely related to a lower average year over year sales and marketing headcount of 32%. Marketing program spending was also reduced in fiscal 2019 by $1.6 million compared to the previous fiscal year.

Quarter ended September 30, 2018 compared to the quarter ended September 30, 2017

Sales and marketing expense decreased $9.1 million or 35% in fiscal Q2 2019 compared to fiscal Q2 2018. This decrease was driven by our continuing efforts to optimize resources around strategic areas of our business. There was a decrease in compensation and benefits of $5.6 million in fiscal 2019 compared to fiscal 2018 largely related to a lower average year over year sales and marketing headcount of 41%. Marketing program spending was also reduced in fiscal 2019 by $1.8 million compared to the previous fiscal year.

Quarter ended December 31, 2018 compared to the quarter ended December 31, 2017

Sales and marketing expense decreased $9.7 million or 36% in fiscal Q3 2019 compared to fiscal Q3 2018. This decrease was driven by our continuing efforts to optimize resources around strategic areas of our business. There was a decrease in compensation and benefits of $6.6 million in fiscal 2019 compared to fiscal 2018 largely related to a lower average year over year sales and marketing headcount of 43%. Marketing program spending was also reduced in fiscal 2019 by $1.7 million compared to the previous fiscal year.

Quarter ended March 31, 2019 compared to the quarter ended March 31, 2018

Sales and marketing expense decreased $6.0 million or 27% in fiscal Q4 2019 compared to fiscal Q4 2018. This decrease was driven by our continuing efforts to optimize resources around strategic areas of our business. There was a decrease in compensation and benefits of $5.0 million in fiscal 2019 compared to fiscal 2018 largely related to a lower average year over year sales and marketing headcount of 27%. Marketing program spending was also reduced in fiscal 2019 by $0.6 million compared to the previous fiscal year.

 

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General and administrative

Quarter ended June 30, 2018 compared to the quarter ended June 30, 2017

General and administrative expense increased $7.0 million or 56% in fiscal Q1 2019 compared to fiscal Q1 2018. This increase was primarily due to a $5.8 million increase in professional fees associated with the financial restatement activities and related civil ligation defense costs, and an additional $1.0 million in outside service related to the business transition. This is partially offset by a $0.9 million decrease in compensation and benefits largely related to a lower year over year general and administrative average headcount of 15%.

Quarter ended September 30, 2018 compared to the quarter ended September 30, 2017

General and administrative expense increased $2.6 million or 22% in fiscal Q2 2019 compared to fiscal Q2 2018. This increase was primarily due to a $3.3 million increase in professional fees associated with the financial restatement activities and related civil ligation defense costs. This is partially offset by a $1.2 million decrease in compensation and benefits largely related to a lower year over year general and administrative average headcount of 17%.

Quarter ended December 31, 2018 compared to the quarter ended December 31, 2017

General and administrative expense increased $1.1 million or 9% in fiscal Q3 2019 compared to fiscal Q3 2018. This increase was primarily due to a $4.6 million increase in professional fees associated with the financial restatement activities and related civil ligation defense costs. This is partially offset by a $0.7 million decrease in compensation and benefits largely related to a lower year over year general and administrative average headcount of 20%, a $0.5 million decrease in infrastructure costs related to facility consolidation activities, and a $0.9 million decrease in other expenses related to the business transition.

Quarter ended March 31, 2019 compared to the quarter ended March 31, 2018

General and administrative expense increased $2.6 million or 16% in fiscal Q4 2019 compared to fiscal Q4 2018. This increase was primarily due to a $7.2 million increase in professional fees associated with the financial restatement activities and related civil ligation defense costs. This is partially offset by a $1.0 million decrease in compensation and benefits largely related to a lower year over year general and administrative average headcount of 17%.

Restructuring charges

In the first quarter of fiscal 2019, restructuring charges increased by $2.3 million as compared to the first quarter of fiscal 2018 due to a $1.8 million increase in severance and benefits and a $0.5 million increase in facilities restructuring. In the second quarter of fiscal 2019, restructuring charges increased by $0.2 million as compared to the second quarter of fiscal 2018 due to a $0.2 million increase in severance and benefits. In the third quarter of fiscal 2019, restructuring charges decreased by $3.0 million as compared to the third quarter of fiscal 2018 due to a $3.2 million decrease in severance and benefits. In the fourth quarter of fiscal 2019, restructuring charges decreased by $2.4 million as compared to the fourth quarter of fiscal 2018 due to a $2.4 million decrease in severance and benefits

For additional information on our restructuring plans and disclosure of restructuring charges refer to Note 6: Restructuring Charges to the Consolidated Financial Statements. Until we achieve consistent and sustainable levels of profitability, we may incur restructuring charges in the future from additional strategic cost reduction efforts, and efforts to align our cost structure with our business model.

Interest expense, net

The increased interest expense in each of the quarter in fiscal year 2019 compared to each of the quarters in fiscal year 2018 is driven by the overall increase in interest rates on our term loans and revolving line of credit. In addition, increases in our overall debt balances during the fiscal quarters ended December 31, 2018 and March 31, 2019 in relation to the comparable periods in the prior fiscal year resulted in a further increase in our interest expense.

Loss on debt extinguishment

During the fiscal year ended March 31, 2019, the Company incurred a loss on debt extinguishment of $17.5 million which includes $14.9 million related to the August 2018 amendment to the TCW Term Loan, $1.8 million related to the August 2018 amendment to the PNC Credit Facility and $0.8 million related to the December 2018 amendment to the PNC Credit Facility.

Other expenses and losses,

In the first quarter of fiscal 2019, other income increased by $0.1 million as compared to the first quarter of fiscal 2018 due to the impact of change in mark-to-market valuation of the warrants related to our long-term debt. In the second quarter of fiscal 2019, other income decreased by $0.3 million as compared to the second quarter of fiscal 2018 due to the impact of change in mark-to-market valuation of the warrants related to our long-term debt. In the third quarter of fiscal 2019, other income increased by $3.6 million as compared to the third quarter of fiscal 2018. This increase was primarily due to a gain of $2.8 million on the disposal of an investment and an increase of $1.1 million resulting from the change in mark-to-market valuation on the warrants related to our long-term debt. In the fourth quarter of fiscal 2019, other income decreased by $1.4 million as compared to the fourth quarter of fiscal 2018. This decrease was primarily due to a decrease of $1.0 million resulting from the loss on the mark-to-market valuation on the warrants related to our long-term debt and a decrease of $0.4 million in foreign exchange gain.

 

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Income tax expense (benefit)

Quarter ended June 30, 2018 compared to the quarter ended June 30, 2017

Income tax benefit was $0.6 million in the first quarter of fiscal 2019 compared with $1.3 million in the first quarter of fiscal 2018. The $0.7 million decrease in income tax benefit was primarily due to the first quarter of fiscal 2018 benefitting from a $1.5 million reserve release resulting from an audit settlement with the German tax authorities.

Quarter ended September 30, 2018 compared to the quarter ended September 30, 2017

Income tax expense was $1.0 million in the second quarter of fiscal 2019 compared with $0.2 million in the second quarter of fiscal 2018. The $0.8 million increase in tax expense was primarily due to higher foreign taxes in the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018.

Quarter ended December 31, 2018 compared to the quarter ended December 31, 2017

Income tax expense was $0.3 million in the third quarter of fiscal 2019 compared with an income tax benefit of $2.1 million in the third quarter of fiscal 2018. The $2.4 million increase in income tax expense was primarily due to the third quarter of fiscal 2018 benefitting from a $2.9 million refundable tax credit resulting from the repeal of the Corporate Alternative Minimum Tax enacted as part of the Tax Cuts and Jobs Act of 2017.

Quarter ended March 31, 2019 compared to the quarter ended March 31, 2018

Income tax expense was $1.6 million in the fourth quarter of fiscal 2019 compared with an income tax expense of less than $0.1 million in the fourth quarter of fiscal 2018. The $1.6 million increase in income tax expense was primarily due to the fourth quarter of fiscal 2018 benefitting from a $0.6 million reserve release resulting from an audit settlement with the German tax authorities more than offset by higher foreign taxes in the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018.

Liquidity and Capital Resources

We consider liquidity in terms of the sufficiency of internal and external cash resources to fund our operating, investing and financing activities. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our balance sheet and amounts available under our Amended PNC Credit Facility (as defined below).

 

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We require significant cash resources to meet our obligations to pay principal and interest on our outstanding debt, provide for our research and development activities, fund our working capital needs and make capital expenditures. Our future liquidity requirements will depend on multiple factors, including our research and development plans and capital asset needs. We may need or decide to seek additional funding through equity or debt financings but cannot guarantee that additional funds would be available on terms acceptable to us, if at all.

We had cash and cash equivalents of $10.8 million as of March 31, 2019, compared to $10.9 million as of March 31, 2018. These amounts exclude, as of the end of both fiscal years, $5.0 million in restricted cash that we are required to maintain under the Credit Agreements (as defined below).

Our outstanding long-term debt amounted to $145.6 million as of March 31, 2019, net of $17.3 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt, and $116.0 million as of March 31, 2018, net of $7.5 million current portion of long-term debt. We also have a revolving credit facility with PNC, which was undrawn and had an available amount of $18.9 million as of March 31, 2019 (subject to change based on certain financial metrics). See “—Debt Profile and Covenants” and “—Contractual Obligations” below for further information about our outstanding debt.

We are highly leveraged and subject to various debt covenants under our Credit Agreements (as defined below), including financial maintenance covenants that require progressive improvements in metrics related to our financial condition and results of operations. Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations. See “Risks Related to our Business Operations” section of Item 1A Risk Factors.

Cash Flows

The following table summarizes our consolidated cash flows for the periods indicated.

 

     Fiscal Years Ended March 31,     2019 vs. 2018     2018 vs. 2017  
($ in thousands)    2019     2018     2017
(Restated)
    $ Change     $ Change  

Cash provided by (used in):

          

Operating activities

   $ (16,859   $ (5,032   $ 8,556     $ (11,827   $ (13,588

Investing activities

     235       (2,296     (1,433     2,531       (863

Financing activities

     16,210       (11,232     (7,886     27,442       (3,346

Effect of exchange rate changes

     62       (145     17       207       (162
  

 

 

   

 

 

   

 

 

     

Net decrease in cash and cash equivalents and restricted cash

   $ (352   $ (18,705   $ (746    
  

 

 

   

 

 

   

 

 

     

Cash Provided by (Used in) Operating Activities

Net cash used in operating activities was $16.9 million in fiscal 2019, an increase of $11.8 million from $5.0 million in fiscal 2018, mainly reflecting a $25.4 million decrease in payables in fiscal 2019, compared to a $21.6 million increase in fiscal 2018, and an approximately $7.4 million increase in cash interest expense in fiscal 2019 compared to fiscal 2018, reflecting the terms of our refinanced debt. Our outstanding payables increased steadily through each quarter in 2018 due to our efforts to manage working capital, undertaken mainly to fund costs related to professional fees associated with the financial restatement activities and related civil ligation defense costs, and decreased steadily through fiscal 2019, except in the fourth quarter, reflecting a normalization of our payables cycles following our debt refinancing in late December 2018. These factors more than offset the impact of a $20.9 million improvement in loss from operations.

Net cash used in operating activities was $5.0 million in fiscal 2018, a net decrease of $13.6 million from cash provided by operating activities of $8.6 million in fiscal 2017. The change was driven mainly by a $33.9 million net decrease in income (loss) from operations (to a loss of $27.2 million in fiscal 2018 from income of $6.7 million in fiscal 2017) and partially offset by a $21.6 million decrease in payables in fiscal 2018, as discussed above, compared to $5.3 million increase in fiscal 2017. An approximately $4.3 million increase in cash interest expense also contributed to the change between periods.

 

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Cash provided by (used in) investing activities

Net cash provided by investing activities was $0.2 million in fiscal 2019, reflecting investment income of $2.9 million related to an investment in an equity fund that was liquidated during the period, which more than offset $2.7 million in capital expenditures. Net cash used in investing activities was $2.3 million and $1.4 million in fiscal 2018 and 2017, respectively, reflecting capital expenditures in both years, partially offset in 2017 by $0.7 million in asset sales. Our capital expenditures in all fiscal years consisted primarily of tooling, engineering lab equipment, and leasehold improvements.

Cash provided by (used in) financing activities

Net cash provided by financing activities was $16.2 million in fiscal 2019. Net cash used in financing activities was $11.2 million in fiscal 2018 and $7.9 million in fiscal 2017. In all years, the results were driven by our debt refinancing activities, which are summarized under “—Debt Profile and Covenants” below and Note 5: Long-Term Debt, to our consolidated financial statements.

Debt Profile and Covenants

We are party to a senior secured revolving credit facility in an available principal amount equal to the lesser of (i) $45.0 million and (ii) the “borrowing base” (as defined under the Amended PNC Credit Agreement) (the “Amended PNC Credit Facility”) under an Amended and Restated Revolving Credit and Security Agreement (the “Amended PNC Credit Agreement”) with certain lenders and PNC Bank, National Association, as administrative agent. We entered into the Amended PNC Credit Agreement in December 2018 and borrowed approximately $4.4 million on the closing date, which was subsequently repaid. The Amended PNC Credit Facility had a borrowing base of $18.9 million as of March 31, 2019, all of which was available at that date and remains available as of the date of filing of this Annual Report on Form 10-K.

We are also party to a senior secured term loan facility in an aggregate principal amount of $165.0 million (the “Senior Secured Term Loan”) under a Term Loan Credit and Security Agreement between us, certain lenders and U.S. Bank, National Association, as disbursing and collateral agent, entered into in December 2018 (the “Senior Secured Credit Agreement” and together with the Amended PNC Credit Agreement, the “Credit Agreements”). The Term Loan Credit Agreement provides for a senior secured term loan of $150.0 million, drawn on the closing date, and a senior secured delayed draw term loan of $15.0 million, drawn in January 2019. The proceeds of the Senior Secured Term Loan were used to repay our previously outstanding long-term debt and fund our working capital requirements. Outstanding amounts under both Credit Agreements mature and are due and payable on December 27, 2023.

Borrowings under the Amended PNC Credit Facility bear interest, at our option, equal to, (a) the greater of (i) the base rate, as defined in the Amended PNC Credit Facility, (ii) the daily Overnight Bank Funding Rate plus 0.5% and (iii) the daily LIBOR rate plus 1.0%, plus an applicable margin of (A) 3.00% for the period from the facility closing date until the date quarterly financial statements are delivered to PNC for the fiscal quarter ending June 30, 2019 and (B) thereafter, ranging from 2.50% to 3.50% based on our applicable Total leverage Ratio, as described below, or (b) the LIBOR rate plus an applicable margin of (A) 4.00% for the period from the facility closing date until the date quarterly financial statements are delivered to PNC for the fiscal quarter ending June 30, 2019 and (B) thereafter, ranging from 3.50% to 4.50% based on our applicable total leverage ratio, as defined in the Amended PNC Credit Facility agreement. Interest on the Amended PNC Credit Facility is payable quarterly.

Borrowings under the Senior Secured Term Loan bear interest at a rate per annum, at our option, equal to (a) the greater of (i) 3.00%, (ii) the Federal funds rate plus 0.50%, (iii) the LIBOR rate plus 1.0%, and (iv) the Prime rate as quoted by the Wall Street Journal, plus an applicable margin of 9.00% or (b) LIBOR Rate plus an applicable margin of 10.00%. Interest on the Senior Secured Term Loan is payable quarterly. Principal payments of 0.25% of the original balance of the Senior Secured Term Loan are due quarterly with the remaining principal balance due at maturity. Additionally, on an annual basis beginning with the fiscal year ending March 31, 2020, we will be required to perform a calculation of Excess Cash Flow, as defined in the Senior Secured Senior Secured Credit Agreement, which may require an additional payment of the principal in certain circumstances. The interest rate applicable to our borrowings under the Senior Secured Term Loan as of March 31, 2019 was 12.6%.

 

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Pursuant to each Credit Agreement, we granted a lien to the respective agents under the Senior Secured Term Loan and the Amended PNC Credit Facility in all of the assets now owned or hereafter acquired by us, Quantum LTO Holdings, LLC, our wholly-owned direct subsidiary and any future domestic subsidiary that, at the respective agent’s discretion, becomes a loan party under the Credit Agreements, including, without limitation: accounts, books, chattel paper, commercial tort claims, deposit accounts, equipment, fixtures, general intangibles, inventory, investment property, intellectual property and intellectual property licenses, equity interests, securities accounts, supporting obligations, money and cash equivalents, and the proceeds and products of each of the foregoing, in each case, subject to certain exceptions.

The Credit Agreements contain certain customary financial and other covenants, including requirements to prepay the loans in an amount equal to 100% of the net cash proceeds from certain assets dispositions, subject to certain reinvestment rights and other exceptions, and restrictions on the payment of dividends and certain other payments (subject to certain exceptions). Amounts outstanding under the Credit Agreements may become due and payable upon the occurrence of specified events, which among other things include (subject to certain exceptions and cure periods): failure to pay principal, interest, or any fees when due; breach of any representation or warranty, covenant, or other agreement in the Credit Agreements; the occurrence of a bankruptcy or insolvency proceeding with respect to the Company or any of its subsidiaries; any “Event of Default” with respect to other indebtedness involving an aggregate amount of $1.0 million or more; any lien created by the Credit Agreements or any related security documents ceasing to be valid and perfected; the Credit Agreements or any related security documents or guarantees ceasing to be legal, valid, and binding upon the parties thereto; or a change of control.

The Credit Agreements also require us to meet the following financial maintenance covenants, which are tested quarterly for compliance:

 

   

A minimum Fixed Charge Coverage Ratio, defined in the Credit Agreements as the ratio of (x) Covenant EBITDA (as defined below) less unfunded capital expenditures (as defined in the Credit Agreements) for a given period to (y) consolidated fixed charges (as defined in the Credit Agreements, including interest, scheduled principal and fees paid on outstanding debt, cash income tax expense, certain restricted payments, and cash rent) for that period.

The table below sets forth the minimum Fixed Charge Coverage Ratios that we must meet for each four consecutive fiscal quarter period ending on the indicated dates:

 

     Minimum Fixed Charge Coverage Ratio  

Fiscal Quarter Ending

   Senior Secured Term Loan      Amended PNC Credit Facility  

March 31, 2019

     0.75:1.00        0.81:1.00  

June 30, 2019

     0.85:1.00        0.97:1.00  

September 30, 2019

     0.90:1.00        1.05:1.00  

December 31, 2019

     0.90:1.00        1.20:1.00  

March 31, 2020

     1.05:1.00        1.25:1.00  

June 30, 2020

     1.05:1.00        1.30:1.00  

September 30, 2020

     1.25:1.00        1.40:1.00  

December 31, 2020 and each fiscal quarter ending thereafter

     1.25:1.00        1:50:1.00  

 

   

A maximum Total Net Leverage Ratio, defined in the Credit Agreements as the ratio, on a consolidated basis, of (x)(1) with respect to the Senior Secured Term Loan, our outstanding debt (as defined under the Credit Agreements) as of a given date or (2) with respect to the Amended PNC Credit Facility, our average outstanding debt and issued but undrawn letters of credit under the Amended PNC Credit Facility (in each case, as determined pursuant to the Credit Agreements) during a fiscal quarter, minus (3) in each case, restricted and certain other cash and cash equivalents (as defined under the Credit Agreements) as of a given date, to (y) Covenant EBITDA for the four fiscal quarter period ending on the given date.

 

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The table below sets forth the maximum Total Net Leverage Ratios that we must not exceed as of the indicated dates:

 

     Maximum Total Net Leverage Ratio  

Fiscal Quarter Ending

   Senior Secured Term Loan      Amended PNC Credit Facility  

March 31, 2019

     6.00:1.00        5.43:1.00  

June 30, 2019

     5.50:1.00        4.80:1.00  

September 30, 2019

     5.00:1.00        4.40:1.00  

December 31, 2019

     4.50:1.00        3.75:1.00  

March 31, 2020

     4.00:1.00        3.50:1.00  

June 30, 2020

     3.75:1.00        3.25:1.00  

September 30, 2020

     3.50:1.00        2.75:1.00  

December 31, 2020

     3.25:1.00        2:50:1.00  

March 31, 2021 and each fiscal quarter ending thereafter

     3.00:1.00        2:50:1.00  

 

   

If our Total Net Leverage Ratio, on a consolidated basis, is greater than 3.25 to 1.00 as of a given date, we must maintain Covenant EBITDA of not less than the amount set forth in the table below for each four consecutive fiscal quarter period ending as of the dates indicated:

 

     Minimum Covenant EBITDA (in whole dollars)  

Fiscal Quarter Ending

   Senior Secured Term Loan      Amended PNC Credit Facility  

March 31, 2019

   $ 25,000,000        27,500,000  

June 30, 2019

   $ 28,000,000        31,000,000  

September 30, 2019

   $ 30,000,000        33,000,000  

December 31, 2019

   $ 30,000,000        37,000,000  

March 31, 2020

   $ 35,000,000        38,000,000  

June 30, 2020

   $ 35,000,000        39,000,000  

September 30, 2020

   $ 40,000,000        45,000,000  

December 31, 2020

   $ 40,000,000        48,000,000  

March 31, 2021

   $ 40,000,000        48,000,000  

June 30, 2021 and each fiscal quarter ending thereafter

   $ 45,000,000        48,000,000  

 

   

With respect to the Amended PNC Credit Facility only, a maximum Total Leverage Ratio, defined in the Credit Agreements as the ratio, on a consolidated basis, of (x) our outstanding debt (as defined under the Credit Agreements) to (y) Covenant EBITDA for the four fiscal quarter period ending on the given date.

The table below sets forth the maximum Total Net Leverage Ratios that we must not exceed as of the indicated dates:

 

     Maximum Total Leverage Ratio  

Fiscal Quarter Ending

   Amended PNC Credit Facility  

March 31, 2019

     6.00:1.00  

June 30, 2019

     5.30:1.00  

September 30, 2019

     5.00:1.00  

December 31, 2019

     4.50:1.00  

March 31, 2020

     4.25:1.00  

June 30, 2020

     4:00:1.00  

September 30, 2020

     3.50:1.00  

December 31, 2020

     3.50:1.00  

March 31, 2021 and each fiscal quarter ending thereafter

     3.50:1.00  

 

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Maintain, as of the end of each quarterly period, minimum liquidity (as defined in the Credit Agreements, including certain unrestricted cash amounts and amounts available under the Amended PNC Credit Facility, less certain expenses) of at least $10.0 million.

As of the three-month period ended March 31, 2019, we reported the following covenant measures to our lenders:

 

   

Fixed Charge Coverage Ratio of 1.37 to 1.00;

 

   

Total Net Leverage Ratio of 4.07 to 1.00;

 

   

Covenant EBITDA of $37.3 million (see “—Covenant EBITDA” below);

 

   

Total Leverage Ratio of 4.41 to 1.00; and

 

   

Liquidity of $31.4 million.

We believe we were in compliance with all covenants under the Credit Agreements as of the date of filing of this Annual Report on Form 10-K.

Covenant EBITDA

Covenant EBITDA is identical to “EBITDA” as defined under the Credit Agreements and we are required to report it to our lenders pursuant to the covenants contained in the Credit Agreements. Covenant EBITDA is a key component of compliance metrics under certain covenants in the Credit Agreement, as described above. Consequently, we consider Covenant EBITDA to be an important measure of our financial condition. Covenant EBITDA reflects further adjustments to Adjusted EBITDA as discussed in “Non-U.S. GAAP Financial Measures” included above in Item 7. The key adjustments include adding back amortization of service inventory and a limitation on total allowable professional fees related to the financial restatement activities that will be added back to the Covenant EBITDA.

Covenant EBITDA is calculated under the Credit Agreements as our net loss determined based on U.S. GAAP for a given fiscal period, adjusted for certain items, including without limitation: taxes and tax credits, interest expense, depreciation and amortization, certain non-cash compensation and other charges, certain refinancing-related costs (up to certain aggregate limits), certain severance and facility closure costs (up to certain aggregate limits), certain transaction-related costs and purchase accounting and other adjustments with respect to acquisitions permitted under the Credit Agreements, certain expenses in connection with the professional fees associated with the financial restatement activities and related civil ligation defense costs (up to certain aggregate limits), and other items.

Commitments and Contingencies

Our contingent liabilities consist primarily of certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. We have little history of costs associated with such indemnification requirements and contingent liabilities associated with product liability may be mitigated by our insurance coverage. In the normal course of business to facilitate transactions of our services and products, we indemnify certain parties with respect to certain matters, such as intellectual property infringement or other claims. We also have indemnification agreements with our current and former officers and directors. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of our indemnification claims, and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our operating results, financial position or cash flows.

We are also subject to ordinary course litigation and potential costs related to professional fees associated with the financial restatement activities and related civil ligation defense costs, See Note 11 Commitments and Contingencies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

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Off Balance Sheet Arrangements

We entered into a registration rights agreement with the holders of the warrants issued to the lenders under the Term Loan Credit Agreement, as described under “—Contractual Obligations” below. The agreement calls for us to prepare and file a registration statement with the SEC and use commercially reasonable efforts to cause the registration statement to be declared effective as soon as practicable, but in no event later than October 31, 2019 (the “Registration Penalty Date”). If we are unable to file and cause a registration statement to be declared effective by the Registration Penalty Date, we would be required to pay each warrant holder an amount of cash equal to (i) $300,000 multiplied by (ii) such holder’s pro rata share of all outstanding warrants on the day of a Registration Penalty Date and on every thirtieth day thereafter until such filing failure is cured. In the event we fail to make the delay payments in a timely manner, such outstanding payments shall bear interest at 5.0% until paid in full. We expect to meet all registration requirements and determined that such a payment was not probable at the time the agreement was entered into, nor was such a payment probable as of March 31, 2019 or as of the date of filing of this Annual Report on Form 10-K.

Except for this registration rights contingency and the indemnification commitments described under “—Commitments and Contingencies” above, we do not currently have any other off-balance sheet arrangements and do not have any holdings in variable interest entities.

Contractual Obligations

We have contractual obligations and commercial commitments, some of which are not recognized as liabilities in our financial statements. The table below summarizes our material enforceable and legally binding obligations and future commitments as of March 31, 2019.

 

            Fiscal Years Ending March 31,  
(dollars in thousands)    Total      2020      2021 to 2022      2023 to 2024      After 2024  

Debt(a)

   $ 164,588      $ 1,650      $ 3,300      $ 159,638      $ —    

Interest on debt(b)

     96,107        20,660        40,696        34,751        —    

Operating leases(c)

     19,356        4,424        7,097        4,130        3,705  

Purchase obligations(d)

     32,404        32,404        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 312,455      $ 59,138      $ 51,093      $ 198,519      $ 3,705  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Represents nominal principal amount of debt outstanding under the Senior Secured Term Loan as of March 31, 2019. See Note 5: Long-Term Debt, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

(b)

Estimated interest payment obligations have been calculated for all periods assuming an interest rate of 12.6%, which was the rate applicable to outstanding amounts under the Senior Secured Term Loan as of March 31, 2019.

(c)

Operating leases include leases of certain facilities under non-cancelable lease agreements and equipment leases for various types of office equipment. Some of the leases have renewal options ranging from one to ten years and others contain escalation clauses.

(d)

Includes primarily contractual commitments to purchase inventory from contract manufacturers and other suppliers.

In addition to the contractual obligations included in the table above, in connection with our entry into the Senior Secured Term Loan, we issued warrants to purchase approximately 7.1 million shares of our common stock, at an exercise price of $1.33 per share, to the lenders under the Term Loan Credit Agreement (the “Senior Secured Term Loan Warrants”). The exercise price and the number of shares underlying the Senior Secured Term Loan Warrants are subject to adjustment in the event of specified events, including dilutive issuances of common stock or common stock linked equity instruments at a price lower than the exercise price of the warrants, a subdivision, combination or reclassification of our common stock, or specified dividend payments. The Senior Secured Term Loan Warrants are exercisable until December 27, 2028. Upon exercise, the aggregate exercise price may be paid, at each warrant holder’s election, in cash or on a net issuance basis, based upon the fair market value of our common stock at the time of exercise. The warrants liability is recorded at fair value in shareholders equity. See Note 5: Long-Term Debt, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

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Critical Accounting Policies, Estimates and Assumptions

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. On an ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider the following accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change. The following accounting policies include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain. For information on our significant accounting policies, including the policies discussed below, see Note 3: Summary of Significant Accounting Policies, to our consolidated financial statements.

Revenue Recognition

Our revenue is derived from three main sources: (1) Products, (2) Professional services and (3) Royalties. Our performance obligations are satisfied at a point in time or over time as stand ready obligations. A majority of our revenue is recognized at a point in time when products are accepted, installed or delivered. Product revenue is recognized at the point in time when the customer takes control of the product, which typically occurs at the point of shipment. Professional services revenue primarily consists of installation, consulting and training and hardware and software support. Installation services are typically completed within a short period of time and revenue from these services is recognized upon completion, while revenue from support plans is recognized ratably over the contractual term of the service contract. We license certain products under royalty arrangements, pursuant to which our licensees periodically provide us with reports containing units sold to end users subject to the royalties. The reports substantiate that our performance obligation has been satisfied and we recognize royalty revenue based on the reports or when amounts can be reasonably estimated.

There are significant judgements used when applying ASC Topic 606 to contracts with customers. Most of our contracts contain multiple goods and services designed to meet each customers’ unique storage needs. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price of the good or service underlying each performance obligation. Where standalone selling price may not be directly observable (e.g., the performance obligation is not sold separately), we maximize the use of observable inputs by using information including reviewing discounting practices, performance obligations with similar customers and product groupings. We determined that invoice price is the best representation of what we expect to receive from the delivery of each performance obligation. This judgment is based on the fact that each storage solution is customizable to meet an individual customer’s needs and every product’s transaction price can vary depending on the mix of other products included in the same purchase order and there are no identifiable trends that provide a good representation of expected margin for each product.

Product revenue may be impacted by a variety of price adjustments or other factors, including rebates, returns and stock rotation. We use the expected value method to estimate the net consideration expected to be returned to the customer. We use historical data and current trends to drive our estimates. We record a reduction to revenue to account for these items that may result in variable consideration. We initially measure a returned asset at the carrying amount of the inventory, less any expected costs to recover the goods including potential decreases in value of the returned goods.

Income Taxes

Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and tax bases of assets and liabilities, measured at the enacted tax rates expected to apply to taxable income in the years in which those tax assets or liabilities are expected to be realized or settled. Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.

 

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A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the tax provision.

We recognize the financial statement effects of an uncertain income tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. We recognize penalties and tax-related interest expense as a component of income tax expense in our consolidated statements of operations. See Note 8: Income Taxes, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Inventories

Manufacturing Inventories

Our manufacturing inventory is recorded at the lower of cost or net realizable value, with cost being determined on a first-in, first-out (“FIFO”) basis. Costs include material, direct labor, and an allocation of overhead in the case of work in process. Adjustments to reduce the cost of manufacturing inventory to its net realizable value, if required, are made for estimated excess, obsolete or impaired balances. Factors influencing these adjustments include declines in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates.

Service Parts Inventories

Our service parts inventories are recorded at the lower of cost or net realizable value, with cost being determined on a FIFO basis. Service parts inventories consist of both component parts, which are primarily used to repair defective units, and finished units, which are provided for customer use permanently or on a temporary basis while the defective unit is being repaired. We record adjustments to reduce the carrying value of service parts inventory to its net realizable value, and dispose of parts with no use and a net realizable value of zero. Factors influencing these adjustments include product life cycles, end of service life plans and the volume of enhanced or extended warranty service contracts. Estimates of net realizable value involve significant estimates and judgments about the future, and revisions would be required if these factors differ from our estimates.

Restructuring Reserves

Restructuring reserves include charges related to the realignment and restructuring of our business operations. These charges represent judgments and estimates of costs of severance, closure and consolidation of facilities and settlement of contractual obligations under our operating leases, including sublease rental rates, asset write-offs and other related costs. We reassess the reserve requirements to complete each individual plan under restructuring programs at the end of each reporting period. If these estimates change in the future or actual results differ from our estimates, additional charges may be required.

Recently Issued and Adopted Accounting Pronouncements

For recently issued and adopted accounting pronouncements, see Note 3: Summary of Significant Accounting Policies, to our consolidated financial statements.

 

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ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.

Interest Rate Risk

Our primary market risk exposure is to changing interest rates on our long-term debt. We had total outstanding debt of $162.9 million under our variable interest Senior Secured Term Loan as of March 31, 2019. Borrowings under the Senior Secured Term Loan bear interest at a rate per annum, at the Company’s option, equal to (a) the greater of (i) 3.00%, (ii) the Federal funds rate plus 0.50%, (iii) the LIBOR Rate based upon an interest period of 1 month plus 1.0%, and (iv) the Prime Rate as quoted by the Wall Street Journal, plus an applicable margin of 9.00% or (b) LIBOR Rate plus an applicable margin of 10.00%. Interest on the Senior Secured Term Loan is payable quarterly. Principal payments of 0.25% of the original balance of the Senior Secured Term Loan are due quarterly with the remaining principal balance due at maturity. Based on the amounts outstanding, a 100-basis point increase or decrease in market interest rates would result in a change to annual interest expense of approximately $1.6 million at March 31, 2019. As of March 31, 2019, we have no borrowings on our Amended TCW Credit Facility. Our other long-term debt related to lease obligations have fixed interest rates and terms, and as such, we consider the associated risk to our results of operations from changes in market rates of interest to be minimal.

Foreign Exchange Risk

We conduct business in certain international markets. Because we operate in international markets, we have exposure to different economic climates, political arenas, tax systems and regulations that could affect foreign exchange rates. Our primary exposure to foreign currency risk relates to transacting in foreign currency and recording the activity in U.S. dollars. Changes in exchange rates between the U.S. dollar and these other currencies will result in transaction gains or losses, which we recognize in our Consolidated Statements of Operations.

To the extent practicable, we minimize our foreign currency exposures by maintaining natural hedges between our assets and liabilities and revenues and expenses denominated in foreign currencies. We may enter into foreign exchange derivative contracts or other economic hedges in the future. Our goal in managing our foreign exchange risk is to reduce to the extent practicable our potential exposure to the changes that exchange rates might have on our earnings.

Inflation Risk

Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

 

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

     Page  

Quantum Corporation – Financial Statements

  

Independent Auditor’s Report

     61  

Consolidated Balance Sheets

     63  

Consolidated Statements of Operations and Comprehensive Loss

     64  

Consolidated Statements of Cash Flows

     65  

Consolidated Statements of Stockholders’ Deficit

     67  

Notes to Consolidated Financial Statements

     68  

Schedule II – Consolidated Valuation and Qualifying Accounts

     192  

 

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Independent Auditors Report

To the Board of Directors and Stockholders

Quantum Corporation

San Jose, California

Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Quantum Corporation and its subsidiaries (the “Company”) as of March 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the three-year period ended March 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2019 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set form therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal controls over financial reporting as of March 31, 2019, based on the criteria established in Internal Controls—Integrated Framework (2013) issued by the COSO because of material weaknesses in internal control over the Company’s control environment, revenue recognition and financial reporting process that existed as of March 31, 2019.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in the accompanying Management Report on Internal Control Over Financial Reporting. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audits of the March 31, 2019, 2018, and 2017 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Restatement of Previously Issued Consolidated Financial Statements and Management’s Conclusion Regarding Internal Control over Financial Reporting

As discussed in Note 2 to the consolidated financial statements, the Company has restated its fiscal 2017 consolidated financial statements to correct misstatements.

Management previously concluded that the Company maintained effective internal control over financial reporting as of March 31, 2017. However, management has subsequently determined that material weaknesses in internal control over financial reporting related to ineffective controls within the Company’s financial reporting process existed as of that date.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for revenue in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method.

 

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Basis for Opinion

The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements on the financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ ArmaninoLLP

We have served as the Company’s auditor since 2019.

San Ramon, California

August 6, 2019

 

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QUANTUM CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

     March 31,  
     2019     2018  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 10,790     $ 10,865  

Accounts receivable, net of allowance for doubtful accounts of $68 and $320 as of March 31, 2019 and 2018, respectively

     86,828       96,350  

Manufacturing inventories

     18,440       34,428  

Service part inventories

     19,070       21,889  

Other current assets

     18,095       13,565  

Restricted cash, current

     1,065       1,342  
  

 

 

   

 

 

 

Total current assets

     154,288       178,439  

Property and equipment, net

     8,437       9,698  

Intangible assets, net

     34       138  

Restricted cash, long-term

     5,000       5,000  

Other long term assets

     5,112       9,364  
  

 

 

   

 

 

 

Total assets

   $ 172,871     $ 202,639  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current liabilities:

    

Accounts payable

   $ 37,395     $ 62,646  

Deferred revenue, current

     90,407       96,866  

Accrued restructuring charges, current

     2,876       3,166  

Long-term debt, current portion

     1,650       7,500  

Accrued compensation

     17,117       19,460  

Other accrued liabilities

     29,025       17,638  
  

 

 

   

 

 

 

Total current liabilities

     178,470       207,276  

Deferred revenue, long-term

     36,733       38,587  

Accrued restructuring charges, long-term

     —         2,653  

Long-term debt, net of current portion

     145,621       115,986  

Other long-term liabilities

     11,827       11,604  
  

 

 

   

 

 

 

Total liabilities

     372,651       376,106  

Commitment and contingencies (Note 11)

    

Stockholders’ deficit

    

Preferred stock 20,000 shares authorized; no shares issued or outstanding as of March 31, 2019 and 2018

     —         —    

Common stock, $0.01 par value per share; 1,000,000 shares authorized; 36,040 and 35,443 shares issued and outstanding at March 31, 2019 and March 31, 2018, respectively

     360       354  

Additional paid-in capital

     499,224       481,610  

Accumulated deficit

     (697,954     (655,157

Accumulated other comprehensive loss

     (1,410     (274
  

 

 

   

 

 

 

Total stockholders’ deficit

     (199,780     (173,467
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 172,871     $ 202,639  
  

 

 

   

 

 

 

The accompanying Notes are an integral part of these consolidated financial statements.

 

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QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

 

     Years Ended
March 31,
 
     2019     2018     2017
(As Restated)
 

Revenue:

      

Product revenue

   $ 244,654     $ 268,582     $ 308,318  

Service revenue

     134,696       136,523       145,938  

Royalty revenue

     23,330       32,579       38,798  
  

 

 

   

 

 

   

 

 

 

Total revenue

     402,680       437,684       493,054  
  

 

 

   

 

 

   

 

 

 

Costs and expenses:

      

Product cost of revenue

     179,846       206,111       226,660  

Service cost of revenue

     55,220       58,789       61,122  
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     235,066       264,900       287,782  
  

 

 

   

 

 

   

 

 

 

Gross profit

     167,614       172,784       205,272  
  

 

 

   

 

 

   

 

 

 

Operating expense

      

Research and development

     32,113       38,562       44,379  

Sales and marketing

     69,400       102,242       100,527  

General and administrative

     65,277       52,128       51,590  

Restructuring charges

     5,570       8,474       2,095  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     172,360       201,406       198,591  
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (4,746     (28,622     6,681  

Other (income) expense,

      

Interest expense

     21,095       11,670       7,993  

Loss on debt extinguishment

     17,458       6,934       41  

Other income, net

     (2,878     (767     (601
  

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (40,421     (46,459     (752

Income tax expense (benefit)

     2,376       (3,113     1,656  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (42,797   $ (43,346   $ (2,408
  

 

 

   

 

 

   

 

 

 

Loss per share - basic and diluted

   $ (1.20   $ (1.25   $ (0.07
  

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding - basic and diluted

     35,551       34,687       33,742  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (42,797   $ (43,346   $ (2,408

Change in foreign currency translation adjustments

     (1,136     1,402       (770
  

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (43,933   $ (41,944   $ (3,178
  

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these consolidated financial statements.

 

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QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Years Ended March 31,  
     2019     2018     2017  
                 (As Restated)  

Cash flows from operating activities:

      

Net loss

   $ (42,797   $ (43,346   $ (2,408

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     4,266       4,970       5,635  

Amortization of debt issuance costs

     2,825       1,537       1,373  

Provision for product and service inventories

     8,851       8,146       7,609  

Tax benefit from settlement and Tax Reform Act

     —         (3,952     —    

Stock-based compensation expense

     3,409       5,394       6,698  

Non-cash interest expense

     1,670       49       —    

Non-cash loss on debt extinguishment

     17,851       6,962       —    

Non-cash restructuring charges

     —         598       —    

Bad debt expense

     315       295       24  

Deferred income taxes, net

     2,356       69       497  

Loss on disposal of property and equipment

     268       129       11  

Unrealized foreign exchange (gain) loss

     (224     1,437       (650

Change in fair value of liability classified warrants

     (143     (210     —    

(Gain) loss on investment

     (2,729     118       —    

Changes in assets and liabilities:

      

Accounts receivable

     8,054       6,510       (370

Manufacturing inventories

     13,054       (2,613     3,827  

Service parts inventories

     (3,506     (6,760     (3,404

Accounts payable

     (25,356     21,647       (5,284

Accrued restructuring charges

     (2,943     (463     (1,644

Accrued compensation

     (2,342     (4,330     1,784  

Deferred revenue

     (8,367     4,228       (1,686

Other assets and liabilities

     8,629       (5,447     (3,456
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (16,859     (5,032     8,556  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment

     (2,708     (2,584     (2,217

Proceeds from sale of assets

     51       10       736  

Cash distributions from investments

     2,892       278       48  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     235       (2,296     (1,433
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Borrowings of long-term debt, revolving credit facility and subordinated convertible debt, net of debt issuance costs

     507,707       367,755       104,914  

Repayments long-term of debt

     (491,143     (316,053     (113,082

Repayment of convertible subordinated debt

     —         (62,827     —    

Payment of tax withholding due upon vesting of restricted stock

     (354     (1,822     (737

Proceeds from issuance of common stock under the employee stock purchase plan

     —         1,715       1,019  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     16,210       (11,232     (7,886
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     62       (145     17  
  

 

 

   

 

 

   

 

 

 

Net decrease in cash, cash equivalents and restricted cash

     (352     (18,705     (746

Cash, cash equivalents and restricted cash at the beginning of period

     17,207       35,912       36,658  
  

 

 

   

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at the end of period

   $ 16,855     $ 17,207     $ 35,912  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Purchases of property and equipment included in accounts payable

   $ 105     $ 173     $ 279  

Transfer of inventory to property and equipment

   $ 408     $ 1,036     $ 1,928  

Cash Paid For:

      

Interest

   $ 17,677     $ 10,244     $ 5,966  

Income taxes, net of refunds

   $ 68     $ 1,455     $ 677  

The accompanying Notes are an integral part of these consolidated financial statements.

 

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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statement of cash flows.

 

 

Cash and cash equivalents

   $ 10,790      $ 10,865      $ 12,958  

Restricted cash, current

     1,065        1,342        2,954  

Restricted cash, long-term

     5,000        5,000        20,000  
  

 

 

    

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash at the end of period

   $ 16,855      $ 17,207      $ 35,912  
  

 

 

    

 

 

    

 

 

 

The accompanying Notes are an integral part of these consolidated financial statements.

 

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QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands)

 

                             Accumulated        
     Common Stock     Additional     Accumulated     Other Comprehensive        
     Shares     Amount     Paid-in Capital     Deficit     Loss     Total  

Balances at March 31, 2016 (as reported)

     33,276     $ 332     $ 466,879     $ (596,940   $ 3,844     $ (125,885

Cumulative restatement adjustments

           (12,463     (4,750     (17,213
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2016 (as restated)

     33,276       332       466,879       (609,403     (906     (143,098

Net loss

           (2,408       (2,408

Foreign currency translation adjustments

             (770     (770

Shares issued under employee stock purchase plan

     293       3       1,016           1,019  

Shares issued under employee stock incentive plans, net

     693       7       (7         —    

Shares surrendered in lieu of withholding taxes for stock incentive plans

     (199     (2     (735         (737

Stock-based compensation expense

         6,698           6,698  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2017 (as restated)

     34,063       340       473,851       (611,811     (1,676     (139,296

Net loss

           (43,346       (43,346

Foreign currency translation adjustment

             1,402       1,402  

Shares issued under employee stock purchase plan

     316       3       1,712           1,715  

Shares issued under employee stock incentive plans, net

     1,064       11       (1,827         (1,816

Stock-based compensation expense

         5,990           5,990  

Reclassifications of liability classified warrants to equity

         1,884           1,884  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2018

     35,443       354       481,610       (655,157     (274     (173,467

Net loss

           (42,797       (42,797

Foreign currency translation adjustment

             (1,136     (1,136

Shares issued under employee stock purchase plan

     597       6       (360         (354

Stock-based compensation expense

         3,409           3,409  

Reclassification of liability classified warrants to equity

         14,565           14,565  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2019

     36,040     $ 360     $ 499,224     $ (697,954   $ (1,410   $ (199,780
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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QUANTUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1:

DESCRIPTION OF BUSINESS

Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), founded in 1980 and reincorporated in Delaware in 1987, is a proven industry leader in storing and managing video and video-like data delivering, the industry’s top streaming performance for video and rich media applications, along with the lowest cost, highest density massive-scale data protection and archive systems. The Company helps customers capture, create and share digital data and preserve and protect it for decades. The Company’s end-to-end, software-defined, hyperconverged storage solutions span from non-violate memory express (“NVMe”), to solid state drives, (“SSD”), hard disk drives, (“HDD”), tape and the cloud and are tied together leveraging a single namespace view of the entire data environment. The Company works closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving needs.

 

NOTE 2:

RESTATEMENT

Restatement of Previously Issued Financial Statements

In February 2018, the Audit Committee (“Audit Committee”) of our Board of Directors (the “Board”), and subsequently a special committee of the Board (the “Special Committee”) consisting of two members of the Audit Committee, began conducting an internal investigation, with the assistance of independent accounting and legal advisors, into matters related to the Company’s accounting practices and internal control over financial reporting related to revenue recognition for transactions occurring between January 1, 2016 and March 31, 2018. Upon the recommendation of the Audit Committee and as a result of the investigation by the Special Committee and after consultation with the Company’s management, on September 14, 2018, the Company’s Board of Directors concluded that the Company’s previously issued consolidated financial statements and other financial data for the fiscal years ended March 31, 2017, 2016 and 2015 contained in the Company’s Annual Reports on Form 10-K for the fiscal year ended March 31, 2017, and the Company’s condensed consolidated financial statements for each of the quarterly and year-to-date periods ended June 30, 2015, September 30, 2015, December 31, 2015, June 30, 2016, September 30, 2016, December 31, 2016, June 30, 2017 and September 30, 2017 (collectively, the “Non-Reliance Periods”) should not be relied upon and required restatement (the “Restatement”). The Board also determined that the Company’s disclosures related to these financial statements and related communications issued by or on behalf of the Company with respect to the Non-Reliance Periods, including management’s assessment of internal control over financial reporting and disclosure controls and procedures, should not be relied upon.

This Note discloses the nature of the Restatement adjustments and shows the impact of the restatement on revenues, expenses, income, assets, liabilities, equity, and cash flows from operating activities, investing activities and financing activities, and the cumulative effects of these adjustments on the consolidated balance sheets, statements of operations and comprehensive loss, statement of stockholders’ deficit and statements of cash flows for the fiscal year ended March 31, 2017. In addition, this Note shows the effects of the adjustment to opening accumulated deficit as of April 1, 2016, which adjustment reflects the impact of the Restatement on periods prior to the fiscal year ended March 31, 2017. The cumulative impact of the Restatement for all previously reported periods was an adjustment to increase accumulated deficit of approximately $12.5 million and decrease to accumulated other comprehensive income of approximately $4.8 million as of April 1, 2016. The impact on fiscal year 2017 was a reduction in pre-tax loss and net loss of $5.5 million and $6.1 million, respectively. The restated interim financial information for the relevant unaudited interim financial statements for the three months ended June 30, 2017 and the three-and six-months ended September 30, 2017 are included in Note 13: Quarterly Financial Data (Unaudited).

Restatement Background

On January 11, 2018, the Company received a subpoena from the Securities and Exchange Commission (“SEC”) seeking documents pertaining to the Company’s accounting practices and internal controls related to revenue recognition for transactions commencing April 1, 2016. The Company subsequently decided to postpone the release of Quantum’s results for the third quarter of fiscal 2018 and the Audit Committee began an independent investigation into the Company’s accounting practices and internal controls over financial reporting related to revenue recognition for transactions occurring between January 1, 2016 and March 31, 2018, with the assistance of independent accounting and legal advisors. Subsequently, the Special Committee, undertook to continue the investigation.

 

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In September 2018, the Special Committee substantially completed and finalized its principal findings with respect to its investigation. The principal findings included a determination that the Company engaged in certain business and sales practices that may have undermined its historical accounting treatment for transactions with several key distributors and at least one end customer. The Special Committee found that the identified transactions potentially affected by such practices commenced at least in the fourth quarter of fiscal 2015 and continued at least through the fourth quarter of fiscal 2018 (the “Investigation Related Revenue Misstatements”). The Special Committee also found that these business and sales practices may have resulted in the Company recognizing revenue for certain transactions prior to satisfying the criteria for revenue recognition required under generally accepted accounting principles in the United States of America (“U.S. GAAP”).

In response to the findings of the Special Committee, the Company conducted a thorough review of its financial records for the fiscal years ended March 31, 2015, 2016 and 2017, and for each of the quarterly and year to date periods ended June 30, 2017 and September 30, 2017 to determine whether further adjustments were necessary. The Company concluded that there were material misstatements in the consolidated financial statements for the fiscal years ended March 31, 2015, 2016 and 2017 as well as the unaudited interim consolidated financial statements for the quarterly periods ended June 30, 2016, December 31, 2016, June 30, 2017 and September 30, 2017.

The Special Committee investigation is now complete, although our outside legal counsel, together with the assistance of the independent legal counsel to the Special Committee and independent accounting advisors, continue to provide support as requested in connection with the SEC investigation discussed in more detail in Item 3—Legal Proceedings contained in this Annual Report on Form 10-K.

As part of the Company’s review of its financial records, management identified control deficiencies related to the control environment, risk assessment, information and communication, and monitoring. For further information regarding these control deficiencies, please see Item 9A—Controls and Procedures in this Annual Report on Form 10-K. The Company’s incorrect accounting was the result of these control deficiencies. The Company’s investigation found that one of these factors was that an inconsistent and sometimes inappropriate tone at the top was present under the then existing senior management that did not in certain instances result in adherence to U.S. GAAP and the Company’s accounting policies and procedures. Other factors affecting the overall historic accounting environment included: lack of an effective control environment for certain accounting estimates; lack of sufficient personnel with an appropriate level of knowledge, experience and training commensurate with the Company’s financial reporting requirements; lack of clear reporting structures, reporting lines and decisional authority responsibilities; lack of effective controls over certain business processes which included the execution of controls over revenue recognition and the preparation, analysis and review of significant account reconciliations and closing adjustments; and other matters. Taken together, these factors contributed to the consolidated financial statement errors that resulted in the Restatement.

Description of Restatement Matters and Restatement Adjustments

The categories of restatement adjustments and their impact on previously reported consolidated financial statements are described below.

 

  (a)

Investigation Related Revenue – As disclosed in Note 2: Restatement, the Company prematurely recognized product revenue sold to certain distributors, resellers and end-user customers. The associated product cost of revenue for each product revenue sales order was also recognized in the incorrect period. Additionally, for all transactions where product revenue was recognized prematurely, a reclassification is recorded at sell-in to reflect the movement of inventory at Quantum’s warehouse to inventory at its distributor’s warehouse. For the transactions where revenue was recognized prematurely, the Company restated the consolidated financial statements to reflect the revenue in the period in which the criteria for revenue recognition under U.S. GAAP have been satisfied. For revenue transactions where the criteria for revenue recognition under U.S. GAAP have not yet been satisfied, we deferred revenue recognition until all criteria are satisfied. The impact of this misstatement to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is a decrease to product revenue and product cost of revenue of $11.9 million and $4.5 million, respectively, and a decrease to pre-tax earnings of $7.4 million. The impact to the consolidated balance sheet at March 31, 2017 is a decrease to accounts receivable and other accrued liabilities of $13.6 million and $0.5 million, respectively and an increase to manufacturing inventories and deferred revenue current of $8.6 million and $4.1 million, respectively.

 

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  (b)

Service Revenue Amortization Convention – The Company inappropriately recognized service revenue on a monthly convention at the beginning of the initial month of service regardless of the service period start date resulting in an acceleration of revenue recognition. Additionally, certain annual service contracts were inappropriately recognized over a 13-month period resulting in a deceleration of revenue recognition. The combined impact of these misstatements to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is an increase to service revenue and pre-tax earnings of $1.6 million. The impact to the consolidated balance sheet at March 31, 2017 is an increase in current and long-term deferred revenue of $3.5 million and $1.3 million, respectively.

 

  (c)

Cash Consideration Paid to Customers – The Company inappropriately recorded cash consideration paid to customers as expenses rather than as a reduction of revenue as such payments did not meet the identifiable benefit criteria within the Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“Topic 605”) guidance. We have reclassified these expenses from sales and marketing expense to product revenue. The impact of this misstatement to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is a decrease to product revenue and sales and marketing expense of $2.0 million with no impact to pre-tax earnings. There was no impact to the consolidated balance sheet at March 31, 2017.

 

  (d)

Sales Tax – The Company inappropriately accrued U.S. states’ sales tax on foreign sales. There was no impact to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017. The impact of this misstatement to the consolidated balance sheet at March 31, 2017 is a decrease to accounts receivable and other accrued liabilities of $0.5 million.

 

  (e)

Accrued Warranty – The Company reviewed its warranty accrual methodology and determined that previous estimates did not appropriately reflect the Company’s historical experience. The Company changed its method in calculating the warranty accrual and applied the adjustments retroactively. The impact of this misstatement to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is an increase to service cost of revenue and a decrease to pre-tax earnings of $0.4 million. The impact to the consolidated balance sheet at March 31, 2017 is an increase in other accrued liabilities of $0.4 million.

 

  (f)

Commissions Accrual – Relating to misstatement (a), when the Company prematurely recognized revenue, the associated commission expense was also prematurely recognized. The Company restated commission expense to match the timing of associated revenue recognition. The impact of this misstatement to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is a decrease to sales and marketing expense and an increase in pre-tax earnings of $0.7 million. The impact to the consolidated balance sheet at March 31, 2017 is a decrease to accrued compensation of $1.4 million.

 

  (g)

Short Term Disability Plan – The Company inappropriately accounted for its employee funded disability plan and did not reflect employee contributions within restricted cash and did not recognize the obligation to fund disability claims as incurred. The impact of this misstatement on the consolidated balance sheet at March 31, 2017 is an increase to restricted cash and accrued compensation of $1.1 million. There was no impact to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017.

 

  (h)

Third Party Maintenance Contracts – The Company changed its method to appropriately account for capitalized third party maintenance contracts. The impact of this misstatement to the consolidated balance sheet at March 31, 2017 was a decrease to accounts payable and other current assets of $0.8 million. There was no impact of this misstatement to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017.

 

  (i)

Debt Issuance Costs – The Company reclassified capitalized debt issuance costs on its revolver loan from long-term debt to a current asset. The impact of this misstatement to the consolidated balance sheet at March 31, 2017 is an increase to long term debt, net of current portion and other long-term assets of $1.6 million. There was no impact to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017.

 

  (j)

Restructuring The Company did not properly calculate expenses related to its restructuring activities, including failure to apply appropriate discount rates and omitting certain facilities in calculating the restructuring liabilities. The impact of this misstatement to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is an increase to restructuring charges and a decrease in pre-tax earnings of less than $0.1 million. The impact to the consolidated balance sheet at March 31, 2017 is an increase to current and non-current accrued restructuring charges of $1.0 million and $3.9 million, respectively.

 

  (k)

General Presentation – Certain activities in the statement of cash flows and consolidated balance sheets have been reclassified to conform with current fiscal year’s presentation. The impact to the consolidated balance sheet at March 31, 2017 is a decrease to warranty liability and an increase to other accrued liabilities of $3.3 million. There was no impact to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017.

 

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  (l)

Australian Deferred Tax Assets and Valuation Allowance – The Company failed to record deferred tax assets for certain book-tax differences at an Australian affiliate and to further establish a valuation allowance against certain of the tax assets. The impact of this misstatement to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is an increase to income tax expense of $0.2 million. The impact to the balance sheet at March 31, 2017 is an increase to other long term assets and accumulated deficit of $0.5 million and $0.7 million, respectively.

 

  (m)

Deferred Tax Liability Related to Unrealized Swiss Currency Gains – The Company misclassified and under accrued Swiss income tax on unrealized currency gains attributable to a dollar-denominated intercompany note receivable. The impact of this misstatement to the consolidated balance sheet at March 31, 2017 is a decrease to other accrued liabilities of $0.6 million and an increase to accumulated other comprehensive loss and other long-term liabilities of $0.1 million and $0.5 million respectively. There was no impact of this misstatement to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017.

 

  (n)

Reserves for Uncertain Tax Positions on Transfer Pricing – The Company did not accrue a reserve for foreign taxes payable due to uncertain tax positions relating to its transfer pricing for services and interest income on intercompany notes and payables. The impact of this misstatement to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is an increase to income tax expense of $0.3 million. The impact to the consolidated balance sheet at March 31, 2017 is an increase to other long-term liabilities of $4.2 million and a decrease to the accumulated deficit of $3.8 million.

 

  (o)

Valuation Allowance for State Credit Carryforward – The Company failed to analyze all evidence, both positive and negative, when considering the future realization of its Texas state credit carryforward and inappropriately established a 100% valuation allowance against the related deferred tax asset. The Company reevaluated the evidence and partially removed this valuation allowance. The impact of this misstatement to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is an increase to income tax expense of less than $0.1 million. The impact to the consolidated balance sheet at March 31, 2017 is an increase to other long-term assets and accumulated deficit of $0.3 million.

 

  (p)

Tax Accounting – The Company recalculated its income tax expense on an annual and quarterly basis to account for certain errors in the previous calculations of its federal income tax receivable, federal long term income tax payable, and state income tax payable. Restatements impacting book income and various asset and liability accounts had no net effect on deferred taxes or tax expense due to the Company’s position of losses and a full valuation allowance. The impact of this misstatement to the statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is a decrease to income tax expense of less than $0.1 million. The impact to the consolidated balance sheet at March 31, 2017 is a decrease to other accrued liabilities and accumulated deficit of $0.1 million and $0.9 million respectively, and an increase in other long-term liabilities of $0.7 million.

 

  (q)

Other Adjustments – There are other restatement matters otherwise not described in items (a) through (s) of this Note. The related adjustments are individually insignificant in the fiscal year ended March 31, 2017 but in aggregate are material to the consolidated financial statements. These misstatements include:

 

   

Unrecognized gain (loss) of cumulative translation adjustments upon the liquidation of certain foreign entities

 

   

Unrecognized asset retirement obligations

 

   

Incorrect accounting for a cost method investment

 

   

Accruals recorded in the incorrect accounting period

The aggregate impact of these misstatement to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is a decrease to general and administrative and other expenses of less than $0.1 million, and an increase in interest expense of less than $0.1 million. The resulting impact to pre-tax earnings is a decrease of less than $0.1 million. The impact to the consolidated balance sheet at March 31, 2017 is a decrease to property and equipment, other long-term assets, and accumulated comprehensive income of $0.3 million, $0.7 million, and $4.8 million respectively, and an increase in other accrued liabilities $0.9 million.

Consolidated financial statement adjustments tables

The following tables present the restatement adjustments to previously issued consolidated financial statements, including the previously reported consolidated balance sheet as of March 31, 2017, and the consolidated statement of operations and comprehensive loss, stockholders’ deficit and statement of cash flows for the fiscal year ended March 31, 2017. The correction of misstatements affecting fiscal years prior to the fiscal year ended March 31, 2017 are reflected as a cumulative adjustment to the April 1, 2016 stockholders’ deficit on the consolidated balance sheet and consolidated statement of stockholders’ deficit.

 

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QUANTUM CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

     March 31, 2017  
     As Reported     Restatement
Adjustments
    Restatement
Reference
     As Restated  

ASSETS

         

Current Assets

         

Cash and cash equivalents

   $ 12,958     $ —          $ 12,958  

Accounts receivable, net of allowance for doubtful accounts of $16 as of March 31, 2017

     116,056       (14,110     a, d        101,946  

Manufacturing inventories

     27,661       8,613       a        36,274  

Service part inventories

     19,849       —            19,849  

Other current assets

     9,969       (786     h        9,183  

Restricted cash

     1,832       1,122       g        2,954  
  

 

 

   

 

 

      

 

 

 

Total current assets

     188,325       (5,161        183,164  

Property and equipment, less accumulated depreciation

     11,186       (310     q        10,876  

Intangible assets, less accumulated amortization

     276       —            276  

Restricted cash, long-term

     20,000       —            20,000  

Other long term assets

     5,240       1,686       i, l, o, q        6,926  
  

 

 

   

 

 

      

 

 

 

Total assets

   $ 225,027     $ (3,785      $ 221,242  
  

 

 

   

 

 

      

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

         

Liabilities

         

Current liabilities:

         

Accounts payable

   $ 41,611       (785     h      $ 40,826  

Accrued warranty

     3,263       (3,263     k        —    

Deferred revenue, current

     84,683       7,642       a, b        92,325  

Accrued restructuring charges, current

     869       1,025       j        1,894  

Long-term debt current portion

     —         —            —    

Convertible subordinated debt, current

     62,827       —            62,827  

Accrued compensation

     24,104       (315     f, g        23,789  

Other accrued liabilities

     12,998       2,947       a, d, e, k, m, p,         15,945  
  

 

 

   

 

 

      

 

 

 

Total current liabilities

     230,355       7,251          237,606  

Deferred revenue, long-term

     37,642       1,254       b        38,896  

Accrued restructuring charges, long-term

     481       3,907       j        4,388  

Long-term debt, net of current portion

     65,028       1,648       i        66,676  

Convertible subordinated debt, long-term

     —         —            —    

Other long-term liabilities

     7,520       5,452       m, n, p        12,972  
  

 

 

   

 

 

      

 

 

 

Total liabilities

     341,026       19,512          360,538  

Commitment and contingencies (Note 11)

         

Stockholders’ deficit

         

Preferred stock:

         

Preferred stock 20,000 shares authorized; no shares issued as of March 31, 2017

     —         —            —    

Common stock:

         

Common stock, $0.01 par value; 1,000,000 shares authorized; 34,063 shares issued and outstanding at March 31, 2017

     340       —            340  

Additional paid-in capital

     473,850       —            473,850  

Accumulated deficit

     (593,295     (18,516    
a-b, e-f, j, l,
n-q
 
 
     (611,811

Accumulated other comprehensive income

     3,106       (4,781     m, q        (1,675
  

 

 

   

 

 

      

 

 

 

Total stockholders’ deficit

     (115,999     (23,297        (139,296
  

 

 

   

 

 

      

 

 

 

Total liabilities and stockholders’ deficit

   $ 225,027     $ (3,785      $ 221,242  
  

 

 

   

 

 

      

 

 

 

 

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QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Year end March 31, 2017  
     As Reported     Restatement
Adjustments
   

Restatement
References

   As Restated  

Revenue:

         

Product revenue

   $ 322,212     $ (13,894   a, c    $ 308,318  

Service revenue

     144,335       1,603     b      145,938  

Royalty revenue

     38,798       —            38,798  
  

 

 

   

 

 

      

 

 

 

Total revenue

     505,345       (12,291        493,054  
  

 

 

   

 

 

      

 

 

 

Costs and expenses:

         

Product cost of revenue

     231,207       (4,547   a      226,660  

Service cost of revenue

     60,714       408     e      61,122  

Total cost of revenue

     291,921       (4,139        287,782  
  

 

 

   

 

 

      

 

 

 

Gross profit

     213,424       (8,152        205,272  
  

 

 

   

 

 

      

 

 

 

Operating expenses:

         

Research and development

     44,379       —            44,379  

Sales and marketing

     103,235       (2,708   c, f      100,527  

General and administrative

     51,599       (9   q      51,590  

Restructuring charges

     2,063       32     j      2,095  
  

 

 

   

 

 

      

 

 

 

Total operating expenses

     201,276       (2,685        198,591  
  

 

 

   

 

 

      

 

 

 

Income (loss) from operations

     12,148       (5,467        6,681  

Other expenses and losses, net:

         

Interest expense, net

     7,912       81     q      7,993  

Loss on debt extinguishment

     41       —            41  

Other income, net

     (562     (39   q      (601
  

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes

     4,757       (5,509        (752

Income tax expense (benefit)

     1,112       544     l, n, o, p      1,656  
  

 

 

   

 

 

      

 

 

 

Net income (loss)

   $ 3,645     $ (6,053      $ (2,408
  

 

 

   

 

 

      

 

 

 

Net loss per share:

         

Basic

   $ 0.11          $ (0.07

Diluted

   $ 0.11          $ (0.07

Weighted average common shares outstanding - basic

     33,742            33,742  

Weighted average common shares outstanding - diluted

     34,113            33,742  

 

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QUANTUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     For the Fiscal Year Ended March 31, 2017  
     As Reported     Restatement
Adjustments
    Restatement
Reference
     As Restated  

Cash flows from operating activities:

         

Net income (loss)

   $ 3,645     $ (6,053    
a, b, e, f, j, l,
n, o, q
 
 
   $ (2,408

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

         

Depreciation and amortization

     5,433       202       k, q        5,635  

Amortization of intangible assets

     175       (175     k        —    

Amortization of debt issuance costs

     1,373       —            1,373  

Product and service parts lower of cost or market adjustment

     4,960       2,649       k        7,609  

Share-based compensation expense

     6,698       —            6,698  

Bad debt expense

     —         24       k        24  

Deferred income taxes, net

     97       400       k, l, n-p        497  

Loss on disposal of property and equipment

     —         11       k        11  

Unrealized foreign exchange (gain)/loss

     —         (650     k        (650

Changes in assets and liabilities:

         

Accounts receivable

     (10,097     9,727       a, d, k        (370

Manufacturing inventories

     12,931       (9,104     a, k        3,827  

Service parts inventories

     (4,969     1,565       k        (3,404

Accounts payable

     (4,845     (439     h, k        (5,284

Accrued warranty

     (167     167       k        —    

Accrued restructuring charges

     (1,387     (257     j, k        (1,644

Accrued compensation

     1,492       292       f, g, k        1,784  

Deferred revenue

     (2,020     334       a, b, k        (1,686

Other assets and liabilities

     (5,601     2,145       a, d, e, i, k, q        (3,456
  

 

 

   

 

 

      

 

 

 

Net cash provided by (used in) operating activities

     7,718       838          8,556  
  

 

 

   

 

 

      

 

 

 

Cash flows from investing activities:

         

Purchases of property and equipment

     (1,752     (465     k, q        (2,217

Proceeds from sale of assets

     —         736       k        736  

Cash distributions from investments

     —         48       k        48  
  

 

 

   

 

 

      

 

 

 

Net cash provided by (used in) investing activities

     (1,752     319          (1,433
  

 

 

   

 

 

      

 

 

 

Cash flows from financing activities:

         

Borrowings of long-term debt and subordinated convertible debt, net of debt issuance costs

     104,914       —            104,914  

Repayments on long-term debt

     (106,172     (6,910     k        (113,082

Repayment of convertible subordinated debt

     (6,910     6,910       k        —    

Payment of tax withholding due upon vesting of restricted stock

     (738     1       k        (737

Proceeds from issuance of common stock under the employee stock purchase plan

     1,020       (1     k        1,019  
  

 

 

   

 

 

      

 

 

 

Net cash provided by (used in) financing activities

     (7,886     —            (7,886
  

 

 

   

 

 

      

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     52       (36     k        16  
  

 

 

   

 

 

      

 

 

 

Net decrease in cash, cash equivalents and restricted cash

     (1,868     1,122          (746

Cash, cash equivalents and restricted cash at the beginning of period

     36,658       —            36,658  
  

 

 

   

 

 

      

 

 

 

Cash, cash equivalents and restricted cash at the end of period

   $ 34,790     $ 1,122        $ 35,912  
  

 

 

   

 

 

      

 

 

 

Supplemental disclosure of cash flow information:

         

Purchases of property and equipment included in accounts payable

   $ 321     $ (42      $ 279  

Transfer of inventory to property and equipment

   $ 1,588     $ 340        $ 1,928  

Cash Paid For:

         

Interest

   $ 5,952     $ 14       k      $ 5,966  

Taxes, net of refunds

   $ 1,050     $ (373     k      $ 677  

 

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Table of Contents
NOTE 3:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated. The Company reviews subsidiaries and affiliates, as well as other entities, to determine if they should be considered variable interest entities (“VIE”), and whether it should change the consolidation determinations based on changes in their characteristics. The Company considers an entity a VIE if its equity investors own an interest therein that lacks the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or if the entity is structured with non-substantive voting interests. To determine whether or not the entity is consolidated with the Company’s results, the Company also evaluates which interests are variable interests in the VIE and which party is the primary beneficiary of the VIE.

Stock Split

On April 18, 2017, the Company effected a 1 for 8 reverse stock split of its issued and outstanding shares of common stock (the “Reverse Stock Split”). The par value of the Company’s common stock was unchanged as a result of the Reverse Stock Split, remaining at $0.01 per share, which resulted in reclassification of capital from par value to additional paid-in capital. All share and per share data as of and for the fiscal year ended March 31, 2017 and comparative periods included within the Company’s consolidated financial statements and related footnotes have been adjusted to account for the effect of the Reverse Stock Split.

Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Certain accounting estimates involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period, which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates, which could have a material impact on the carrying values of the Company’s assets and liabilities and its results of operations.

Cash and Cash Equivalents

The Company has cash deposits and cash equivalents deposited in or managed by major financial institutions. Cash equivalents include all highly liquid investment instruments with an original maturity of three months or less, and consist primarily of money market accounts. At times the related amounts are in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses with these financial institutions and does not believe it represents significant credit risk.

Restricted Cash

Restricted cash is primarily attributable to minimum cash reserve requirements under the Company’s revolving credit agreements. The remaining restricted cash is comprised of bank guarantees and similar required minimum balances that serve