Annual Statements Open main menu

QUANTUM CORP /DE/ - Quarter Report: 2018 December (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended December 31, 2018

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

 

 

 

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

  95110
(Address of principal executive offices)   (Zip Code)

(408) 944-4000

(Registrant’s telephone number, including area code)

 

 

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

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 checkmark whether the registrant has submitted electronically and every Interactive Data File required to be submitted and posted 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 checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 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  ☒

As of the close of business on September 28, 2018 was 35,551,570 shares of Quantum Corporation’s common stock issued and outstanding.

 

 

 


Table of Contents

QUANTUM CORPORATION

INDEX

 

         

Page

Number

 

Explanatory Note

  

Item 1.

  

Financial Statements:

  
  

Condensed Consolidated Balance Sheets

     4  
  

Condensed Consolidated Statements of Operations and Comprehensive Loss

     5  
  

Condensed Consolidated Statements of Cash Flows

     6  
  

Condensed Consolidated Statements of Stockholders’ Deficit

     7  
  

Notes to Condensed Consolidated Financial Statements

     8  

Item 2.

  

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

     16  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     25  

Item 4.

  

Controls and Procedures

     25  
     PART II—OTHER INFORMATION       

Item 1.

  

Legal Proceedings

     26  

Item 1A.

  

Risk Factors

     26  

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

     26  

Item 3

  

Defaults Upon Senior Securities

     26  

Item 4

  

Mine Safety Disclosures

     26  

Item 5

  

Other Information

     26  

Item 6.

  

Exhibits

     26  

 

2


Table of Contents

Explanatory Note

This Quarterly Report on Form 10-Q (the “Form 10-Q”) contains our condensed consolidated financial statements for the three- and nine-months ended December 31, 2018. The financial results contained in this Quarterly Report on Form 10-Q were presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 (the “Form 10-K”) and filed with the Securities and Exchange Commission on August 6, 2019. The Form 10-K is described in more detail below. We are separately filing this Form 10-Q in order to become eligible to utilize registration statements on Form S-8, including those Form S-8s that we have previously filed. The information contained in this Form 10-Q has not changed from the information that we provided in the Form 10-K.

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 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 June 30, 2018. The consolidated financial statements and related financial information contained in any of our Annual Reports on Form 10-K filed during the period commencing with the fourth quarter of fiscal 2015 and prior to our most recently filed Annual Report on Form 10-K should no longer be relied upon. Additionally, the condensed consolidated financial statements and related financial information contained in any of our Quarterly Reports on Form 10-Q filed during the period commencing with the fourth quarter of fiscal 2015 and for periods prior to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 should no longer be relied upon. Included in this Quarterly Report on Form 10-Q is our restated condensed consolidated financial statements for the three and nine months ended December 31, 2018. We included restated consolidated financial statements for the fiscal year ended March 31, 2017 in our most recently filed Annual Report on Form 10-K.

 

3


Table of Contents
ITEM 1.

FINANCIAL STATEMENTS

QUANTUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     December 31, 2018     March 31, 2018  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 10,926     $ 10,865  

Accounts receivable

     79,571       96,350  

Manufacturing inventories

     15,563       34,428  

Service parts inventories

     18,551       21,889  

Other current assets

     7,877       13,565  

Restricted cash

     1,098       1,342  
  

 

 

   

 

 

 

Total current assets

     133,586       178,439  

Property and equipment, net

     8,773       9,698  

Restricted cash, long-term

     5,000       5,000  

Other long-term assets

     7,632       9,502  
  

 

 

   

 

 

 

Total assets

   $ 154,991     $ 202,639  
  

 

 

   

 

 

 

Liabilities and stockholders’ deficit

    

Current liabilities

    

Accounts payable

   $ 38,774     $ 62,646  

Deferred revenue, current

     84,879       96,866  

Accrued restructuring charges, current

     3,947       3,166  

Long-term debt current portion

     1,500       7,500  

Accrued compensation

     14,705       19,460  

Other accrued liabilities

     25,295       17,638  
  

 

 

   

 

 

 

Total current liabilities

     169,100       207,276  

Deferred revenue, long-term

     34,361       38,587  

Accrued restructuring charges, long-term

           2,653  

Long-term debt, net of current portion

     137,073       115,986  

Other long-term liabilities

     10,695       11,604  
  

 

 

   

 

 

 

Total liabilities

     351,229       376,106  
  

 

 

   

 

 

 

Stockholders’ deficit

    

Preferred stock

     —         —    

Common stock

     356       354  

Additional paid-in capital

     493,349       481,610  

Accumulated deficit

     (688,543     (655,157

Accumulated other comprehensive loss

     (1,400     (274
  

 

 

   

 

 

 

Total stockholders’ deficit

     (196,238     (173,467
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 154,991     $ 202,639  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(Unaudited)

 

     Nine Months ended December 31,     Three Months ended December 31,  
     2018     2017     2018     2017  

Revenue:

        

Product revenue

   $ 181,477     $ 212,422     $ 62,986     $ 75,343  

Service revenue

     101,013       104,902       34,097       34,875  

Royalty revenue

     16,913       25,051       4,896       5,776  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     299,403       342,375       101,979       115,994  

Product cost of revenue

     132,576       160,401       45,819       58,119  

Service cost of revenue

     41,879       44,857       13,078       14,915  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     174,455       205,258       58,897       73,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     124,948       137,117       43,082       42,960  

Operating expenses:

        

Research and development

     24,030       29,957       7,907       9,162  

Sales and marketing

     52,797       79,613       16,990       26,711  

General and administrative

     46,943       36,342       13,481       12,416  

Restructuring charges

     5,428       5,940       1,227       4,239  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     129,198       151,852       39,605       52,528  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (4,250     (14,735     3,477       (9,568

Other (income) expense, net:

        

Interest expense, net

     14,809       8,185       6,238       2,968  

Loss on debt extinguishment

     17,458       39       5,033       —    

Other (income) expense, net

     (3,870     (385     (3,846     (210
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (32,647     (22,574     (3,948     (12,326

Income tax expense (benefit)

     739       (3,161     337       (2,127
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (33,386   $ (19,413   $ (4,285   $ (10,199
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share - basic and diluted

   $ (0.94   $ (0.56   $ (0.12   $ (0.29
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding – basic and diluted

     35,500       34,499       35,552       34,820  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (33,386   $ (19,413   $ (4,285   $ (10,199

Other comprehensive income (loss), net of tax:

        

Change in foreign currency translation adjustments

     (1,126     556       (157     (229
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (34,512   $ (18,857   $ (4,442   $ (10,428
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Nine Months
Ended
December 31,
2018
    Nine Months
Ended
December 31,
2017
 

Cash flows from operating activities:

    

Net loss

   $ (33,386   $ (19,413

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     3,228       3,822  

Amortization of debt issuance costs

     2,211       1,263  

Provision for product and service inventories

     7,385       7,073  

Stock-based compensation expense

     2,818       4,583  

Non-cash interest expense, net

     1,670       —    

Non-cash loss on debt extinguishment

     17,458       39  

Non-cash restructuring charges

     —         598  

Pension expense

     787       1,071  

Bad debt expense

     167       290  

Deferred income taxes, net

     903       (2,700

Loss on asset disposal

     31       20  

Unrealized foreign exchange (gain) loss

     (382     963  

Change in fair value of liability classified warrants

     (942     33  

(Gain) loss on investment

     (2,861     113  

Changes in assets and liabilities:

    

Accounts receivable

     15,677       5,846  

Manufacturing inventories

     16,475       (2,976

Service parts inventories

     (2,050     (3,426

Accounts payable

     (24,031     16,229  

Accrued restructuring charges

     (1,872     1,902  

Accrued compensation

     (5,542     (4,720

Deferred revenue

     (15,783     (8,015

Other assets and liabilities

     7,744       634  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (10,295     3,229  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,755     (2,060

Proceeds from the sale of assets

     50       4  

Cash distributions from investments

     2,892       278  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,187       (1,778
  

 

 

   

 

 

 

Cash flows from financing activities:

    

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

     397,088       290,404  

Repayments on long-term debt

     (388,080     (239,109

Repayment of convertible subordinated debt

     —         (62,836

Payment of tax withholding due upon vesting of restricted stock

     —         (1,807

Proceeds from issuance of common stock, net

     —         1,012  
  

 

 

   

 

 

 

Net cash provided by (used in) in financing activities

     9,008       (12,336
  

 

 

   

 

 

 

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

     (83     336  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents and restricted cash

     (183     (10,549

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

     17,207       35,912  
  

 

 

   

 

 

 

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

   $ 17,024     $ 25,363  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Purchases of property and equipment included in accounts payable

   $ 159     $ 88  

Transfer of inventory to property and equipment

   $ 393     $ 934  

Cash Paid For:

    

Interest

   $ 12,140     $ 7,118  

Income taxes, net of refunds

   $ 64     $ 1,179  

The following table provides a reconciliation of the captions in the condensed consolidated balance sheets to the condensed consolidated statements of cash flows:

 

Cash and cash equivalents

   $ 10,926     $ 10,309  

Restricted cash, current

     1,098       3,054  

Restricted cash, long-term

     5,000       12,000  
  

 

 

   

 

 

 

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

   $ 17,024     $ 25,363  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands)

(Unaudited)

 

     Nine months ended December 31, 2017  
     Common Stock      Additional
Paid in Capital
    Accumulated
Deficit
    Accumulated Other
Comprehensive Loss
    Total  
     Shares      Amount  

Balances at March 31, 2017

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

Net loss

             (19,413       (19,413

Foreign currency translation adjustments

               556       556  

Shares issued under employee stock incentive plans, net

     1,014        11        (806         (795

Stock-based compensation expense

           5,181           5,181  

Warrants issued related to long-term debt

           1,063           1,063  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2017

     35,077      $ 351      $ 479,289     $ (631,224   $ (1,120   $ (152,704
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Nine months ended December 31, 2018  
     Common Stock      Additional
Paid in Capital
    Accumulated
Deficit
    Accumulated Other
Comprehensive Loss
    Total  
     Shares      Amount  

Balances at March 31, 2018

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

Net loss

             (33,386       (33,386

Foreign currency translation adjustments

               (1,126     (1,126

Shares issued under employee stock incentive plans, net

     35        1        (7         (6

Stock-based compensation expense

           2,818           2,818  

Warrants issued related to long-term debt

     75        1        8,928           8,929  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2018

     35,553      $ 356      $ 493,349     $ (688,543   $ (1,400   $ (196,238
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

QUANTUM CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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-volatile 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: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. All intercompany balances and transactions have been eliminated. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included within the Company’s most recent Annual Report on Form 10-K filed with SEC on August 6, 2019, which includes the audited and consolidated financial statements for the Company’s fiscal years ended March 31, 2019, March 31, 2018 and March 31, 2017.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of December 31, 2018 and the results of operations, cash flows, and changes in stockholder’s deficit for the nine months ended December 31, 2018 and 2017. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

Use of Estimates

The preparation of these condensed 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 the results of operations.

Fair Value Measurements

The fair value of financial instruments is based on estimates using quoted market prices, discounted cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated timing and amount of future cash flows. Therefore, the estimates of fair value may differ substantially from amounts that ultimately may be realized or paid at settlement or maturity of the financial instruments, and those differences may be material. Accordingly, the aggregate fair value amounts presented may not represent the value as reported by the institution holding the instrument.

 

8


Table of Contents

The Company uses the three-tier hierarchy established by U.S. GAAP, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value to determine the fair value of its financial instruments. This hierarchy indicates to what extent the inputs used in the Company’s calculations are observable in the market. The different levels of the hierarchy are defined as follows:

 

Level 1:    Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2:    Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:    Inputs are unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

New Accounting Pronouncements Adopted in Fiscal 2019

In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Subsequent to the initial ASU the FASB issued the following updates and technical clarifications: ASU No. 2015-14, Deferral of the Effective Date, ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Identifying Performance Obligations and Licensing, ASU No. 2016-02, Narrow-Scope Improvements and Practical Expedients, ASU 2016-20, Technical Corrections and Improvements to Topic 606, ASU No. 2017-13, Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update) and ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The Company implemented changes to its processes, policies and internal controls to meet the impact of the new standard and disclosure requirements.

On April 1, 2018, the Company adopted Topic 606, using the modified retrospective transition method applied to those contracts which were not completed as of April 1, 2018. Results for reporting periods beginning after April 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s our historic accounting policy. Adoption of Topic 606 did not have a significant impact on recorded revenue in the three and nine months ended December 31, 2018. See Note 5 – Revenue for further details.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”). Previously, transfers between cash and cash equivalents and restricted cash were included within operating and investing activities on the Company’s consolidated statements of cash flows. ASU 2016-18 requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statements of cash flows. The Company adopted ASU 2016-18 beginning April 1, 2018, the beginning of its fiscal 2019, on a retrospective basis. Upon adoption, the Company’s restricted cash balances of $6.1 million, and $15.1 million at December 31, 2018, and December 31, 2017, respectively, are included in cash and cash equivalents and restricted cash on the Company’s condensed consolidated statements of cash flows.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company early adopted ASU 2017-11 as of April 1, 2018 and its adoption impacted the accounting for warrants issued in connection with the Company’s Senior Secured Term Loan discussed in Note 4: Long-Term Debt.

 

9


Table of Contents

Accounting Pronouncements Pending Adoption

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The New Lease Standard requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by most leases. Lessees will classify their leases as either finance or operating, with classification affecting recognition, measurement, and presentation of expenses and cash flows arising from a lease. However, regardless of classification, both types of leases will be recognized on the balance sheet except for those leases for which the Company has elected the short-term lease practical expedient. The New Lease Standard is effective for the Company on April 1, 2019 for the fiscal year ended March 31, 2020. A modified retrospective transition approach is required, in which the New Lease Standard is applied to all leases existing at the date of initial application. An entity may choose to use either the effective date or the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company will adopt the effective date as the date of initial application. Consequently, financial information will not be updated, and disclosures required under the New Lease Standard will not be provided for dates and periods before April 1, 2019.

An entity is permitted to elect certain optional practical expedients for transition to the New Lease Standard. The Company elected the package of practical expedients that allows it to not reassess 1) whether any expired or existing contracts are or contain leases, 2) the lease classification for any expired or existing leases, and 3) initial direct costs for any expired or existing leases. The Company will not elect the practical expedient to use hindsight when determining the lease term.

The New Lease Standard also provides certain optional accounting policy elections related to an entity’s ongoing lease accounting, which can be elected by class of underlying asset. For real estate, vehicles, computers, and office equipment, the Company elected the short-term lease exception whereby the Company will not recognize a lease liability or right-of-use asset on its balance sheet for leases that meet the definition of a short-term lease under the New Lease Standard, generally those leases with a term of 12 months or less. The Company also made an accounting policy election to combine non-lease and lease components for its leases involving real estate, vehicles, computers and office equipment. Consequently, each separate lease and non-lease component associated with that lease will be accounted for as a single combined lease component.

The adoption of the New Lease Standard resulted in the recognition of lease liabilities of $13.5 million and right-of-use assets of $12.7 million, which include the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheet as of April 1, 2019. The adoption of ASU 2016-02 is not expected to have a material impact on the Company’s consolidated statements of operations or cash flows.

NOTE 3: INVENTORIES

Manufacturing and service inventories consist of the following (in thousands):

 

     As of December 31,
2018
     As of March 31,
2018
 

Manufacturing inventories:

     

Finished goods:

     

Manufactured finished goods

   $ 4,406      $ 11,215  

Distributor inventory

     4,543        10,870  
  

 

 

    

 

 

 

Total finished goods

     8,949        22,085  
  

 

 

    

 

 

 

Work in progress

     63        778  

Raw materials

     6,551        11,565  
  

 

 

    

 

 

 

Total manufacturing inventories

   $ 15,563      $ 34,428  
  

 

 

    

 

 

 

Service inventories:

     

Finished goods

   $ 13,159      $ 14,863  

Component parts

     5,392        7,026  
  

 

 

    

 

 

 

Total service inventories

   $ 18,551      $ 21,889  
  

 

 

    

 

 

 

 

10


Table of Contents

NOTE 4: LONG-TERM DEBT

The Company’s long-term debt consisted of the following (in thousands):

 

     As of December 31,
2018
     As of March 31,
2018
 

TCW Term Loan

   $ —        $ 90,424  

PNC Credit Facility

     6,433        33,107  

Senior Secured Term Loan

     150,000        —    
  

 

 

    

 

 

 

Total debt

     156,433        123,531  

Less: current portion

     (1,500      (7,500

Less: unamortized debt issuance costs (1)

     (17,860      (45
  

 

 

    

 

 

 

Long-term debt, net

   $ 137,073      $ 115,986  
  

 

 

    

 

 

 

 

(1)

The unamortized debt issuance costs related to the Senior Secured Term Loan are presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying condensed consolidated balance sheets. Unamortized debt issuance costs related to the PNC Credit Facility are presented within other assets on the accompanying condensed consolidated balance sheets.

As of December 31, 2018, the interest rates on the Senior Secured Term Loan and the Amended PNC Credit Facility were 12.8% and 8.5%, respectively. As of December 31, 2018, the Company had no amounts outstanding on the Amended PNC Credit Facility and had borrowing availability of $22.3 million.

As of December 31, 2018, the Company was required to maintain a $5.0 million restricted cash reserve as part of the Amended PNC Credit Facility. This balance is presented as long-term restricted cash within the accompanying condensed consolidated balance sheet as of December 31, 2018.

NOTE 5: REVENUE

In the following table, revenue is disaggregated by major product offering and geographies (in thousands):

 

     Nine months ended December 31, 2018  
     Americas      Europe      Asia Pacific      Consolidated  

Primary storage systems

   $ 28,377      $ 15,887      $ 6,094      $ 50,358  

Secondary storage systems

     50,163        27,809        9,497        87,469  

Device and media

     24,618        13,870        5,163        43,651  

Service

     65,274        27,910        7,828        101,012  

Royalty

     *        *        *        16,913  
           

 

 

 

Total Revenue

            $ 299,403  
           

 

 

 

 

     Three months ended December 31, 2018  
     Americas      Europe      Asia Pacific      Consolidated  

Primary storage systems

   $ 9,488      $ 4,944      $ 1,456      $ 15,888  

Secondary storage systems

     21,421        11,161        3,287        35,869  

Device and media

     6,706        3,494        1,029        11,229  

Service

     22,033        9,421        2,643        34,097  

Royalty

     *        *        *        4,896  
           

 

 

 

Total Revenue

            $ 101,979  
           

 

 

 

 

11


Table of Contents
     Nine months ended December 31, 2017  
     Americas      Europe      Asia Pacific      Consolidated  

Primary storage systems

   $ 38,292      $ 18,937      $ 7,824      $ 65,053  

Secondary storage systems

     55,270        27,219        11,755        94,244  

Device and media

     31,230        15,326        6,569        53,125  

Service

     67,787        28,984        8,131        104,902  

Royalty

     *        *        *        25,051  
           

 

 

 

Total Revenue

            $ 342,375  
           

 

 

 

 

     Three months ended December 31, 2017  
     Americas      Europe      Asia Pacific      Consolidated  

Primary storage systems

   $ 16,038      $ 8,678      $ 2,854      $ 27,570  

Secondary storage systems

     17,481        9,458        3,112        30,051  

Device and media

     10,309        5,578        1,835        17,722  

Service

     22,536        9,636        2,703        34,875  

Royalty

     *        *        *        5,776  
           

 

 

 

Total Revenue

            $ 115,994  
           

 

 

 

 

*

Royalty revenue is not allocable to geographic regions.

Revenue for Americas geographic region outside of the United States is not significant.

NOTE 6: RESTRUCTURING CHARGES

In the nine months ended December 31, 2018, management approved plans to eliminate 83 positions in the U.S. and internationally. The purpose of this plan was to improve operational efficiencies and align with management’s strategic vision for the Company. Severance and benefits costs of approximately $4.6 million were incurred under this restructuring plan. As of December 31, 2018, the Company had four locations with a restructuring accrual.

In the nine months ended December 31, 2017, management approved plans to eliminate 100 positions in the U.S. and internationally. The purpose of this plan was to improve operational efficiencies and align with management’s strategic vision for the Company. Severance and benefits costs of approximately $5.8 million were incurred under this restructuring plan.

The following table summarizes the activity included in restructuring charges for the period ended December 31, 2018 and 2017 (in thousands):

 

     Severance
and benefits
     Facilities      Total  

Balance as of March 31, 2018

   $ 1,430      $ 4,389      $ 5,819  

Restructuring costs

     4,602        55        4,657  

Adjustments to prior estimates

     —          771        771  

Cash payments

     (5,631      (1,669      (7,300
  

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2018

   $ 401      $ 3,546      $ 3,947  
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2017

   $ 130      $ 6,152      $ 6,282  

Restructuring costs

     5,783        157        5,940  

Cash payments

     (1,917      (1,523      (3,440

Other non-cash

     (598      —          (598
  

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2017

   $ 3,398      $ 4,786      $ 8,184  
  

 

 

    

 

 

    

 

 

 

Estimated timing of future payments

        

Fiscal 2019

   $ 401      $ 670      $ 1,071  

Fiscal 2020 to 2023

     —          2,876        2,876  
  

 

 

    

 

 

    

 

 

 
   $ 401      $ 3,546      $ 3,947  
  

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

Facility restructuring accruals will be paid in accordance with the respective facility lease terms and amounts above are net of estimated sublease amounts.

NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s assets, measured and recorded at fair value on a recurring basis, may consist of money market funds which are included in cash and cash equivalents in the Condensed Consolidated Balance Sheets and are valued using quoted market prices (level 1 fair value measurements) at the respective balance sheet dates.

No impairments charges were recognized for non-financial assets in the nine months ended December 31, 2018 and 2017. We have no non-financial liabilities measured and recorded at fair value on a non-recurring basis.

Warrants and Warrant Liability

The Company uses the Black-Scholes-Merton option valuation model for estimating fair value of common stock warrants. The expected life of warrants granted represent the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, exercise patterns, and post-vesting forfeitures. The Company estimates volatility based on the historical volatility of the common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black-Scholes-Merton stock option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent term equal to the expected life of the award. The Company has not paid any cash dividends on the common stock and does not anticipate paying any cash dividends in the foreseeable future.

During fiscal year 2018, the Company began issuing common stock warrants in connection with the TCW Term Loan agreement. The warrants were initially accounted for as a liability and recorded at estimated fair value on a recurring basis due to exercise price reset provisions contained with the warrant agreements. As such, the Company estimated the fair value of the warrants at the end of each reporting period using a Black-Scholes valuation model. At the end of each reporting period, the Company recorded the changes in the estimated fair value during the period in other expense (income) in the condensed consolidated statements of operations and comprehensive loss.

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuations for the warrant liability for the nine months ended December 31, 2018 and 2017 (in thousands):

 

     Warrant liability  

Balance, March 31, 2018

   $ 272  

Issuances

     5,682  

Settlements

     (176

Changes in fair value

     (942
  

 

 

 

Balance, December 31, 2018

   $ 4,836  
  

 

 

 
  

Balance, March 31, 2017

   $ —  

Issuances

     1,772  

Settlements

     (1,063

Changes in fair value

     33  
  

 

 

 

Balance, December 31, 2017

   $ 742  
  

 

 

 

Long-term Debt

The Company’s financial liabilities were comprised primarily of long-term debt as of December 31, 2018 and March 31, 2018. The Company uses significant other observable market data or assumptions (Level 2 inputs as defined in accounting guidance) that it believes market participants would use in pricing debt.

 

13


Table of Contents

The carrying value and fair value of the financial liabilities were primarily comprised of the following as of December 31, 2018 and March 31, 2018 (in thousands):

 

     As of  
     December 31, 2018      March 31, 2018  
     Carrying
Value
     Fair Value      Carrying
Value
     Fair Value  

Long term debt: (1)

           

TCW Term Loan

   $ —      $ —      $ 90,424      $ 90,424  

PNC Credit Facility

     —          —          33,107        27,323  

Senior Secured Term Loan

     150,000        150,000        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 150,000      $ 150,000      $ 123,531      $ 117,747  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Fair value based on outstanding borrowings and market interest rates (level 2)

NOTE 8: INCOME TAXES

The effective income tax rates for the three and nine months ended December 31, 2018 were (8.5%) and (2.3%), respectively, as compared to 17.3% and 14.0% for the three and nine months ended December 31, 2017, respectively. Income tax provisions for each of these periods reflect expenses for foreign income taxes and state taxes and differed from the federal statutory rate of 21% in fiscal 2019 and 31.5% in fiscal 2018 due primarily to unbenefited losses experienced in jurisdictions with valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions. The three and nine months ended December 31, 2017 also benefitted from a $2.7 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 and the nine months ended December 31, 2017 benefitted from a $1.6 million reserve release resulting from an audit settlement with the German tax authorities.

As of December 31, 2018, including interest and penalties, the Company had $127.7 million of unrecognized tax benefits, $109.5 million of which, if recognized, would favorably affect the effective tax rate. As of December 31, 2018, the Company had accrued interest and penalties related to these unrecognized tax benefits of $0.9 million. The Company recognizes interest and penalties related to income tax matters in the income tax provision in the condensed consolidated statements of operations and comprehensive loss. As of December 31, 2018, $122.1 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the condensed consolidated balance sheets and $5.6 million (including interest and penalties) were recorded in other long-term liabilities in the condensed consolidated balance sheets. The Company does not believe it is likely that the unrecognized tax benefits would materially change in the next 12 months.

NOTE 9: NET LOSS PER SHARE

Net Loss per Share

The following table sets forth the performance share units, restricted stock units, stock options and warrants that were excluded from the calculation of diluted net loss per share as they were anti-dilutive (in thousands);

 

Nine Months ended      Three Months ended  
December 31,
2018
     December 31,
2017
     December 31,
2018
     December 31,
2017
 
  6,247        1,873        5,481        1,873  

The dilutive impact related to common shares from stock incentive plans and outstanding warrants is determined by applying the treasury stock method of determining value to the assumed vesting of outstanding performance share units and restricted stock units and the exercise of outstanding options and warrants. The dilutive impact related to common shares from contingently issuable performance share units is determined by applying a two-step approach using both the contingently issuable share guidance and the treasury stock method.

 

14


Table of Contents

NOTE 10: COMMITMENTS AND CONTINGENCIES

Commitments to Purchase Inventory

The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon management forecast of customer demand. The Company has similar arrangements with certain other suppliers. The Company is responsible for the financial impact on the supplier or contract manufacturer of any reduction or product mix shift in the forecast relative to materials that the third party had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for inventory in excess of current customer demand or for costs of excess or obsolete inventory. As of December 31, 2018, the Company had issued non-cancelable commitments for $29.9 million to purchase inventory from its contract manufacturers and suppliers.

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 the Company has incorporated Realtime Data’s patented technology into its 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 and relating to the Realtime patents. That stay remains pending. The Company believes the probability that this lawsuit will have a material adverse effect on its business, operating results or financial condition is remote.

In February 2018, two putative class action lawsuits were filed in the United States 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 the Company in connection with its financial statements for its fiscal year 2017. On December 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, the Company agreed to pay $8.2 million to plaintiffs. The amount includes all of plaintiffs’ attorneys’ fees, and the full amount will be paid by the Company’s directors and officers liability insurance carriers. A Stipulation of Settlement was signed by the Parties on June 28, 2019, and the Court granted preliminary approval on July 26, 2019. A hearing on final approval of the settlement has been scheduled for 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 Company’s senior officers breached their fiduciary duties 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 the Company to adopt a number of corporate governance reforms and to pay plaintiffs’ attorneys’ fees of $0.8 million, which will be paid by the Company’s directors and officers liability insurance carriers. A hearing on final approval of the Derivative Litigation settlement has been set for September 6, 2019.

In February 2018, the Company received a document subpoena from the SEC requesting information pertaining to the Company’s financial statements for the period April 1, 2017 through the date of the subpoena. The Company responded to that subpoena. In August 2018, the Company received a second subpoena requesting similar documents for the period April 1, 2015 through the date of the subpoena. The Company understands that the SEC’s investigation relates to the facts and circumstances described in the Explanatory Paragraph and Note 2: Restatement, included in the Company’s most recently filed Annual Report on Form 10-K. The Company has produced a substantial volume of documents to the SEC and is cooperating with the SEC staff. The investigation is ongoing.

Other Matters

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

 

15


Table of Contents

NOTE 11: SUBSEQUENT EVENTS

See the Company’s most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2019 and the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2019 for events occurring subsequent to December 31, 2018.

 

ITEM 2.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Quantum Corporation. MD&A is provided as a supplement to and should be read in conjunction with our most recently filed Annual Report on Form 10-K for the year ended March 31, 2019, in particular, the Risk Factors set forth in Part I, Item 1A of that Annual Report on Form 10-K and our condensed consolidated financial statements (Part I, Item 1 of this Quarterly Report on Form 10-Q).

FORWARD-LOOKING STATEMENT

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this report usually contain the words “will,” “estimate,” “anticipate,” “expect,” “believe,” “project” or similar expressions and variations or negatives of these words. All such forward-looking statements including, but not limited to, (1) our goals, strategy and expectations for future operating performance including our goals for fiscal 2020 and our strategies for achieving those goals; (2) our expectations and beliefs regarding the storage market and the other markets in which we compete; (3) our belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, debt service and sustain our operations for at least the next 12 months; (4) our expectations regarding our ongoing efforts to control our cost structure and; (5) our expectations regarding the outcome of any litigation or investigations in which we are involved; and (6) our business goals, objectives, key focuses, opportunities and prospects, are inherently uncertain as they are based on management’s expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, about which we speak only as of the date hereof. As a result, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to those factors discussed under “Risk Factors” in Part II, Item 1A included in our most recently filed Annual Report on Form 10-K. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement except as required by law.

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.

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.

 

16


Table of Contents

RESULTS

We had total revenue of $102.0 million and $299.4 million for the three and nine months ended December 31, 2018, respectively, a $14.0 and $43.0 million decrease from the three and nine months ended December 31, 2017, respectively. The decrease in the three months ended December 31, 2018 compared to the three months ended December 31, 2017 was primarily due to a decrease in our product revenue of $12.4 million or 16%. The decrease in the nine months ended December 31, 2018 compared to the nine months ended December 31, 2017 was primarily due to a decrease in our product revenue of $30.9 million or 15% and a decrease in royalty revenue of $8.1 million or 32%. Our gross margin for the three months ended December 31, 2018 was 42%, an increase of 521 basis points from the three months ended December 31, 2017 and our gross margin for the nine months ended December 31, 2018 was 42%, an increase of 168 basis points compared to the nine months ended December 31, 2017. The gross margin improvements were due to a shift in revenue mix and higher service gross margins.

Operating expenses decreased $12.9 million and $22.7 million during the three and nine months ended December 31, 2018, respectively, compared to the three and nine months ended December 31, 2017. The decrease in operating expenses is primarily due to decreased sales and marketing costs as we continue to optimize resources around strategic areas of our business. The reduction of sales and marketing expenses during the nine months ended December 31, 2018 compared to the nine months ended December 31, 2017 was offset by an increase in general and administrative expenses related to professional fees associated with the internal investigation, financial restatement and related activities.

We had net cash used in operating activities of $10.3 million during the nine months ended December 31, 2018 compared to cash provided by operating activities of $3.2 million during the nine months ended December 31, 2017, a net decrease of $13.5 million. The change relates primarily to changes in operating working capital between periods.

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, costs related to the financial restatement and related activities described in the Explanatory Paragraph included in this Quarterly Report on Form 10-Q 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 debt extinguishment, costs related to the financial restatement and related activities and other non-recurring expenses 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).

We consider 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;

 

17


Table of Contents
   

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 ongoing costs related to the financial restatement and related activities; or (6) potential future strategic and financial restructuring expenses;

 

   

Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) potential ongoing costs related to the financial restatement and related activities; (3) potential losses on debt extinguishment; 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 and our U.S. GAAP financial results. 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:

Adjusted EBITDA

 

     For the nine months
ended December 31,
     For the three months
ended December 31,
 
(Dollars in thousands)    2018      2017      2018      2017  

U.S. GAAP Net Loss

   $ (33,386    $ (19,143    $ (4,285    $ (10,199

Interest expense, net

     14,809        8,185        6,238        2,968  

Income tax benefit (expense)

     739        (3,161      337        (2,127

Depreciation and amortization expense

     3,228        3,822        1,047        1,212  

Stock-based compensation expense

     2,818        4,583        1,100        1,570  

Restructuring charges

     5,428        5,940        1,227        4,239  

Loss on debt extinguishment

     17,458        39        5,033        —    

Cost related to financial restatement and related activities

     12,743        —          4,297        —    

Other non-recurring expenses

     749        1,513        —          1,513  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 24,583      $ 1,778      $ 14,994      $ (824
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income (Loss)

 

     For the nine months
ended December 31,
     For the three months
ended December 31,
 
(Dollars in thousands, except per share amounts)    2018      2017      2018      2017  

U.S. GAAP Net Loss

   $ (33,386    $ (19,143    $ (4,285    $ (10,199

Restructuring charges

     5,428        5,940        1,227        4,239  

Loss on debt extinguishment

     17,458        39        5,033        —    

Cost related to financial restatement and related activities

     12,743        —          4,297        —    

Other non-recurring expenses

     749        1,513        —          1,513  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income (Loss)

   $ 2,992      $ (11,651    $ 6,272      $ (4,447
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income (Loss) per share:

           

Basic

   $ 0.08      $ (0.34    $ 0.18      $ (0.13

Diluted

   $ 0.07      $ (0.34    $ 0.15      $ (0.13

Weighted average shares outstanding:

           

Basic

     35,500        34,499        35,552        34,820  

Diluted

     41,747        34,499        41,033        34,820  

 

18


Table of Contents

RESULTS OF OPERATIONS

Revenue

 

     Three Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Product Revenue

   $ 62,986        62   $ 75,343        65   $ (12,357     (16 %) 

Service Revenue

     34,097        33     34,875        30     (778     (2 %) 

Royalty Revenue

     4,896        5     5,776        5     (880     (15 %) 
  

 

 

      

 

 

      

 

 

   

Total Revenue

   $ 101,979        100   $ 115,994        100   $ (14,015     (12 %) 
  

 

 

      

 

 

      

 

 

   

 

     Nine Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Product Revenue

   $ 181,477        61   $ 212,422        62   $ (30,944     (15 %) 

Service Revenue

     101,013        33     104,902        31     (3,890     (4 %) 

Royalty Revenue

     16,913        6     25,051        7     (8,138     (32 %) 
  

 

 

      

 

 

      

 

 

   

Total Revenue

   $ 299,403        100   $ 342,375        100   $ (42,972     (13 %) 
  

 

 

      

 

 

      

 

 

   

We had total revenue of $102.0 million in the three months ended December 31, 2018, a $14.0 million or 12% decrease from the three months ended December 31, 2017, primarily due to decreased revenues across product, services and royalty. We had total revenue of $299.4 million in the nine months ended December 31, 2018, a $43.0 million or 13% decrease from the nine months ended December 31, 2017, also due to decreased revenues across product, services and royalty.

Product revenue decreased $12.4 million, or 16% in the three months ended December 31, 2018 from the three months ended December 31, 2017. Product revenue decreased $30.9 million, or 15% in the nine months ended December 31, 2018 from the nine months ended December 31, 2017. These period over period decreases were primarily due to decreases in primary storage systems and devices and media. Service revenue decreased $0.8 million and $3.9 million in the three and nine months ended December 31, 2018 and 2017, respectively, due to decreased service contract revenue from our secondary storage systems. Royalty revenue decreased $0.9 million and $8.1 million in the three and nine months ended December 31, 2018 and 2017, respectively, due to lower overall market volume and weighting 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. The disputes between the two tape manufacturers were recently resolved.

Gross Profit

 

     Three Months Ended December 31,              
(Dollars in thousands)    2018      Gross margin     2017      Gross Margin     Change     Basis point
change
 

Product gross profit

   $ 17,167        27   $ 17,224        23   $ (57     439  

Service gross profit

     21,019        62     19,960        57     1,059       441  

Royalty gross profit

     4,896        100     5,776        100     (880     —    
  

 

 

      

 

 

      

 

 

   

Gross profit

   $ 43,082        42   $ 42,960        37   $ 122       521  
  

 

 

      

 

 

      

 

 

   
     Nine Months Ended December 31,              
(Dollars in thousands)    2018      Gross margin     2017      Gross Margin     Change     Basis point
change
 

Product gross profit

   $ 48,901        27   $ 52,021        24   $ (3,120     246  

Service gross profit

     59,134        59     60,045        57     (911     130  

Royalty gross profit

     16,913        100     25,051        100     (8,138     —    
  

 

 

      

 

 

      

 

 

   

Gross profit

   $ 124,948        42   $ 137,117        40   $ (12,169     168  
  

 

 

      

 

 

      

 

 

   

Despite a decrease in the high gross margin royalty revenue in the three and nine months ended December 31, 2018 compared to the comparable periods in the prior year, gross margin increased five percentage points and two percentage points, respectively, driven by higher gross margins on both product and service. Product gross margin increased from 23% and 24% in the three and nine months ended December 31, 2017, respectively, to 27% in both the three and nine months ended December 31, 2018. The gross margin increased for primary storage, secondary storage and devices and media. The improvement in service gross margin during the three and nine months ended December 31, 2018 compared to the prior fiscal periods relates primarily to a decrease in spending due to a decrease in the related average service headcount.

 

19


Table of Contents

Research and development expenses

 

     Three Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Research and development expenses

   $ 7,907        8   $ 9,162        8   $ (1,255     (14 %) 

 

     Nine Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Research and development expenses

   $ 24,030        8   $ 29,957        9   $ (5,927     (20 %) 

Research and development expenses decreased $1.3 million and $5.9 million during the three and nine months ended December 31, 2018, respectively, compared to the prior fiscal periods due to a decrease in compensation and benefits largely related to a lower average research and development headcount. Research and development expenses as a percentage of revenue remained relatively consistent during both comparative periods.

Sales and Marketing Expenses

 

     Three Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Sales and marketing expenses

   $ 16,990        17   $ 26,711        23   $ (9,721     (36 %) 

 

     Nine Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Sales and marketing expenses

   $ 52,797        18   $ 79,613        23   $ (26,816     (34 %) 

Sales and marketing expenses decreased $9.7 million and $26.8 million during the three and nine months ended December 31, 2018 compared to the prior fiscal periods or 36% and 34%, respectively. The decreases were driven by our continuing efforts to reduce headcount and achieve greater efficiencies in the sales and marketing functions. These decreases were primarily due to a decrease in compensation and benefits during the three and nine months ended December 31, 2018 compared to the prior fiscal periods largely related to a lower average sales and marketing headcount. Marketing program spending was also reduced during the comparative periods.

General and Administrative Expenses

 

     Three Months Ended December 31,               
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change      % Change  

General and administrative expenses

   $ 13,481        13   $ 12,416        11   $ 1,065        9

 

     Nine Months Ended December 31,               
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change      % Change  

General and administrative expenses

   $ 46,943        16   $ 36,342        11   $ 10,601        29

General and administrative expenses increased $1.1 million and $10.6 million in the three and nine months ended December 31, 2018 compared to the prior fiscal periods which was an increase of 9% and 29%, respectively. The increases were primarily due to an increase in professional fees associated with the internal investigation, financial restatement and related activities. Those increases were partially offset by a decrease in compensation and benefits largely related to a lower average period over period general and administrative headcount and a decrease in infrastructure costs related to facility consolidation activities.

 

20


Table of Contents

Restructuring Charges

 

     Three Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Restructuring charges

   $ 1,227        1   $ 4,239        4   $ (3,012     (71 %) 

 

     Nine Months Ended December 31,              
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change     % Change  

Restructuring charges

   $ 5,428        2   $ 5,940        2   $ (512     (9 %) 

Restructuring charges decreased by $3.0 million or 71% in the three months ended December 31, 2018 compared to the three months ended December 31, 2017. This decrease was primarily due to the higher level of headcount reductions that occurred during the three months ended December 31, 2018 compared to the three months ended December 31, 2017. Restructuring charges during the nine months ended December 31, 2018 compared to the nine months ended December 31, 2017 remained relatively flat due to the timing and cost of employee headcount reductions. 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.

Other (Income) Expense, Net

 

     Three Months Ended December 31,              
(Dollars in thousands)    2018     % of revenue     2017     % of revenue     Change     % Change  

Other (income) expense, net

   $ (3,846     (4 %)    $ (210     0   $ (3,636     1,731

 

     Nine Months Ended December 31,              
(Dollars in thousands)    2018     % of revenue     2017     % of revenue     Change     % Change  

Other (income) expense, net

   $ (3,870     (1 %)    $ (385     0   $ (3,485     905

Other (income) expense, net of $3.8 million and $3.9 million during the three and nine months ended December 31, 2018 relates primarily to a gain of $2.8 million on the disposal of an investment and $1.1 million resulting from the change in mark-to-market valuation of the warrants related to our TCW Term Loan. The remaining change comparing the three and nine months ended December 31, 2018 and 2017, respectively, relates primarily to fluctuations in foreign exchange (gains) losses.

Interest expense, net

 

     Three Months Ended December 31,               
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change      % Change  

Interest expense, net

   $ 6,238        6   $ 2,968        3   $ 3,270        110

 

     Nine Months Ended December 31,               
(Dollars in thousands)    2018      % of revenue     2017      % of revenue     Change      % Change  

Interest expense, net

   $ 14,809        5   $ 8,185        2   $ 6,624        81

Interest expense, net increased by $3.3 million or 110% from the three months ended December 31, 2018 to the three months ended December 31, 2017. Interest expense, net increased $6.6 million or 81% from the nine months ended December 31, 2018 compared to the nine months ended December 31, 2017. The increases were primarily due to a higher principal balance during the comparable periods.

 

21


Table of Contents

Loss on Debt Extinguishment

 

     Three Months Ended December 31,                
(Dollars in thousands)    2018      % of revenue     2017 (as
Restated)
     % of revenue      Change      % Change  

Loss on debt extinguishment

   $ 5,033        5   $ —          NM      $ 5,033        NM  

 

     Nine Months Ended December 31,                
(Dollars in thousands)    2018      % of revenue     2017 (as
Restated)
     % of revenue      Change      % Change  

Loss on debt extinguishment

   $ 17,458        6   $ 39        NM      $ 17,419        NM  

During the three and nine month periods ended December 31, 2018 we incurred a loss on debt extinguishment of $5.0 million and $17.4 million, respectively, related to amendments to and the repayment of our TCW Term Loan and amendments to our PNC Credit Facility.

Income tax expense (benefit)

 

     Three Months Ended December 31,               
(Dollars in thousands)    2018      % of pre-tax
loss
    2017     % of pre-tax
loss
    Change      % Change  

Income tax expense (benefit)

   $ 337        (9 %)    $ (2,127     17   $ 2,464        (116 %) 

 

     Nine Months Ended December 31,               
(Dollars in thousands)    2018      % of pre-tax
loss
    2017     % of pre-tax
loss
    Change      % Change  

Income tax expense (benefit)

   $ 739        (2 %)    $ (3,161     14   $ 3,900        (123 %) 

The income tax expense (benefit) for the three and nine months ended December 31, 2018 and 2017 are primarily influenced by foreign and state income taxes. The three months ended December 31, 2017 benefitted from a $2.7 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 and the nine months ended December 31, 2017 also benefitted from a $1.6 million reserve release resulting from an audit settlement with the German tax authorities. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance.

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).

We require significant cash resources to meet 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 June 30, 2019 which excludes $5.0 million in restricted cash that we are required to maintain under the Credit Agreements (as defined below).

 

22


Table of Contents

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. For additional information about our debt, see the sections entitled “Risk Factors—Risks Related to Our Business Operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our Annual Report on Form 10-K filed on August 6, 2019. We belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, debt service and sustain our operations for at least the next 12 months.

Cash Flows

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

 

     Nine Months Ended December 31,         
(Dollars in thousands)    2018      2017      $ Change  

Cash provided by (used in):

        

Operating activities

   $ (10,295    $ 3,229      $ (13,524

Investing activities

     1,187        (1,778      2,965  

Financing activities

     9,008        (12,336      21,344  

Effect of exchange rate changes

     (83      336        (419
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents and restricted cash

   $ (183    $ (10,549    $ 10,366  
  

 

 

    

 

 

    

 

 

 

Cash Provided by (Used In) Operating Activities

We had net cash used in operating activities of $10.3 million during the nine months ended December 31, 2018 compared to cash provided by operating activities of $3.2 million during the nine months ended December 31, 2017, a net decrease of $13.5 million. The change relates primarily to changes in operating working capital balances between periods.

Cash Provided By (Used In) Investing Activities

Net cash used in investing activities was $1.2 million in the nine months ended December 31, 2018 which is comprised of $1.8 million of purchases of property and equipment offset by a cash distribution related to the liquidation of an investment. Cash used in investing activities during the nine months ended December 31, 2017 was $1.8 million comprised primarily of $2.1 million in purchases of property and equipment offset by a cash distribution from an investment.

Cash Provided By (Used In) Financing Activities

Cash provided by financing activities was $9.0 million during the nine months ended December 31, 2018 compared to cash used in financing activities during the nine months ended December 31, 2017, a net change of $21.3 million which is driven primarily by borrowings and repayments under our long-term debt.

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 agreement) 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 are also party to a senior secured term loan facility in an aggregate principal amount of $165.0 million 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 key terms of the Credit Agreements and material financial covenants are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our most recently filed Annual Report on Form 10-K.

Our nominal outstanding principal amount under the Senior Secured Term Loan was $164.2 million as of June 30, 2019. The interest rate applicable to our borrowings under the Senior Secured Term Loan as of June 30, 2019 was 12.3%. The Amended PNC Credit Facility had a borrowing base of $24.2 million as of June 30, 2019, all of which was available at that date.

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

 

23


Table of Contents

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 below.

Covenant EBITDA is calculated under the Credit Agreements as our GAAP net income (loss) 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), transaction-related costs and purchase accounting and other adjustments with respect to acquisitions permitted under the Credit Agreements and, certain expenses in connection with the financial restatement activities (up to certain aggregate limits) that will be added back to Covenant EBITDA.

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 our financial statement restatement activities and related legal costs.

Off Balance Sheet Arrangements

We entered into a registration rights agreement with the holders of the warrants issued to the lenders under the Senior Secured Term Loan agreement entered into in December 2018, as described in our most recently filed Annual Report on Form 10-K. 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 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 the date of filing of this Quarterly Report on Form 10-Q.

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, such as purchase obligations and operating lease obligations, are not recognized as liabilities in our financial statements. There have not been any other material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

 

24


Table of Contents

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 Quarterly Report on Form 10-Q. 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 certain 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. Our accounting policies that include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain are summarized in our most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2019 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Critical Accounting Policies.” For information on our significant accounting policies, including the policies, see Note 2: Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Recently Issued and Adopted Accounting Pronouncements

For recently issued and adopted accounting pronouncements, see Note 2: Summary of Significant Accounting Policies included in the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and Note 3: Summary of Significant Accounting Policies, to our consolidated financial statements included in our most recently filed Annual Report on Form 10-K.

Off Balance Sheet Arrangements

We have not entered into any material off balance sheet arrangements outside of the ordinary course of business since the most recently ended fiscal year as disclosed in the header “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K.

Contractual Obligations and Commitments

We have not entered into any material contractual obligations or commitments outside of the ordinary course of business since the most recently ended fiscal year as disclosed in the header “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

There have been no material changes to our critical accounting policies and use of estimates from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our quantitative and qualitative disclosures about market risk from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recently filed Annual Report on Form 10-K.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

(a)

Evaluation of disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by the Quarterly Report on Form 10-Q. This control evaluation was performed under the supervision and with the participation of management, including our CEO and our CFO. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by the SEC. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding the required disclosure. Based on this evaluation, management, including our Chief Executive Officer and our Chief Financial Officer, concluded as of December 31, 2018 that our disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting. We had concluded that our internal control over financial reporting and disclosure controls and procedures was not effective as of March 31, 2019, as described in Item 9A, “Controls and Procedures” of our most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

 

(b)

Changes in internal control over financial reporting. Changes to our internal control over financial reporting (as that term is defined in the Exchange Act) are described in Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended March 31, 2019 filed with the SEC on August 6, 2019. Except as described in that Annual Report on Form 10-K, there were no changes to our internal control over financial reporting that materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.

 

25


Table of Contents

PART II—OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

There have been no material changes to the legal proceedings previously disclosed in our Annual Report on Form 10-K filed on August 6, 2019.

 

ITEM 1A.

RISK FACTORS

There have been no material changes to the previously disclosed risk factors discussed in Part 1 “Part I, Item 1A, Risk Factors” in our most recently filed Annual Report on Form 10-K for the year ended March 31, 2019. You should consider carefully these factors, together with all of the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, before making an investment decision.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

N/A

 

ITEM 4.

MINE SAFETY DISCLOSURES

N/A

 

ITEM 5.

OTHER INFORMATION

N/A

 

ITEM 6.

EXHIBITS

 

Exhibit

Number

  

Description

  4.1    Registration Rights Agreement, dated December 27, 2018 between the Company, OC II FIE V LP and BTC Holdings Fund  I, LLC. (Incorporated by reference to exhibit 4.3 filed with the Company’s Current Report on Form 8-K (No. 001-13449) filed on December 28, 2018).
10.1    Form of Warrant to Purchase Stock dated October  31, 2018 issued to TCW Direct Lending, LLC and its affiliates (Incorporated by reference to exhibit 10.71 filed with the Company’s Annual Report on Form  10-K (No. 001-13449) filed on August 6, 2019)
10.2    Form of Warrant to Purchase Stock dated November  30, 2018 issued to TCW Direct Lending, LLC and its affiliates (Incorporated by reference to exhibit 10.72 filed with the Company’s Annual Report on Form  10-K (No. 001-13449) filed on August 6, 2019)
10.3    Offer Letter between the Company and Lewis W. Moorehead, dated October 3, 2018 (Incorporated by reference to exhibit  10.75 filed with the Company’s Annual Report on Form 10-K (No. 001-13449) filed on August 6, 2019)
10.4    Term Loan Credit and Security Agreement, dated December  27, 2018, between the Company, Quantum LTO, the lenders party thereto, and U.S. Bank, National Association (Incorporated by reference to exhibit 10.1 filed with the Company’s Current Report on Form 8-K (No. 001-13449) filed on December 28, 2018)
10.5    Amended and Restated Revolving Credit and Security Agreement, dated December  27, 2018, between the Company, Quantum LTO, the lenders party thereto, and PNC Bank, National Association (Incorporated by reference to exhibit 10.2 filed with the Company’s Current Report on Form 8-K (No. 001-13449) filed on December 28, 2018)
10.6    Warrant to Purchase Common Stock dated December  27, 2018 issued to OC II FIE V LP (Incorporated by reference to exhibit 4.1 filed with the Company’s Current Report on Form 8-K (No. 001-13449) filed on December 28, 2018)
10.7    Warrant to Purchase Common Stock dated December  27, 2018 issued to BTC Holdings Fund I, LLC (Incorporated by reference to exhibit 4.2 filed with the Company’s Current Report on Form 8-K (No. 001-13449) filed on December 28, 2018)
31.1    Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE   

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

*

In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrant specifically incorporates it by reference.

 

26


Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

QUANTUM CORPORATION

/s/ J. MICHAEL DODSON

J. Michael Dodson
Chief Financial Officer
(Principal Financial Officer)
Date: August 22, 2019