QUANTUM CORP /DE/ - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended December 31, 2019



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

For the transition period from ___ to ___

Commission File Number 1-13449

Quantum Corporation

(Exact name of registrant as specified in its charter)



Delaware		94-2665054
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

224 Airport Parkway	Suite 550
San Jose	CA	95110
(Address of Principal Executive Offices)		(Zip Code)



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

(Former name, former address and former fiscal year, if changed since last report)

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



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value per share	QMCO	OTC Markets

Table of Contents



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.
	x	Yes	¨	No



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

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



Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	o
		Emerging growth company	o



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
	o



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
	o	Yes	x	No

As of the close of business on January 27, 2020, there were 39,858,691 shares of Quantum Corporation’s common stock issued and outstanding.

Table of Contents

QUANTUM CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended December 31, 2019

Table of Contents



		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	4
	Index To Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	29
Item 6.	Exhibits	30

	Signatures	31

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUANTUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts, unaudited)



	December 31, 2019			March 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	7,542		$	10,790
Restricted cash	897			1,065
Accounts receivable, net of allowance for doubtful accounts of $264 and $68 as of December 31, 2019 and March 31, 2019, respectively	74,877			86,828
Manufacturing inventories	25,172			18,440
Service parts inventories	18,935			19,070
Other current assets	8,451			18,095
Total current assets	135,874			154,288
Property and equipment, net	8,546			8,437
Restricted cash	5,000			5,000
Right-of-use assets, net	11,910			—
Other long-term assets	3,973			5,146
Total assets	$	165,303		$	172,871
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	44,643		$	37,395
Deferred revenue	74,616			90,407
Accrued restructuring charges	—			2,876
Long-term debt	1,650			1,650
Accrued compensation	14,772			17,117
Other accrued liabilities	16,338			29,025
Total current liabilities	152,019			178,470
Deferred revenue	35,349			36,733
Long-term debt, net of current portion	152,414			145,621
Operating lease liabilities	10,045			—
Other long-term liabilities	10,943			11,827
Total liabilities	360,770			372,651
Commitments and contingencies (Note 6)
Stockholders' deficit
Common stock, $0.01 par value; 125,000 shares authorized; 39,855, and 36,040 shares issued and outstanding at December 31, 2019 and March 31, 2019, respectively	399			360
Additional paid-in capital	504,422			499,224
Accumulated deficit	(699,327		)	(697,954		)
Accumulated other comprehensive loss	(961		)	(1,410		)
Total stockholders’ deficit	(195,467		)	(199,780		)
Total liabilities and stockholders’ deficit	$	165,303		$	172,871

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts, unaudited)



	Three Months Ended						Nine Months Ended
	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Revenue:
Product	$	66,435		$	62,986		$	200,361		$	181,477
Service	32,892			34,097			98,673			101,013
Royalty	3,988			4,896			15,700			16,913
Total revenue	103,315			101,979			314,734			299,403
Cost of revenue:
Product	43,672			45,819			140,337			132,576
Service	12,567			13,078			37,972			41,879
Total cost of revenue	56,239			58,897			178,309			174,455
Gross profit	47,076			43,082			136,425			124,948
Operating expenses:
Research and development	9,325			7,907			27,058			24,030
Sales and marketing	15,421			16,991			46,101			52,797
General and administrative	10,719			13,481			43,623			46,943
Restructuring charges	(64		)	1,227			1,020			5,428
Total operating expenses	35,401			39,606			117,802			129,198
Income (loss) from operations	11,675			3,476			18,623			(4,250		)
Other income (expense), net	(611		)	3,846			(446		)	3,870
Interest expense	(6,425		)	(6,238		)	(19,079		)	(14,809		)
Loss on debt extinguishment, net	—			(5,033		)	—			(17,458		)
Net income (loss) before income taxes	4,639			(3,949		)	(902		)	(32,647		)
Income tax provision (benefit)	(110		)	337			471			739
Net income (loss)	$	4,749		$	(4,286	)	$	(1,373	)	$	(33,386	)
Net income (loss) per share - basic	$	0.12		$	(0.12	)	$	(0.04	)	$	(0.94	)
Net income (loss) per share - diluted	$	0.10		$	(0.12	)	$	(0.04	)	$	(0.94	)
Weighted average shares - basic	38,134			35,552			36,828			35,500
Weighted average shares - diluted	46,567			35,552			36,828			35,500

Net income (loss)	$	4,749		$	(4,286	)	$	(1,373	)	$	(33,386	)
Foreign currency translation adjustments, net	839			(157		)	449			(1,126		)
Total comprehensive income (loss)	$	5,588		$	(4,443	)	$	(924	)	$	(34,512	)

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)



	Nine Months Ended December 31,
	2019			2018
Operating activities
Net loss	$	(1,373	)	$	(33,386	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization	3,119			3,228
Amortization of debt issuance costs	3,012			2,211
Provision for product and service inventories	4,946			7,385
Stock based compensation	5,408			2,818
Non-cash loss on debt extinguishment	—			17,458
Bad debt expense	220			167
Deferred income taxes	242			903
Unrealized foreign exchange (gain) loss	479			(382		)
Changes in assets and liabilities:
Accounts receivable	11,731			15,677
Manufacturing inventories	(8,915		)	16,475
Service parts inventories	(2,881		)	(2,050		)
Accounts payable	7,676			(24,031		)
Accrued restructuring charges	(2,876		)	(1,872		)
Accrued compensation	(2,345		)	(5,542		)
Deferred revenue	(17,176		)	(15,783		)
Other assets and liabilities	(6,233		)	9,371
Net cash used in operating activities	(4,966		)	(7,353		)
Investing activities
Purchases of property and equipment	(2,327		)	(1,755		)
Net cash used in investing activities	(2,327		)	(1,755		)
Financing activities
Borrowings of long-term debt and credit facility	245,590			397,088
Repayments of long-term debt and credit facility	(241,539		)	(388,080		)
Payment of taxes due upon vesting of restricted stock	(171		)	—
Net cash provided by financing activities	3,880			9,008
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(3		)	(83		)
Net change in cash, cash equivalents and restricted cash	(3,416		)	(183		)
Cash, cash equivalents, and restricted cash at beginning of period	16,855			17,207
Cash, cash equivalents, and restricted cash at end of period	$	13,439		$	17,024
Supplemental disclosure of cash flow information
Cash paid for interest	$	15,942		$	12,140
Cash paid for income taxes, net of refunds	$	155		$	64
Non-cash transactions
Purchases of property and equipment included in accounts payable	$	178		$	159
Transfer of inventory to property and equipment	$	253		$	393
Payment of litigation settlements with insurance proceeds	$	8,950		$	—
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows:
Cash and cash equivalents	$	7,542		$	10,926
Restricted cash, current	897			1,098
Restricted cash, long-term	5,000			5,000
Total cash, cash equivalents and restricted cash at the end of period	$	13,439		$	17,024

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

QUANTUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands, unaudited)



Three Months Ended	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders' Deficit
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders' Deficit
Balance, September 30, 2018	35,556	$	356	$	483,496		$	(684,257	)	$	(1,243	)	$	(201,648	)
Net loss	—	—		—			(4,286		)	—			(4,286		)
Foreign currency translation adjustments	—	—		—			—			(157		)	(157		)
Shares issued under employee incentive plans, net	—	—		—			—			—			—
Warrants issued related to long-term debt, net	—	—		8,753			—			—			8,753
Stock-based compensation	—	—		1,100			—			—			1,100
Balance, December 31, 2018	35,556	$	356	$	493,349		$	(688,543	)	$	(1,400	)	$	(196,238	)

Balance, September 30, 2019	36,717	$	368	$	502,398		$	(704,076	)	$	(1,800	)	$	(203,110	)
Net income	—	—		—			4,749			—			4,749
Foreign currency translation adjustments	—	—		—			—			839			839
Shares issued under employee incentive plans, net	355	3		(4		)	—			—			(1		)
Warrants exercised related to long-term debt, net	2,783	28		(28		)	—			—			—
Stock-based compensation	—	—		2,056			—			—			2,056
Balance, December 31, 2019	39,855	$	399	$	504,422		$	(699,327	)	$	(961	)	$	(195,467	)



Nine Months Ended	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders' Deficit
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders' Deficit
Balance, 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 incentive plans, net	38	1		(7		)	—			—			(6		)
Warrants exercised related to long-term debt, net	75	1		175			—			—			176
Warrants issued related to long-term debt, net	—	—		8,753			—			—			8,753
Stock-based compensation	—	—		2,818			—			—			2,818
Balance, December 31, 2018	35,556	$	356	$	493,349		$	(688,543	)	$	(1,400	)	$	(196,238	)

Balance, March 31, 2019	36,040	$	360	$	499,224		$	(697,954	)	$	(1,410	)	$	(199,780	)
Net loss	—	—		—			(1,373		)	—			(1,373		)
Foreign currency translation adjustments	—	—		—			—			449			449
Shares issued under employee incentive plans, net	1,032	11		(182		)	—			—			(171		)
Warrants exercised related to long-term debt, net	2,783	28		(28		)	—			—			—
Stock-based compensation	—	—		5,408			—			—			5,408
Balance, December 31, 2019	39,855	$	399	$	504,422		$	(699,327	)	$	(961	)	$	(195,467	)

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



		Page
Note 1:	Description of Business and Summary of Significant Accounting Policies	6
Note 2:	Revenue	7
Note 3:	Fair Value of Financial Instruments	9
Note 4:	Inventories	10
Note 5:	Leases	10
Note 6:	Commitments and Contingencies	12
Note 7:	Restructuring Charges	13
Note 8:	Net Loss Per Share	13
Note 9:	Income Taxes	14
Note 10:	Long-Term Debt	14

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), founded in 1980 and reincorporated in Delaware in 1987, is an 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 low cost, high density massive-scale data protection and archive systems. The Company helps customers capture, create and share digital data and preserve and protect it for decades. The Company’s end-to-end, software-defined, hyperconverged storage solutions span from non-violate memory express (“NVMe”), to solid state drives, (“SSD”), hard disk drive, (“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.

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 (restated).

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, 2019 and the results of operations, cash flows and changes in stockholders’ deficit for the three and nine months ended December 31, 2019 and 2018. 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 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.

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.

Recently Adopted Accounting Pronouncements

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-20 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company did not elect to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to accumulated deficit.

In June 2018, the FASB issued ASU No. 2018-07, Share-based Payments to Non-Employees (“ASU 2018-07”), to simplify the accounting for share- based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. For public business entities, this ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU 2018-07 did not impact the Company’s condensed consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-15, Implementation Costs Incurred in Cloud Computing Arrangements (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). For public entities, ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that fiscal year. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”). ASU 2016-13 will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace the current “incurred loss” model with an “expected loss” model. Under the “incurred loss” model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that it is probable that a loss has occurred (i.e., that it has been “incurred”). Under the “expected loss” model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The “incurred loss” model considers past events and current conditions, while the “expected loss” model includes expectations for the future which have yet to occur. ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, was issued in November 2018 and excludes operating leases from the new guidance. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognition and measurement of future provisions for expected losses on its accounts receivable.

NOTE 2: REVENUE

Table of Contents

Based on how the Company manages its business, the Company has determined that it currently operates in one reportable segment. The Company operates in three geographic regions: (a) Americas; (b) Europe, Middle East and Africa (“EMEA”); and (c) Asia Pacific (“APAC”). Revenue by geography is based on the location of the customer from which the revenue is earned.

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



	Three Months Ended				Nine Months Ended
	December 31, 2019		December 31, 2018		December 31, 2019		December 31, 2018
Americas
Primary storage systems	$	17,748	$	9,488	$	45,088	$	28,377
Secondary storage systems	9,461		21,421		48,187		50,162
Device and media	6,467		6,706		24,486		24,618
Service	20,628		22,033		62,564		65,275
Total revenue	54,304		59,648		180,325		168,432

EMEA
Primary storage systems	5,384		4,944		12,852		15,887
Secondary storage systems	11,233		11,161		28,967		27,809
Device and media	7,933		3,494		18,106		13,870
Service	10,063		9,421		29,114		27,910
Total revenue	34,613		29,020		89,039		85,476

APAC
Primary storage systems	2,555		1,456		7,210		6,094
Secondary storage systems	4,612		3,287		11,127		9,497
Device and media	1,042		1,029		4,338		5,163
Service	2,201		2,643		6,995		7,828
Total revenue	10,410		8,415		29,670		28,582

Consolidated
Primary storage systems	25,687		15,888		65,150		50,358
Secondary storage systems	25,306		35,869		88,281		87,468
Device and media	15,442		11,229		46,930		43,651
Service	32,892		34,097		98,673		101,013
Royalty*	3,988		4,896		15,700		16,913
Total revenue	$	103,315	$	101,979	$	314,734	$	299,403



*	Royalty revenue is not allocable to geographic regions.

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

Contract Balances

The following table presents the Company’s contract liabilities and certain information related to this balance as of and for the nine months ended December 31, 2019 (in thousands):



	December 31, 2019
Contract liabilities (deferred revenue)	$	109,965
Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period	$	70,027

Table of Contents

Remaining Performance Obligations

Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and contractually agreed upon amounts, yet to be invoiced, that will be recognized as revenue in future periods. Remaining performance obligations are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, adjustments for revenue that have not materialized and foreign exchange adjustments. The Company applied the practical expedient in accordance within ASC 606, Revenue from Contracts with Customers (“ASC 606”), to exclude amounts for variable consideration constituting a sale- or usage-based royalty promised in exchange for a license of intellectual property from remaining performance obligations.

Remaining performance obligation consisted of the following (in thousands):



	Current		Non-Current		Total
As of December 31, 2019	$	91,052	$	47,421	$	138,473

The Company expects to recognize approximately 66% of the remaining performance obligations within the next 12 months. The majority of the Company’s noncurrent remaining performance obligations is expected to be recognized in the next 13 to 60 months.

NOTE 3: 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 three and nine months ended December 31, 2019 and 2018. The Company has 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 Term Loan Credit and Security Agreement dated October 21, 2016 with TCW Asset Management Company LLC. 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-Merton valuation model. At the end of each reporting period, the Company recorded the changes in the estimated fair value during the period in other (income) expense in the condensed consolidated statements of operations and comprehensive income (loss).

During the three months ended March 31, 2019, the exercise price for these warrants reset and became fixed, at which time they were considered to be indexed to the Company’s own stock and met the scope requirements for equity classification. The fair value of the warrants upon the exercise price reset was reclassified to stockholders’ deficit. The Company classified the warrants liability subject to recurring fair value measurement as Level 3 prior to the reclassification to stockholders’ deficit. As the outstanding warrants were reclassified to stockholders’ deficit in the fourth quarter of fiscal year 2019, there was no warrant liability as of December 31, 2019 and March 31, 2019.

Table of Contents

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 (in thousands):



	Warrant liability
As of March 31, 2018	$	272
Issuances	2,784
Settlements	(176		)
Changes in fair value	164
As of December 31, 2018	$	3,044

Long-term Debt

The total estimated fair value of long-term debt as of December 31, 2019 and March 31, 2019 was approximately $162.9 million and $160.3 million, respectively, based on outstanding borrowings and market interest rates for the period. The fair value has been classified as Level 2 within the fair value hierarchy.

NOTE 4: INVENTORIES

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

Manufacturing inventories



	December 31, 2019		March 31, 2019
Finished goods:
Manufactured finished goods	$	13,925	$	8,160
Distributor inventory	527		3,345
Total finished goods	14,452		11,505
Work in progress	885		107
Raw materials	9,835		6,828
Total manufacturing inventories	$	25,172	$	18,440

Service parts inventories



	December 31, 2019		March 31, 2019
Finished goods	$	13,735	$	13,437
Component parts	5,200		5,633
Total service inventories	$	18,935	$	19,070

NOTE 5: LEASES

The Company adopted Accounting Standard Update (“ASU”) No. 2016-02, Leases (“Topic 842”) effective April 1, 2019 using the optional transition method in ASU 2018-11, Targeted Improvements. Therefore, the reported results as of December 31, 2019 and for the three and nine months ended December 31, 2019 reflect the application of Topic 842, while the reported results for the three and nine December 31, 2018 and as of March 31, 2019 were not adjusted and continue to be reported under Accounting Standard Codification (“ASC”) 840, Leases, the accounting guidance in effect for the prior periods.

Under Topic 842, the Company determines if an arrangement is a lease at inception. The lease term begins on the commencement date, which is the date the Company takes possession of the property and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The lease terms are

Table of Contents

used to determine lease classification as an operating or finance lease and is used to calculate straight-line lease expense for operating leases. The Company elected the package of practical expedients permitted under the transition guidance within Topic 842 to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs.

Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets also include prepaid lease payments and exclude lease incentives received. As the Company’s leases typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date for its leases. The determination of the incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate using the Company’s current unsecured borrowing rate, adjusted for various factors such as collateralization and term to align with the terms of the lease. The Company elected the short-term lease recognition exemption for all leases that qualify. Therefore, leases with an initial term of 12 months or less are not recorded on the balance sheet; instead, lease payments are recognized as lease expense on a straight-line basis over the lease term.

The Company has operating leases for facilities, vehicles, computers, and other office equipment with various expiration dates. The leases have remaining terms of 1 to 8 years. Certain leases contain renewal options for varying periods, which are at the Company’s sole discretion. The Company did not use hindsight when determining lease term, therefore, the Company carried forward the lease term as determined prior to the adoption of Topic 842. For new leases with renewal or termination options, such option periods will be included in the determination of the Company’s ROU assets and lease liabilities if the Company is reasonably certain to exercise the option. Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the lease liability to the extent they are variable in nature. These variable lease costs are recognized as a variable lease expense when incurred.

Components of lease cost were as follows (in thousands):



Lease Cost	Three Months Ended December 31, 2019		Nine Months Ended December 31, 2019

Operating lease cost	$	1,259	$	3,835
Variable lease cost	109		321
Short-term lease cost	58		89
Total lease cost	$	1,426	$	4,245



Maturity of Lease Liabilities	Operating Leases
2020, excluding the nine months ended December 31, 2019	$	1,194
For the fiscal year ended March 31,
2021	4,319
2022	3,356
2023	2,443
2024	2,327
Thereafter	4,819
Total lease payments	$	18,458
Less: Imputed interest	(5,287		)
Present value of lease liabilities	$	13,171

Table of Contents

Supplemental balance sheet information related to leases was as follows:



	December 31, 2019
Operating lease right-of-use asset	$	11,910
Other current liabilities	$	3,126
Operating lease liability	10,045
Total operating lease liabilities	$	13,171



Lease Term and Discount Rate	December 31, 2019
Weighted average remaining operating lease term (years)	5.12
Weighted average discount rate for operating leases	13.91	%

Operating cash outflows related to operating leases totaled $3.4 million for the nine months ended December 31, 2019.

NOTE 6: 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, 2019, the Company had issued non-cancelable commitments for $18.3 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 we have incorporated Realtime Data’s patented technology into our compression products and services. Realtime Data seeks unspecified monetary damages and other relief that the Court deems appropriate. On July 31, 2017, the District Court stayed proceedings in this litigation pending decision in Inter Partes Review proceedings currently before the Patent Trial and Appeal Board relating to the Realtime patents. That stay remains in effect. We believe the probability that this lawsuit will have a material adverse effect on our business, operating results or financial condition is remote.

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 the Company’s results of operations, cash flows or financial position.

Table of Contents

NOTE 7: RESTRUCTURING CHARGES

There were no new restructuring plans initiated during the nine months ended December 31, 2019. In the nine months ended December 31, 2018, management approved two plans to eliminate 66 positions in the U.S. and internationally. The purpose of these plans was to improve operational efficiencies and align with management’s strategic vision for the Company. Severance and benefits costs of approximately $3.6 million were incurred as a result.

The following table summarizes the restructuring activities for the nine months ended December 31, 2019 and 2018 (in thousands):



	Severance and Benefits			Facilities			Total
Balance as of March 31, 2019	$	—		$	2,876		$	2,876
Restructuring costs	—			—			—
Adjustments to prior estimates	—			1,020			1,020
Cash payments	—			(3,659		)	(3,659		)
Other non-cash	—			63			63
Balance as of December 31, 2019	$	—		$	300		$	300

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

Facility restructuring accruals will be paid by the end of the fiscal year ending March 31, 2020.

NOTE 8: NET INCOME (LOSS) PER SHARE

The following outstanding stock-based instruments which are comprised of performance share units, restricted stock units, stock options and warrants were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive (in thousands):



Three Months Ended		Nine Months Ended
December 31, 2019	December 31, 2018	December 31, 2019	December 31, 2018
—	5,481	7,385	6,247

The dilutive impact related to common shares from restricted stock units, stock options and warrants is determined by applying the treasury stock method of determining value to the assumed vesting of outstanding 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.

For the three and nine months ended December 31, 2019, there were 0.3 million contingently issuable performance based restricted stock units excluded from the calculation of diluted net income (loss) per share, respectively, as their performance condition had not yet been achieved. These shares will be earned based on the Company’s achievement of certain performance conditions in addition to a time-based vesting period.

For the three and nine months ended December 31, 2019, there were 1.3 million contingently issuable market based restricted stock units excluded from the calculation of diluted net income (loss) per share, respectively, as

Table of Contents

their market performance condition had not yet been achieved. These shares will be earned based on the Company’s achievement of certain average stock price targets in addition to a time-based vesting period.

On November 25, 2019, 3.8 million warrants issued by the Company related to the TCW Term Loan agreement were exercised on a cashless basis resulting in the issuance of 2.8 million shares of common stock.

NOTE 9: INCOME TAXES

The effective tax rate for the three and nine months ended December 31, 2019 was -2.7% and -52.2%, respectively, as compared to -9.0% and -2.0% for the three and nine months ended December 31, 2018, respectively. The effective tax rates differed from the federal statutory tax rate of 21% during each of these periods 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.

As of December 31, 2019, including interest and penalties, the Company had $118.4 million of unrecognized tax benefits, $100.2 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of December 31, 2019, the Company had accrued interest and penalties related to these unrecognized tax benefits of $1.1 million. The Company recognizes interest and penalties related to income tax matters in the income tax provision in the condensed consolidated statements of operations. As of December 31, 2019, $112.3 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 $6.1 million (including interest and penalties) were recorded in other long-term liabilities in the condensed consolidated balance sheets. During the next 12 months, it is reasonably possible that approximately $11.2 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations.

NOTE 10: LONG-TERM DEBT

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



	As of
	December 31, 2019			March 31, 2019
Senior Secured Term Loan	$	163,350		$	164,588
Amended PNC Credit Facility	5,289			—
Less: current portion	(1,650		)	(1,650		)
Less: unamortized debt issuance costs⁽¹⁾	(14,575		)	(17,317		)
Long-term debt, net	$	152,414		$	145,621

⁽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 Amended PNC Credit Facility are presented within other assets on the accompanying condensed consolidated balance sheets.

As of December 31, 2019, the interest rates on the Senior Secured Term Loan and the Amended PNC Credit Facility were 12.0% and 7.8%, respectively. As of December 31, 2019, after drawing down $5.3 million, the Amended PNC Credit Facility had a remaining borrowing availability of $16.7 million.

As of December 31, 2019, 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, 2019.

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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 belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures and debt service, and sustain our operations for at least the next 12 months; (2) our expectations regarding the outcome of any litigation or investigations in which we are involved; and (3) 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. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement.

OVERVIEW

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”), 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.

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 provides 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.

NON- U.S. GAAP FINANCIAL MEASURES

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

Adjusted EBITDA is a non-U.S. GAAP financial measure defined by us as net loss before interest expense, net, provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring charges, costs related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: – Restatement in our most recently filed Annual Report on Form 10-K 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, stock-based compensation expense, costs related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: – Restatement in the Annual Report on Form 10-K and other

Table of Contents

non-recurring (income) expenses. The Company calculates Adjusted Net Income (Loss) per Basic and Diluted share using the Company’s above-referenced definition of Adjusted Net Income (Loss).

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

We have provided below a reconciliation of Adjusted EBITDA and Adjusted Net Income (Loss) to Net Income (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. We believe 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 our business and help our investors better compare our operating performance over multiple periods. Accordingly, we believe that Adjusted EBITDA and Adjusted Net Income (Loss) provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and our board of directors.

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


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

•

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


•	Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) the potentially dilutive impact of stock-based compensation; (3) potential ongoing costs related to the financial restatement and related activities; (4) loss on debt extinguishment; or (5) potential future restructuring expenses; and


•	other companies, including companies in our industry, may calculate Adjusted EBITDA, Adjusted Net Income (Loss) 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.

Table of Contents

The following is a reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure, Net Income (Loss) (in thousands):



	Three Months Ended						Nine Months Ended
	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Net income (loss)	$	4,749		$	(4,286	)	$	(1,373	)	$	(33,386	)
Interest expense, net	6,425			6,238			19,079			14,809
Provision (benefit) for income taxes	(110		)	337			471			739
Depreciation and amortization expense	1,081			1,047			3,119			3,228
Stock-based compensation expense	2,055			1,100			5,407			2,818
Restructuring charges	(64		)	1,227			1,020			5,428
Loss on debt extinguishment	—			5,033			—			17,458
Cost related to financial restatement and related activities	564			4,297			12,743			12,743
Other non-recurring (income) expense, net	—			(3,925		)	—			(3,176		)
Adjusted EBITDA	$	14,700		$	11,068		$	40,466		$	20,661

The following is a reconciliation of Adjusted Net Income to the most comparable U.S. GAAP financial measure, Net Income (Loss) (in thousands):
	Three Months Ended						Nine Months Ended
	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Net income (loss)	$	4,749		$	(4,286	)	$	(1,373	)	$	(33,386	)
Restructuring charges	(64		)	1,227			1,020			5,428
Loss on debt extinguishment	—			5,033			—			17,458
Stock-based compensation	2,055			1,100			5,407			2,818
Cost related to financial restatement and related activities	564			4,297			12,743			12,743
Other non-recurring (income) expense, net	—			(3,925		)	—			(3,176		)
Adjusted Net income	$	7,304		$	3,446		$	17,797		$	1,885
Adjusted Net Income per share:
Basic	$	0.19		$	0.10		$	0.48		$	0.05
Diluted	$	0.16		$	0.08		$	0.40		$	0.05
Weighted average shares outstanding:
Basic	38,134			35,552			36,828			35,500
Diluted	46,567			41,033			44,213			41,747

Table of Contents

RESULTS OF OPERATIONS



	Three Months Ended						Nine Months Ended
(in thousands)	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Total revenue	$	103,315		$	101,979		$	314,734		$	299,403
Total cost of revenue ⁽¹⁾	56,239			58,897			178,309			174,455
Gross profit	47,076			43,082			136,425			124,948
Operating expenses
Research and development ⁽¹⁾	9,325			7,907			27,058			24,030
Sales and marketing ⁽¹⁾	15,421			16,991			46,101			52,797
General and administrative ⁽¹⁾	10,719			13,481			43,623			46,943
Restructuring charges	(64		)	1,227			1,020			5,428
Total operating expenses	35,401			39,606			117,802			129,198
Income (loss) from operations	11,675			3,476			18,623			(4,250		)
Other income (expense)	(611		)	3,846			(446		)	3,870
Interest expense	(6,425		)	(6,238		)	(19,079		)	(14,809		)
Loss on debt extinguishment, net	—			(5,033		)	—			(17,458		)
Income (loss) before income taxes	4,639			(3,949		)	(902		)	(32,647		)
Income tax provision (benefit)	(110		)	337			471			739
Net income (loss)	$	4,749		$	(4,286	)	$	(1,373	)	$	(33,386	)

⁽¹⁾Includes stock-based compensation as follows:



	Three Months Ended				Nine Months Ended
(in thousands)	December 31, 2019		December 31, 2018		December 31, 2019		December 31, 2018
Cost of revenue	$	162	$	99	$	335	$	285
Research and development	480		118		745		335
Sales and marketing	300		195		708		262
General and administrative	1,114		688		3,620		1,936
Total	$	2,056	$	1,100	$	5,408	$	2,818

Comparison of the Three Months Ended December 31, 2019 and 2018

Revenue



	Three Months Ended
(dollars in thousands)	December 31, 2019		% of revenue		December 31, 2018		% of revenue		$ Change			% Change
Product revenue
Primary storage systems	$	25,687	25	%	$	15,888	16	%	$	9,799		62	%
Secondary storage systems	25,306		24	%	35,869		35	%	(10,563		)	(29	)%
Devices and media	15,442		15	%	11,229		11	%	4,213			38	%
Total product revenue	$	66,435	64	%	$	62,986	62	%	$	3,449		5	%
Service revenue	32,892		32	%	34,097		33	%	(1,205		)	(4	)%
Royalty revenue	3,988		4	%	4,896		5	%	(908		)	(19	)%
Total revenue	$	103,315	100	%	$	101,979	100	%	$	1,336		1	%

Table of Contents

Product revenue

In the three months ended December 31, 2019, product revenue increased $3.4 million, or 5%, as compared to the same period in 2018. Primary storage systems represented $9.8 million of the increase, driven by growth in our U.S. business. Secondary storage systems represented a $(10.6) million decrease, driven by fluctuating purchase cycles with our hyperscale customers. Devices and media represented $4.2 million of the increase, driven by the resolution of a legal dispute, which had caused a constraint on LTO tape supply between the two principal suppliers in the market.

Service revenue

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

Service revenue was relatively flat, decreasing 4% in the three months ended December 31, 2019 compared to the same period in 2018 due to a combination of reduced new customer installations and reduced support renewals from our legacy customers.

Royalty revenue

We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $(0.9) million, or 19%, in the three months ended December 31, 2019 compared to the same period in 2018 due to lower overall market volume.

Gross Profit and Margin



	Three Months Ended
(dollars in thousands)	December 31, 2019		Gross margin %		December 31, 2018		Gross margin %		$ Change			Basis point change
Product gross profit	$	22,763	34.3	%	$	17,167	27.3	%	$	5,596		700
Service gross profit	20,325		61.8	%	21,019		61.6	%	(694		)	20
Royalty gross profit	3,988		100.0	%	4,896		100.0	%	(908		)	—
Gross profit	$	47,076	45.6	%	$	43,082	42.2	%	$	3,994		340

Product Gross Margin

Product gross margin increased 700 basis points for the three months ended December 31, 2019, as compared with the same period in 2018. This increase was due primarily to cost reductions across a wide range of product offerings and a sales mix weighted towards more profitable product lines.

Service Gross Margin

Service gross margin increased 20 basis points for the three months ended December 31, 2019, as compared with the same period in 2018. This increase was due primarily to weighting towards higher margin offerings.

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Table of Contents

Operating expenses



	Three Months Ended
(dollars in thousands)	December 31, 2019			% of revenue		December 31, 2018		% of revenue		$ Change			% Change
Research and development	$	9,325		9	%	$	7,907	8	%	$	1,418		18	%
Sales and marketing	15,421			15	%	16,991		17	%	(1,570		)	(9	)%
General and administrative	10,719			10	%	13,481		13	%	(2,762		)	(20	)%
Restructuring charges	(64		)	—	%	1,227		1	%	(1,291		)	(105	)%
Total operating expenses	$	35,401		34	%	$	39,606	39	%	$	(4,205	)	(11	)%

In the three months ended December 31, 2019, research and development expense increased $1.4 million, or 18%, as compared with the same period in 2018. This increase was partially attributable to an increase in research and development headcount focused on new product development.

In the three months ended December 31, 2019, sales and marketing expenses decreased $1.6 million, or 9%, as compared with the same period in 2018. This decrease was largely driven by an overall decrease in compensation and benefits as the result of lower headcount and a decrease in marketing programs and professional services costs.

In the three months ended December 31, 2019, general and administrative expenses decreased $2.8 million, or 20% as compared with the same period in 2018. This decrease was due primarily to higher costs in 2018 related to the financial restatement and related activities, bad debt expense, and bank fees. This was partially offset by an increase in headcount and stock compensation.

In the three months ended December 31, 2019, restructuring expenses decreased $1.3 million, or 105% as compared with the same period in 2018. The decrease was the result of no material restructuring activity incurred during the current quarter.

Other Income (Expense)



	Three Months Ended
(dollars in thousands)	December 31, 2019			% of revenue		December 31, 2018			% of revenue		$ Change			% Change
Other income (expense)	$	(611	)	(1	)%	$	3,846		4	%	$	4,457		(116	)%
Interest expense	(6,425		)	(6	)%	(6,238		)	(6	)%	187			(3	)%
Loss on debt extinguishment	—			—	%	(5,033		)	—	%	(5,033		)	(100	)%

Other (income) expense, net during the three months ended December 31, 2019 and 2018 were related primarily to a $2.8 million gain on investment, and a $1.1 million gain in the fair value of warrants.

In the three months ended December 31, 2019, interest expense increased $0.2 million, or 3%, as compared with the same period in 2018 due primarily to a higher principal balance.

In the three months ended December 31, 2019, we incurred a loss on debt extinguishment related to our Term Loan.



	Three Months Ended
(dollars in thousands)	December 31, 2019			% of revenue		December 31, 2018		% of revenue		$ Change			% Change
Income tax provision	$	(110	)	—	%	$	337	—	%	$	(447	)	(133	)%

The income tax provision for the three months ended December 31, 2019 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the U.S., 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

Table of Contents

full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgement 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.

Comparison of the Nine Months Ended December 31, 2019 and 2018

Revenue



	Nine Months Ended
(dollars in thousands)	December 31, 2019		% of revenue		December 31, 2018		% of revenue		$ Change			% Change
Product revenue
Primary storage systems	$	65,150	21	%	$	50,358	17	%	$	14,792		29	%
Secondary storage systems	88,281		28	%	87,468		28	%	813			1	%
Devices and media	46,930		15	%	43,651		15	%	3,279			8	%
Total product revenue	$	200,361	64	%	$	181,477	60	%	$	18,884		10	%
Service revenue	98,673		31	%	101,013		34	%	(2,340		)	(2	)%
Royalty revenue	15,700		5	%	16,913		6	%	(1,213		)	(7	)%
Total revenue	$	314,734	100	%	$	299,403	100	%	$	15,331		5	%

Product Revenue

In the nine months ended December 31, 2019, product revenue increased $18.9 million, or 10%, as compared to the same period in the prior year. Primary storage systems represented $14.8 million of the increase, driven by growth in our U.S. domestic business. Secondary storage systems represented $0.8 million of the increase, driven by growth with our hyperscale customers. Devices and media increased $3.3 million driven by the resolution of a legal dispute, which had caused a constraint on LTO tape supply between the two principal suppliers in the market.

Service Revenue

Service revenue was relatively flat, decreasing 2% in the nine months ended December 31, 2019 compared to the same period in the prior year. This decrease was due to a combination of reduced new customer installations and reduced support renewals from our legacy customers.

Royalty Revenue

We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $1.2 million, or 7%, in the nine months ended December 31, 2019 as compared to the same period in the prior year.

Gross Profit and Margin



	Nine Months Ended
(dollars in thousands)	December 31, 2019		Gross margin %		December 31, 2018		Gross margin %		$ Change			Basis point change
Product gross profit	$	60,024	30.0	%	$	48,901	26.9	%	$	11,123		310
Service gross profit	60,701		61.5	%	59,134		58.5	%	1,567			300
Royalty gross profit	15,700		100.0	%	16,913		100.0	%	(1,213		)	—
Gross profit	$	136,425	43.3	%	$	124,948	41.7	%	$	11,477		160

Product Gross Margin

Product gross margin increased 310 basis points for the nine months ended December 31, 2019, as compared with the same period in 2018. This increase was due primarily to cost reductions across a wide range of product offerings, and a mix weighted towards more profitable products.

Service Gross Margin

Table of Contents

Service gross margin increased 300 basis points for the nine months ended December 31, 2019, as compared with the same period in 2018. This increase was due primarily to reductions in cost of service.

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating expenses



	Nine Months Ended
(dollars in thousands)	December 31, 2019		% of revenue		December 31, 2018		% of revenue		$ Change			% Change
Research and development	$	27,058	9	%	$	24,030	8	%	$	3,028		13	%
Sales and marketing	46,101		15	%	52,797		18	%	(6,696		)	(13	)%
General and administrative	43,623		14	%	46,943		16	%	(3,320		)	(7	)%
Restructuring charges	1,020		—	%	5,428		2	%	(4,408		)	(81	)%
Total operating expenses	$	117,802	37	%	$	129,198	43	%	$	(11,396	)	(9	)%

In the nine months ended December 31, 2019, research and development expense increased $3.0 million, or 13%, as compared with the same period in 2018. This increase was partially attributable to an increase in research and development headcount and professional services cost related to new product development.

In the nine months ended December 31, 2019, sales and marketing expenses decreased $6.7 million, or 13%, as compared with the same period in 2018. This decrease was driven by a decrease in compensation and benefits as the result of lower headcount and a decrease in marketing programs and professional services costs.

In the nine months ended December 31, 2019, general and administrative expenses decreased $3.3 million, or 7%, as compared with the same period in 2018. This decrease was driven primarily by lower costs related to the financial restatement and related activities, lower software expenses as we streamline our processes and tools throughout the company, decreased facilities expenses as we consolidate our physical footprint, and decreased bank fees. These decreases were partially offset by increases to stock compensation expense.

In the nine months ended December 31, 2019, restructuring expenses decreased $4.4 million, or 81%, as compared with the same period in 2018. This decrease was primarily due to the high level of headcount reductions that occurred during 2018.

Other Income (Expense)



	Nine Months Ended
(dollars in thousands)	December 31, 2019			% of revenue		December 31, 2018			% of revenue		$ Change			% Change
Other income (expense)	$	(446	)	0	%	$	3,870		1	%	$	4,316		(112	)%
Interest expense	(19,079		)	(6	)%	(14,809		)	(5	)%	4,270			(29	)%
Loss on debt extinguishment, net	—			—	%	(17,458		)	(6	)%	(17,458		)	(100	)%

Other (income) expense, net during the nine months ended December 31, 2019 and 2018 were related primarily to a $2.8 million gain on investment, and a $1.1 million gain in the fair value of warrants.

In the nine months ended December 31, 2019, interest expense increased $4.3 million, or 29%, as compared with the same period in 2018. This increase was primarily due to a higher principal balance.

In the nine months ended December 31, 2018, we incurred a loss on debt extinguishment related to our Term Loan.



	Nine Months Ended
(dollars in thousands)	December 31, 2019		% of revenue		December 31, 2018		% of revenue		$ Change		% Change
Income tax provision	$	471	—	%	$	739	—	%	(268	)	(36	)%

Table of Contents

The income tax provision for the nine months ended December 31, 2019 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the U.S., 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 judgement 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). Management believes that current working capital and borrowings available under the PNC Credit Facility will provide us with sufficient capital to fund operations for at least one year.

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 $7.5 million as of December 31, 2019, compared to $10.8 million as of March 31, 2019. These amounts exclude, as of both dates, $5.0 million in restricted cash that we are required to maintain under the Credit Agreements (as defined below) and $0.9 million and $1.1 million of short-term restricted cash, respectively.

Our outstanding long-term debt amounted to $152.4 million as of December 31, 2019, net of $14.6 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt, and $145.6 million as of March 31, 2019, net of $17.3 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt. Included in long-term debt as of December 31, 2019 was $5.3 million of borrowings under our Amended PNC Credit Facility. After drawing down $5.3 million under our Amended PNC Credit Facility, there was an additional $16.7 million of borrowing availability as of December 31, 2019 (subject to change based on certain financial metrics). See “—Debt Profile and Covenants” and “—Contractual Obligations” below for further information about our outstanding debt.

We are 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 for the fiscal year ended March 31, 2019.

Cash Flows

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

Table of Contents



	Nine Months Ended December 31,
(Dollars in thousands)	2019			2018
Cash provided by (used in):
Operating activities	$	(4,966	)	$	(7,353	)
Investing activities	(2,327		)	(1,755		)
Financing activities	3,880			9,008
Effect of exchange rate changes	(3		)	(83		)
Net decrease in cash and cash equivalents and restricted cash	$	(3,416	)	$	(183	)

Cash Used In Operating Activities

Net cash used in operating activities was $5.0 million for the nine months ended December 31, 2019, a change of $2.4 million from the same period in the prior year. Operating cash flow after adjustments to net loss excluding changes in assets and liabilities was $16.1 million and $0.4 million during the nine months ended December 31, 2019 and 2018, respectively. The increase is primarily attributable to an increase in gross profit of $11.5 million, a decrease in operating expenses of $11.4 million, a decrease in other income (expense) of $4.3 million and an increase in interest expense of $4.2 million. Cash used in operating activities related to changes in assets and liabilities was $21.0 million and $7.8 million during the nine months ended December 31, 2019 and 2018, respectively.

Cash Used in Investing Activities

Net cash used in investing activities was $2.3 million in the nine months ended December 31, 2019, which was mostly flat compared to the same period the prior year. Our capital expenditures in both periods consisted primarily of tooling purchases and leasehold improvements.

Cash Used in Financing Activities

Net cash provided by financing activities was $3.9 million in the nine months ended ended December 31, 2019, a decrease of $5.1 million compared to the same period in the prior year. In the fiscal quarter ended December 31, 2019, we had net borrowings on our credit facility net of payments related to long-term debt of $4.1 million compared to net borrowings of $9.0 million during the prior comparable period.

Debt Profile and Covenants

We are party to a senior secured revolving credit facility in an available principal amount equal to the lesser of (i) $45.0 million and (ii) the “borrowing base” (as defined under the Amended PNC Credit Agreement) (the “Amended PNC Credit Facility”) under an Amended and Restated Revolving Credit and Security Agreement (the “Amended PNC Credit Agreement”) with certain lenders and PNC Bank, National Association, as administrative agent. We are also party to a senior secured term loan facility in an aggregate principal amount of $165.0 million (the “Senior Secured Term Loan”) under a Term Loan Credit and Security Agreement between us, certain lenders and U.S. Bank, National Association, as disbursing and collateral agent, entered into in December 2018 (the “Senior Secured Credit Agreement” and together with the Amended PNC Credit Agreement, the “Credit Agreements”).

The 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 Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

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.

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.

Table of Contents

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, described under “—Contractual Obligations” below.

The warrant holders have the right to require us to prepare and file a registration statement with the SEC within 45 days of a demand and use commercially reasonable efforts to cause the registration statement to be declared effective as soon as practicable. If we are unable to file a registration statement in accordance with the terms of the registration rights agreement, we would be required to make a monthly filing delay penalty payment to each warrant holder in an amount of cash equal to (i) $300,000 multiplied by (ii) such holder’s pro rata share of all outstanding warrants until such filing delay is cured. In the event we fail to make the filing delay penalty 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 December 31, 2019 or 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, are not recognized as liabilities in our financial statements. As a result of our adoption of ASC Topic 842 as of April 1, 2019, certain operating lease obligations that were previously not reflected on our balance sheet have been reflected on the balance sheet at their fair values. See Note 5: Leases, to our unaudited condensed consolidated financial statements for further details. 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.

In connection with our entry into the Senior Secured Term Loan, we issued warrants to purchase approximately 7.1 million shares of our common stock, at an exercise price of $1.33 per share, to the lenders under the Senior Secured Term Loan (the “Senior Secured Term Loan Warrants”). The exercise price and the number of shares

Table of Contents

underlying the Senior Secured Term Loan Warrants are subject to adjustment in the event of specified events, including dilutive issuances of common stock or common stock linked equity instruments at a price lower than the exercise price of the warrants, a subdivision, combination or reclassification of our common stock, or specified dividend payments. The Senior Secured Term Loan Warrants are exercisable until December 27, 2028. Upon exercise, the aggregate exercise price may be paid, at each warrant holder’s election, in cash or on a net issuance basis, based upon the fair market value of our common stock at the time of exercise.

Critical Accounting Estimates and Policies

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles (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

Table of Contents

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 additional information on our significant accounting policies, see Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Recently Issued and Adopted Accounting Pronouncements

We adopted ASC Topic 842, Leases, effective on April 1, 2019. As a result, we recorded lease liabilities of $13.0 million and related right of use assets of $11.9 million on our balance sheet as of December 31, 2019. See Note 5: Leases, to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

For other recently issued and adopted accounting pronouncements, see Note 1 to the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 3 to our consolidated financial statements included in our most recently filed 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 recent Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures. We had concluded that our internal control over financial reporting and disclosure controls and procedures were 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 year ended March 31, 2019, for which remediation efforts are ongoing. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13-1-15(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, 2019 that our disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting.

(b)

Changes in internal control over financial reporting. Other than the changes described above in Item 9A, “Controls and Procedures” of our most recently filed Annual Report on Form 10-K for the year ended March 31, 2019, there were no other changes in our internal control over financial reporting that occurred during the nine months ended December 31, 2019 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In February 2018, two putative class action lawsuits were filed in the U.S. District Court for the Northern District of California against the Company and two former executive officers (the “Class Action”). The lawsuits were consolidated on May 16, 2018. The Class Action plaintiffs sought unspecified damages for certain alleged material

Table of Contents

misrepresentations and omissions made by the Company in connection with its financial statements for fiscal year 2017. On September 25, 2018, the Court granted permission to plaintiffs in the action to file an Amended Consolidated Complaint. Before the plaintiffs filed their amended consolidated complaint, the parties met with a mediator to discuss a potential settlement of the case. On February 20, 2019, the parties reached a settlement in principal; under the terms of the settlement, the Company agreed to pay $8.2 million to plaintiffs. The amount includes all of plaintiffs’ attorneys’ fees, and the full amount was paid by the Company’s directors and officers liability insurance carriers during the three months ended September 30. 2019. A Stipulation of Settlement was signed by the Parties on June 28, 2019, and the Court entered preliminary approval of the settlement on July 26, 2019. In its order granting preliminary approval, the Court set November 14, 2019 as the date for consideration of a motion for final approval of the settlement. On November 27, 2019, the United States District Court for the Northern District of California entered the Final Judgement and Order Granting Final Approval of the Stipulation of Settlement in the class action litigation.

On December 20, 2019, the Company and the Securities and Exchange Commission ("SEC") settled a cease-and-desist proceeding arising out of the SEC's investigation of the matters disclosed in the Company's Current Reports on Form 8-K filed on February 8, 2018, September 14, 2018 and August 6, 2019. The matters concern the Company's historic accounting practices, internal controls and a restatement related to revenue recognition for transactions between the fourth quarter of fiscal 2015 and the second quarter of fiscal 2018. The settlement includes a cease and desist order and payment of $1.0 million as a civil penalty. The civil penalty was fully accrued for as of December 31, 2019 and the Company has paid the amount to the SEC.

As of December 31, 2019, there have been no material changes to the legal proceedings previously disclosed in our most recently filed Annual Report on Form 10-K.

Table of Contents

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 Annual Report on Form 10-K for the year ended March 31, 2019 filed with the SEC on August 6, 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.

Table of Contents

ITEM 6. EXHIBITS

The exhibits required to be filed or furnished as part of this Quarterly Report are listed below. Notwithstanding any language to the contrary, exhibits 32.1 and 32.2 shall not be deemed to be filed as part of this Quarterly Report 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 Company specifically incorporates it by reference.

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Filing Date

Exhibit

Filed or Furnished Herewith

10.1

Offer letter between the Company and Rebecca Jacoby, dated December 16, 2019

8-K

1-13449

12/16/2019

10.1

10.2

Amended and Restated Employee Stock Purchase Plan Agreement (As amended and restated through November 13, 2019)

8-K

1-13449

11/13/2019

10.2

10.3

Amended and Restated Long-term Incentive Plan Agreement (As amended and restated through November 13, 2019)

8-K

1-13449

11/13/2019

10.1

10.4

Offer letter between the Company and Regan MacPherson, dated September 10,2019

10-Q

1-13449

11/6/2019

10.1

31.1

Certification of the Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Principal Financial Officer pursuant to Section 302(a) 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

Table of Contents

SIGNATURES

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: January 29, 2019