Company Quick10K Filing
Quantum
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 0 $0
10-Q 2020-01-29 Quarter: 2019-12-31
10-Q 2019-11-05 Quarter: 2019-09-30
10-Q 2019-08-06 Quarter: 2019-06-30
10-K 2019-08-06 Annual: 2019-03-31
10-Q 2019-08-23 Quarter: 2018-12-31
10-Q 2019-08-23 Quarter: 2018-09-30
10-Q 2017-11-09 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-K 2017-06-01 Annual: 2017-03-31
10-Q 2017-02-03 Quarter: 2016-12-31
10-Q 2016-11-04 Quarter: 2016-09-30
10-Q 2016-08-05 Quarter: 2016-06-30
10-K 2016-06-03 Annual: 2016-03-31
10-Q 2016-02-05 Quarter: 2015-12-31
10-Q 2015-11-06 Quarter: 2015-09-30
10-Q 2015-08-07 Quarter: 2015-06-30
10-K 2015-06-12 Annual: 2015-03-31
10-Q 2015-02-06 Quarter: 2014-12-31
10-Q 2014-11-07 Quarter: 2014-09-30
10-Q 2014-08-08 Quarter: 2014-06-30
10-K 2014-06-06 Annual: 2014-03-31
10-Q 2014-02-07 Quarter: 2013-12-31
10-Q 2013-11-12 Quarter: 2013-09-30
10-Q 2013-08-09 Quarter: 2013-06-30
10-K 2013-06-07 Annual: 2013-03-31
10-Q 2013-02-08 Quarter: 2012-12-31
10-Q 2012-08-09 Quarter: 2012-06-30
10-K 2012-06-14 Annual: 2012-03-31
10-Q 2012-02-09 Quarter: 2011-12-31
10-Q 2011-11-09 Quarter: 2011-09-30
10-Q 2011-08-09 Quarter: 2011-06-30
10-K 2011-06-14 Annual: 2011-03-31
10-Q 2011-02-08 Quarter: 2010-12-31
10-Q 2010-11-05 Quarter: 2010-09-30
10-Q 2010-08-06 Quarter: 2010-06-30
10-K 2010-06-11 Annual: 2010-03-31
10-Q 2010-02-05 Quarter: 2009-12-31
8-K 2020-01-29 Earnings, Exhibits
8-K 2019-12-16 Officers, Exhibits
8-K 2019-12-02 Other Events
8-K 2019-11-21 Other Events
8-K 2019-11-18 Officers, Shareholder Vote, Exhibits
8-K 2019-11-07 Officers
8-K 2019-11-05 Earnings, Exhibits
8-K 2019-09-06 Other Events
8-K 2019-09-05 Officers
8-K 2019-08-06 Earnings, Exhibits
8-K 2019-06-29 Other Events
8-K 2019-05-28 Other Events, Exhibits
8-K 2019-04-11 Other Events
8-K 2019-04-11 Officers, Regulation FD, Exhibits
8-K 2019-04-04 Officers
8-K 2019-01-29 Officers
8-K 2019-01-21 Exhibits
8-K 2019-01-15 Exhibits
8-K 2018-12-28 Other Events
8-K 2018-12-27 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-09-14 Amendment, Other Events, Exhibits
8-K 2018-08-23 Enter Agreement, Off-BS Arrangement, Sale of Shares
8-K 2018-08-15 Other Events, Exhibits
8-K 2018-06-22 Exit Costs, Officers, Exhibits
8-K 2018-05-25 Officers, Exhibits
8-K 2018-05-11 Officers
8-K 2018-02-15 Exhibits
8-K 2018-02-06 Exit Costs, Other Events, Exhibits
8-K 2018-01-16 Officers, Exhibits
8-K 2017-12-14 Enter Agreement, Sale of Shares, Exhibits
QTM 2019-12-31
Part I-Financial Information
Item 1. Financial Statements
Note 1: Description of Business and Summary of Significant Accounting Policies
Note 2: Revenue
Note 3: Fair Value of Financial Instruments
Note 4: Inventories
Note 5: Leases
Note 6: Commitments and Contingencies
Note 7: Restructuring Charges
Note 8: Net Income (Loss) per Share
Note 9: Income Taxes
Note 10: Long-Term Debt
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 exhibit101offerletterrebec.htm
EX-10.2 exhibit102employeestockpur.htm
EX-10.3 exhibit1012012ltincentivep.htm
EX-10.4 exhibit101q220macphersonof.htm
EX-31.1 exhibit311q320.htm
EX-31.2 exhibit312q320.htm
EX-32.1 exhibit321q320.htm
EX-32.2 exhibit322q320.htm

Quantum Earnings 2019-12-31

QTM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
UCC 0 5,303 5,053 1,194 939 1,326 578 24% 0.4 18%
GNLN 0 181 51 103 18 -18 -16 -61 18% 3.9 -10%
WSCC 0 0 0 0 0 11 11 0 0.0 117,704%
LITH 0 0 0 0 0 -0 -0 0 -0.2 -350%
GRCK 0 1 2 0 0 -4 -4 0 62% -0.0 -422%
PGAS 0 13 3 5 3 -1 -1 -1 57% 0.7 -7%
QTM 0 172 375 401 167 -39 -7 147 42% -21.1 -23%
FWLAF 0 0 1 0 0 -0 -0 0 -0.6
BHL 0 209,908 191,553 7,577 0 -391 -1,209 -2,582 0% 2.1 -0%
PRKR 0 5 33 0 -1 -16 -15 3 -1,984% -0.2 -340%

10-Q 1 quantumq32010-q.htm 10-Q Document

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

or

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

For the transition period from ___ to ___

Commission File Number 1-13449
Quantum Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
94-2665054
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
224 Airport Parkway
Suite 550
 
 
San Jose
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






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.



QUANTUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended December 31, 2019

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.


1


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.


2


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.

3


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
 
 
 
 
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
 
 
 
 
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.

4


INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



5



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.
 

6


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

7



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


8



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.

9



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

10


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



11


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.


12


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

13


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.



14


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

15


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.

16


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



17


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
 %



18


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.


19


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
 %
 
$