Company Quick10K Filing
Quick10K
Quantum
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-K 2019-03-31 Annual: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-03-31 Annual: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
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 Officers, Regulation FD, Exhibits
8-K 2019-04-11 Other Events
8-K 2019-04-04 Officers
8-K 2019-01-29 Officers
8-K 2019-01-21 Exhibits
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
GPT Gramercy Property Trust 4,398
ELON Echelon 38
CMXC Cell Medx 23
GRST Ethema Health 2
ENCR Ener-Core 2
DWSS Morgan Stanley Smith Barney Spectrum Strategic 0
VSYM View Systems 0
BRKA Berkshire Hathaway 0
PNTTE Punto Group 0
SEK Swedish Export Credit 0
QTM 2019-09-30
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 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 exhibit101q220.htm
EX-31.1 exhibit311q220.htm
EX-31.2 exhibit312q220.htm
EX-32.1 exhibit321q220.htm
EX-32.2 exhibit322q220.htm

Quantum Earnings 2019-09-30

QTM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 quantumq22010-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 September 30, 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, $0.001 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 October 31, 2019, there were 36,941,906 shares of Quantum Corporation’s common stock issued and outstanding.



QUANTUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 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)
 
September 30, 2019
 
March 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,000

 
$
10,790

Restricted cash
936

 
1,065

Accounts receivable, net of allowance for doubtful accounts of $275 and $68 as of September 30, 2019 and March 31, 2019, respectively
71,390

 
86,828

Manufacturing inventories
22,032

 
18,440

Service parts inventories
18,845

 
19,070

Other current assets
9,840

 
18,095

Total current assets
129,043

 
154,288

Property and equipment, net
8,606

 
8,437

Restricted cash
5,000

 
5,000

Right-of-use assets, net
11,933

 

Other long-term assets
3,678

 
5,146

Total assets
158,260

 
172,871

Liabilities and Stockholders’ Deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
39,354

 
37,395

Deferred revenue
76,578

 
90,407

Accrued restructuring charges
299

 
2,876

Long-term debt
1,650

 
1,650

Accrued compensation
15,006

 
17,117

Other accrued liabilities
18,821

 
29,025

Total current liabilities
151,708

 
178,470

Deferred revenue
34,981

 
36,733

Long-term debt, net of current portion
153,600

 
145,621

Operating lease liabilities
9,848

 

Other long-term liabilities
11,233

 
11,827

Total liabilities
361,370

 
372,651

Commitments and contingencies (Note 6)
 
 
 
Stockholders' deficit
 
 
 
Common stock, $0.01 par value; 1,000,000 shares authorized; 36,717, and 36,040 shares issued and outstanding at September 30, 2019 and March 31, 2019, respectively
368

 
360

Additional paid-in capital
502,398

 
499,224

Accumulated deficit
(704,076
)
 
(697,954
)
Accumulated other comprehensive loss
(1,800
)
 
(1,410
)
Total stockholders’ deficit
(203,110
)
 
(199,780
)
Total liabilities and stockholders’ deficit
$
158,260

 
$
172,871

See accompanying Notes to Condensed Consolidated Financial Statements.


1


QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts, unaudited)
 
Three Months Ended
 
Six Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Revenue:
 
 
 
 
 
 
 
Product
$
68,130

 
$
51,622

 
$
133,926

 
$
118,491

Service
32,401

 
33,352

 
65,781

 
66,916

Royalty
5,258

 
4,938

 
11,712

 
12,017

Total revenue
105,789

 
89,912

 
211,419

 
197,424

Cost of revenue:
 
 
 
 
 
 
 
Product
49,467

 
41,319

 
96,666

 
86,756

Service
12,799

 
13,066

 
25,404

 
28,802

Total cost of revenue
62,266

 
54,385

 
122,070

 
115,558

Gross profit
43,523

 
35,527

 
89,349

 
81,866

Operating expenses:
 
 
 
 
 
 
 
Research and development
9,350

 
7,862

 
17,733

 
16,123

Sales and marketing
14,824

 
16,682

 
30,680

 
35,807

General and administrative
14,329

 
14,072

 
32,905

 
33,461

Restructuring charges
821

 
294

 
1,084

 
4,201

Total operating expenses
39,324

 
38,910

 
82,402

 
89,592

Income (loss) from operations
4,199

 
(3,383
)
 
6,947

 
(7,726
)
Other income (expense), net
76

 
(196
)
 
165

 
24

Interest expense
(6,347
)
 
(4,636
)
 
(12,653
)
 
(8,571
)
Loss on debt extinguishment, net

 
(12,425
)
 

 
(12,425
)
Net loss before income taxes
(2,072
)
 
(20,640
)
 
(5,541
)
 
(28,698
)
Income tax provision
243

 
977

 
581

 
402

Net loss
$
(2,315
)
 
$
(21,617
)
 
$
(6,122
)
 
$
(29,100
)
 
 
 
 
 
 
 
 
Loss per share - basic and diluted
$
(0.06
)
 
$
(0.61
)
 
$
(0.17
)
 
$
(0.82
)
Weighted average shares - basic and diluted
36,297

 
35,502

 
36,172

 
$
35,473

 
 
 
 
 
 
 
 
Net loss
$
(2,315
)
 
$
(21,617
)
 
$
(6,122
)
 
$
(29,100
)
Foreign currency translation adjustments, net
(474
)
 
(86
)
 
(390
)
 
(969
)
Total comprehensive loss
$
(2,789
)
 
$
(21,703
)
 
$
(6,512
)
 
$
(30,069
)

See accompanying Notes to Condensed Consolidated Financial Statements.


2


QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Six Months Ended September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(6,122
)
 
$
(29,100
)
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities
 
 
 
Depreciation and amortization
2,034

 
2,181

Amortization of debt issuance costs
2,008

 
842

Provision for product and service inventories
3,442

 
5,859

Stock based compensation
3,352

 
1,718

Non-cash loss on debt extinguishment

 
12,425

Bad debt expense
199

 
(383
)
Unrealized foreign exchange (gain) loss
(99
)
 
(286
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
15,239

 
19,434

Manufacturing inventories
(5,799
)
 
11,677

Service parts inventories
(1,180
)
 
(1,122
)
Accounts payable
1,478

 
(17,520
)
Accrued restructuring charges
(2,576
)
 
(1,382
)
Accrued compensation
(2,111
)
 
(4,415
)
Deferred revenue
(15,582
)
 
(11,426
)
Other assets and liabilities
(3,939
)
 
14,209

Net cash provided by (used in) operating activities
(9,656
)
 
2,711

Investing activities
 
 
 
Purchases of property and equipment
(1,315
)
 
(1,331
)
Net cash used in investing activities
(1,315
)
 
(1,331
)
Financing activities
 
 
 
Borrowings of long-term debt and credit facility
172,119

 
164,968

Repayments of long-term debt and credit facility
(165,968
)
 
(171,584
)
Payment of taxes due upon vesting of restricted stock
(171
)
 
(6
)
Net cash provided by (used in) financing activities
5,980

 
(6,622
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
72

 
(137
)
Net change in cash, cash equivalents and restricted cash
(4,919
)
 
(5,379
)
Cash, cash equivalents, and restricted cash at beginning of period
16,855

 
17,207

Cash and cash equivalents at end of period
$
11,936

 
$
11,828

Supplemental disclosure of cash flow information
 
 
 
      Cash paid for interest
$
10,567

 
$
9,938

      Cash paid for income taxes, net of refunds
$
(51
)
 
$
(45
)
   Non-cash transactions
 
 
 
      Purchases of property and equipment included in accounts payable
$
249

 
$
104

      Transfer of inventory to property and equipment
$
169

 
$
176

      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
$
6,000

 
$
5,704

      Restricted cash, current
936

 
6,124

      Restricted cash, long-term
5,000

 

Total cash, cash equivalents and restricted cash at the end of period
$
11,936

 
$
11,828

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, June 30, 2018
 
35,443

 
$
356

 
$
482,028

 
$
(662,642
)
 
$
(1,157
)
 
$
(181,415
)
Net loss
 

 

 

 
(21,617
)
 

 
(21,617
)
Foreign currency translation adjustments
 

 

 

 

 
(86
)
 
(86
)
Shares issued under employee incentive plans, net
 
38

 

 
2

 

 

 
2

Warrants exercised related to long-term debt
 
75

 

 
175

 

 

 
176

Stock-based compensation
 

 

 
1,291

 

 

 
1,291

Balance, September 30, 2018
 
35,556

 
$
356

 
$
483,496

 
$
(684,257
)
 
$
(1,243
)
 
$
(201,648
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
 
36,046

 
$
360

 
$
500,211

 
$
(701,761
)
 
$
(1,326
)
 
$
(202,516
)
Net loss
 

 

 

 
(2,315
)
 

 
(2,315
)
Foreign currency translation adjustments
 

 

 

 

 
(474
)
 
(474
)
Shares issued under employee incentive plans, net
 
671

 
8

 
(178
)
 

 

 
(170
)
Stock-based compensation
 

 

 
2,365

 

 

 
2,365

Balance, September 30, 2019
 
36,717

 
$
368

 
$
502,398

 
$
(704,076
)
 
$
(1,800
)
 
$
(203,110
)

Six 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
 

 

 

 
(29,100
)
 

 
(29,100
)
Foreign currency translation adjustments
 

 

 

 

 
(969
)
 
(969
)
Shares issued under employee incentive plans, net
 
38

 
1

 
(7
)
 

 

 
(6
)
Warrants exercised related to long-term debt
 
75

 
1

 
175

 

 

 
176

Stock-based compensation
 

 

 
1,718

 

 

 
1,718

Balance, September 30, 2018
 
35,556

 
$
356

 
$
483,496

 
$
(684,257
)
 
$
(1,243
)
 
$
(201,648
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
 
36,040

 
$
360

 
$
499,224

 
$
(697,954
)
 
$
(1,410
)
 
$
(199,780
)
Net loss
 

 

 

 
(6,122
)
 

 
(6,122
)
Foreign currency translation adjustments
 

 

 

 

 
(390
)
 
(390
)
Shares issued under employee incentive plans, net
 
677

 
8

 
(178
)
 

 

 
(170
)
Stock-based compensation
 

 

 
3,352

 

 

 
3,352

Balance, September 30, 2019
 
36,717

 
$
368

 
$
502,398

 
$
(704,076
)
 
$
(1,800
)
 
$
(203,110
)

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 September 30,  2019 and the results of operations, cash flows and changes in stockholders’ deficit for the three and six months ended September 30, 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. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. For all entities, this ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Certain amendments must be applied prospectively while others are to be applied on a retrospective basis to all periods presented. The adoption of this ASU will not have an effect on the condensed consolidated financial statements.

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

7


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

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
 
Six Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Americas
 
 
 
 
 
 
 
   Primary storage systems
$
17,327

 
$
9,710

 
$
27,340

 
$
18,889

   Secondary storage systems
15,029

 
9,731

 
38,726

 
28,743

   Device and media
9,348

 
7,629

 
18,019

 
17,912

   Service
20,366

 
21,552

 
41,936

 
43,241

Total revenue
62,070

 
48,622

 
126,021

 
108,785

 
 
 
 
 
 
 
 
EMEA
 
 
 
 
 
 
 
   Primary storage systems
3,388

 
5,628

 
7,468

 
10,943

   Secondary storage systems
8,079

 
5,640

 
17,734

 
16,648

   Device and media
6,640

 
4,422

 
10,173

 
10,376

   Service
9,828

 
9,215

 
19,051

 
18,489

Total revenue
27,935

 
24,905

 
54,426

 
56,456

 
 
 
 
 
 
 
 
APAC
 
 
 
 
 
 
 
   Primary storage systems
3,203

 
3,179

 
4,655

 
4,638

   Secondary storage systems
3,078

 
3,185

 
6,515

 
6,209

   Device and media
2,038

 
2,498

 
3,296

 
4,133

   Service
2,207

 
2,585

 
4,794

 
5,186

Total revenue
10,526

 
11,447

 
19,260

 
20,166

 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
   Primary storage systems
23,918

 
18,517

 
39,463

 
34,470

   Secondary storage systems
26,186

 
18,556

 
62,975

 
51,600

   Device and media
18,026

 
14,549

 
31,488

 
32,421

   Service
32,401

 
33,352

 
65,781

 
66,916

   Royalty*
5,258

 
4,938

 
11,712

 
12,017

Total revenue
$
105,789

 
$
89,912

 
$
211,419

 
$
197,424

 
*
Royalty revenue is not allocable to geographic regions.

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


8


Contract Balances

The following table presents the Company’s contract liabilities and certain information related to this balance as of and for the six months ended September 30, 2019 (in thousands): 
 
 
September 30, 2019
Contract liabilities (deferred revenue)
 
$
111,559

Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period
 
$
51,850


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 September 30, 2019
 
$
92,610

 
$
45,896

 
$
138,506


The Company expects to recognize approximately 70% 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 six months ended September 30, 2019 and 2018. We have no non-financial liabilities measured and recorded at fair value on a non-recurring basis.

Warrants and Warrant Liability

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

During fiscal year 2018, the Company began issuing common stock warrants in connection with the TCW Term Loan agreement. The warrants were initially accounted for as a liability and recorded at estimated fair value on a recurring basis due to exercise price reset provisions contained with the warrant agreements. As such, the Company estimated the fair value of the warrants at the end of each reporting period using a Black-Scholes-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 loss.

9



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 would meet 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. A portion of these warrants were based on significant inputs that were not observable in the market. As the outstanding warrants were reclassified to stockholders’ deficit in the fourth quarter of fiscal year 2019, there was no warrant liability as of September 30, 2019 and March 31, 2019.

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 six months ended September 30, 2018 (in thousands):
 
Warrant liability
As of March 31, 2018
$
272

   Issuances
2,784

   Settlements
(176
)
   Changes in fair value
164

As of September 30, 2018
$
3,044


Long-term Debt

The total estimated fair value of long-term debt as of September 30, 2019 and March 31, 2019 was approximately $170.8 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
 
September 30, 2019
 
March 31, 2019
   Finished goods:


 


      Manufactured finished goods
$
10,015

 
$
8,160

      Distributor inventory
1,445

 
3,345

         Total finished goods
11,460

 
11,505

   Work in progress
1,084

 
107

   Raw materials
9,488

 
6,828

Total manufacturing inventories
$
22,032

 
$
18,440


Service parts inventories
 
September 30, 2019
 
March 31, 2019
   Finished goods
$
14,146

 
$
13,437

   Component parts
4,699

 
5,633

Total service inventories
$
18,845

 
$
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 September 30, 2019 and for the three and six months ended September 30, 2019 reflect the application of Topic 842, while the reported results for the three months ended September 30, 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 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

10


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 September 30, 2019
 
Six Months Ended September 30, 2019
 
  
 
 
 
Operating lease cost
  
$
1,304

 
$
2,576

Variable lease cost
  
147

 
212

Short-term lease cost
  
29

 
31

Total lease cost
  
$
1,480

 
$
2,819


Maturity of Lease Liabilities
 
Operating Leases
Six months ended March 31, 2020
 
$
2,286

For the fiscal year ended March 31,
 
 
   2021
 
4,233

   2022
 
3,388

   2023
 
2,366

   2024
 
2,127

   Thereafter
 
3,870

Total lease payments
 
$
18,270

Less: Imputed interest
 
(5,218
)
Present value of lease liabilities
 
$
13,052


Lease Term and Discount Rate
 
September 30, 2019
Weighted average remaining operating lease term (years)
 
4.85

Weighted average discount rate for operating leases
 
14.03
%

The Company’s right-of-use asset was $11.9 million as of September 30, 2019, and $0 as of March 31, 2019.

Operating cash outflows related to operating leases totaled $1.3 million for the six months ended September 30, 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 September 30, 2019, the Company had issued non-cancelable commitments for $21.5 million to purchase inventory from its contract manufacturers and suppliers.



11


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.

In February 2018, two putative class action lawsuits were filed in the U.S. District Court for the Northern District of California against the Company and two former executive officers (the “Class Action”). The lawsuits were consolidated on May 16, 2018. The Class Action plaintiffs sought unspecified damages for certain alleged material misrepresentations and omissions made by 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 our directors and officers liability insurance carriers. A Stipulation of Settlement was signed by the Parties on June 28, 2019, and the Court entered preliminary approval of the settlement on July 26, 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.

In May 2018, two shareholders filed litigation in California Superior Court for Santa Clara County on behalf of Quantum against several current and former officers and directors of the Company. A third action brought by a shareholder on behalf of Quantum was filed on March 4, 2019. These three lawsuits (the “Derivative Litigation”), which were consolidated by the Court, alleged, inter alia, that the board members and certain of the senior officers breached their fiduciary duties to the Company and its shareholders by causing the Company to make materially false and misleading statements concerning the Company’s financial health, business operations, and growth prospects in its public filings and communications with investors, including misrepresentations regarding the Company’s disclosure controls and procedures, revenue recognition, and internal controls over financial reporting. After extensive negotiations, the parties reached a definitive agreement to settle the Derivative Litigation in February 2019. The settlement requires the Company to adopt a number of corporate governance reforms and to pay plaintiffs’ attorneys’ fees of $0.8 million, which was paid by our directors and officers liability insurance carriers. On September 6, 2019, the Court entered final approval of the Derivative Litigation settlement.
In January 2018, the Company received a document subpoena from the SEC requesting information pertaining to its financial statements for the period April 1, 2017 through the date of the subpoena. The Company responded to that subpoena. In August 2018, the Company received a second subpoena requesting similar documents for the period April 1, 2015 through the date of the subpoena. The Company understands that the SEC’s investigation relates to the facts and circumstances regarding the restatement of the Company’s financial statements which is described in the Explanatory Note and Note 2, Restatement, in the Company’s most recently filed Annual Report on Form 10-K. The Company has produced a substantial volume of documents to the SEC and is cooperating with the SEC staff. The investigation is ongoing.
Other Matters
Additionally, from time to time, the Company is a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, the Company does not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, cash flows or financial position.

NOTE 7: RESTRUCTURING CHARGES
There were no new restructuring plans initiated during the six months ended September 30, 2019. In the six months ended September 30, 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 six months ended September 30, 2019 and 2018 (in thousands):

12


 
 
Severance and Benefits
  
Facilities
 
Total
Balance as of March 31, 2019
 
$

  
$
2,876

 
$
2,876

   Restructuring costs
 

  
826

 
826

   Adjustments to prior estimates
 

 
258

 
258

   Cash payments
 

  
(3,661
)
 
(3,661
)
Balance as of September 30, 2019
 
$

  
$
299

 
299

 
 
 
 
 
 
 
Balance as of March 31, 2018
 
$
1,430

 
$
4,389

 
$
5,819

   Restructuring costs
 
3,607

 
48

 
3,655

   Adjustments to prior estimates
 

 
546

 
546

   Cash payments
 
(4,592
)
 
(991
)
 
(5,583
)
Balance as of September 30, 2018
 
$
445

  
$
3,992

 
$
4,437

 
 
 

  
 

 
 


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

NOTE 8: NET 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 loss per share because their effect would have been anti-dilutive (in thousands):

Three Months Ended
 
Six Months Ended
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
8,625

 
2,121

 
6,860

 
1,694


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.

NOTE 9: INCOME TAXES
The effective tax rate for the three and six months ended September 30, 2019 was -11.7% and -10.5%, respectively, as compared to -4.7% and -1.4% for the three and six months ended September 30, 2018, respectively. Income tax provisions for each of these periods reflect expenses for foreign income taxes and state taxes and differed from the federal statutory rate of 21% 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 September 30, 2019, including interest and penalties, the Company had $118.0 million of unrecognized tax benefits, $99.8 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of September 30, 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 September 30, 2019, $112.0 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 $6.0 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.

13



NOTE 10: LONG-TERM DEBT
The Company’s long-term debt consisted of the following (in thousands):
 
As of
 
September 30, 2019
 
March 31, 2019
Senior Secured Term Loan
$
163,763

 
$
164,588

Amended PNC Credit Facility
6,976

 

Less: current portion
(1,650
)
 
(1,650
)
Less: unamortized debt issuance costs (1)
(15,489
)
 
(17,317
)
Long-term debt, net
$
153,600

 
$
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 September 30, 2019, the interest rates on the Senior Secured Term Loan and the Amended PNC Credit Facility were 12.1% and 8.0%, respectively. As of September 30, 2019, after drawing down $7.0 million, the Amended PNC Credit Facility had a remaining borrowing availability of $14.8 million.

As of September 30, 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 September 30, 2019.


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 goals, strategy and expectations for future operating performance including our goals for fiscal 2020 and our strategies for achieving those goals; (2) our expectations and beliefs regarding the storage market and the other markets in which we compete; (3) our belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures and debt service, and sustain our operations for at least the next 12 months; (4) our expectations regarding our ongoing efforts to control our cost structure; (5) our expectations regarding the outcome of any litigation or investigations in which we are involved; and (6) our business goals, objectives, key focuses, opportunities and prospects, are inherently uncertain as they are based on management’s expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, about which we speak only as of the date hereof. As a result, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include but are not limited to those factors discussed under “Risk Factors” in Part II, Item 1A. 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.

14


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 non-recurring expenses. The Company calculates Adjusted Net Income (Loss) per Basic and Diluted share using the Company’s above-referenced definition of Adjusted Net Income (Loss).
The Company considers non-recurring expenses to be expenses that have not been incurred within the prior two years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses.
We have provided below a reconciliation of Adjusted EBITDA and Adjusted Net Income (Loss) to net loss, the most directly comparable U.S. GAAP financial measure. We have presented Adjusted EBITDA because it is a key measure used by our management and the board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operating plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business performance. 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; or (6) potential future strategic and financial 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; or (4) potential future strategic and financial 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. The following is a reconciliation of Adjusted EBITDA and Adjusted Net Income (Loss) to net loss, the most directly comparable financial measure calculated in accordance with U.S. GAAP, for each of the periods indicated:

15


Adjusted EBITDA (in thousands)
Three Months Ended
 
Six Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
U.S. GAAP net loss
$
(2,315
)
 
$
(21,617
)
 
$
(6,122
)
 
$
(29,100
)
Interest expense, net
6,347

 
4,636

 
12,653

 
8,571

Provision for income taxes
243

 
977

 
581

 
402

Depreciation and amortization expense
1,013

 
1,051

 
2,034

 
2,181

Stock-based compensation expense
2,365

 
1,291

 
3,352

 
1,718

Restructuring charges
821

 
294

 
1,084

 
4,201

Loss on debt extinguishment

 
12,425

 

 
12,425

Cost related to financial restatement and related activities
4,188

 
3,324

 
12,179

 
8,445

Other non-recurring expenses

 

 

 
749

Adjusted EBITDA
$
12,662

 
$
2,381

 
$
25,761

 
$
9,592

 
 
 

 
 
 
 
 
 
 

 
 
 
 
Adjusted Net Income (Loss) (in thousands)
Three Months Ended
 
Six Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
U.S. GAAP net loss
$
(2,315
)
 
$
(21,617
)
 
$
(6,122
)
 
$
(29,100
)
Restructuring charges
821

 
294

 
1,084

 
4,201

Loss on debt extinguishment

 
12,425

 

 
12,425

Stock-based compensation
2,365

 

 
3,352

 

Cost related to financial restatement and related activities
4,188

 
3,324

 
12,179

 
8,445

Other non-recurring expenses

 

 

 
749

   Adjusted Net Income (Loss)
$
5,059

 
$
(5,574
)
 
$
10,493

 
$
(3,280
)
 
 
 

 
 
 
 
   Adjusted Net Income (Loss) per share:
 
 
 
 
 
 
 
      Basic
$
0.14

 
$
(0.16
)
 
$
0.29

 
$
(0.09
)
      Diluted
$
0.11

 
$
(0.16
)
 
$
0.24

 
$
(0.09
)
   Weighted average shares outstanding:
 
 
 
 
 
 
 
      Basic
36,297

 
35,502

 
36,172

 
35,473

      Diluted
44,923

 
35,502

 
43,032

 
35,473



16


RESULTS OF OPERATIONS
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Total revenue
$
105,789

 
$
89,912

 
$
211,419

 
$
197,424

Total cost of revenue (1)
62,266

 
54,385

 
122,070

 
115,558

Gross margin
43,523

 
35,527

 
89,349

 
81,866

Operating expenses
 
 
 
 
 
 
 
Research and development (1)
9,350

 
7,862

 
17,733

 
16,123

Sales and marketing (1)
14,824

 
16,682

 
30,680

 
35,807

General and administrative (1)
14,329

 
14,072

 
32,905

 
33,461

Restructuring charges
821

 
294

 
1,084

 
4,201

Total operating expenses
39,324

 
38,910

 
82,402

 
89,592

Income (loss) from operations
4,199

 
(3,383
)
 
6,947

 
(7,726
)
Other income (expense)
76

 
(196
)
 
165

 
24

Interest expense
(6,347
)
 
(4,636
)
 
(12,653
)
 
(8,571
)
Loss on debt extinguishment, net

 
(12,425
)
 

 
(12,425
)
Loss before income taxes
(2,072
)
 
(20,640
)
 
(5,541
)
 
(28,698
)
Income tax provision
243

 
977

 
581

 
402

Net loss
$
(2,315
)
 
$
(21,617
)
 
$
(6,122
)
 
$
(29,100
)
(1) Includes stock-based compensation as follows:
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Cost of revenue
$
81

 
$
111

 
$
173

 
$
186

Research and development
143

 
131

 
265

 
217

Sales and marketing
291

 
215

 
408

 
67

General and administrative
1,850

 
834

 
2,506

 
1,248

   Total
$
2,365

 
$
1,291

 
$
3,352

 
$
1,718


Comparison of the Three Months Ended September 30, 2019 and 2018
Revenue
 
Three Months Ended
 
 
 
 
(dollars in thousands)
September 30, 2019
 
% of
revenue
 
September 30, 2018
 
% of
revenue
 
$ Change
 
% Change
Product revenue
 
 
 
 
 
 
 
 
 
 
 
   Primary storage systems
$
23,918

 
23
%
 
$
18,517

 
21
%
 
$
5,401

 
29
 %
   Secondary storage systems
26,186

 
25
%
 
18,556

 
21
%
 
7,630

 
41
 %
   Devices and media
18,026

 
17
%
 
14,549

 
16
%
 
3,477

 
24
 %
      Total product revenue
$
68,130

 
64
%
 
$
51,622

 
58
%
 
$
16,508

 
32
 %
Service revenue
32,401

 
31
%
 
33,352

 
37
%
 
(951
)
 
(3
)%
Royalty revenue
5,258

 
5
%
 
4,938

 
5
%
 
320

 
6
 %
Total revenue
$
105,789

 
100
%
 
$
89,912

 
100
%
 
$
15,877

 
18
 %



17


Product revenue
In the three months ended September 30, 2019, product revenue increased $16.5 million, or 32%, as compared to the same period in 2018. Secondary storage systems represented $7.6 million of the increase, driven by growth with our hyperscaler customers. Primary storage systems represented $5.4 million of the increase, driven by growth in our U.S. business. Devices and media represented $3.5 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 3% in the three months ended September 30, 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 increased $0.3 million, or 6%, in the three months ended September 30, 2019 compared to the same period in 2018 due to higher overall market volume and the resolution of a legal dispute between two principal suppliers in the market.

Gross Profit and Margin
 
Three Months Ended
 
 
 
 
(dollars in thousands)
September 30, 2019
 
Gross
margin %
 
September 30, 2018
 
Gross
margin %
 
$ Change
 
Basis point change
Product gross profit
$
18,663

 
27.4
%
 
$
10,303

 
20.0
%
 
$
8,360

 
740

Service gross profit
19,602

 
60.5
%
 
20,286

 
60.8
%
 
(684
)
 
(30
)
Royalty gross profit
5,258

 
100.0
%
 
4,938

 
100.0
%
 
320

 

Gross profit
$
43,523

 
41.1
%
 
$
35,527

 
39.5
%
 
$
7,996

 
160


Product Gross Margin
Product gross margin increased 740 basis points for the three months ended September 30, 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 decreased 30 basis points for the three months ended September 30, 2019, as compared with the same period in 2018. This decrease was due primarily to weighting towards lower margin offerings.
Royalty Gross Margin
Royalties do not have significant related cost of sales.


18


Operating expenses
 
Three Months Ended
 
 
 
 
(dollars in thousands)
September 30, 2019
 
% of
revenue
 
September 30, 2018
 
% of
revenue
 
$ Change
 
% Change
Research and development
$
9,350

 
9
%
 
$
7,862

 
9
%
 
$
1,488

 
19
 %
Sales and marketing
14,824

 
14
%
 
16,682

 
19
%
 
(1,858
)
 
(11
)%
General and administrative
14,329

 
14
%
 
14,072

 
16
%
 
257

 
2
 %
Restructuring charges
821

 
1
%
 
294

 
%
 
527

 
179
 %
   Total operating expenses
$
39,324

 
37
%
 
$
38,910

 
43
%
 
$
414

 
1
 %
In the three months ended September 30, 2019, research and development expense increased $1.5 million, or 19%, as compared with the same period in 2018. This increase was largely attributable to an increase in research and development headcount.
In the three months ended September 30, 2019, sales and marketing expenses decreased $1.9 million, or 11%, 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 September 30, 2019, general and administrative expenses increased $0.3 million, or 2% as compared with the same period in 2018. This increase was due primarily to an increase in stock compensation expense and costs related to the financial restatement and related activities offset by a decrease in bad debt expense, IT operational costs and other miscellaneous expenses.
In the three months ended September 30, 2019, restructuring expenses increased $0.5 million, or 179% as compared with the same period in 2018. The increase was due primarily to the closure of a facility.

Other Income (Expense)
 
Three Months Ended
 
 
 
 
(dollars in thousands)
September 30, 2019
 
% of
revenue
 
September 30, 2018
 
% of
revenue
 
$ Change
 
% Change
Other income (expense)
$
76

 
0
 %
 
$
(196
)
 
(0
)%
 
$
272

 
(139
)%
Interest expense
(6,347
)
 
(6
)%
 
(4,636
)
 
(5
)%
 
(1,711
)
 
37
 %

Other (income) expense, net during the three months ended September 30, 2019 and 2018 were related primarily to foreign exchange (gains) losses.

In the three months ended September 30, 2019, interest expense increased $1.7 million, or 37%, as compared with the same period in 2018 due primarily to a higher principal balance.

 
Three Months Ended
 
 
 
 
(dollars in thousands)
September 30, 2019
 
% of
revenue
 
September 30, 2018
 
% of
revenue
 
$ Change
 
% Change
Income tax provision
$
243

 
%
 
$
977

 
1
%
 
$
(734
)
 
(75
)%

The income tax provision for the three months ended September 30, 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.

19



Comparison of the Six Months Ended September 30, 2019 and 2018

Revenue
 
Six Months Ended
 
 
 
 
(dollars in thousands)
September 30, 2019
 
% of
revenue
 
September 30, 2018
 
% of
revenue
 
$ Change
 
% Change
Product revenue
 
 
 
 
 
 
 
 
 
 
 
   Primary storage systems
$
39,463

 
19
%
 
$
34,470

 
17
%
 
$
4,993

 
14
 %
   Secondary storage systems
62,975

 
30
%
 
51,600

 
26
%
 
11,375

 
22
 %
   Devices and media
31,488

 
15
%
 
32,421

 
16
%
 
(933
)
 
(3
)%
      Total product revenue
$
133,926

 
63
%
 
$
118,491

 
60
%
 
$
15,435

 
13
 %
Service revenue
65,781

 
31
%
 
66,916