Company Quick10K Filing
Quantum
Price2.04 EPS-1
Shares37 P/E-4
MCap75 P/FCF-5
Net Debt142 EBIT8
TEV217 TEV/EBIT27
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-03-31 Filed 2020-06-24
10-Q 2019-12-31 Filed 2020-01-29
10-Q 2019-09-30 Filed 2019-11-05
10-Q 2019-06-30 Filed 2019-08-06
10-K 2019-03-31 Filed 2019-08-06
10-Q 2018-12-31 Filed 2019-08-23
10-Q 2018-09-30 Filed 2019-08-23
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-K 2017-03-31 Filed 2017-06-01
10-Q 2016-12-31 Filed 2017-02-03
10-Q 2016-09-30 Filed 2016-11-04
10-Q 2016-06-30 Filed 2016-08-05
10-K 2016-03-31 Filed 2016-06-03
10-Q 2015-12-31 Filed 2016-02-05
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-07
10-K 2015-03-31 Filed 2015-06-12
10-Q 2014-12-31 Filed 2015-02-06
10-Q 2014-09-30 Filed 2014-11-07
10-Q 2014-06-30 Filed 2014-08-08
10-K 2014-03-31 Filed 2014-06-06
10-Q 2013-12-31 Filed 2014-02-07
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-09
10-K 2013-03-31 Filed 2013-06-07
10-Q 2012-12-31 Filed 2013-02-08
10-Q 2012-06-30 Filed 2012-08-09
10-K 2012-03-31 Filed 2012-06-14
10-Q 2011-12-31 Filed 2012-02-09
10-Q 2011-09-30 Filed 2011-11-09
10-Q 2011-06-30 Filed 2011-08-09
10-K 2011-03-31 Filed 2011-06-14
10-Q 2010-12-31 Filed 2011-02-08
10-Q 2010-09-30 Filed 2010-11-05
10-Q 2010-06-30 Filed 2010-08-06
10-K 2010-03-31 Filed 2010-06-11
10-Q 2009-12-31 Filed 2010-02-05
8-K 2020-06-24
8-K 2020-06-16
8-K 2020-06-01
8-K 2020-05-18
8-K 2020-05-18
8-K 2020-04-16
8-K 2020-04-06
8-K 2020-01-29
8-K 2019-12-23
8-K 2019-12-16
8-K 2019-12-02
8-K 2019-11-21
8-K 2019-11-18
8-K 2019-11-07
8-K 2019-11-05
8-K 2019-10-15
8-K 2019-09-06
8-K 2019-09-05
8-K 2019-08-06
8-K 2019-06-29
8-K 2019-05-28
8-K 2019-04-11
8-K 2019-04-11
8-K 2019-04-04
8-K 2019-01-29
8-K 2019-01-21
8-K 2019-01-15
8-K 2018-12-28
8-K 2018-12-27
8-K 2018-09-14
8-K 2018-08-23
8-K 2018-08-15
8-K 2018-06-22
8-K 2018-05-25
8-K 2018-05-11
8-K 2018-02-15
8-K 2018-02-06
8-K 2018-01-16
8-K 2017-12-14

QTM 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1: Description of Business and Significant Accounting Policies
Note 2: Revenue Recognition
Note 3: Balance Sheet Information
Note 4: Debt
Note 5: Leases
Note 6: Restructuring Charges
Note 7: Stock Incentive Plans and Share - Based Compensation
Note 8: Net Loss per Share
Note 9: Income Taxes
Note 10: Commitments and Contingencies
Note 11: Fair Value of Financial Instruments
Note 12: Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-4.1 exhibit41.htm
EX-10 exhibit101king.htm
EX-10.2 exhibit102rsuagreement.htm
EX-10.3 exhibit103marketrsuagreeme.htm
EX-10.4 exhibit104rsuagreementnon-.htm
EX-10.5 exhibit105psuagreement.htm
EX-10.6 exhibit106rsuagreementdire.htm
EX-21 a03312020exhibit-21.htm
EX-23.1 a03312020exhibit-23.htm
EX-31.1 a03312020exhibit-311.htm
EX-31.2 a03312020exhibit-312.htm
EX-32.1 a03312020exhibit-321.htm
EX-32.2 a03312020exhibit-322.htm

Quantum Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
38026314629-88-2052012201420172020
Assets, Equity
1601177431-12-552012201420172020
Rev, G Profit, Net Income
206-8-22-36-502012201420172020
Ops, Inv, Fin

10-K 1 a0331202010k.htm 10-K Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2020

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 001-13449
qlogoa01.jpg
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
 
Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
x
 No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨
Yes
x
 No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b) by the registered public accounting firm that prepared or issued its audit report.
x
 
 
 
 
 
 
 
 
 
 
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 last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock held by its non-affiliates, computed by reference to the price at which the common stock was last sold, was $115,331,509.
As of the close of business on June 22, 2020, there were 39,905,090 shares of Quantum Corporation’s common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
The portions of the registrant's proxy statement to be filed in connection with the Annual Meeting of Stockholders to be held in 2020 have been incorporated by reference into Part III of this Annual Report on Form 10-K.



QUANTUM CORPORATION

ANNUAL REPORT ON FORM 10-K
For the Year Ended March 31, 2020

Table of Contents
 
 
Page
Number
 
PART I
 
 
PART II
 
 
PART III
 
 
PART IV
 
 
 
 
 
 

i


As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "Quantum," "we," "us," and "our" refer to Quantum Corporation and its subsidiaries taken as a whole, unless otherwise noted or unless the context indicates otherwise.

Note Regarding Forward-Looking Statements
This Annual Report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding COVID-19's anticipated impacts on our business, our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Item 1A. Moreover, we operate in a competitive and changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, you should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this report or to conform these statements to actual results or revised expectations.


PART I
ITEM 1. BUSINESS
COVID-19 Risks and Uncertainties
We are subject to the risks arising from COVID-19 which have caused substantial financial market volatility and have adversely affected both the U.S. and the global economy. For many of our customers, the COVID-19 pandemic has significantly affected their business. Movie and television production has been paused, professional and collegiate sports seasons have been postponed or cancelled, and many corporations and enterprises have put information technology spending on hold while they assess the short- and long-term impact of the pandemic. While our supply chain remains intact and operating, we have experienced issues related to our logistics network. The reduced capacity within and across freight lanes (aircraft, personnel, customs clearance, etc.) has caused late deliveries from re-routes and mis-shipments, as well as increased expedite and other charges to deliver and receive products. To date, we have experienced minimal impact on product availability, although future capacity constraints across the network due to lost capacity from factory down time, closures, as well as reduced staff and demand signal fluctuations are expected to impact product availability in the months and possibly quarters to come.

We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. Our management continues to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.

3


Overview

We are a leader in storing and managing digital video and other forms of unstructured data. We help customers around the world to ingest, process, and analyze digital data at high speed, and preserve and protect it for decades. Our customers include some of the world’s largest corporations, government agencies, service providers, broadcasters, movie studios, sports leagues and teams, and enterprises in all industries. We work closely with a broad network of distributors, VARs, DMRs, OEMs and other suppliers to solve our customers most pressing business challenges.

Our Customer Solution

Our customers are typically managing and storing large amounts of digital video and other forms of “video-like” data such as high-resolution images. This data is generally referred to as “unstructured” data, and video and digital images represent the largest subset of this data. This unstructured data is growing rapidly, and already represents the vast majority of the data being created every day.

This data has unique requirements, and our portfolio has been designed to address these requirements end-to-end. When this data is first created, it requires very high-speed performance, which we provide using a combination of non-volatile memory express (“NVMe”), solid state drives (“SSD”), and hard disk drives (“HDD”). Once this data is ingested and processed, it typically needs to be stored and protected forever. We provide both object storage systems and tape storage systems for low-cost, long-term protection and archiving, and the complete solution is managed by our StorNext software. StorNext is both a high-speed file system as well as a data management platform. In addition to providing customers access to their data across the various types of storage systems above, StorNext can also move data to and from public cloud storage, which our customers are increasingly using as part of their overall data infrastructure.

We also offer a portfolio of products designed for video surveillance recording and storage, including a line of network video recording servers, and a line of hyperconverged storage systems for surveillance recording and management.

With the exception of our tape storage systems, which are based on hardware we have designed, all of our products are powered by our software, and run on commodified server hardware. Our product portfolio is increasingly software-defined, and our technology roadmap is moving to becoming completely software-defined.

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

Industry Background

Digital video and imaging data is growing exponentially, and in the next few years is likely to represent the vast majority of the data produced in the world. This class of data presents a unique set of challenges for our customers. These data sets are exponentially larger than the average corporate database, they need to be stored and protected for decades, and many of the data services designed for databases and other corporate applications do not work with this data. In addition, video and image data is very difficult to search, and yet it is the data that has the most value to the business lines of many of our customers. Lastly, these datasets typically have a lifecycle that initially requires very high performance for creation, intake, cataloging, analysis and collaboration, which then needs to be archived and protected for decades at a low cost. With these challenges in mind, our mission is to design products to address these needs, enabling our customers with solutions that will help them create, innovate and protect.
Some examples across the industries that we serve include:
The media and entertainment industry producing high-resolution content for movies and TV shows, including content in streaming services;
Large corporations producing video content for marketing and advertising, and for internal training and communication purposes;

4


Surveillance cameras for city surveillance, critical infrastructure, higher education, retail, restaurants, and more;
Scientific research and applications;
Life sciences, genome sequencing and microscopy;
Military and defense applications that manage images and video from drones and satellites;
Video, image, and sensor data captured on the manufacturing floor;
Video, image, and sensor data produced by cars as part of ADAS and autonomous vehicle development.

Products

High-Performance Shared Storage Systems

At the core of our high-performance shared storage product line is our StorNext software that enables high-speed ingest, editing, processing and management of digital video and image datasets. Major broadcasters and studios, post-production companies including streaming services, sports franchises, and corporations around the world use StorNext.

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

The Quantum F-SeriesA line of ultra-fast, highly available NVMe storage servers for editing, rendering, and processing of video content and other large unstructured datasets.
Quantum QXS-Series: A line of high performance, reliable hybrid storage arrays, offered with either HDDs, SSDs, or some combination of the two.

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

Object Storage Systems

With the acquisition of the ActiveScale object storage business from Western Digital that was completed in March of 2020, we now offer leading object storage systems for massive-scale, online content repositories such as media archives, genome sequencing data repositories, and big data lakes. Our ActiveScale object storage provides high levels of data durability and facilitates the management of many petabytes and billions of objects. ActiveScale object storage software stores data in object format and uses patented erasure-encoding software to protect data across storage nodes and across multiple geographic sites.

Tape Storage

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

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

Backup Storage Systems

5



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

Storage Systems for Surveillance and Physical Security

We offer a broad portfolio of products designed for the capture and analysis of video surveillance and security. These products include network video recording servers, as well as hyperconverged storage systems for video surveillance management and recording. In addition, we offer appliances designed for video surveillance analytics and to run different types of access control systems.

Our strategy is to offer the broadest physical security server and storage portfolio available from any single supplier, with solutions designed and optimized for surveillance and physical security workloads, providing high performance and density, resulting in cost-effective solutions.

In-Vehicle Storage Systems

Our R-Series is a line of ruggedized, removable storage systems for in-vehicle data capture, mobile surveillance, and military applications. Our R-Series includes a removable storage magazine which allows data generated in the vehicle to be easily uploaded to a shared storage environment, such as our StorNext file system, for processing and analytics.

Services

We offer a broad range of services to complement our systems and technology, including managed services, implementation and training services, and support services for our customers around the world. Our customers are increasingly looking to purchase our technology using an as-a-service model, or different forms of managed services, and we now offer a full line of these services to meet these needs.

Global Services and Warranty

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

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

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

6



Research and Development

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

Sales and Distribution Channels

Product Sales Channels

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

OEM Relationships

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

Customers

Our customers vary across multiple industries worldwide ranging from small businesses to global enterprises. In addition, we sell to OEMs, distributors, VARs and DMRs to reach end user customers. Sales to our top five customers represented 23%, 33%, 29% revenue in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, of which no customer represented 10% or more of our total revenue.

Competition

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

As our customers look to use more public cloud storage services, providers provide both a competitive threat and new platforms on which to run our software. We expect that the infrastructures of the future will be both hybrid-cloud and multi-cloud, meaning our customers will store their data in the various large public cloud environments, and also want to use services from multiple public cloud vendors.

Our high-performance shared storage systems and object storage systems primarily face competition from the EMC business unit of Dell Inc., (“Dell”), International Business Machines Corporation, (“IBM”), NetApp, Inc., (“NetApp”), and other enterprise storage vendors in the markets we serve.

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


7


Our backup storage systems primarily compete with products sold by Dell, HPE and Veritas Technologies LLC. Additionally, several software companies that have traditionally been partners with us have deduplication features in their products and will, at times, compete with us.

Manufacturing and Supply Chain

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

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

Our tape media is manufactured in Japan and distributed globally.

Intellectual Property and Technology

We generally rely on patent, copyright, trademark and trade secret laws and contract rights to establish and maintain our proprietary rights in our technology and products. As of March 31, 2020, we hold approximately 319 U.S. patents and have 40 pending U.S. patent applications. In general, these patents have a 20-year term from the first effective filing date for each patent. We also hold multiple foreign patents and patent applications for certain of our products and technologies. Although we believe that our patents and applications have significant value, rapidly changing technology in our industry means that our future success may also depend heavily on the technical competence and creative skills of our employees.

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

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

We, along with HPE and IBM, belong to the LTO Consortium, an organization that licenses the Consortium members’ patents covering the LTO specifications. Media manufacturers and other parties take licenses to the LTO Consortium patent pool in exchange for a royalty payment to the Consortium, which then distributes the royalties to each of the three Consortium members.

Segment Information

We operate as a single reporting unit and operating segment for business and operating purposes. Information about revenue attributable to each of our product groups is included in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and information about revenue and long-lived assets attributable to certain geographic regions is included in Note 2 , Revenue and Note 3, Balance Sheet Information, respectively, to the consolidated financial statements and risks attendant to our foreign operations is set forth below in Item 1A Risk Factors.

Seasonality


8


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

Backlog

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

Executive Officers and Management Team

Following are the names and positions of our management team as of June 22, 2020, including a brief account of the business experience of each.
Name
 
Position with Quantum
James J. Lerner
 
President, Chief Executive Officer and Chairman of the Board
J. Michael Dodson
 
Chief Financial Officer
Elizabeth King
 
Chief Revenue Officer
Lewis Moorehead
 
Chief Accounting Officer
Regan MacPherson
 
Senior Vice President, Chief Legal & Compliance Officer and Secretary
Don Martella
 
Senior Vice President, Engineering

James J. Lerner, 50, was appointed as President and CEO of the Company, effective July 1, 2018, and was appointed Chairman of the Board on August 7, 2018. He also serves on the Company’s Board. Mr. Lerner has previously served as Vice President and Chief Operating Officer at Pivot3 Inc. from March 2017 to June 2018, and Chief Revenue Officer from November 2016 to March 2017. Prior to Pivot3, from March 2014 to August 2015, Mr. Lerner served as President of Cloud Systems and Solutions at Seagate Technology Public Limited Company. Prior to Seagate, Mr. Lerner served in various executive roles at Cisco Systems, Inc., including most recently as Senior Vice President and General Manager of the Cloud & Systems Management Technology Group. Before beginning his career as a technology company executive, Mr. Lerner was a Senior Consultant at Andersen Consulting. Since 2011, Mr. Lerner has served on the Board of Trustees of Astia, a global not-for-profit organization built on a community of men and women dedicated to the success of women-led, high-growth ventures, and is currently serving as the Chair of the Board of Trustees. Mr. Lerner earned a Bachelor of Arts in Quantitative Economics and Decision Sciences from U.C. San Diego.
 
J. Michael Dodson, 59, was appointed Chief Financial Officer effective May 31, 2018. He was also appointed interim Chief Executive Officer, a position in which he served until James J. Lerner joined the Company on July 1, 2018. From August 2017 to May 2018, Mr. Dodson served as the Chief Financial Officer of Greenwave Systems. Prior to joining Greenwave Systems, Mr. Dodson served as the Chief Operating Officer and Chief Financial Officer at Mattson Technology, Inc. from 2012 to 2017. He joined Mattson as Executive Vice President, Chief Financial Officer and Secretary in 2011. Prior to joining Mattson, Mr. Dodson served as Chief Financial Officer at four global public technology companies and Chief Accounting Officer for an S&P 500 company. Mr. Dodson started his career with Ernst & Young in San Jose, California. Since July 2013, he has served on the Board of Directors of Sigma Designs, Inc., a provider of system-on-chip solutions, including as Lead Independent Director since January 2014 and Chairman of the Audit Committee since 2015. He has also served on Board of Directors of A10 Network since February 2020 and was named Chairman of their Audit Committee in June 2020. In addition, Mr. Dodson serves as a director of two private entities: a charitable organization and a privately held for-profit company. He holds a B.B.A. degree with dual majors in Accounting and Information Systems Analysis and Design from the University of Wisconsin-Madison.

9



Elizabeth King, 62, has served as Quantum’s Chief Revenue Officer since March 2019. Prior to Quantum, from January 2017 to February 2019, she was Vice President, Go-to-Market & Enablement, HPC & AI at HPE. She joined HPE as part of HPE’s acquisition of SGI, where she served as SVP of worldwide sales from January 2014 through December 2016. Prior to HPE/SGI, she was vice president of strategic alliances for IBM and global systems integrators at Juniper Networks from June 2010 to January 2014. Prior to Juniper, she was vice president and general manager of the Hitachi Server Group of Hitachi Data Systems. She also held key senior sales, business development and operations roles at Nokia (formerly Alcatel-Lucent), Oracle (formerly Sun Microsystems), Raytheon, and Texas Instruments. Ms. King holds an MBA with honors from the University of Dallas and a Bachelor of Science in mechanical engineering from Lehigh University.

Lewis Moorehead, 48, has served as our Chief Accounting Officer since October 2018. Prior to joining Quantum, Mr. Moorehead was the Director of Finance, Accounting and Tax at Carvana, Co., a publicly traded on-line retailer, from November 2016 to October 2018. From September 2004 to October 2016, he served as Managing Partner at Quassey, an investment firm. While at Quassey, he also served as Vice President of Finance and Principal Accounting Officer at Limelight Networks, a NASDAQ-listed global content delivery network and SaaS provider, from March 2010 to August 2013. He has also held finance and accounting positions at eTelecare Global Solutions, Rivers and Moorehead PLLC, Intelligentias, Inc., American Express and PricewaterhouseCoopers. He holds a Bachelor of Business Administration (B.B.A.), cum laude, in Accounting from the University of Wisconsin-Whitewater.

Regan MacPherson, 57, joined Quantum in October 2019 as Chief Legal & Compliance Officer. Prior to joining Quantum, she was the Vice President and Chief Compliance Officer at Marvell Semiconductor, Inc. from June 2017 to October 2019. Ms. MacPherson served as Senior Vice President and General Counsel of Seagate Technology, PLC from March 2016 to June 2017. Ms. MacPherson also served as Vice President and Interim General Counsel from August 2015 to March 2016, Deputy General Counsel from September 2013 to August 2015, in addition to varying roles of increasing responsibility from July 2005 to September 2013, at Seagate Technology plc. Ms. MacPherson holds a Juris Doctor from Southwestern Law School and a Bachelor of Arts in political science from San Francisco State University.

Don Martella, 52, joined Quantum in August 2006 as Vice President, Tape Automation Engineering in connection with Quantum’s acquisition of ADIC. In April 2011, he assumed his current role as Senior Vice President of Engineering. In that capacity he is responsible for our research and development and advanced manufacturing activities. Before joining Quantum, Mr. Martella held leadership positions in R&D and Quality at ADIC; and engineering and management roles at Oracle (formerly StorageTek) in the tape business. Mr. Martella holds a master's in business administration and a Bachelor of Science in electrical and computer engineering from the University of Colorado.

Employees

As of March 31, 2020, we had 829 employees.
 
Available Information

We were founded in 1980 and reincorporated in Delaware in 1987.

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

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

10


ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, together with all other information in this Annual Report, before investing in any of our securities. The occurrence of any single risk or any combination of risks could materially and adversely affect our business, operating results, financial condition, liquidity, or competitive position, and consequently, the value of our securities. The material adverse effects include, but are not limited to, not growing our revenue or market share at the pace that they have grown historically or at all, our revenue and market share fluctuating on a quarterly and annual basis, an extension of our history of losses and a failure to become profitable, not achieving the revenue and net income (loss) guidance that we provide, and harm to our reputation and brand.

The recent COVID-19 pandemic could adversely affect our business, results of operations and financial condition.

The COVID-19 pandemic and efforts to control its spread have impacted and will continue to impact our workforce and operations, and those of our strategic partners, customers, suppliers and logistics providers. These impacts have included and may include under-absorbed overhead, increased logistics and other costs and decreased product output. While our third-party partners are all currently operational, in some cases with exemptions from government restrictions, this is subject to change based on evolving conditions related to the pandemic.

The effects of the pandemic are uncertain and difficult to predict, but may include:

Further disruptions to our supply chain, our operations or those of our strategic partners, customers or suppliers caused by employees or others contracting COVID-19, or governmental orders to contain the spread of COVID-19 such as travel restrictions, quarantines, shelter in place orders, trade controls, and business shutdowns;
A global economic downturn or a recession causing a decrease in short- or long-term demand for our products, resulting in industry oversupply and decreases of average selling prices (“ASPs”), which would negatively impact our sales and profitability;
Deterioration of worldwide credit markets that may limit our ability or increase our cost to obtain external financing to fund our operations and capital expenditures and result in a higher rate of losses on our accounts receivables due to customer credit defaults;
Extreme volatility in financial markets which has and may continue to adversely impact our stock price and our ability to access the financial markets on acceptable terms, or at all;
Increased data security and technology risk as many employees transition to work from home arrangements, including possible outages to systems and technologies critical to remote work and increased data privacy risk with cybercriminals attempting to take advantage of the disruption; and
Management’s ongoing commitment of significant time, attention and resources to respond to the pandemic.

The degree to which the pandemic ultimately impacts our business and results of operations will depend on future developments beyond our control which are highly uncertain and cannot be predicted at this time, including the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, the effectiveness of government stimulus programs, any possible resurgence of COVID-19 that may occur after the initial outbreak subsides, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in more detail in this “Risk Factors” section, such as those relating to adverse global or regional conditions, our highly competitive industry, supply chain disruption, customer demand conditions and our ability to forecast demand, cost saving initiatives, our indebtedness and liquidity, and cyber-attacks.

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

Our level of indebtedness presents significant risks to our business and investors, both in terms of the constraints that it places on our ability to operate our business and because of the possibility that we may not generate

11


sufficient cash and results of operations to remain in compliance with our covenants and pay the principal and interest on our indebtedness as it becomes due. We recently failed to meet certain financial covenants in our debt agreements, which could have resulted in a default under these agreements if we had not obtained a waiver of noncompliance from our lenders. For further description of our outstanding debt, see the section captioned “Liquidity and Capital Resources” in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As a result of our indebtedness:
Our ability to invest in growing our business is constrained by the financial covenants contained in our credit facility, which require us to maintain a minimum fixed charge coverage ratio and liquidity levels;
We must dedicate a significant portion of our cash flow from operations and other capital resources to debt service, thereby reducing our ability to fund working capital, capital expenditures, research and development and other cash requirements;
Our flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete may be limited, including our ability to engage in mergers and acquisitions activity, which may place us at a competitive disadvantage;
We are subject to mandatory field audits and control of cash receipts by the lenders if we do not maintain liquidity above certain thresholds;
We may be more vulnerable to adverse economic and industry conditions; and
We may be unable to make payments on other indebtedness or obligations.

Our credit facility contains restrictive covenants that require us to comply with and maintain certain liquidity levels and a minimum fixed charge coverage ratio, as well as restrict our ability, subject to certain thresholds, to:
Incur debt;
Incur liens;
Make acquisitions of businesses or entities or sell certain assets;
Make investments, including loans, guarantees and advances;
Engage in transactions with affiliates;
Pay dividends or engage in stock repurchases; and
Enter into certain restrictive agreements.

The weakness we experienced for several years in the market for our storage, back up and data protection business, which is the primary driver of our overall cash flow and operating income, placed increased pressure on our ability to meet our liquidity and fixed charge coverage ratio covenants. In recent periods, our business has declined due, in part, to the negative impact of the COVID-19 pandemic. As a result, we fell out of compliance with certain financial covenants, including, for example, the total net leverage ratio and total leverage ratio covenants for the fourth fiscal quarter period ending March 31, 2020. We received a waiver from our lenders for the noncompliance of these covenants. In June 2020, we amended our debt agreements to revise our financial covenants in light of currently expected business levels under current market conditions, including the negative impact of COVID-19. These amendments required us to make significant payments to our lenders, including approximately $1.0 million and to issue 3,400,000 warrants that are exercisable for shares of our common stock, which when exercised will result in significant dilution to our stockholders and could cause our stock price to decline. In addition, we also incurred significant costs related to advisors, attorneys and accountants. We believe we will be able to meet these covenants in the future, but if our financial results turn out to be lower than expected, we may breach a covenant, which could result in a default under our credit facility agreements.

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

Our credit facility is collateralized by a pledge of all our assets. If we were to default and were unable to obtain a waiver for such a default, the lenders would have a right to foreclose on our assets to satisfy our obligations under

12


these agreements. Any such action on the part of the lenders against us could have a materially adverse impact on our business, financial condition and results of operations.

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

We have previously identified deficiencies in our control environment and financial reporting process that resulted in material weaknesses in our internal control over financial reporting and previously concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of March 31, 2019. As of March 31, 2020, we remediated these material weaknesses and have concluded that our internal control over financial reporting and our disclosure controls and procedures were effective. However, if we fail to maintain proper and effective internal controls, material misstatements in our financial statements could occur and impair our ability to produce accurate and timely financial statements and could adversely affect investor confidence in our financial reports, which could negatively affect our business.

We have concluded that our internal control over financial reporting and disclosure controls and procedures were effective as of March 31, 2020. However, in our prior fiscal year and as of March 31, 2019, we concluded that our internal control over financial reporting and disclosure controls and procedures were not effective due to the existence of material weaknesses in our control environment, financial reporting process and internal control over financial reporting. We restated our consolidated financial statements and related disclosures for the year ended March 31, 2017, and restated each of the quarterly periods related to the three months ended June 30, 2017 and the three- and six-month periods ended September 30, 2017, following the identification of misstatements as a result of an internal investigation that we concluded in fiscal 2020. This prior restatement and our ineffective internal control over financial reporting damaged our reputation, caused us to incur a significant amount of costs and resulted in the distraction of our management team from the operation of our business. We cannot provide assurance that the material weaknesses and deficiencies that we identified as of March 31, 2019 will not reoccur, or that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future. We intend to continue to monitor the tone at the top of our organization, our financial reporting process, and our operational, information technology, financial systems, compliance and infrastructure procedures and controls. We also intend to continue to expand, train, retain and manage our personnel who are essential to effective internal control and compliance. In doing so, we will continue to incur expenses and expend management time.

If we fail to maintain proper and effective internal controls, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results in the future. Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all. If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. Restated financial statements and failures in internal control may also cause us to fail to meet reporting obligations or debt covenants, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to further regulatory investigations and penalties or stockholder litigation, and materially and adversely impact our business and financial condition.

Risks Related to our Business Operations

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

We currently derive significant revenue from products that incorporate some form of tape technology, and we expect to continue to derive significant revenue from these products in the next several years. As a result, our future results of operations depend in part on continued market acceptance and use of products employing tape technology. We believe that the storage environment is changing, including reduced demand for tape products.

13


Decreased market acceptance or use of products employing tape technology has materially and adversely impacted our business, financial condition and results of operations, and we expect that our revenues from certain types of tape products could continue to decline, which could materially and adversely impact our business, financial condition and results of operations in the future.

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


We may not be entitled to forgiveness of our recently received Paycheck Protection Program loan, and our application for the Paycheck Protection Program loan could in the future be determined to have been impermissible, which could result in the imposition on us of fines and other penalties, or could result in damage to our reputation.

On April 13, 2020 we entered into a Paycheck Protection Term Note for a principal amount of $10,000,000, or the PPP Loan, under the Paycheck Protection Program, or PPP, of the recently enacted Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. We have used all of the proceeds from the PPP Loan to maintain our employees and their current salaries in the United States. The PPP Loan has a two-year term and bears annual interest at a rate of 1.0%. Payments of principal and interest on the PPP Loan will be deferred for no longer than ten months from loan origination. Thereafter, we are required to pay the lender equal monthly payments of principal and interest.

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, we may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by us during a specified period after receipt of the loan proceeds for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered period will qualify for forgiveness. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will ultimately apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the U.S. Small Business Administration, or the SBA.

In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the spirit and broad objectives of the PPP and of the CARES Act. The certification described above does not contain any objective criteria and is subject to interpretation. On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. In addition, the SBA stated its intent to audit the PPP Loan application of any company, like us, that received proceeds under the PPP of more than $2 million. Additionally, on May 8, 2020, we were one of five publicly traded companies to receive a letter from the United States House of Representatives’ Select Subcommittee on the Coronavirus Crisis, or the Subcommittee, requesting that we return the PPP Loan proceeds, and if we did not return the proceeds, requiring us to produce to the Subcommittee specified documentation related to our PPP Loan. We intend to cooperate fully with the Subcommittee’s review of our PPP Loan. There has also been significant media coverage and controversy with respect to public companies applying for and receiving PPP loans. If we are later determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties, including significant

14


civil, criminal and administrative penalties and could be required to repay the PPP Loan in its entirety. In addition, receipt of a PPP Loan may result in adverse publicity and damage to our reputation. The Subcommittee’s review of our PPP Loan is requiring us to consume a significant amount of financial and management resources. In addition, any review or audit by the SBA or other government entity or claims under the False Claims Act, could consume additional significant financial and management resources. Any of these events could have a material adverse effect on our business, results of operations and financial condition.


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

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

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

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

A change in competitive strategy that adversely affects a reseller’s willingness or ability to distribute our products;
The reduction, delay or cancellation of orders or the return of a significant amount of products;
Our inability to gain traction in developing new indirect sales channels for our branded products;
The loss of one or more of such distributors or resellers;
Any financial difficulties of such distributors or resellers that result in their inability to pay amounts owed to us; or
Changes in requirements or programs that allow our products to be sold by third parties to government customers.
If our products fail to meet our or our customers’ specifications for quality and reliability, we may face liability and reputational or financial harm which may adversely impact our results of operations and our competitive position may suffer.
Although we place great emphasis on product quality, we may from time to time experience problems with the performance of our products, which could result in one or more of the following:
Increased costs related to fulfillment of our warranty obligations;
The reduction, delay or cancellation of orders or the return of a significant amount of products;
Focused failure analysis causing distraction of the sales, operations and management teams; or
The loss of reputation in the market and customer goodwill.
These factors could cause our business, financial condition and results of operations to be materially and adversely affected.
In addition, we face potential liability for performance problems of our products because our end users employ our storage technologies for the storage and backup of important data and to satisfy regulatory requirements. Loss of

15


this data could cost our customers significant amounts of money, directly and indirectly as a result of lost revenues, intellectual property, proprietary business information or other harm to their business. In some cases, the failure of our products may have been caused by third-party technology that we incorporate into our products. Even if failures are caused by third-party technology, we may be required to expend resources to address the failure and work with our customers to preserve our relationship with them. We could also potentially face claims for product liability from our customers if our products cause property damage or bodily injury. Although there are limitations of liability in our commercial agreements and we maintain technology errors and omissions liability and general liability insurance, our insurance may not cover potential claims of these types or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability or litigation costs that are not covered by insurance or is in excess of our limitation of liability or our insurance coverage could harm our business.

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

Our product sales have been and continue to be concentrated among a small number of our direct end-user customers and channel partners as a result of how we sell our products. Under our business model, we sell directly to end user customers, through distributors, VARs and DMRs (which we collectively call our “channel partners”), as well as to OEMs. We sell to many end-user customers and channel partners on purchase orders, not under the terms of a binding long-term procurement agreement. Accordingly, they generally are not obligated to purchase any minimum product volume, and our relationships with them are terminable at will. In addition, recently we have focused our direct-sales business on the largest users of hierarchical storage architectures, the so-called “Hyper-scalers”; there are very few of these extremely large storage customers. During the fiscal years ended March 31, 2020 and March 31, 2019 no customers represented 10% or more of the Company’s total revenue. A significant reduction in orders from, or a loss of, one or more large customers would have a material adverse effect on our results of operations.

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

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

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

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

F-Series: an all-flash NVMe storage array – designed for the most demanding media workloads
R-Series: a ruggedized in-vehicle storage array purpose-built for autonomous vehicle development (to ingest large number of data streams) or for transportation surveillance applications;

16


VS-Series: a highly resilient, hyper-converged surveillance storage system that meets all the needs of security teams; and
Distributed Cloud Services: a set of Quantum services that offers cloud-like simplicity and economics for on-premise environments.

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

Our new products will achieve market acceptance and significant market share, or that the markets for these products will continue or grow as we have anticipated;
Our new products will be successfully or timely qualified with our customers by meeting customer performance and quality specifications which must occur before customers will place large product orders; or
We will achieve high volume production of these new products in a timely manner, if at all;
We will introduce additional new products in the time frame we are forecasting; or
We will not experience technical, quality, performance-related or other difficulties that could prevent or delay the introduction and market acceptance of new products.

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

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

Uncertainty about economic conditions, particularly under the current circumstances caused by the COVID-19 pandemic, poses a risk as businesses may further reduce or postpone spending in response to reduced budgets, tightening of credit markets, negative financial news and declines in income or asset values which could adversely affect our business, financial condition and results of operations. The volatile economic conditions in recent years along with periods of economic uncertainty in various countries around the world has made planning more difficult for us. We continue to face risks related to uncertain tariff levels between countries where our products are manufactured and where they are sold, unstable political and economic conditions in Europe, including concerns about sovereign debt, and uncertainty related to the United Kingdom’s exit from the European Union and related political matters, which could negatively impact the U.S. and global economies and adversely affect our financial results. In addition, we may not be able to access capital markets in the near-term or our ability to access capital markets may be restricted. We will not be eligible to use a common short-form registration statement on Form S-3, which would better enable us to access capital markets, until November 2020. Our inability to access capital markets in an effective and efficient manner could have an impact on our ability to react to changing economic and business conditions and could also materially and adversely affect our ability to sustain our operations at their current levels.

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

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

Technological developments and competition over the years in the tape automation market, and in the storage market in general, have resulted in decreased prices for tape automation products and our other product offerings. Pricing pressure is more pronounced in the tape automation market for entry-level products and less pronounced for enterprise products. Over time, the prices of our products and competitor products have decreased, but such products often incorporate new and/or different features and technologies from what we offered in prior years. We face risks that customers could choose competitors’ products over ours due to these features and technologies or

17


due to pricing differences. We address pricing pressure in three ways: first, by reducing production costs; second, by adding features to increase value to maintain a certain level of gross margin for our tape automation systems; and third, by selling the overall value of our technologies in solving the customer’s business challenges thereby changing the conversation from a pricing negotiation to a value discussion. However, short term cost reduction efforts, and the value discussions may not yield new sales. In addition, if competition further intensifies, or if there is additional industry consolidation, our sales and gross margins for tape automation systems could decline, which could materially and adversely affect our business, financial condition and results of operations.

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

competitors consolidating, having greater resources and becoming more competitive with us;
companies that we have not historically competed against entering into one or more of our primary markets and increasing competition in such market(s);
customers that are also competitors becoming more competitive with us and/or reducing their purchase of our products; and
competitors acquiring our current suppliers or business partners and negatively impacting our business model.

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

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

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

The continued use by our customers of tape media for storage;
The size of the installed base of devices and similar products that use tape media cartridges;
The performance of our strategic licensing partners, which sell tape media cartridges;
The relative growth in units of newer device products, since the associated media cartridges for newer products typically sell at higher prices than the media cartridges associated with older products;
The media consumption habits and rates of end users;
The pattern of device retirements;
The level of channel inventories; and
agreement on standards for newer generations of the tape media that generates our royalty revenue.

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

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

18


materially and adversely affect our business, financial condition and results of operations. We also face the risk of not being able to quickly implement a replacement technology or otherwise mitigate the risks associated with not having access to this licensed technology, which may also materially and adversely affect our business, financial condition and results of operations.

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

In the last several years, we have recorded significant restructuring charges and made cash payments to reduce our cost of sales and operating expenses to respond to adverse economic and industry conditions, to execute strategic management decisions and to rationalize our operations following acquisitions. During fiscal years 2018 through 2020 we have implemented restructuring plans to eliminate certain positions in the U.S. and internationally and to exit certain locations. These restructuring plans may result in decreases to our revenues or adversely affect our ability to grow our business in the future. Workforce reductions may also adversely affect employee morale and our ability to retain our employees. We may take future steps to further reduce our operating costs, including future cost reduction steps or restructurings in response to strategic decisions, adverse changes in our business or industry or future acquisitions. We may be unable to reduce our cost of sales and operating expenses at a rate and to a level appropriate in relation to our future sales, which may materially and adversely affect our business, financial condition and results of operations.

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

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

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

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

The loss of the services of any of our key employees, the inability to attract or retain qualified talent in the future, or delays in hiring required talent, particularly sales and engineering talent, could delay the development and introduction of our products or services and/or negatively affect our ability to sell our products or services.
 
If we do not successfully manage the changes that we have made and may continue to make to our infrastructure and management, our business could be disrupted, and that could adversely impact our results of operations and financial condition.

Managing change is an important focus for us. In recent years, we have implemented several significant initiatives involving our sales and marketing, product engineering and operations organizations, aimed at increasing our efficiency and better aligning these groups with our corporate strategy. In addition, we have reduced headcount to streamline and consolidate our supporting functions as appropriate in response to market or competitive conditions

19


and following past acquisitions and have increased our reliance on certain third-party business relationships. If we are unable to successfully manage the changes that we implement and detect and address issues as they arise, our business could be disrupted, and our results of operations and financial condition could be materially and adversely impacted.

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

From time to time, third parties allege that our products infringe their patented or proprietary technology and demand that we purchase a license from them. For example, we are currently in patent litigation with Realtime Data LLC d/b/a IXO, which has been stayed, described in Note 10: Commitments and Contingencies. The ultimate outcome of any license discussion or litigation, including the Realtime litigation, is uncertain. Adverse resolution of any third-party infringement claim could subject us to substantial liabilities and require us to refrain from manufacturing and selling certain products. In addition, the costs incurred in intellectual property litigation can be substantial, regardless of the outcome. As a result, our business, financial condition and results of operations could be materially and adversely affected.

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

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

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

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

One of the characteristics of open source software is that the source code for our open source projects is publicly available, and anyone who obtains copies has a license under certain of our intellectual property rights, which, depending on the license, may include certain of our patents, to modify and redistribute the software and use it to compete in the marketplace. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for competitors to use our open source project software to develop their own software, potentially reducing the demand for our solution and putting price pressure on our subscription offerings. We cannot guarantee that competitive pressure or the availability of new open source software will not result in price reductions, reduced operating margins and loss of market share, any one of which could harm our business, financial condition, results of operations and cash flows.
 
In addition, we use our own open source project software in our proprietary products. As a result, there is a risk that we may inadvertently release as open source certain code that was intended to be kept as proprietary, that reveals confidential information regarding the inner workings of our proprietary products, or that could enable competitors to more readily reverse engineer or replicate aspects of our proprietary technology that we would otherwise protect as trade secrets. We may also accept contributions from third parties to our open source projects, and it may be difficult for us to accurately determine the origin of the contributions and whether their use, including in our proprietary products, infringes, misappropriates or violates third-party intellectual property or other rights. The availability of certain of our own software in source code form may also enable others to detect and exploit security vulnerabilities in our products.

20


Our products may contain "open source" software and failure to comply with the terms of the open source license could have a material adverse effect on our competitive positions and financial results.
Certain products or technologies acquired or developed by us may include “open source” software. Open source software is typically licensed for use at no initial charge. Certain open source software licenses, however, require users of the open source software to license to others any software that is based on, incorporates or interacts with, the open source software under the terms of the open source license. Although we endeavor to comply fully with such requirements, third parties could claim that we are required to license larger portions of our software than we believe we are required to license under open source software licenses. If such claims were successful, they could adversely impact our competitive position and financial results by providing our competitors with access to sensitive information that may help them develop competitive products. In addition, our use of open source software may harm our business and subject us to intellectual property claims, litigation or proceedings in the future because:
open source license terms may be ambiguous and may subject us to unanticipated obligations regarding our products, technologies and intellectual property;
open source software generally cannot be protected under trade secret law; and
it may be difficult for us to accurately determine the origin of the open source code and whether the open source software infringes, misappropriates or violates third-party intellectual property or other rights.
As a result of our global manufacturing and sales operations, we are subject to a variety of risks related to our business outside of the U.S., any of which could, individually or in the aggregate, have a material adverse effect on our business.
A significant portion of our manufacturing and sales operations and supply chain occurs in countries other than the U.S. We also have sales outside the U.S. We utilize contract manufacturers to produce and fulfill orders for our products and have suppliers for various components, several of which have operations located in foreign countries including China, Hungary, Japan, Malaysia, Singapore, Mexico, the Philippines and Thailand. Because of these operations, we are subject to a number of risks including:
import and export duties and value-added taxes;
import, export and trade regulation changes that could erode our profit margins or restrict our ability to transport our products;
reduced or limited protection of our intellectual property;
compliance with multiple and potentially conflicting regulatory requirements and practices;
commercial laws that favor local businesses;
exposure to economic fluctuations including inflationary risk and continuing sovereign debt risk;
shortages in component parts and raw materials;
the burden and cost of complying with foreign and U.S. laws governing corporate conduct outside the U.S. including the Foreign Corrupt Practices Act, the United Kingdom Bribery Act and other similar regulations;
adverse movement of foreign currencies against the U.S. dollar (the currency in which our results are reported) and uncertain global economic conditions generally;
inflexible employee contracts and employment laws that may make it difficult to terminate or change the compensation structure for employees in some foreign countries in the event of business downturns;
recruiting employees in highly competitive markets and wage inflation in certain markets;
potential restrictions on the transfer of funds between countries;
political instability, military, social and infrastructure risks, especially in emerging or developing economies;
natural disasters, including earthquakes, flooding, typhoons and tsunamis;
pandemics and epidemics, including the impact of COVID-19, and governmental restrictions on the operation of businesses, travel and other restrictions, which may vary from country-to-country; and
cultural differences that affect the way we do business.
Any or all of these risks could have a material adverse effect on our business.

21


Our quarterly results of operations have fluctuated significantly, and past quarterly results of operations should not be used to predict future performance.
Our quarterly results of operations have fluctuated significantly in the past and could fluctuate significantly in the future. As a result, our quarterly results of operations should not be used to predict future performance. Quarterly results of operations could be materially and adversely affected by a number of factors, including, but not limited to:
fluctuations in IT spending as a result of economic conditions or fluctuations in U.S. federal government spending;
failure by our contract manufacturers to complete shipments in the last month of a quarter during which a substantial portion of our products are typically shipped;
changes in product mix;
new product announcements by us or our competitors which may cause delays in purchasing;
customers canceling, reducing, deferring or rescheduling significant orders as a result of excess inventory levels, weak economic conditions or other factors;
seasonality, including customer fiscal year-ends and budget availability impacting customer demand for our products;
declines in large orders (defined as orders greater than $200,000);
declines in royalty or software revenues;
product development and ramp cycles and product performance or quality issues of ours or our competitors;
poor execution of and performance against expected sales and marketing plans and strategies;
reduced demand from our OEM or distributors, VAR, DMR and other large customers;
increased competition which may, among other things, increase pricing pressure or reduce sales;
restructuring actions or unexpected costs; and
foreign exchange fluctuations.
Our manufacturing, component production and service repair are outsourced to third-party contract manufacturers, component suppliers and service providers. If we cannot obtain products, parts and services from these third parties in a cost effective and timely manner that meets our customers’ expectations, this could materially and adversely impact our business, financial condition and results of operations.
Many aspects of our supply chain and operational results are dependent on the performance of third-party business partners. We use third-party contract manufacturers, service providers and/or product integrators in connection with our outsourced manufacturing model. We face a number of risks as a result of these relationships, including, among others:
Sole source of product supply

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

Cost and purchase commitments

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


22


Financial condition and stability

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

Quality and supplier conduct

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

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

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

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

23


customer satisfaction and/or increased expenses, which could in turn have a material and adverse impact on our business, results of operations and financial condition.

Our stock price has experienced significant volatility in the recent past, and this significant volatility may continue to occur and could cause the trading price of our common stock to
decline.

Our stock price has been extremely volatile in the recent past. For example, the closing price of our common stock was $8.35 on January 29, 2020 and was $1.48 on March 18, 2020.

The trading price of our common stock may fluctuate in response to a number of events and factors, many of which are beyond our control, such as:

quarterly variations in our results of operations;
failure to meet our expectations or the expectations of securities analysts and investors;
failure to comply with applicable regulatory requirements or any investigations or enforcement actions; related to a potential failure to comply with applicable regulations;
significant changes in our brand or reputation;
new products, services, innovations and strategic developments by our competitors or us, or business combinations and investments by our competitors or us;
changes in our capital structure, including issuance of additional debt or equity to the public, and the issuance of common stock upon exercise of our outstanding warrants;
large or sudden purchases or sales of stock by existing or new investors; and
the result of any litigation or governmental investigation, which could result in liabilities and reputational harm.

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

changes in interest and exchange rates;
a continued widespread decline in the U.S. or global economy as a result of the continued impact of COVID-19 or other pandemics or natural disasters;
fluctuations in the stock market in general and market prices for technology companies in particular; and
tariffs imposed by the U.S. Government on sales originating in or being shipped to countries with which we have on-going trade or other political conflicts.
Any of these events and factors may cause our stock price to rise or fall and may adversely affect our business and financing opportunities.
Our operation and design processes are subject to safety and environmental regulations which could lead to increased costs, or otherwise adversely affect our business, financial condition and results of operations.

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

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

24



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

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

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

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

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

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

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

For example, in 2016, the European Parliament enacted the General Data Protection Regulation (or “GDPR”) which governs the collection, storage and use of personal information gathered in the European Union, regardless of

25


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

We must maintain appropriate levels of service parts inventories. If we do not have sufficient service parts inventories, we may experience increased levels of customer dissatisfaction. If we hold excessive service parts inventories, we may incur financial losses.
 
We maintain levels of service parts inventories to satisfy future warranty obligations and also to earn service revenue by providing enhanced and extended warranty and repair service during and beyond the warranty period. We estimate the required amount of service parts inventories based on historical usage and forecasts of future warranty and extended warranty requirements, including estimates of failure rates and costs to repair, and out of warranty revenue. Given the significant levels of judgment inherently involved in the process, we cannot provide assurance that we will be able to maintain appropriate levels of service parts inventories to satisfy customer needs and to avoid financial losses from excess service parts inventories. If we are unable to maintain appropriate levels of service parts inventories, our business, financial condition and results of operations may be materially and adversely impacted.
From time to time we have made acquisitions. The failure to successfully integrate future acquisitions could harm our business, financial condition and results of operations.
As a part of our business strategy, we have in the past and may make acquisitions in the future, subject to certain debt covenants. For example, in March 2020, we acquired the ActiveScale object storage business from Western Digital Technologies, Inc. We may also make significant investments in complementary companies, products or technologies. If we fail to successfully integrate such acquisitions or significant investments, it could harm our business, financial condition and results of operations. Risks that we may face in our efforts to integrate any recent or future acquisitions include, among others:
failure to realize anticipated synergies from the acquisition;
difficulties in assimilating and retaining employees;
potential incompatibility of business cultures or resistance to change;
coordinating geographically separate organizations;
diversion of management’s attention from ongoing business concerns;
coordinating infrastructure operations in a rapid and efficient manner;
the potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services;
failure of acquired technology or products to provide anticipated revenue or margin contribution;
insufficient revenues to offset increased expenses associated with the acquisition;
costs and delays in implementing or integrating common systems and procedures;
reduction or loss of customer orders due to the potential for market confusion, hesitation and delay;
impairment of existing customer, supplier and strategic relationships of either company;
insufficient cash flows from operations to fund the working capital and investment requirements;
difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
the possibility that we may not receive a favorable return on our investment, the original investment may become impaired, and/or we may incur losses from these investments;
dissatisfaction or performance problems with the acquired company;
the assumption of risks of the acquired company that are difficult to quantify, such as litigation;
the cost associated with the acquisition, including restructuring actions, which may require cash payments that, if large enough, could materially and adversely affect our liquidity; and
assumption of unknown liabilities or other unanticipated adverse events or circumstances.
Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of any transaction. We cannot provide assurance that we will be able to successfully integrate any business, products, technologies or personnel that we may acquire in the future, and our failure to do so could negatively impact our business, financial condition and results of operations.

26


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

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

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

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

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

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



27


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in San Jose, California. We lease facilities in North America, Europe, and Asia Pacific. We believe our facilities are adequate for our current needs. The following is a summary of the significant locations and primary functions of those facilities as of March 31, 2020:
Location
            
Function
North America
 
 
San Jose, CA
 
Corporate headquarters, administration, research and development
Irvine, CA
 
Administration, research and development, sales, service
Englewood, CO
 
Administration, research and development, sales, service, operations
Mendota Heights, MN
 
Research and development
Richardson, TX
 
Research and development
Bellevue, WA
 
Administration and sales
 
Europe
 
 
Paris, France
 
Sales and service
Boehmenkirch, Germany
 
Service
Munich, Germany
 
Sales, service
Zurich, Switzerland
 
Administration, operations management
Bracknell, UK
 
Sales, service
London, UK
 
Sales
Ghent, Belgium
 
Research and development
 
Asia Pacific
 
 
Adelaide, Australia
 
Research and development
Kuala Lumpur, Malaysia
 
Customer service
Seoul, Korea
 
Sales, service
Singapore City, Singapore
 
Administration, operations management, sales
Tokyo, Japan
 
Sales


ITEM 3. LEGAL PROCEEDINGS
See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Commitments and Contingencies.”


ITEM 4. MINE SAFETY DISCLOSURE

None.

PART II
      
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Holders of Record, and Dividends

28



Our common stock was traded on the New York Stock Exchange ("NYSE") under the symbol “QTM.” On January 15, 2019, we were delisted from the NYSE.

On January 16, 2019, we started trading under the symbol “QMCO” on the OTC Pink, which is operated by OTC Markets Group Inc.

On February 4, 2020, we started trading on the Nasdaq Global Select Market under the symbol "QMCO".

The per share prices reflected in the following table represent the range of high and low sales prices of our common stock for the quarters indicated. The OTC Pink quotations do not reflect retail markup, markdown or commission and may not necessarily represent the prices of actual transactions during these quarterly periods.
 
High
 
Low
Fiscal 2020
 
 
 
First quarter ended June 30, 2019
$2.81
 
$2.31
Second quarter ended September 30, 2019
6.26
 
2.63
Third quarter ended December 31, 2019
7.42
 
5.30
Fourth quarter ended March 31, 2020
8.35
 
1.48
 
 
 
 
Fiscal 2019
 
 
 
First quarter ended June 30, 2018
$4.04
 
$2.06
Second quarter ended September 30, 2018
2.58
 
1.63
Third quarter ended December 31, 2018
2.97
 
1.21
Fourth quarter ended March 31, 2019
2.65
 
1.40

As of June 22, 2020, we had 248 holders of record of our common stock.

We have no intention of paying cash dividends in the foreseeable future. Our ability to pay dividends is restricted by the covenants in our senior secured term loan and amended PNC credit facility agreements. See the section captioned “Liquidity and Capital Resources” in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 4: Debt to the consolidated financial statements.

Recent Sales of Unregistered Securities
During the year ended March 31, 2020, we did not sell any equity securities that were not registered under the Securities Act of 1933.

Issuer Purchases of Equity Securities
During the year ended March 31, 2020, there were no purchases of our common stock by or on behalf of us or any of our affiliated purchasers, as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.

29


Stock Performance Graph
The graph below compares the cumulative total return of a $100 investment in our common stock with the cumulative total return of the same investment in the Nasdaq and the S&P 500 Index from March 31, 2015 through March 31, 2020.
stockpricegrapha02.jpg



30


ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," our audited consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" and other financial information included elsewhere in this Annual Report on Form 10-K.


 
For the Year Ended March 31,
 
2020(1)
 
2019
 
2018
 
2017
 
2016
 
(In thousands, except per share data)
Statement of Operations Data
 
 
 
 
 
 
 
 
 
Total revenue
$
402,949

 
$
402,680

 
$
437,684

 
$
493,054

 
$
479,843

Total cost of revenue
230,441

 
235,066

 
264,900

 
287,782

 
276,524

Gross margin
172,508

 
167,614

 
172,784

 
205,272

 
203,319

Income (loss) from operations
21,204

 
(4,746
)
 
(28,622
)
 
6,681

 
(67,040
)
Net loss
(5,210
)
 
(42,797
)
 
(43,346
)
 
(2,408
)
 
(75,626
)
Net loss per share - basic and diluted
$
(0.14
)
 
$
(1.20
)
 
$
(1.25
)
 
$
(0.07
)
 
$
(2.30
)
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total assets
$
165,995

 
$
172,871

 
$
202,639

 
$
221,242

 
$
230,812

Short-term debt
7,321

 
1,650

 
7,500

 
62,827

 
3,000

Long-term debt, net
146,847

 
145,621

 
115,986

 
66,676

 
131,961


(1) 2020 amounts reflect our adoption of the new lease accounting standard, which resulted in the recording of $12.7 million of right-of-use assets and corresponding lease liabilities as of April 1, 2020, which were not retroactively adjusted and reflect our historical accounting policies. See Note 1 to our consolidated financial statements for additional information.






31


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report. In particular, the risk factors contained in Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources.

The following discussion contains forward-looking statements, such as statements regarding COVID-19's anticipated impacts on our business, our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements.
OVERVIEW
We are a leader in storing and managing digital video and other forms of unstructured data. We help customers around the world to ingest, process, and analyze digital data at high speed, and preserve and protect it for decades. Our customers include some of the world’s largest corporations, government agencies, service providers, broadcasters, movie studios, sports leagues and teams, and enterprises in all industries. We work closely with a broad network of distributors, VARs, DMRs, OEMs and other suppliers to solve our customers most pressing business challenges.
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 providers. Our portfolio of solutions includes:
StorNext scale out file storage: A line of products designed for the highest speed ingest, processing, and analysis of video and other forms of unstructured data. Powered by the StorNext file system software and data management platform, this product line includes new NVMe flash storage servers (F-series) and hybrid SSD/HDD storage arrays.
Video Surveillance Systems: Quantum offers a broad portfolio of solutions designed for video surveillance and physical security, including network video recording servers (NVRs), hyperconverged (HCI) storage servers to host multiple physical security workloads, GPU-based analytics servers, and file and object storage systems for large scale surveillance archives.
ActiveScale Object Storage: Massively scalable object storage systems used to preserve and protect data with the highest levels of data durability.
Tape Storage: Low cost, ultra-secure storage systems for long term archiving and ransomware protection. Quantum provides both the storage systems and sells tape media under the Quantum brand.
Backup Storage Systems: high-performance, scalable storage for backup and multi-site disaster recovery.
Quantum Services: A full line of services including managed services and Storage-as-a-Service offerings, as well as maintenance, implementation, training and consulting services.

COVID-19 IMPACT AND ASSOCIATED ACTIONS
Since the beginning of March 2020, COVID-19 has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders. These measures may remain in place for a significant period of time.

In light of these events, we have taken actions to protect the health and safety of our employees while continuing to serve our global customers as an essential business. We have implemented more thorough sanitation practices as outlined by health organizations and instituted social distancing policies at our locations around the world, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel.

For many of our customers, the COVID-19 pandemic has significantly affected their business. Movie and television production has been paused, professional and collegiate sports seasons have been postponed or cancelled, and many corporations and enterprises have put information technology spending on hold while they assess the short- and long-term impact of the pandemic. While our supply chain remains intact and operating, we have experienced issues related to our logistics network. The reduced capacity within and across freight lanes (aircraft, personnel,

32


customs clearance, etc.) has caused late deliveries from re-routes and mis-shipments, as well as increased expedite and other charges to deliver and receive products. To date, we have experienced minimal impact on product availability, although future capacity constraints across the network due to lost capacity from factory down time, closures, as well as reduced staff and demand signal fluctuations are expected to impact product availability in the months and possibly quarters to come.

We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. We expect COVID-19 to significantly impact our financial condition, results of operations, and liquidity through at least our second quarter and likely much longer.

We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See “The recent COVID-19 pandemic could adversely affect our business, results of operations and financial condition” in Part II, Item 1A, Risk Factors, of this Annual Report on Form 10-K for more information regarding the risks we face as a result of the COVID-19 pandemic.

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 Annual Report on Form 10-K for the year ended March 31, 2019, 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 for the year ended March 31, 2019 and other 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

33


of stock-based compensation expense; (5) loss on debt extinguishment or (6) potential future restructuring expenses;
Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) the potentially dilutive impact of stock-based compensation expense; (3) loss on debt extinguishment; or (4) 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.
The following is a reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure, Net Income (Loss) (dollars in thousands):

 
Year Ended March 31,
 
2020
 
2019
 
2018
Net loss
$
(5,210
)
 
$
(42,797
)
 
$
(43,346
)
Interest expense, net
25,350

 
21,095

 
11,670

Provision (benefit) for income taxes
803

 
2,376

 
(3,113
)
Depreciation and amortization expense
4,287

 
4,266

 
4,970

Stock-based compensation expense
6,748

 
3,409

 
5,394

Restructuring charges
1,022

 
5,570

 
8,474

Loss on debt extinguishment

 
17,458

 
6,934

Cost related to financial restatement and related activities
12,868

 
19,664

 
1,709

Other non-recurring (income) expense, net

 
1,500

 
2,848

Adjusted EBITDA
$
45,868

 
$
32,541

 
$
(4,460
)
 
 
 
 
 
 
The following is a reconciliation of Adjusted Net Income (Loss) to the most comparable U.S. GAAP financial measure, Net Income (Loss) (in thousands, except per share amounts):

 
Year Ended March 31,
 
2020
 
2019
 
2018
Net loss
$
(5,210
)
 
$
(42,797
)
 
$
(43,346
)
Restructuring charges
1,022

 
5,570

 
8,474

Loss on debt extinguishment

 
17,458

 
6,934

Stock-based compensation
6,748

 
3,409

 
5,394

Cost related to financial restatement and related activities
12,868

 
19,664

 
1,709

Other non-recurring (income) expense, net

 
1,500

 
2,848

   Adjusted net income (loss)
$
15,428

 
$
4,804

 
$
(17,987
)
   Adjusted net income (loss) per share:
 
 
 
 
 
      Basic
$
0.41

 
$
0.14

 
$
(0.52
)
      Diluted
$
0.34

 
$
0.12

 
$
(0.52
)
   Weighted average shares outstanding:
 
 
 
 
 
      Basic
37,593

 
35,551

 
34,687

      Diluted
45,059

 
40,515

 
34,687




34


RESULTS OF OPERATIONS
 
Year Ended March 31,
(dollars in thousands)
2020
 
2019
 
2018
Total revenue
$
402,949

 
$
402,680

 
$
437,684

Total cost of revenue (1)
230,441

 
235,066

 
264,900

Gross profit
172,508

 
167,614

 
172,784

Operating expenses
 
 
 
 
 
Research and development (1)
36,301

 
32,113

 
38,562

Sales and marketing (1)
59,524

 
69,400

 
102,242

General and administrative (1)
54,457

 
65,277

 
52,128

Restructuring charges
1,022

 
5,570

 
8,474

Total operating expenses
151,304

 
172,360

 
201,406

Income (loss) from operations
21,204

 
(4,746
)
 
(28,622
)
Other income (expense)
(261
)
 
2,878

 
767

Interest expense
(25,350
)
 
(21,095
)
 
(11,670
)
Loss on debt extinguishment, net

 
(17,458
)
 
(6,934
)
Income (loss) before income taxes
(4,407
)
 
(40,421
)
 
(46,459
)
Income tax provision (benefit)
803

 
2,376

 
(3,113
)
Net income (loss)
$
(5,210
)
 
$
(42,797
)
 
$
(43,346
)
(1) Includes stock-based compensation as follows:
 
Year Ended March 31,
(dollars in thousands)
2020
 
2019
 
2018
Cost of revenue
$
452

 
$
334

 
$
725

Research and development
984

 
440

 
906

Sales and marketing
1,165

 
179

 
1,790

General and administrative
4,147

 
2,456

 
1,973

   Total
$
6,748

 
$
3,409

 
$
5,394



35


Comparison of the Years Ended March 31, 2020 and 2019

Revenue
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2020
 
% of
revenue
 
20191
 
% of
revenue
 
$ Change
 
% Change
Product revenue
 
 
 
 
 
 
 
 
 
 
 
   Secondary storage systems
$
111,672

 
28
%
 
$
126,528

 
31
%
 
$
(14,856
)
 
(12
)%
   Primary storage systems
77,152

 
19
%
 
58,811

 
15
%
 
18,341

 
31
 %
   Devices and media
62,344

 
15
%
 
59,315

 
15
%
 
3,029

 
5
 %
      Total product revenue
$
251,168

 
62
%
 
$
244,654

 
61
%
 
$
6,514

 
3
 %
Service revenue
131,050

 
33
%
 
134,696

 
33
%
 
(3,646
)
 
(3
)%
Royalty revenue
20,731

 
5
%
 
23,330

 
6
%
 
(2,599
)
 
(11
)%
Total revenue
$
402,949

 
100
%
 
$
402,680

 
100
%
 
$
269

 
 %
1 Primary and Secondary storage system revenue has been adjusted for fiscal year 2019 due to certain reclassifications from Primary to Secondary storage systems.

Product Revenue
In fiscal 2020, product revenue increased $6.5 million, or 3%, as compared to fiscal 2019. Primary storage systems represented $18.3 million of the increase driven by growth across both our Media & Entertainment and government vertical markets. Devices and media increased $3.0 million driven by the resolution of a legal dispute, which had caused a constraint on LTO tape supply between the two principal suppliers in the market. This was offset in part by a $14.9 million decrease in Secondary storage systems due to declines in our legacy enterprise backup business for both branded and OEM products.
Service Revenue
Service revenue decreased $3.6 million, or 3%, in fiscal 2020 compared to fiscal 2019. This decrease was due to reduced support renewals from our legacy backup customers, partially offset by new customer support agreements and installations.
Royalty Revenue
We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $2.6 million, or 11%, in fiscal 2020, as compared to fiscal 2019, related to overall declines in market unit volumes as the primary use of tape transitions from backup to archive workflows.

Gross Profit and Margin
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2020
 
Gross
margin %
 
2019
 
Gross
margin %
 
$ Change
 
Basis point change
Product gross profit
$
71,408

 
28.4
%
 
$
64,808

 
26.5
%
 
$
6,600

 
190

Service gross profit
80,369

 
61.3
%
 
79,476

 
59.0
%
 
893

 
230

Royalty gross profit
20,731

 
100.0
%
 
23,330

 
100.0
%
 
(2,599
)
 

Gross profit
$
172,508

 
42.8
%
 
$
167,614

 
41.6
%
 
$
4,894

 
120


Product Gross Margin
Product gross margin increased 190 basis points in fiscal 2020, as compared with fiscal 2019. This increase was due primarily to cost reductions across a wide range of product offerings, and a mix weighted towards more profitable products.
Service Gross Margin

36


Service gross margin increased 230 basis points for fiscal 2020, as compared with the same period in 2019. This increase was due primarily to reductions in cost of service.
Royalty Gross Margin
Royalties do not have significant related cost of sales.

Operating expenses
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2020
 
% of
revenue
 
2019
 
% of
revenue
 
$ Change
 
% Change
Research and development
$
36,301

 
9
%
 
$
32,113

 
8
%
 
$
4,188

 
13
 %
Sales and marketing
59,524

 
15
%
 
69,400

 
17
%
 
(9,876
)
 
(14
)%
General and administrative
54,457

 
14
%
 
65,277

 
16
%
 
(10,820
)
 
(17
)%
Restructuring charges
1,022

 
%
 
5,570

 
1
%
 
(4,548
)
 
(82
)%
   Total operating expenses
$
151,304

 
38
%
 
$
172,360

 
43
%
 
$
(21,056
)
 
(12
)%

In fiscal 2020, research and development expense increased $4.2 million, or 13%, as compared with fiscal 2019. This increase was partially attributable to an increase in research and development headcount and professional services cost related to new product development.
In fiscal 2020, sales and marketing expenses decreased $9.9 million, or 14%, as compared with fiscal 2019. This decrease was driven by a decrease in compensation and benefits as the result of lower headcount and a decrease in marketing programs and professional services costs.
In fiscal 2020, general and administrative expenses decreased $10.8 million, or 17%, as compared with fiscal 2019. This decrease was driven primarily by lower costs related to our prior financial restatement and related activities, which we primarily incurred in fiscal 2019 compared to fiscal 2020, lower software expenses as we streamline our processes and tools throughout the company, decreased facilities expenses as we consolidate our physical footprint, and decreased bank fees. These decreases were partially offset by increases to stock compensation expense.
In fiscal 2020, restructuring expenses decreased $4.5 million, or 82%, as compared with fiscal 2019. This decrease was primarily due to the higher level of headcount reductions that occurred during fiscal 2019.

Other Income (Expense)
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2020
 
% of
revenue
 
2019
 
% of
revenue
 
$ Change
 
% Change
Other income (expense)
$
(261
)
 
0
 %
 
$
2,878

 
1
 %
 
$
3,139

 
(109
)%
Interest expense
(25,350
)
 
(6
)%
 
(21,095
)
 
(5
)%
 
4,255

 
20
 %
Loss on debt extinguishment

 
 %
 
(17,458
)
 
(4
)%
 
(17,458
)
 
(100
)%

In fiscal 2020, other (income) expense, net decreased $3.1 million or 109%, compared to fiscal 2019. The decrease was primarily related to a gain on the disposal of an investment that occurred in fiscal 2019, and differences in foreign currency gains and losses during each period.

In fiscal 2020, interest expense increased $4.3 million, or 20%, as compared to fiscal 2019. This increase was primarily due to a higher average principal balance of our outstanding debt.

In fiscal 2019, we incurred a loss on debt extinguishment related to our Term Loan.



37


 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2020
 
% of
revenue
 
2019
 
% of
revenue
 
$ Change
 
% Change
Income tax provision
$
803

 
%
 
$
2,376

 
1
%
 
$
(1,573
)
 
(66
)%

Our income tax provision is primarily influenced by foreign and state income taxes. In fiscal 2020, the income tax provision decreased $1.6 million or 66%, compared to fiscal 2019, related primarily to an unfavorable $1.4 million valuation allowance recorded in fiscal 2019 for our Australian deferred tax assets. 
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.
Comparison of the Years Ended March 31, 2019 and 2018

Revenue
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
20191
 
% of
revenue
 
20181
 
% of
revenue
 
$ Change
 
% Change
Product revenue
 
 
 
 
 
 
 
 
 
 
 
   Primary storage systems
$
58,811

 
15
%
 
$
77,976

 
18
%
 
$
(19,165
)
 
(25
)%
   Secondary storage systems
126,528

 
31
%
 
121,402

 
28
%
 
5,126

 
4
 %
   Devices and media
59,315

 
15
%
 
69,204

 
16
%
 
(9,889
)
 
(14
)%
      Total product revenue
$
244,654

 
61
%
 
$
268,582

 
61
%
 
$
(23,928
)
 
(9
)%
Service revenue
134,696

 
33
%
 
136,523

 
31
%
 
(1,827
)
 
(1
)%
Royalty revenue
23,330

 
6
%
 
32,579

 
8
%
 
(9,249
)
 
(28
)%
Total revenue
$
402,680

 
100
%
 
$
437,684

 
100
%
 
$
(35,004
)
 
(8
)%
1 Primary and Secondary storage system revenue has been adjusted for fiscal years 2019 and 2018 due to certain reclassifications from Primary to Secondary storage systems.

Product Revenue
In fiscal 2019, product revenue decreased $23.9 million, or 9%, as compared to fiscal 2018. Primary storage systems represented $19.2 million of the decrease, driven by declines in lower margin disk business in our U.S. domestic market. Devices and media decreased $9.9 million driven by a legal dispute, which caused a constraint on LTO tape supply between the two principal suppliers in the market. These were offset in part by secondary storage systems which increased $5.1 million driven by growth with our hyperscale customers.
Service Revenue
Service revenue was relatively flat, decreasing 1% in fiscal 2019 compared to fiscal 2018. This decrease was due to a combination of reduced new customer installations and reduced support renewals from our legacy customers.
Royalty Revenue
We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $9.2 million, or 28%, in fiscal 2019 as compared to fiscal 2018 due to overall declines in market unit volumes as the primary use of tape transitions from backup to archive workflows.


38


Gross Profit and Margin
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2019
 
Gross
margin %
 
2018
 
Gross
margin %
 
$ Change
 
Basis point change
Product gross profit
$
64,808

 
26.5
%
 
$
62,471

 
23.3
%
 
$
2,337

 
320

Service gross profit
79,476

 
59.0
%
 
77,734

 
56.9
%
 
1,742

 
210

Royalty gross profit
23,330

 
100.0
%
 
32,579

 
100.0
%
 
(9,249
)
 

Gross profit
$
167,614

 
41.6
%
 
$
172,784

 
39.5
%
 
$
(5,170
)
 
210


Product Gross Margin
Product gross margin increased 320 basis points in fiscal 2019, as compared with fiscal 2018. This increase was due primarily to cost reductions across a wide range of product offerings, and a mix weighted towards more profitable products.
Service Gross Margin
Service gross margin increased 210 basis points in fiscal 2019, as compared with fiscal 2018. This increase was due primarily to reductions in cost of service.
Royalty Gross Margin
Royalties do not have significant related cost of sales.

Operating expenses
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2019
 
% of
revenue
 
2018
 
% of
revenue
 
$ Change
 
% Change
Research and development
$
32,113

 
8
%
 
$
38,562

 
9
%
 
$
(6,449
)
 
(17
)%
Sales and marketing
69,400

 
17
%
 
102,242

 
23
%
 
(32,842
)
 
(32
)%
General and administrative
65,277

 
16
%
 
52,128

 
12
%
 
13,149

 
25
 %
Restructuring charges
5,570

 
1
%
 
8,474

 
2
%
 
(2,904
)
 
(34
)%
   Total operating expenses
$
172,360

 
43
%
 
$
201,406

 
46
%
 
$
(29,046
)
 
(14
)%

In fiscal 2019, research and development expense decreased $6.4 million, or 17%, as compared with fiscal 2018. This decrease was partially attributable to a decrease in research and development headcount and professional services cost as we drove efficiencies throughout the business.
In fiscal 2019, sales and marketing expenses decreased $32.8 million, or 32%, as compared with fiscal 2018. This decrease was driven by a decrease in compensation and benefits as the result of lower headcount and a decrease in marketing programs and professional services costs.
In fiscal 2019, general and administrative expenses increased $13.1 million, or 25%, as compared with fiscal 2018. This increase was driven primarily by higher costs in fiscal 2019 related to our prior financial restatement and related activities. and increases in stock compensation expense.
In fiscal 2019, restructuring expenses decreased $2.9 million, or 34%, as compared with fiscal 2018. This decrease was primarily due to the high level of headcount reductions that occurred during fiscal 2018.


39


Other Income (Expense)
 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2019
 
% of
revenue
 
2018
 
% of
revenue
 
$ Change
 
% Change
Other income (expense)
$
2,878

 
1
 %
 
$
767

 
0
 %
 
(2,111
)
 
275
 %
Interest expense
(21,095
)
 
(5
)%
 
(11,670
)
 
(3
)%
 
9,425

 
(81
)%
Loss on debt extinguishment
(17,458
)
 
(4
)%
 
(6,934
)
 
(2
)%
 
10,524

 
(152
)%

In fiscal 2019, other (income) expense, net increased $2.1 million or 275%, compared to fiscal 2018. The increase was primarily due to a gain of $2.8 million on the disposal of an investment in fiscal 2019, offset by a $0.6 million reduction in foreign exchange gain as compared to fiscal 2018.

In fiscal 2019, interest expense increased $9.4 million, or 81%, as compared with fiscal 2018. This increase was primarily due to a higher average principal balance.

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


 
Year Ended March 31,
 
 
 
 
(dollars in thousands)
2019
 
% of
revenue
 
2018
 
% of
revenue
 
$ Change
 
% Change
Income tax provision (benefit)
$
2,376

 
1
%
 
$
(3,113
)
 
(1
)%
 
$
5,489

 
(176
)%

Our income tax provision is primarily influenced by foreign and state income taxes. In fiscal 2019, our income tax provision (benefit) increased $5.5 million or 176%, compared to fiscal 2018. The increase was primarily due to fiscal 2018 benefitting from a $2.1 million reserve release resulting from an audit settlement with a foreign taxing authority and a $2.9 million refundable tax credit resulting from the repeal of the Corporate Alternative Minimum Tax enacted as part of the Tax Cuts and Jobs Act in 2017.


40


Quarterly Results of Operations and Key Business Metrics

The following tables set forth our unaudited quarterly statements of operations data for the most recent eight quarters, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements. The following quarterly financial data should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," our audited consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" and other financial information included elsewhere in this Annual Report on Form 10-K.

 
Three Months Ended
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sep. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sep. 30, 2018
 
June 30, 2018
Total revenue
$
88,215

 
$
103,315

 
$
105,789

 
$
105,630

 
$
103,277

 
$
101,979

 
$
89,912

 
$
107,512

Total cost of revenue
52,132

 
56,239

 
62,266

 
59,804

 
60,611

 
58,897

 
54,385

 
61,173

Gross profit
36,083

 
47,076

 
43,523

 
45,826

 
42,666

 
43,082

 
35,527

 
46,339

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
9,243

 
9,325

 
9,350

 
8,383

 
8,083

 
7,907

 
7,862

 
8,261

Sales and marketing
13,423

 
15,421

 
14,824

 
15,856

 
16,603

 
16,990

 
16,682

 
19,125

General and administrative
10,833

 
10,719

 
14,329

 
18,576

 
18,333

 
13,481

 
14,072

 
19,391

Restructuring charges
2

 
(64
)
 
821

 
263

 
142

 
1,227

 
294

 
3,907

Total
33,501

 
35,401

 
39,324

 
43,078

 
43,161

 
39,605

 
38,910