Quantum Completes Restatement Process, Continues Business Transformation

As part of its Q1 financial results (ending June 30, 2019), Quantum announced  that it has completed the previously announced financial restatement process and provided results for each of the three fiscal years ended March 31, 2017, March 31, 2018 and March 31, 2019, which include the financial data and discussion for all interim periods for these fiscal years.

“Today, Quantum is a leaner, more efficient company poised for growth based on a series of transformative steps we have taken,” commented Jamie Lerner, Chairman and CEO, Quantum.  “With the leadership of our new shareholder-engaged Board of Directors and executive team, we’ve eliminated over $70 million in annualized expenses, completed the restatement process, and are ready to capitalize on a revitalized and healthy tape market as well as the expanding opportunity to store and manage video and image data across a wide range of industries.”

First Fiscal Quarter of 2020 (Period ended June 30, 2019) vs. Prior-Year First Quarter
Revenue was $105.6 million for the first fiscal quarter in 2020, compared to $107.5 million in the year-ago quarter.

Inclusive of $8.3 million in non-recurring charges, net loss was $3.8 million in the first fiscal quarter of 2020, compared to a net loss of $7.5 million including $9.8 million in non-recurring charges in the year ago quarter.

Excluding $8.3 million in non-recurring charges, Adjusted Net Income was $4.4 million, or $0.11 per diluted share in the first fiscal quarter of 2020, compared to an Adjusted Net Income of $2.3 million, or $0.06 per diluted share, in the year-ago quarter after excluding $9.8 million in non-recurring charges.

Gross profit in the first fiscal quarter of 2020 was $45.8 million or 43% gross margin, compared to $46.3 million or 43% in the year-ago quarter. Gross margins remained flat year over year despite lower royalty revenue in the first fiscal quarter of 2020 that was negatively impacted by LTO media supply issues, which were resolved in early August as described below.

Total operating expenses in the quarter were $43.1 million or 41% of sales, compared to $50.7 million, or 47% in the year-ago quarter. SG&A expenses declined 11% to $34.4 million compared to $38.5 million in the year-ago quarter. R&D expenses were $8.4 million, up 1% compared to $8.3 million in the year-ago quarter.

The Company incurred $6.3 million in interest expense, compared to $3.9 million in the year-ago quarter.

Adjusted EBITDA increased 82% to $13.1 million in the first fiscal quarter of 2020, compared to $7.2 million in the year-ago quarter.

Balance Sheet and Liquidity as of June 30, 2019

• Cash and cash equivalents of $10.8 million as of June 30, 2019, compared to $10.8 million as of March 31, 2019. These amounts exclude $5.0 million in restricted cash required under the Company’s Credit Agreements.
• Outstanding long-term debt as of June 30, 2019 was $146.1 million net of $16.4 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt. This compares to $145.6 million of outstanding debt as of March 31, 2019, net of $17.3 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt. Quantum also has a $45 million revolving credit facility which was undrawn at both June 30, 2019 and March 31, 2019.
• Total interest expense for fiscal Q1 2020 was $6.3 million.

Financial and Operational Highlights

• Gross margins improved by three percentage points from 39% in fiscal 2018 to 42% in fiscal 2019 primarily due to lower headcount in service and improved gross margins on products.
• Recurring, high-margin Services revenue decreased slightly from $136.5 million in fiscal 2018 to $134.7 million in fiscal 2019, or 1%.  The related gross profit and gross margin increased from $77.7 million and 57% in fiscal 2018 to $79.5 million and 59% in fiscal 2019.
• Adjusted EBITDA of $32.5 million for fiscal 2019 compared to Adjusted EBITDA of negative $4.5 million in fiscal 2018, a year-over-year improvement of approximately $37 million.

A reconciliation between GAAP and non-GAAP information is contained in the financial information below. Additional information about Adjusted EBITDA and Adjusted Net Income information appears at the end of this release.

Management Commentary

The transformation of Quantum includes the following:

• New Team
  • Reconstituted Board of Directors to include significant shareholders; our comprehensive transformation stems from a series of shareholder campaigns directed at corporate accountability and operational improvement
  • Since January 2018, replaced almost three-fourths of prior management
  • Recruited executives including CEO, CFO, CRO, CAO, CIO, VP Supply Chain, General Counsel, Corporate Controller and Director of Internal Audit
  • Adopted new business priorities, standards and governance practices focused on innovation and profitable sales
• New corporate strategy focused on leading the video storage market, informed by:
  • The projection that 80% of the world’s data by 2025 will be video or video-like data
  • Quantum’s customers find us to be a leader in both the high-speed processing of video and long-term archiving of video and unstructured data
• New gross margin focus
  • Reset sales commission plan that pays on gross margin achievement
  • Curtailed reselling low margin third party products aimed at boosting revenue at the expense of gross margins
  • Reduced annualized spending by $10 million in cost of sales expenses representing primarily headcount reductions
• New and Enhanced Products
  • Significant physical and software enhancements to tape library products aimed at the hyperscaler and cloud market
  • Quantum F-Series, a new line of NVMe flash storage arrays
  • Quantum VS-Series, a hyperconverged platform for video surveillance and management of buildings systems
  • Quantum R-Series, ruggedized, removable storage systems for in-vehicle data capture, mobile surveillance and military applications
  • Quantum Cloud-Based Analytics, enables monitoring and configuration through the cloud, connecting all our products to the Quantum Distributed Cloud
• New Cost Structure
  • Eliminated $60 million in annualized operating expenses that included a reduction of approximately 30% of the workforce
  • Vacated nine facilities and offices world wide

“With the restatement behind us, we are focused on growing our business profitably and creating sustainable value for our shareholders,” Mr. Lerner said. “Our key next step will be to re-list our shares on a national exchange, a goal we expect to complete by the end of 2019. With the accelerating growth of video and hi-resolution image data across all industries, a healthy tape industry that is expected to return to growth, and a right-sized expense structure, we are well-positioned to deliver positive future results for our shareholders, customers, suppliers and employees.”

Outlook
For the second fiscal quarter, management expects revenues in the range of $99 million to $105 million. Excluding approximately $3 million in non-recurring charges, the Company expects resulting Adjusted Net Income to be in the range of $2 million to $4 million. Adjusted EBITDA is expected to be in the range of $10 million to $12 million.

“We believe we have a sustainable platform from which to grow, with exciting new products targeting the future of video storage,” added Mr. Lerner. “Historically, our fiscal second quarter tends to have some seasonal impact from holiday schedules and generally slower business during the summer months. Our fiscal third quarter, which ends in December, traditionally is our strongest of the year.”

For the remaining three quarters of fiscal 2020, Quantum expects total revenues to increase by $15 million to $30 million or 6% to 10% compared to same period in the prior year, with revenues from new products increasing as the year progresses. Due to the Company’s tight cost controls and focus on improving gross margins, Quantum expects Adjusted EBITDA to increase to a range of $50 million to $55 million or by 55% to 70% for the full fiscal year compared to the prior fiscal year.

Financial Restatement Summary
In September 2018 the Company announced the substantial completion of an internal investigation conducted by a Special Committee of the Board of Directors.  This investigation concluded that the previous management, who have all been terminated or are no longer part of the Company, had engaged in certain business and sales practices that may have undermined its historical accounting treatment for certain sales transactions with several distributors and at least one end customer. These practices led to the Company prematurely recognizing revenue. The Company’s finance department, overseen by the Board’s Audit Committee, completed its review of revenue for fiscal years 2015 through 2018 and identified approximately $180 million of revenue that was prematurely recorded.  The revenue restatement re-casted the timing of revenue, not the quality or accuracy of the revenue itself.   Excluding the first and last quarters of the restatement period, the average quarterly net revenue adjustment ranged from a decrease of approximately $7 million to an increase of approximately $5 million. These restatement adjustments did not affect historical or current cash balances, and there were no significant accounts receivable write-offs over the restatement periods. All of the inventory that is remaining in distributors’ inventory and yet to be sold through to an end customer has been paid for by the distributor. Quantum expects to recognize the revenue from this remaining distributor inventory in the future when the products are sold to an end-customer. The total cost expected to be incurred for professional fees related to the internal investigation, financial restatement and related activities is approximately $33 million.

In addition, the Company is cooperating with an on-going investigation by the SEC related to the restatement. Quantum has produced a substantial volume of documents to the SEC and continues to respond to information requests from the SEC staff.