Quantum: We've got that accounting probe taped. Now about refinancing...
We'll need to make deal by January 2019
Timing is everything: Quantum Corp is renegotiating a refinancing package that could, if not agreed, take the business down. At the same time, it is nearing the end of an accounting probe that has highlighted serious revenue recognition errors in multi-year results that will need to be rectified.
An investigation by the firm's auditors launched after the US Securities and Exchange Commission sent Quantum a subpoena related to its accounting practices and internal controls over the recognition of revenue for transactions commencing 1 April 2016.
The "principal findings" have concluded that Quantum was involved in "certain business and sales practices" that may well "undermine" its bookkeeping for sales to several distributors and at least one end customer. These took place between Q4 of Quantum's fiscal '15 and Q4 of '18.
As a result, Quantum said the filed P&L accounts for Q1, Q2 and Q3 in fiscal '15, the same quarters in 2016, and Q1 and Q2 of fiscal '17 "should no longer be relied upon because of misstatements" and will be "recognised in different historical periods".
Though the probe has "substantially completed and finalised its principal findings", Quantum does not yet have a final figure on the amount that will need to be restated, or in fact when that work will be done and dusted.
The current estimate is that for Q2 ended 30 September 2017, there was between $25m to $35m of "prematurely recognised revenue in the historical periods" that may be realised in subsequent quarters. And for Q1 '18, Quantum found between $15m to $25m that was realised too early and will need to be "recognised in future periods".
To date, Quantum delayed filing of its 10-Q for its Q3 '17 and Q1 '18 and expects to file these, along with "restated results, as soon as practicable".
Given the parlous state of accounting procedure, the firm said it "expects to report one or more material weaknesses in internal control over financial reporting".
The scale-out storage biz said it will "continue to implement and will continue to evaluate additional remedial measures based on the findings of the investigation".
Quantum stated in the SEC filing that it does not expect cash and cash equivalents to be affected by the restatement. It revealed it had $122.4m in outstanding total debts including amounts owed to its Term Loan Credit and Security Agreement and its Revolving Credit and Security agreement.
The business recently agreed to amend its Term Loan Agreement (TLA) and the Revolver Agreement (RA), which it viewed as an "interim step" in a "comprehensive refinancing package" that it expects to complete by the end the of calendar 2018.
But Quantum warned it must meet "ongoing milestones" connected to the finance – it didn't stipulate what these are - "some of which" are in its control and some which are not.
Failure to meet these by the end of January 2019, which is the maturity date for the TLA and the RA, will mean it is unable to pay lenders or ratify other financial obligations as they fall due.
"As a result of the above and the company's current working capital position, there is substantial doubt about the company's ability to continue as a going concern," the 8-K form stated.
"There can be no assurance that the company will be able to satisfy the ongoing milestones within the required time periods or consummate a Refinancing Transaction by January 31, 2019.
"Even if the company is successful in completing a Refinancing Transaction, it may also be required to modify, delay or abandon some of its business plans and investments, which could have a material adverse effect on the company's business, operating results and financial condition." ®