What changed in this filing

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Item 1A. Risk Factors

2021-05-26 compared with 2020-06-24 · 292 added, 298 removed, 224 unchanged (72% of the section changed)

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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.

Risks Related to Our Business and Industry

The COVID-19 pandemic has affected our business and may continue to affect our business.

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.

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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.

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;

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:

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;

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

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.

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

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;

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:

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;

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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.

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.

Loss of 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.

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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.

During the fiscal years ended March 31, 2021 and March 31, 2020 no single customers represented 10% or more of our 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.

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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:

an all-flash NVMe storage array – designed for the most demanding media workloads

a ruggedized in-vehicle storage array purpose-built for autonomous vehicle development (to ingest large number of data streams) or for transportation surveillance applications;

a highly resilient, hyper-converged surveillance storage system that meets all the needs of security teams;

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;

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;

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.

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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.

Some of those competitors, such as Dell, IBM, HPE, 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

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.

Over time, the prices of our products and competitor products have decreased, but such products often incorporate new 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 due to pricing differences.

If competition further intensifies, 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.

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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;

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

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.

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 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.

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.

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.

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 December 2020, we acquired Square Box Systems Ltd.

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;

• 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.

We have taken considerable steps towards reducing our cost structure.

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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.

Managing change is an important focus for us.

In addition, we have reduced headcount to streamline and consolidate our supporting functions as appropriate in response to market or competitive conditions

and following past acquisitions and have increased our reliance on certain third-party business relationships.

Risks related to Intellectual Property

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.

Other legal actions, such as intellectual property actions, brought against the licensing company could also impact our future access to the technology.

Any of these actions could negatively impact our technology licensing, thereby reducing the functionality or features of our products, and could 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.

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.

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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.

Enforcing our intellectual property rights can sometimes only be accomplished through litigation, which is expensive and can divert management’s attention away from our business.

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.

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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;

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.

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.

Risks related to our Supply Chain and Sales Strategy

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.

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Any or all of these risks could have a material adverse effect on our business.

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;

foreign exchange fluctuations.

Our manufacturing, component production and service repair are outsourced to third-party contract manufacturers, component suppliers and service providers.

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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:

We face a number of risks as a result of these relationships.

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.

Because we are relying on one supplier in these situations, 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

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Any or all of these risks could have a material adverse effect on our business.

We rely on a limited number of suppliers and, in some cases, on single-source suppliers, for several key components of our products, and we have not generally entered into agreements for the long-term purchase of these components.

While we actively monitor and manage our supply chain, we cannot anticipate the potential impact that new or current restrictions due to COVID-19 may have on the manufacturing and shipment of our products.

Our reliance on a limited number of suppliers and the lack of any guaranteed sources of supply exposes us to several risks, including:

• the inability to obtain an adequate supply of key components;

• price volatility for the components of our products;

• failure of a supplier to meet our quality or production requirements;

• failure of a supplier of key components to remain in business or adjust to market conditions;

• consolidation among suppliers, resulting in some suppliers exiting the industry, discontinuing the manufacture of components or increasing the price of components.

Further, some of the components in our products are sourced from component suppliers outside the United States, including from China.

The portion of our products that are sourced outside the United States may subject us to additional logistical risks or risks associated with complying with local rules and regulations in foreign countries.

Significant changes to existing international trade agreements could lead to sourcing or logistics disruption resulting from import delays or the imposition of increased tariffs on our sourcing partners.

For example, there have been discussions regarding potential significant changes to U.S.

trade policies, legislation, treaties and tariffs, and the United States and Chinese governments have announced import tariffs by both countries.

If any new legislation and/or regulations are implemented, if existing trade agreements are renegotiated or terminated, or if tariffs are imposed on foreign-sourced or U.S.

goods, it may be inefficient and expensive for us to alter our business operations in order to adapt to or comply with such changes.

Such operational changes could have a material adverse effect on our business, financial condition, results of operations or cash flows.

As a result of these risks, we cannot assure investors that we will be able to obtain a sufficient supply of these key components in the future or that the cost of these components will not increase.

If our supply of components is disrupted or delayed, or if we need to replace our existing suppliers, there can be no assurance that additional components will be available when required or that components will be available on terms that are favorable to us, which could extend our lead times, increase the costs of our components and harm our business, operating results and financial condition.

We may not be able to continue to procure components at reasonable prices, which may require us to enter into longer-term contracts with component suppliers to obtain components at competitive prices.

Any of the foregoing disruptions could increase our costs and decrease our gross margins, harming our business, operating results and financial condition.

If we do not manage the supply of our products and their components efficiently, our results of operation could be adversely affected.

Managing the supply of our products and underlying components is complex.

Our third-party contract manufacturers procure components and build our products based on our forecasts, and we generally do not hold inventory for a prolonged period of time.

These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and analyses from our sales and marketing organizations, adjusted for overall market conditions.

In order to reduce manufacturing lead times and plan for adequate component supply, from time to time we may issue orders for components and products that are non-cancelable and non-returnable.

Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to make accurate forecasts and effectively manage the supply of our products and components.

If we ultimately determine that we have excess supply, we may have to reduce our prices and write down or write off excess or obsolete inventory, which in turn could result in lower gross margins.

Alternatively, insufficient supply levels may lead to shortages that result in delayed revenue, reduced product margins or loss of sales opportunities altogether.

The current overall supply shortage related to semiconductors is an example currently impacting us.

If we are unable to effectively manage our supply and inventory, our results of operations could be adversely affected.

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.

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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.

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.

We rely on indirect sales channels to market and sell our branded products.

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.

Several of our resellers carry competing product lines that they may promote over our products.

When we introduce new products and solutions, 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.

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;

• Changes in requirements or programs that allow our products to be sold by third parties to government customers.

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.

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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

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

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;

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;

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.

Either scenario could result in fewer of our products being available to the affected market segments, reduced levels of customer satisfaction and increased expenses, which could in turn have a material and adverse impact on our business, results of operations and financial condition.

Risks related to Regulatory Matters

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.

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Any of these consequences could materially and adversely impact our business and results of operations.

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.

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.

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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

where such information is stored.

In 2018, California enacted the Consumer Privacy Act (“CCPA”), which regulates information stored by companies doing business in California.

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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.

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;

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.

Risks Related to Our Operating Results or Financial Condition

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 a timely manner;

• 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;

• 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;

• foreign exchange fluctuations.

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.

When we introduce new products to the market, our new products may not achieve market acceptance or significant market share.

In addition, the target markets for our new products may not continue or grow as we anticipate.

Our new products may not be successfully or timely qualified by new customers, and if they are qualified, we may not achieve high volume production with these products in a timely manner, if at all.

In addition, we may 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 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.

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.

could continue to decline, which could materially and adversely impact our business, financial condition and results of operations in the future.