In February 2018, the Audit Committee (“Audit Committee”) of our Board of Directors (the “Board”), and subsequently a special committee of the Board (the “Special Committee”) consisting of two members of the Audit Committee, began conducting an internal investigation, with the assistance of independent accounting and legal advisors, into matters related to the Company’s accounting practices and internal control over financial reporting related to revenue recognition for transactions occurring between January 1, 2016 and March 31, 2018. Upon the recommendation of the Audit Committee and as a result of the investigation by the Special Committee and after consultation with the Company’s management, on September 14, 2018, the Company’s Board of Directors concluded that the Company’s previously issued consolidated financial statements and other financial data for the fiscal years ended March 31, 2017, 2016 and 2015 contained in the Company’s Annual Reports on Form 10-K for the fiscal year ended March 31, 2017, and the Company’s condensed consolidated financial statements for each of the quarterly and year-to-date periods ended June 30, 2015, September 30, 2015, December 31, 2015, June 30, 2016, September 30, 2016, December 31, 2016, June 30, 2017 and September 30, 2017 (collectively, the “Non-Reliance Periods”) should not be relied upon and required restatement (the “Restatement”). The Board also determined that the Company’s disclosures related to these financial statements and related communications issued by or on behalf of the Company with respect to the Non-Reliance Periods, including management’s assessment of internal control over financial reporting and disclosure controls and procedures, should not be relied upon.

This Note discloses the nature of the Restatement adjustments and shows the impact of the restatement on revenues, expenses, income, assets, liabilities, equity, and cash flows from operating activities, investing activities and financing activities, and the cumulative effects of these adjustments on the consolidated balance sheets, statements of operations and comprehensive loss, statement of stockholders’ deficit and statements of cash flows for the fiscal year ended March 31, 2017. In addition, this Note shows the effects of the adjustment to opening accumulated deficit as of April 1, 2016, which adjustment reflects the impact of the Restatement on periods prior to the fiscal year ended March 31, 2017. The cumulative impact of the Restatement for all previously reported periods was an adjustment to increase accumulated deficit of approximately $12.5 million and decrease to accumulated other comprehensive income of approximately $4.8 million as of April 1, 2016. The impact on fiscal year 2017 was a reduction in pre-tax loss and net loss of $5.5 million and $6.1 million, respectively. The restated interim financial information for the relevant unaudited interim financial statements for the three months ended June 30, 2017 and the three-and six-months ended September 30, 2017 are included in Note 13: .

On January 11, 2018, the Company received a subpoena from the Securities and Exchange Commission (“SEC”) seeking documents pertaining to the Company’s accounting practices and internal controls related to revenue recognition for transactions commencing April 1, 2016. The Company subsequently decided to postpone the release of Quantum’s results for the third quarter of fiscal 2018 and the Audit Committee began an independent investigation into the Company’s accounting practices and internal controls over financial reporting related to revenue recognition for transactions occurring between January 1, 2016 and March 31, 2018, with the assistance of independent accounting and legal advisors. Subsequently, the Special Committee, undertook to continue the investigation.

 

In September 2018, the Special Committee substantially completed and finalized its principal findings with respect to its investigation. The principal findings included a determination that the Company engaged in certain business and sales practices that may have undermined its historical accounting treatment for transactions with several key distributors and at least one end customer. The Special Committee found that the identified transactions potentially affected by such practices commenced at least in the fourth quarter of fiscal 2015 and continued at least through the fourth quarter of fiscal 2018 (the “Investigation Related Revenue Misstatements”). The Special Committee also found that these business and sales practices may have resulted in the Company recognizing revenue for certain transactions prior to satisfying the criteria for revenue recognition required under generally accepted accounting principles in the United States of America (“U.S. GAAP”).

In response to the findings of the Special Committee, the Company conducted a thorough review of its financial records for the fiscal years ended March 31, 2015, 2016 and 2017, and for each of the quarterly and year to date periods ended June 30, 2017 and September 30, 2017 to determine whether further adjustments were necessary. The Company concluded that there were material misstatements in the consolidated financial statements for the fiscal years ended March 31, 2015, 2016 and 2017 as well as the unaudited interim consolidated financial statements for the quarterly periods ended June 30, 2016, December 31, 2016, June 30, 2017 and September 30, 2017.

The Special Committee investigation is now complete, although our outside legal counsel, together with the assistance of the independent legal counsel to the Special Committee and independent accounting advisors, continue to provide support as requested in connection with the SEC investigation discussed in more detail in contained in this Annual Report on Form 10-K.

As part of the Company’s review of its financial records, management identified control deficiencies related to the control environment, risk assessment, information and communication, and monitoring. For further information regarding these control deficiencies, please see in this Annual Report on Form 10-K. The Company’s incorrect accounting was the result of these control deficiencies. The Company’s investigation found that one of these factors was that an inconsistent and sometimes inappropriate tone at the top was present under the then existing senior management that did not in certain instances result in adherence to U.S. GAAP and the Company’s accounting policies and procedures. Other factors affecting the overall historic accounting environment included: lack of an effective control environment for certain accounting estimates; lack of sufficient personnel with an appropriate level of knowledge, experience and training commensurate with the Company’s financial reporting requirements; lack of clear reporting structures, reporting lines and decisional authority responsibilities; lack of effective controls over certain business processes which included the execution of controls over revenue recognition and the preparation, analysis and review of significant account reconciliations and closing adjustments; and other matters. Taken together, these factors contributed to the consolidated financial statement errors that resulted in the Restatement.

The categories of restatement adjustments and their impact on previously reported consolidated financial statements are described below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate impact of these misstatement to the consolidated statement of operations and comprehensive loss for the fiscal year ended March 31, 2017 is a decrease to general and administrative and other expenses of less than $0.1 million, and an increase in interest expense of less than $0.1 million. The resulting impact to pre-tax earnings is a decrease of less than $0.1 million. The impact to the consolidated balance sheet at March 31, 2017 is a decrease to property and equipment, other long-term assets, and accumulated comprehensive income of $0.3 million, $0.7 million, and $4.8 million respectively, and an increase in other accrued liabilities $0.9 million.

The following tables present the restatement adjustments to previously issued consolidated financial statements, including the previously reported consolidated balance sheet as of March 31, 2017, and the consolidated statement of operations and comprehensive loss, stockholders’ deficit and statement of cash flows for the fiscal year ended March 31, 2017. The correction of misstatements affecting fiscal years prior to the fiscal year ended March 31, 2017 are reflected as a cumulative adjustment to the April 1, 2016 stockholders’ deficit on the consolidated balance sheet and consolidated statement of stockholders’ deficit.