Quantum said it has settled an SEC investigation of its accounting practices with its agreement to pay a $1.0 million civil penalty.
During the investigation, Quantum said it had recognized revenue incorrectly in statements filed by the company between early 2015 and September 2017. According to an order filed yesterday by the SEC, Quantum deviated from accepted accounting practices when it was under pressure from both declining sales and an activist investor who set revenue targets for the company’s 2015 fiscal year as part of a standstill agreement.
In response, the SEC said, Quantum increasingly encouraged channel partners to build up their inventory of new products and to “pre-buy” products for deals that were expected to close in later periods. But because Quantum sometimes guaranteed profit margins for its channel partners, it couldn’t always determine how much revenue the sale would finally generate in advance, the SEC said. Other special deals between Quantum and its channel partners, like a generous return policy that went beyond what it contractually allowed or its post-delivery obligations related to certain transactions, also complicated the accounting, as did its handling of bill-and-hold arrangements, where the buyer is billed for products that won’t be delivered until a later date. As a result the SEC said, Quantum recognized revenue from some of its transactions with channel partners prematurely.
“While management encouraged sales personnel to pursue stocking orders and pre-buys, Quantum did not sufficiently consider the risks presented by these transactions, including whether these transactions may have required them to design any additional internal accounting controls,” the SEC said in the order, adding that the company’s sales and accounting personnel lacked the experience and training to properly recognize revenue for the transactions in question.
Quantum ended up restating its annual financial statements for fiscal 2015, 2016 and 2017, as well as its statements for the quarters ending June 30, 2016, September 30, 2016, December 31, 2016, June 30, 2017 and September 30, 2017. The restated revenue missed the objectives of the standstill agreement as well as Quantum’s public guidance for fiscal 2017, the SEC said.
Earlier this year, Quantum CEO Jamie Lerner and CFO Mike Dodson told investors that the company’s previous executive team had made “poor business decisions” and prematurely recognized about $180 million of revenue during the period in question. They also said the company had reduced senior management by 45%, laid off more than 300 employees, and eliminate nine facilities in an effort to prepare the company for renewed growth.
“With this settlement now behind us we can move on from legacy issues and focus our full attention on growing our business to create sustainable value for our customers and shareholders,” said Lerner in a prepared statement. “The civil penalty was fully accrued in our financial results, and we are actively advancing our long-term strategy and working expeditiously to re-list on a national exchange.”
Currently trading on the OTC Pink as QMCO, Quantum has also sought relisting on the New York Stock Exchange. The company’s stock price has more than doubled in the second half of the year, rising to a high of $7.13 from $2.64 on July 1.