QUANTUM CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS QUANTUM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts, unaudited) September 30, 2020 March 31, 2020 Assets Current assets: Cash and cash equivalents $ 12,517 $ 6,440 Restricted cash 792 830 Accounts receivable, net of allowance for doubtful accounts of $ 1,399 and $ 1,247 as of September 30, 2020 and March 31, 2020, respectively 62,712 70,370 Manufacturing inventories 35,882 29,196 Service parts inventories 23,211 20,502 Other current assets 8,330 8,489 Total current assets 143,444 135,827 Property and equipment, net 9,655 9,046 Restricted cash 5,000 5,000 Right-of-use assets, net 10,597 12,689 Other long-term assets 4,585 3,433 Total assets $ 173,281 $ 165,995 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 37,834 $ 36,949 Deferred revenue 73,101 81,492 Long-term debt, current portion 1,388 7,321 Accrued compensation 17,878 14,957 Other accrued liabilities 14,750 17,535 Total current liabilities 144,951 158,254 Deferred revenue 33,249 37,443 Long-term debt, net of current portion 171,010 146,847 Operating lease liabilities 9,114 10,822 Other long-term liabilities 11,197 11,154 Total liabilities 369,521 364,520 Commitments and contingencies (Note 9) Stockholders' deficit Preferred stock, 20,000 shares authorized; no shares issued as of September 30, 2020 and March 31, 2020, respectively — — Common stock, $ 0.01 par value; 125,000 shares authorized; 40,740 shares issued and outstanding as of September 30, 2020 and 39,905 as of March 31, 2020, respectively 408 399 Additional paid-in capital 522,357 505,762 Accumulated deficit ( 718,492 ) ( 703,164 ) Accumulated other comprehensive loss ( 513 ) ( 1,522 ) Total stockholders’ deficit ( 196,240 ) ( 198,525 ) Total liabilities and stockholders’ deficit $ 173,281 $ 165,995 See accompanying Notes to Condensed Consolidated Financial Statements. 1 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share amounts, unaudited) Three Months Ended September 30, Six Months Ended September 30, 2020 2019 2020 2019 Revenue: Product $ 50,850 $ 68,130 $ 90,537 $ 133,926 Service 31,494 32,401 61,880 65,781 Royalty 3,477 5,258 6,709 11,712 Total revenue 85,821 105,789 159,126 211,419 Cost of revenue: Product 34,998 49,467 65,380 96,666 Service 12,089 12,799 24,160 25,404 Total cost of revenue 47,087 62,266 89,540 122,070 Gross profit 38,734 43,523 69,586 89,349 Operating expenses: Research and development 10,233 9,350 24,723 17,733 Sales and marketing 13,153 14,824 21,825 30,680 General and administrative 10,263 14,329 20,395 32,905 Restructuring charges 1,585 821 2,637 1,084 Total operating expenses 35,234 39,324 69,580 82,402 Income from operations 3,500 4,199 6 6,947 Other income (expense), net ( 312 ) 76 ( 697 ) 165 Interest expense ( 7,578 ) ( 6,347 ) ( 14,015 ) ( 12,653 ) Net loss before income taxes ( 4,390 ) ( 2,072 ) ( 14,706 ) ( 5,541 ) Income tax provision 202 243 622 581 Net loss $ ( 4,592 ) $ ( 2,315 ) $ ( 15,328 ) $ ( 6,122 ) Net loss per share - basic and diluted $ ( 0.11 ) $ ( 0.06 ) $ ( 0.38 ) $ ( 0.17 ) Weighted average shares - basic and diluted 40,286 36,297 40,097 36,172 Net loss $ ( 4,592 ) $ ( 2,315 ) $ ( 15,328 ) $ ( 6,122 ) Foreign currency translation adjustments, net 722 ( 474 ) 1,009 ( 390 ) Total comprehensive loss $ ( 3,870 ) $ ( 2,789 ) $ ( 14,319 ) $ ( 6,512 ) See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Six Months Ended September 30, 2020 2019 Operating activities Net loss $ ( 15,328 ) $ ( 6,122 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 2,580 2,034 Amortization of debt issuance costs 3,015 2,008 Long-term debt related costs 167 — Provision for product and service inventories 3,588 3,442 Stock-based compensation 4,549 3,352 Bad debt expense 90 199 Deferred income taxes ( 15 ) — Unrealized foreign exchange (gain) loss 1,193 ( 99 ) Changes in assets and liabilities: Accounts receivable, net 7,568 15,239 Manufacturing inventories ( 8,858 ) ( 5,799 ) Service parts inventories ( 4,333 ) ( 1,180 ) Accounts payable 1,601 1,478 Accrued restructuring charges 240 ( 2,576 ) Accrued compensation 2,922 ( 2,111 ) Deferred revenue ( 12,584 ) ( 15,582 ) Other assets and liabilities ( 5,694 ) ( 3,939 ) Net cash used in operating activities ( 19,299 ) ( 9,656 ) Investing activities Purchases of property and equipment ( 1,434 ) ( 1,315 ) Net cash used in investing activities ( 1,434 ) ( 1,315 ) Financing activities Borrowings of long-term debt, net of debt issuance costs 19,400 — Repayments of long-term debt — ( 825 ) Borrowings of credit facility 140,987 172,119 Repayments of credit facility ( 144,058 ) ( 165,143 ) Borrowings of payment protection program 10,000 — Payment of taxes due upon vesting of restricted stock — ( 171 ) Proceeds from issuance of common stock 539 — Net cash provided by financing activities 26,868 5,980 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 96 ) 72 Net change in cash, cash equivalents and restricted cash 6,039 ( 4,919 ) Cash, cash equivalents, and restricted cash at beginning of period 12,270 16,855 Cash, cash equivalents, and restricted cash at end of period $ 18,309 $ 11,936 Supplemental disclosure of cash flow information Cash paid for interest $ 14,181 $ 10,567 Cash received for income taxes, net of refunds $ ( 1,578 ) $ ( 51 ) Non-cash transactions Purchases of property and equipment included in accounts payable $ 294 $ 249 Purchases of property and equipment included in accrued liabilities $ 1,255 $ — Transfer of inventory to property and equipment $ 207 $ 169 Payment of litigation settlements with insurance proceeds $ — $ 8,950 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows: Cash and cash equivalents $ 12,517 $ 6,000 Restricted cash, current 792 936 Restricted cash, long-term 5,000 5,000 Total cash, cash equivalents and restricted cash at the end of period $ 18,309 $ 11,936 See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (in thousands, unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit Three Months Ended Shares Amount Balance, June 30, 2019 36,046 $ 360 $ 500,211 $ ( 701,761 ) $ ( 1,326 ) $ ( 202,516 ) Net loss — — — ( 2,315 ) — ( 2,315 ) Foreign currency translation adjustments, net — — — — ( 474 ) ( 474 ) Shares issued under employee incentive plans, net 671 8 ( 178 ) — — ( 170 ) Stock-based compensation — — 2,365 — — 2,365 Balance, September 30, 2019 36,717 $ 368 $ 502,398 $ ( 704,076 ) $ ( 1,800 ) $ ( 203,110 ) Balance, June 30, 2020 39,905 $ 399 $ 519,235 $ ( 713,900 ) $ ( 1,235 ) $ ( 195,501 ) Net loss — — — ( 4,592 ) — ( 4,592 ) Foreign currency translation adjustments, net — — — — 722 722 Shares issued under employee stock purchase plan 133 2 537 — — 539 Shares issued under employee incentive plans, net 702 7 ( 7 ) — — — Stock-based compensation — — 2,592 — — 2,592 Balance, September 30, 2020 40,740 $ 408 $ 522,357 $ ( 718,492 ) $ ( 513 ) $ ( 196,240 ) See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit Six Months Ended Shares Amount Balance, March 31, 2019 36,040 $ 360 $ 499,224 $ ( 697,954 ) $ ( 1,410 ) $ ( 199,780 ) Net loss — — — ( 6,122 ) — ( 6,122 ) Foreign currency translation adjustments, net — — — — ( 390 ) ( 390 ) Shares issued under employee incentive plans, net 677 8 ( 178 ) — — ( 170 ) Stock-based compensation — — 3,352 — — 3,352 Balance, September 30, 2019 36,717 $ 368 $ 502,398 $ ( 704,076 ) $ ( 1,800 ) $ ( 203,110 ) Balance, March 31, 2020 39,905 $ 399 $ 505,762 $ ( 703,164 ) $ ( 1,522 ) $ ( 198,525 ) Net loss — — — ( 15,328 ) — ( 15,328 ) Foreign currency translation adjustments — — — — 1,009 1,009 Shares issued under employee stock purchase plan 133 2 537 — — 539 Shares issued under employee incentive plans, net 702 7 ( 7 ) — — — Warrants issued related to long-term debt — — 11,515 — — 11,515 Stock-based compensation — — 4,550 — — 4,550 Balance, September 30, 2020 40,740 $ 408 $ 522,357 $ ( 718,492 ) $ ( 513 ) $ ( 196,240 ) See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Page Note 1: Description of Business and Summary of Significant Accounting Policies 7 Note 2: Revenue 8 Note 3: Inventories 10 Note 4: Long-Term Debt 11 Note 5: Leases 13 Note 6: Restructuring Charges 14 Note 7: Net Loss Per Share 14 Note 8: Income Taxes 15 Note 9: Commitments and Contingencies 15 Note 10: Fair Value of Financial Instruments 16 6 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), was founded in 1980 and reincorporated in Delaware in 1987, and is headquartered in San Jose, California. The Company is a leader in storing and managing digital video and other forms of unstructured data, delivering top streaming performance for video and rich media applications, along with low-cost, long-term storage systems for data protection and archiving. The Company helps customers around the world capture, create and share digital data and preserve and protect it for decades. The Company’s software-defined, hyperconverged storage solutions span from non-volatile memory express (“NVMe”), to solid state drives, (“SSD”), hard disk drives, (“HDD”), tape and the cloud and are tied together leveraging a single namespace view of the entire data environment. The Company works closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving needs. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. All intercompany balances and transactions have been eliminated. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included within the Company's most recent Annual Report on Form 10-K. The unaudited consolidated interim financial statements reflect all adjustments, consisting only of normal and recurring items, necessary to present fairly our financial position as of September 30, 2020, the results of operations and comprehensive loss and changes in stockholder's deficit for the three and six months ended September 30, 2020 and 2019, and the statement of cash flows for the six months ended September 30, 2020 and 2019. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations. COVID-19 Risks and Uncertainties Quantum is subject to the risks arising from COVID-19 which have caused substantial financial market volatility and have adversely affected both the U.S. and the global economy. For many of our customers, the COVID-19 pandemic has significantly affected their business. Movie and television production has decreased significantly, professional and collegiate sports seasons have been postponed or cancelled, and many corporations and enterprises have put information technology spending on hold while they assess the short- and long-term impact of the pandemic. While our supply chain remains intact and operating, we have experienced issues related to our logistics network. The reduced capacity within and across freight lanes (aircraft, personnel, customs clearance, etc.) has caused late deliveries from re-routes and mis-shipments, as well as increased expedite and other charges to deliver and receive products. To date, the Company has experienced minimal impact on product availability, although future capacity constraints across the network due to lost capacity from factory down time, closures, as well as reduced staff and demand signal fluctuations are expected to impact product availability in the months and possibly quarters to come. Quantum believes that these social and economic impacts have had a negative effect on sales due to the decline in customers' ability or willingness to purchase its products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. The Company’s management continues to actively monitor the situation and may take further actions altering its business operations that are determined to be in the best interests of its employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. Use of Estimates 7 Table of Contents Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with GAAP. These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented with consideration given to the potential impacts of COVID-19 pandemic. However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that may result from the pandemic. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Inputs are unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our financial instruments consist of Level 1 assets and Level 2 liabilities. Recently Adopted Accounting Pronouncements The Company adopted the guidance in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses of Financial Instruments ("CECL") on April 1, 2020. The ASU requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses over the lifetime of the asset rather than incurred losses. The adoption of ASU 2016-13 did not have a material impact on the condensed consolidated financial statements. The Company adopted the guidance in ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract on April 1, 2020. The ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancelable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The adoption of ASU 2018-15 did not have a material impact on the condensed consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In August 2020, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. We plan to adopt this pronouncement for our fiscal year beginning March 31, 2021, and we do not expect it to have a material effect on our consolidated financial statements. NOTE 2: REVENUE 8 Table of Contents Based on how the Company manages its business, the Company has determined that it currently operates in one reportable segment. The Company operates in three geographic regions: (a) Americas; (b) Europe, Middle East and Africa (“EMEA”); and (c) Asia Pacific (“APAC”). Revenue by geography is based on the location of the customer from which the revenue is earned. In the following table, revenue is disaggregated by major product offering and geographies (in thousands): Three Months Ended September 30, Six Months Ended September 30, 2020 2019 1 2020 2019 1 Americas 2 Primary storage systems $ 16,933 $ 16,352 $ 23,792 $ 25,771 Secondary storage systems 9,317 16,004 17,993 40,296 Device and media 6,069 9,348 12,431 18,019 Service 19,399 20,366 37,994 41,936 Total revenue 51,718 62,070 92,210 126,022 EMEA Primary storage systems 2,798 3,388 5,094 7,226 Secondary storage systems 6,352 8,079 12,968 17,976 Device and media 4,745 6,640 8,767 10,173 Service 10,227 9,828 20,042 19,051 Total revenue 24,122 27,935 46,871 54,426 APAC Primary storage systems 879 1,559 1,938 2,925 Secondary storage systems 3,234 4,721 6,434 8,244 Device and media 523 2,039 1,120 3,296 Service 1,868 2,207 3,844 4,794 Total revenue 6,504 10,526 13,336 19,259 Consolidated Primary storage systems 20,610 21,299 30,824 35,922 Secondary storage systems 18,903 28,804 37,395 66,516 Device and media 11,337 18,027 22,318 31,488 Service 31,494 32,401 61,880 65,781 Royalty 3 3,477 5,258 6,709 11,712 Total revenue $ 85,821 $ 105,789 $ 159,126 $ 211,419 1 Primary and Secondary storage system revenue has been adjusted for September 30, 2019 due to certain reclassifications from Primary to Secondary storage systems. 2 Revenue for Americas geographic region outside of the United States is not significant. 3 Royalty revenue is not allocable to geographic regions. Contract Balances The following table presents the Company’s contract liabilities and certain information related to this balance as of and for the six months ended September 30, 2020 (in thousands): 9 Table of Contents September 30, 2020 Contract liabilities (deferred revenue) $ 106,350 Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period 51,542 Remaining Performance Obligations Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and contractually agreed upon amounts, yet to be invoiced, that will be recognized as revenue in future periods. Remaining performance obligations are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, adjustments for revenue that have not materialized and foreign exchange adjustments. The Company applied the practical expedient in accordance within ASC 606, Revenue from Contracts with Customers (“ASC 606”), to exclude amounts for variable consideration constituting a sale- or usage-based royalty promised in exchange for a license of intellectual property from remaining performance obligations. Remaining performance obligations consisted of the following (in thousands): Current Non-Current Total As of September 30, 2020 $ 86,653 $ 42,598 $ 129,251 The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months. NOTE 3: INVENTORIES Manufacturing and service inventories consist of the following (in thousands): Manufacturing inventories September 30, 2020 March 31, 2020 Finished goods: Manufactured finished goods $ 20,223 $ 15,790 Distributor inventory 286 504 Total finished goods 20,509 16,294 Work in progress 2,833 1,001 Raw materials 12,540 11,901 Total manufacturing inventories $ 35,882 $ 29,196 Service parts inventories September 30, 2020 March 31, 2020 Finished goods $ 17,924 $ 15,845 Component parts 5,287 4,657 Total service parts inventories $ 23,211 $ 20,502 10 Table of Contents NOTE 4: LONG-TERM DEBT The Company’s long-term debt consisted of the following (in thousands): September 30, 2020 March 31, 2020 Senior Secured Term Loan $ 185,208 $ 165,208 Amended PNC Credit Facility — 2,620 Paycheck Protection Program Loan 10,000 — Less: current portion ( 1,388 ) ( 7,321 ) Less: unamortized debt issuance costs (1) ( 22,810 ) ( 13,660 ) Long-term debt, net $ 171,010 $ 146,847 (1) The unamortized debt issuance costs related to the Senior Secured Term Loan are presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying condensed consolidated balance sheets. Unamortized debt issuance costs related to the Amended PNC Credit Facility are presented within other assets on the accompanying condensed consolidated balance sheets. Senior Secured Term Loan On December 27, 2018, the Company entered into a senior secured term loan totaling $ 165.0 million with U.S. Bank, National Association (the “Senior Secured Term Loan”). In connection with the Senior Secured Term Loan, the Company amended its existing Revolving Credit Facility with PNC, providing for borrowing under loans up to a maximum principal amount of the lesser of: (a) $ 45.0 million or (b) the amount of the borrowing base (the “Amended PNC Credit Facility”). The maturity date under the Senior Secured Term Loan and the Amended PNC Credit Facility (collectively, the “Credit Agreements”) is December 27, 2023. On March 30, 2020, the Company entered into an amendment to the Senior Secured Term Loan (the “March 30, 2020 Amendment”) which included deferral of payment of the scheduled amortization payment of $ 0.4 million due on March 31, 2020 to April 1, 2020; and, (b) deferral of payment of the interest due on March 31, 2020 to April 1, 2020. On March 31, 2020, the Company entered into an additional amendment to the Senior Secured Term Loan (the “March 31, 2020 Amendment”) which, among other things, included (a) payment deferral of the scheduled amortization payment of $ 0.4 million due on April 1, 2020 to June 30, 2020; (b) payment of $ 1.9 million of the interest due on April 1, 2020 (of the total interest due of $ 5.0 million) in kind rather than in cash; and (c) the waiver of compliance with the total net leverage ratio covenant, as defined in the Senior Secured Term Loan agreement. On June 16, 2020, the Company entered into an amendment to the Senior Secured Term Loan (the "June 2020 Amendment" and collectively with the March 30, 2020 Amendment and March 31, 2020 Amendment, (the “Term Loan Amendments”). The June 2020 Amendment provided an additional borrowing of $ 20.0 million which was immediately drawn in full. The amendment also (a) waived the excess cash flow payment (the “ECF Payment”), as defined in the Senior Secured Term Loan agreement, of $ 5.3 million for the year ended March 31, 2020; (b) deferred payment of the scheduled amortization payments due on June 30, 2020, September 30, 2020, and December 31, 2020 until the maturity date; (c) amended the definition of “EBITDA” to, among other things, add an add-back for certain costs, expenses and fees incurred in connection with the transactions contemplated by the amendment; (d) waived compliance with the total net leverage ratio, fixed charge coverage ratio, minimum liquidity and minimum EBITDA financial covenants for the quarters ending on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021; (e) added a financial covenant that requires a minimum monthly average undrawn availability of $ 7.0 million under the Amended PNC Credit Facility during the period from June 30, 2020 through and including May 31, 2021; and (f) amended the covenant levels for the total net leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter ending June 30, 2021. The June 2020 Amendment modified the equity clawback provision to allow the Company to prepay up to 50 % of the aggregate principal amount of the outstanding Senior Secured Term Loan balance with cash proceeds of a public offering of the Company’s common stock at a prepayment premium of 5 % of the principal amount being repaid (the “Equity Clawback”). The amendment also added an exit fee of 2 % of the aggregate principal amount repaid excluding amounts repaid that are subject to the Equity Clawback. In connection with the June 2020 Term Loan Amendment, the Company issued to the lenders warrants (the “2020 Term Loan Warrants”) to purchase 3,400,000 shares of the Company’s common stock, at an exercise price of $ 3.00 per share. The exercise price and the number of shares underlying the 2020 Term Loan Warrants are subject to adjustment in the event of specified events, including dilutive issuances of common stock linked equity instruments at a price lower than the exercise price of the warrants, a subdivision or combination of the Company’s common 11 Table of Contents stock, a reclassification of the Company’s common stock or specified dividend payments. The 2020 Term Loan Warrants are exercisable until June 16, 2030. Upon exercise, the aggregate exercise price may be paid, at each warrant holder’s election, in cash or on a net issuance basis, based upon the fair market value of the Company’s common stock at the time of exercise. The Company accounted for the Term Loan Amendments as modifications of the Senior Secured Term Loan. In connection with the modifications, the Company incurred $ 11.9 million in costs including $ 11.3 million related to the value of the 2020 Term Loan Warrants and $ 0.6 million in fees paid to the lenders. These debt issuance costs are reflected as a reduction to the carrying amount of the Senior Secured Term Loan and are amortized to interest expense over the remaining loan term. Approximately $ 0.8 million in third party costs were expensed related to the Term Loan Amendments. Amended PNC Credit Facility On April 3, 2020, the Company entered into an amendment to the Amended PNC Credit Facility (the “April 2020 PNC Amendment”), which amended certain terms, including to waive compliance with the total net leverage ratio and total leverage ratio covenants for the quarter ending March 31, 2020. On June 16, 2020, the Company entered into an amendment to the Amended PNC Credit Facility (the “June 2020 PNC Amendment” and collectively with the April 2020 PNC Amendment, the “PNC Amendments” and including the Term Loan Amendments, the “Amendments”). The amendment amended certain terms, including: (a) the definition of “EBITDA” to, among other things, add an add-back for certain costs, expenses and fees incurred in connection with the transactions contemplated by the amendment; (b) waived compliance with the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, minimum liquidity and minimum EBITDA financial covenants for the quarters ending on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021; (c) added a financial covenant that requires a minimum monthly average undrawn availability level of $ 7.0 million for the period from June 30, 2020 through and including May 31, 2021; (d) added a financial covenant that requires a minimum liquidity of not less than $ 10.0 million at the end of each quarter and a minimum average liquidity level $ 10.0 million for the ninety days preceding the last day of each quarter, beginning with the quarter ending June 30, 2021; (e) amended the covenant levels for the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter ending June 30, 2021; and (f) continued to include a covenant that requires a minimum of $ 5.0 million of PNC qualified cash at all times. The June 2020 PNC Amendment also adjusted the applicable margin for advances under the Amended PNC Credit Facility such that (i) advances designated as “Domestic Rate Loans” and “Swing Loans” will have an applicable margin of (a) 4.50 % for the period from the June 16, 2020 until the date quarterly financial statements are delivered to PNC for the fiscal quarter ending June 30, 2021 and (b) thereafter, ranging from 3.50 % to 4.50 % based on the Company’s applicable total leverage ratio and (ii) advances designated as “LIBOR Rate Loans” will have an applicable margin of (a) 5.50 % for the period from June 16, 2020, until the date quarterly financial statements are delivered to PNC for the fiscal quarter ending June 30, 2021 and (b) thereafter, ranging from 4.50 % to 5.50 % based on the Company’s applicable total leverage ratio. The Company accounted for the PNC Amendments as modifications of the Amended PNC Credit Facility. In connection with the modifications, the Company incurred $ 0.5 million in fees paid to the lenders which was recorded to other assets and is amortized to interest expense over the remaining term of the Amended PNC Credit Facility. Registration Rights Agreement In connection with the June 2020 Term Loan Amendment, the Company entered into an amended and restated registration rights agreement (the “Amended Registration Rights Agreement”) with the holders of the warrants previously issued to the Senior Secured Term Loan lenders in December 2018 and the 2020 Term Loan Warrants (collectively, the “Term Loan Warrants”). The Amended Registration Rights Agreement grants the holders of the Term Loan Warrants certain registration rights for the shares of common stock issuable upon the exercise of the applicable Term Loan Warrants, including (a) the ability of a holder to request that the Company file a Form S-1 registration statement with respect to at least 40 % of the registrable securities held by such holder as of the issuance date of the applicable Term Loan Warrants; (b) the ability of a holder to request that the Company file a Form S-3 registration statement with respect to outstanding registrable securities if at any time the Company is eligible to use a Form S-3 registration statement; and (c) certain piggyback registration rights related to potential future equity offerings of the Company, subject to certain limitations. 12 Table of Contents As of September 30, 2020, the interest rates on the Senior Secured Term Loan and the Amended PNC Credit Facility were 12.0 % and 7.8 %, respectively. As of September 30, 2020, the Amended PNC Credit Facility had a borrowing base of $ 23.6 million, of which $ 21.8 million was available at that date. As of September 30, 2020, the Company was required to maintain a $ 5.0 million restricted cash reserve as part of the Amended PNC Credit Facility. This balance is presented as long-term restricted cash within the accompanying condensed consolidated balance sheet as of September 30, 2020. Paycheck Protection Program On April 13, 2020, the Company entered into a Paycheck Protection Program (“PPP”) Term Loan (“PPP Loan”) effective April 11, 2020 with PNC in an aggregate principal amount of $ 10.0 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The PPP Loan bears interest at a fixed rate of 1 % per annum, with interest deferred up to a maximum of 10 months after the expiration of the covered period, as defined in the PPP Loan agreement, payable monthly thereafter. The PPP Loan has an initial term of two years and is unsecured and guaranteed by the Small Business Administration. Under the terms of the PPP Note, the Company may apply for forgiveness of the amount due on the PPP Loan. The Company used the proceeds from the PPP Loan for qualifying expenses as defined in the PPP and has applied for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, the Company cannot assure at this time that the PPP Loan will be forgiven partially or in full. NOTE 5: LEASES Supplemental balance sheet information related to leases is as follows (in thousands): Operating leases September 30, 2020 March 31, 2020 Operating lease right-of-use asset $ 10,597 $ 12,689 Other accrued liabilities 2,720 3,065 Operating lease liability 9,114 10,822 Total operating lease liabilities $ 11,834 $ 13,887 Components of lease cost were as follows (in thousands): Three Months Ended September 30, Six Months Ended September 30, Lease Cost 2020 2019 2020 2019 Operating lease cost $ 1,338 $ 1,304 $ 2,669 $ 2,576 Variable lease cost 211 147 423 212 Short-term lease cost 39 29 92 31 Total lease cost $ 1,588 $ 1,480 $ 3,184 $ 2,819 13 Table of Contents Maturity of Lease Liabilities Operating Leases For the fiscal year ended March 31, 2021, excluding the six months ended September 30, 2020 $ 2,099 2022 3,813 2023 2,763 2024 2,598 2025 2,310 Thereafter 2,935 Total lease payments $ 16,518 Less: imputed interest ( 4,684 ) Present value of lease liabilities $ 11,834 Lease Term and Discount Rate September 30, 2020 March 31, 2020 Weighted average remaining operating lease term (years) 4.82 4.99 Weighted average discount rate for operating leases 13.96 % 13.91 % Operating cash outflows related to operating leases totaled $ 1.3 million for the six months ended September 30, 2020 and 2019. NOTE 6: RESTRUCTURING CHARGES Costs accrued related to restructuring are classified within accrued liabilities on the condensed consolidated balance sheets. The following table summarizes the restructuring activities for the six months ended September 30, 2020 and 2019 (in thousands): Severance and Benefits Facilities Total Balance as of March 31, 2020 $ — $ — $ — Restructuring costs 2,637 — 2,637 Cash payments ( 2,397 ) — ( 2,397 ) Balance as of September 30, 2020 $ 240 $ — $ 240 Balance as of March 31, 2019 $ — $ 2,876 $ 2,876 Restructuring costs — 826 826 Adjustments to prior estimates — 258 258 Cash payments — ( 3,661 ) ( 3,661 ) Balance as of September 30, 2019 $ — $ 299 $ 299 NOTE 7: NET LOSS PER SHARE The following outstanding stock-based instruments which are comprised of performance share units, restricted stock units, stock options and warrants were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive (in thousands): 14 Table of Contents Three Months Ended September 30, Six Months Ended September 30, 2020 2019 2020 2019 8,020 8,625 7,180 6,860 The dilutive impact related to common shares from restricted stock units, stock options and warrants is determined by applying the treasury stock method of determining value to the assumed vesting of outstanding restricted stock units and the exercise of outstanding options and warrants. The dilutive impact related to common shares from contingently issuable performance share units is determined by applying a two-step approach using both the contingently issuable share guidance and the treasury stock method. For the three and six months ended September 30, 2020, there were 1.6 million and 0.5 million contingently issuable market based and performance based restricted stock units, respectively, excluded from the calculation of diluted net income (loss) per share, as their market and performance conditions had not yet been achieved. These shares will be earned based on the Company’s achievement of certain average stock price and performance targets in addition to a time-based vesting period. NOTE 8: INCOME TAXES The effective tax rate for the three and six months ended September 30, 2020 was - 4.6 % and - 4.2 %, respectively as compared to - 11.7 % and - 10.5 % in the three and six months ended September 30, 2019. Income tax provisions for each of these periods reflect expenses for foreign and state taxes and differed from the federal statutory tax rate of 21% in both periods due primarily to unbenefited losses experienced in jurisdictions with valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions. As of September 30, 2020, including interest and penalties, the Company had $ 109.8 million of unrecognized tax benefits, $ 91.5 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of September 30, 2020, the Company had accrued interest and penalties related to these unrecognized tax benefits of $ 1.2 million. The Company recognizes interest and penalties related to income tax matters in the income tax provision in the condensed consolidated statements of operations. As of September 30, 2020, $ 103.2 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the condensed consolidated balance sheets and $ 6.6 million (including interest and penalties) were recorded in other long-term liabilities in the condensed consolidated balance sheets. During the next 12 months, it is reasonably possible that approximately $ 9.2 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations. NOTE 9: COMMITMENTS AND CONTINGENCIES Commitments to Purchase Inventory The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon the Company’s forecast of customer demand. The Company has similar arrangements with certain other suppliers. The Company is responsible for the financial impact on the supplier or contract manufacturer of any reduction or product mix shift in the forecast relative to materials that the third party had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for inventory in excess of current customer demand or for costs of excess or obsolete inventory. As of September 30, 2020, the Company had issued non-cancelable commitments for $ 21.3 million to purchase inventory from its contract manufacturers and suppliers. Legal Proceedings On July, 22 2016, Realtime Data LLC d/b/a IXO (“Realtime Data”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patents Nos. 15 Table of Contents 7,161,506, 7,378,992, 7,415,530, 8,643,513, 9,054,728, and 9,116,908. The lawsuit has been transferred to the U.S. District Court for the Northern District of California for further proceedings. Realtime Data asserts that the Company has incorporated Realtime Data’s patented technology into its compression products and services. Realtime Data seeks unspecified monetary damages and other relief that the Court deems appropriate. On July 31, 2017, the District Court stayed proceedings in this litigation pending decision in Inter Partes Review proceedings before the Patent Trial and Appeal Board relating to the Realtime patents. In those proceedings the asserted claims of the ’506 patent, the ’992 patent, and the ’513 patent were found unpatentable. In addition, on July 19, 2019, all claims of the ’728 patent, the ’530 patent, and the ’908 patent were found invalid under 35 U.S.C. § 101. The stay remains in effect pending Realtime’s appeal of those rulings. The Company believes the probability that this lawsuit will have a material adverse effect on our business, operating results or financial condition is remote. On July 14, 2020, Starboard Value LP, Starboard Value and Opportunity Master Fund Ltd., Starboard Value and Opportunity S LLC, and Starboard Value and Opportunity C LP (collectively, “Starboard”) filed a lawsuit against Quantum Corporation, Quantum’s former CEO and board member Jon Gacek, and former Quantum board member Paul Auvil in the California Superior Court in Santa Clara County. The complaint alleges that between 2012 and 2014, Starboard purchased a large number of shares of Quantum’s common stock, obtained three seats on Quantum’s board of directors and then, in July 2014, entered into an agreement with Quantum whereby Starboard would not seek control of Quantum’s board but would instead support Quantum’s slate of board nominees so long as Quantum met certain performance objectives by the end of fiscal 2015. The complaint further alleges that Quantum did not meet those performance objectives but hid that by improperly recognizing revenue in fiscal 2015, with the alleged objective of entrenching Messrs. Gacek and Auvil and then-current management. Mr. Gacek resigned from the board effective May 1, 2017 and as CEO effective November 7, 2017; Mr. Auvil resigned from the board effective November 8, 2017. The complaint’s accounting allegations largely repeat allegations made in now-concluded shareholder class actions, shareholder derivative actions and SEC investigation, the settlement of which we previously reported in the Company’s Form 10-Q filed with the SEC on January 29, 2020 and Form 10-K filed with the SEC on August 6, 2019 (among other SEC filings). Based on these allegations, the complaint asserts putative claims for intentional misrepresentation/fraud in the inducement, intentional misrepresentation/fraud and negligent misrepresentation against Quantum, Gacek and Auvil, false promise/promissory fraud and unjust enrichment against Quantum and breach of fiduciary duty against Gacek and Auvil. Starboard is demanding a jury trial, and seeks unspecified damages including punitive damages, an award of rescission or rescissory damages, and award of restitution in an amount necessary to compensate for the alleged unjust enrichment of Quantum, attorney fees and costs and other relief deemed just or appropriate by the court. On September 14, 2020, all defendants filed a joint motion to dismiss this action on grounds of forum non conveniens and the mandatory Delaware forum selection clauses set forth in the contracts between Starboard and Quantum. The parties have filed a stipulation, which is currently under review by the Court; if approved, the stipulation would provide for a briefing schedule on the motion to continue through December 4, 2020, with oral argument on the motion to be held the week of December 14, 2020. At this time, the Company is unable to estimate the range of poss ible outcomes with respect to this matter. Other Commitments Additionally, from time to time, the Company is a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, the Company does not expect that the ultimate outcome of any of these other currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, cash flows or financial position. NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS The Company’s assets, measured and recorded at fair value on a recurring basis, may consist of money market funds which are included in cash and cash equivalents in the Condensed Consolidated Balance Sheets and are valued using quoted market prices (level 1 fair value measurements) at the respective balance sheet dates. No impairments charges were recognized for non-financial assets in the six months ended September 30, 2020 and 2019. The Company has no non-financial liabilities measured and recorded at fair value on a non-recurring basis. Long-term Debt The table below represents the carrying value and total estimated fair value of long-term debt as of September 30, 2020 and 2019. The fair value has been classified as Level 2 within the fair value hierarchy. 16 Table of Contents September 30, 2020 2019 Carrying Value Fair Value Carrying Value Fair Value Senior Secured Term Loan $ 185,208 $ 185,208 $ 170,739 $ 170,764 17 Table of Contents