QUANTUM CORP /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and other information included in this quarterly report and our annual report for the year ended March 31, 2020. In particular, the disclosure contained in Item 1A in our annual report, as updated by Part II, Item 1A in this quarterly report, may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources. The following discussion contains forward-looking statements, such as statements regarding COVID-19's anticipated impacts on our business, our future operating results and financial position, our business strategy and plans, and our objectives for future operations. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. OVERVIEW We are a leader in storing and managing digital video and other forms of unstructured data. We help customers around the world to ingest, process, and analyze digital data at high speed, and preserve and protect it for decades. Our customers include some of the world’s largest corporations, government agencies, service providers, broadcasters, movie studios, sports leagues and teams, and enterprises in all industries. We work closely with a broad network of distributors, VARs, DMRs, OEMs and other suppliers to solve our customers most pressing business challenges. We earn our revenue from the sale of products and services through our channel partners and our sales force. Our products are sold under both the Quantum brand name and the names of various OEM providers. Our portfolio of solutions includes: • StorNext scale out file storage : We offer a line of products designed for the highest speed ingest, processing, and analysis of video and other forms of unstructured data. Powered by the StorNext file system software and data management platform, this product line includes new NVMe flash storage servers (F-series) and hybrid SSD/HDD storage arrays. • Video Surveillance Systems : We offer a broad portfolio of solutions designed for video surveillance and physical security, including network video recording servers (NVRs), hyperconverged (HCI) storage servers to host multiple physical security workloads, GPU-based analytics servers, and file and object storage systems for large scale surveillance archives. • ActiveScale Object Storage : We also sell massively scalable object storage systems used to preserve and protect data with high levels of data durability. • Tape Storage: We provide low cost, secure storage systems for long term archiving and ransomware protection. We provide both the storage systems and sells tape media under the Quantum brand. • Backup Storage Systems : We offer high-performance, scalable storage for backup and multi-site disaster recovery. • Quantum Services : We offer a full line of services including managed services and Storage-as-a-Service offerings, as well as maintenance, implementation, training and consulting services. COVID-19 IMPACT AND ASSOCIATED ACTIONS Since the beginning of March 2020, COVID-19 has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders. These measures may remain in place for a significant period of time. In light of these events, we have taken actions to protect the health and safety of our employees while continuing to serve our global customers as an essential business. We have implemented more thorough sanitation practices as outlined by health organizations and instituted social distancing policies at our locations around the world, including working from home, limiting the number of employees attending in person meetings, reducing the number of people in our sites at any one time, and suspending employee travel. 18 Table of Contents For many of our customers, the COVID-19 pandemic has significantly affected their business. Movie and television production has been paused, 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, we have 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. We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our 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. We expect COVID-19 to significantly impact our financial condition, results of operations, and liquidity through at least our third quarter and likely much longer. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See “The recent COVID-19 pandemic could adversely affect our business, results of operations and financial condition” in Part II, Item 1A, Risk Factors, of our most recent Annual Report on Form 10-K for more information regarding the risks we face as a result of the COVID-19 pandemic. NON-U.S. GAAP FINANCIAL MEASURES To provide investors with additional information regarding our financial results, we have presented Adjusted EBITDA and Adjusted Net Income (Loss), non-U.S. GAAP financial measures defined below. Adjusted EBITDA is a non-U.S. GAAP financial measure defined by us as net loss before interest expense (net), provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring charges, long-term debt related costs, costs related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: – Restatement in our Annual Report on Form 10-K for the year ended March 31, 2019, and other non-recurring expenses. Adjusted Net Income (Loss) is a non-U.S. GAAP financial measure defined by us as net loss before restructuring charges, stock-based compensation expense, long-term debt related costs, costs related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: – Restatement in the Annual Report on Form 10-K for the year ended March 31, 2019 and other non-recurring (income) expenses. The Company calculates Adjusted Net Income (Loss) per Basic and Diluted share using the Company’s above-referenced definition of Adjusted Net Income (Loss). The Company considers non-recurring expenses to be expenses that have not been incurred within the prior two years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses. We have provided below a reconciliation of Adjusted EBITDA and Adjusted Net Income (Loss) to Net Income (Loss), the most directly comparable U.S. GAAP financial measure. We have presented Adjusted EBITDA because it is a key measure used by our management and the board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operating plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business performance. We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Basic and Diluted Share serve as appropriate measures to be used in evaluating the performance of our business and help our investors better compare our operating performance over multiple periods. Accordingly, we believe that Adjusted EBITDA and Adjusted Net Income (Loss) provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and our board of directors. 19 Table of Contents Our use of Adjusted EBITDA and Adjusted Net Income (Loss) have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows: • Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; • Adjusted EBITDA does not reflect: (1) interest and tax payments that may represent a reduction in cash available to us; (2) capital expenditures, future requirements for capital expenditures or contractual commitments; (3) changes in, or cash requirements for, working capital needs; (4) the potentially dilutive impact of stock-based compensation expense; (5) potential future costs related to our long-term debt; (6) potential future restructuring expenses; or (6) potential future costs related to our financial statement restatement and other related activities; • Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) the potentially dilutive impact of stock-based compensation expense; (3) potential future costs related to our long-term debt; or (4) potential future costs related to our financial statement restatement and other related activities; and • Other companies, including companies in our industry, may calculate Adjusted EBITDA, Adjusted Net Income (Loss) or similarly titled measures differently, which reduces its usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA and Adjusted Net Income (Loss) along with other U.S. GAAP-based financial performance measures, including various cash flow metrics and our U.S. GAAP financial results. 20 Table of Contents The following is a reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure, Net Loss (in thousands): Three Months Ended Six Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Net loss $ (4,592) $ (2,315) $ (15,328) $ (6,122) Interest expense, net 7,578 6,347 14,015 12,653 Provision for income taxes 202 243 622 581 Depreciation and amortization expense 1,295 1,013 2,580 2,034 Stock-based compensation expense 2,591 2,365 4,549 3,352 Long-term debt related costs 203 — 1,169 — Restructuring charges 1,585 821 2,637 1,084 Cost related to financial restatement and related activities — 4,188 — 12,179 Adjusted EBITDA $ 8,862 $ 12,662 $ 10,244 $ 25,761 The following is a reconciliation of Adjusted Net Income (Loss) to the most comparable U.S. GAAP financial measure, Net Loss (in thousands): Three Months Ended Six Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Net loss $ (4,592) $ (2,315) $ (15,328) $ (6,122) Restructuring charges 1,585 821 2,637 1,084 Stock-based compensation 2,591 2,365 4,549 3,352 Long-term debt related costs 203 — 1,169 — Cost related to financial restatement and related activities — 4,188 — 12,179 Adjusted net income (loss) $ (213) $ 5,059 $ (6,973) $ 10,493 Adjusted net income (loss) per share: Basic $ (0.01) $ 0.14 $ (0.17) $ 0.29 Diluted $ (0.01) $ 0.11 $ (0.17) $ 0.24 Weighted average shares outstanding: Basic 40,286 36,297 40,097 36,172 Diluted 40,286 44,923 40,097 43,032 21 Table of Contents RESULTS OF OPERATIONS Three Months Ended September 30, Six Months Ended September 30, (in thousands) 2020 2019 2020 2019 Total revenue $ 85,821 $ 105,789 $ 159,126 $ 211,419 Total cost of revenue (1) 47,087 62,266 89,540 122,070 Gross profit 38,734 43,523 69,586 89,349 Operating expenses Research and development (1) 10,233 9,350 24,723 17,733 Sales and marketing (1) 13,153 14,824 21,825 30,680 General and administrative (1) 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) (312) 76 (697) 165 Interest expense (7,578) (6,347) (14,015) (12,653) 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) (1) Includes stock-based compensation as follows: Three Months Ended September 30, Six Months Ended September 30, (in thousands) 2020 2019 2020 2019 Cost of revenue $ 227 $ 81 $ 396 $ 173 Research and development 591 143 1,062 265 Sales and marketing 495 291 832 408 General and administrative 1,278 1,850 2,259 2,506 Total $ 2,591 $ 2,365 $ 4,549 $ 3,352 Comparison of the Three Months Ended September 30, 2020 and 2019 Revenue Three Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 1 % of revenue $ Change % Change Product revenue Primary storage systems $ 20,610 24 % $ 21,299 20 % $ (689) (3) % Secondary storage systems 18,903 22 28,804 27 (9,901) (34) Devices and media 11,337 13 18,027 17 (6,690) (37) Total product revenue $ 50,850 59 % $ 68,130 64 % $ (17,280) (25) Service revenue 31,494 37 32,401 31 (907) (3) Royalty revenue 3,477 4 5,258 5 (1,781) (34) Total revenue $ 85,821 100 % $ 105,789 100 % $ (19,968) (19) 1 Primary and Secondary storage system revenue has been adjusted for the three months ended September 30, 2019 due to certain reclassifications from Primary to Secondary storage systems. Product revenue 22 Table of Contents In the three months ended September 30, 2020, product revenue decreased $17.3 million, or 25%, as compared to the same period in 2019. Primary storage systems represented $0.7 million of the decrease, driven by declines in the media and entertainment industry as a result of the COVID-19 pandemic. Secondary storage systems represented $9.9 million of the decrease, driven primarily by fluctuating purchase cycles with our hyperscale customers. Devices and media represented $6.7 million of the decrease, driven by a lower volume of LTO media sold through our high-volume channel partners. The prior year included a spike in volume as supply issues were resolved between two major vendors in the market. Service revenue We offer a broad range of services including maintenance, implementation and training. Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware. Standard service contracts may be extended or include enhanced service, such as faster service response times. Service revenue decreased 3% in the three months ended September 30, 2020 compared to the same period in 2019 due to a combination of reduced new customer installations and reduced support renewals from our legacy customers. Royalty revenue We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $1.8 million, or 34%, in the three months ended September 30, 2020 compared to the same period in 2019 due to lower overall market volume . Gross Profit and Margin Three Months Ended September 30, (dollars in thousands) 2020 Gross margin % 2019 Gross margin % $ Change Basis point change Product gross profit $ 15,852 31.2 % $ 18,663 27.4 % $ (2,811) 380 Service gross profit 19,405 61.6 19,602 60.5 (197) 110 Royalty gross profit 3,477 100.0 5,258 100.0 (1,781) — Gross profit $ 38,734 45.1 % $ 43,523 41.1 % $ (4,789) 400 Product Gross Margin Product gross margin increased 380 basis points for the three months ended September 30, 2020, as compared with the same period in 2019. This increase was due primarily to a more favorable mix of enterprise products sold, along with a relatively flat operations departmental expense. Service Gross Margin Service gross margin increased 110 basis points for the three months ended September 30, 2020, as compared with the same period in 2019. This increase was primarily the effect of reduced repair costs. Royalty Gross Margin Royalties do not have significant related cost of sales. 23 Table of Contents Operating expenses Three Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 % of revenue $ Change % Change Research and development $ 10,233 11.9 % $ 9,350 8.8 % $ 883 9 % Sales and marketing 13,153 15.3 14,824 14.0 (1,671) (11) General and administrative 10,263 12.0 14,329 13.5 (4,066) (28) Restructuring charges 1,585 1.8 821 0.8 764 93 Total operating expenses $ 35,234 41.1 % $ 39,324 37.2 % $ (4,090) (10) In the three months ended September 30, 2020, research and development expense increased $0.9 million, or 9%, as compared with the same period in 2019. This increase was due in part to an increase in personnel costs due to increased headcount focused on new product development. In the three months ended September 30, 2020, sales and marketing expenses decreased $1.7 million, or 11%, as compared with the same period in 2019. This decrease was largely driven by an overall decrease in compensation and benefits as the result of lower headcount, a decrease in marketing programs and professional services costs, and suspended travel and entertainment expense due to current COVID-19 related restrictions. In the three months ended September 30, 2020, general and administrative expenses decreased $4.1 million, or 28% as compared with the same period in 2019. This decrease was due primarily to higher costs in 2019 related to the financial restatement and related activities. In the three months ended September 30, 2020, restructuring expenses increased $0.8 million, or 93% as compared with the same period in 2019. The increase was the result of a reduction in workforce to improve operational efficiency and rationalize our cost structure. Other Income (Expense) Three Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 % of revenue $ Change % Change Other income (expense) $ (312) 0 % $ 76 — % $ (388) 511 % Interest expense (7,578) (9) (6,347) 6 (1,231) 19 Other income (expense), net during the three months ended September 30, 2020 and 2019 were related primarily to fluctuations in foreign currency exchange rates. In the three months ended September 30, 2020, interest expense increased $1.2 million, or 19%, as compared with the same period in 2019 due primarily to a higher principal balance. Income Taxes Three Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 % of revenue $ Change % Change Income tax provision $ 202 1 % $ 243 — % $ (41) (17) % The income tax provision for the three months ended September 30, 2020 and 2019 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgement is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. 24 Table of Contents Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance. Comparison of the Six Months Ended September 30, 2020 and 2019 Revenue Six Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 1 % of revenue $ Change % Change Product revenue Primary storage systems $ 30,824 19 % $ 35,922 17 % $ (5,098) (14) % Secondary storage systems 37,395 24 66,516 31 (29,121) (44) Devices and media 22,318 14 31,488 15 (9,170) (29) Total product revenue $ 90,537 57 % $ 133,926 63 % $ (43,389) (32) Service revenue 61,880 39 65,781 31 (3,901) (6) Royalty revenue 6,709 4 11,712 6 (5,003) (43) Total revenue $ 159,126 100 % $ 211,419 100 % $ (52,293) (25) 1 Primary and Secondary storage system revenue has been adjusted for the six months ended September 30, 2019 due to certain reclassifications from Primary to Secondary storage systems. Product revenue In the six months ended September 30, 2020, product revenue decreased $43.4 million, or 32%, as compared to the same period in 2019. Secondary storage systems represented $29.1 million of the decrease, driven primarily by fluctuating purchase cycles with our hyperscale customers. Devices and media represented $9.2 million of the decrease, driven by lower volume of LTO media sold through our high-volume channel partners. The prior year included a spike in volume as supply issues were resolved between two major vendors in the market. Primary storage systems represented $5.1 million of the decrease, driven by declines in the media and entertainment industry as a result of the COVID-19 pandemic. Service revenue We offer a broad range of services including maintenance, implementation, and training. Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware. Standard service contracts may be extended or include enhanced service, such as faster service response times. Service revenue decreased 6% in the six months ended September 30, 2020 compared to the same period in 2019 due to a combination of reduced new customer installations and reduced support renewals from our legacy customers. Royalty revenue We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $5.0 million, or 43%, in the six months ended September 30, 2020 compared to the same period in 2019 due to lower overall market volume . 25 Table of Contents Gross Profit and Margin Six Months Ended September 30, (dollars in thousands) 2020 Gross margin % 2019 Gross margin % $ Change Basis point change Product gross profit $ 25,157 27.8 % $ 37,260 27.8 % $ (12,103) — Service gross profit 37,720 61.0 40,377 61.4 (2,657) (40) Royalty gross profit 6,709 100.0 11,712 100.0 (5,003) — Gross profit $ 69,586 43.7 % $ 89,349 42.3 % $ (19,763) 140 Product Gross Margin Product gross margin was flat for the six months ended September 30, 2020, as compared with the same period in 2019. Service Gross Margin Service gross margin decreased 40 basis points for the six months ended September 30, 2020, as compared with the same period in 2019. This decrease was due primarily to total service revenue decreases of 6% with relatively flat corresponding departmental expense. Royalty Gross Margin Royalties do not have significant related cost of sales. Operating expenses Six Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 % of revenue $ Change % Change Research and development $ 24,723 15.5 % $ 17,733 8.4 % $ 6,990 39 % Sales and marketing 21,825 13.7 30,680 14.5 (8,855) (29) General and administrative 20,395 12.8 32,905 15.6 (12,510) (38) Restructuring charges 2,637 1.7 1,084 0.5 1,553 143 Total operating expenses $ 69,580 43.7 % $ 82,402 39.0 % $ (12,822) (16) In the six months ended September 30, 2020, research and development expense increased $7.0 million, or 39%, as compared with the same period in 2019. This increase was due in part to an increase in personnel costs due to increased headcount focused on new product development. In the six months ended September 30, 2020, sales and marketing expenses decreased $8.9 million, or 29%, as compared with the same period in 2019. This decrease was due primarily to a decrease in personnel costs due to lower headcount, a decrease in marketing programs and professional services costs, and suspended travel and entertainment expense due to current COVID-19 related restrictions. In the six months ended September 30, 2020, general and administrative expenses decreased $12.5 million, or 38% as compared with the same period in 2019. This decrease was due primarily to higher costs in 2019 related to the financial restatement and related activities. In the six months ended September 30, 2020, restructuring expenses increased $1.6 million, or 143% as compared with the same period in 2019. The increase was the result of a reduction in workforce to improve operational efficiency and rationalize our cost structure. 26 Table of Contents Other Income (Expense) Six Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 % of revenue $ Change % Change Other income (expense) $ (697) 0 % $ 165 — % $ (862) 522 % Interest expense (14,015) (9) (12,653) 6 (1,362) 11 Other income (expense), net during the six months ended September 30, 2020 and 2019 were related primarily to fluctuations in foreign currency exchange rates. In the six months ended September 30, 2020, interest expense increased $1.4 million, or 11%, as compared with the same period in 2019 due primarily to a higher principal balance. Income Taxes Six Months Ended September 30, (dollars in thousands) 2020 % of revenue 2019 % of revenue $ Change % Change Income tax provision $ 622 — % $ 581 — % $ 41 7 % The income tax provision for the six months ended September 30, 2020 and 2019 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgement is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance. LIQUIDITY AND CAPITAL RESOURCES We consider liquidity in terms of the sufficiency of internal and external cash resources to fund our operating, investing and financing activities. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our balance sheet and amounts available under our Amended PNC Credit Facility (as defined below). We require significant cash resources to meet obligations to pay principal and interest on our outstanding debt, provide for our research and development activities, fund our working capital needs, and make capital expenditures. Our future liquidity requirements will depend on multiple factors, including our research and development plans and capital asset needs. We are 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. We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our 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. We expect the impact of COVID-19 to have a significant impact on our liquidity and capital resources. We had cash and cash equivalents of $12.5 million as of September 30, 2020, compared to $6.4 million as of March 31, 2020. These amounts exclude, as of both dates, $5.0 million in restricted cash that we are required to maintain under the Credit Agreements (as defined below), and $0.8 million of short-term restricted cash. Our outstanding long-term debt amounted to $171.0 million as of September 30, 2020, net of $22.8 million in unamortized debt issuance costs and $1.4 million in current portion of long-term debt, and $146.8 million as of March 31, 2020, net of $13.7 million in unamortized debt issuance costs and $7.3 million in current portion of long-term debt. Included in long-term debt as of September 30, 2020 is $10.0 million borrowed under the Paycheck Protection Program which was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As of 27 Table of Contents September 30, 2020, we had $21.8 million of borrowing availability on our Amended PNC Credit Facility (subject to change based on certain financial metrics). See “—Debt Profile and Covenants” and “—Contractual Obligations” below for further information about our outstanding debt. We are subject to various debt covenants under our Credit Agreements (as defined below). Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations. For additional information about our debt, see the sections entitled “Risk Factors—Risks Related to Our Business Operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020. Cash Flows The following table summarizes our consolidated cash flows for the periods indicated. Six Months Ended September 30, (Dollars in thousands) 2020 2019 Cash provided by (used in): Operating activities $ (19,299) $ (9,656) Investing activities (1,434) (1,315) Financing activities 26,868 5,980 Effect of exchange rate changes (96) 72 Net increase (decrease) in cash and cash equivalents and restricted cash $ 6,039 $ (4,919) Cash Used In Operating Activities Net cash used in operating activities was $19.3 million for the six months ended September 30, 2020. This use of cash is primarily attributable to changes in working capital of $20.0 million driven by the increase in manufacturing and service inventory of $13.6 million and a decrease in deferred revenue of $12.6 million. These were partially offset by an increase in accounts receivable of $7.6 million. The decrease in deferred revenue reflects the seasonal nature of service contract renewals which peak in the fourth fiscal quarter. Net cash used in operating activities was $9.7 million for the six months ended September 30, 2019 which is primarily attributable to a decrease in deferred revenue related to the timing of service contract renewals which are historically more heavily weighted to our third and fourth fiscal quarters. Cash Used in Investing Activities Net cash used in investing activities was $1.4 million in the six months ended September 30, 2020, which was mostly flat compared to the same period in the prior year. Our capital expenditures in both periods consisted primarily of tooling purchases and leasehold improvements. Cash Provided by Financing Activities Net cash provided by financing activities was $26.9 million in the six months ended September 30, 2020 which included Senior Secured Term Loan borrowings of $19.4 million (net of lender fees of $0.6 million), $10.0 million in borrowings under the Paycheck Protection Program and the net pay-down of our Amended PNC Credit Facility. Net cash provided by financing activities was $6.0 million in the six months ended September 30, 2019 related primarily to borrowings under our credit facility. Debt Profile and Covenants PNC Credit Facility 28 Table of Contents We are party to the Amended PNC Credit Agreement, a senior secured revolving credit facility in an available principal amount equal to the lesser of (i) $45.0 million and (ii) the “borrowing base” (as defined under the Amended PNC Credit Agreement). The Amended PNC Credit Facility had a borrowing base of $23.6 million as of September 30, 2020, $21.8 million of which was available to us at that date. On June 16, 2020, we entered into an amendment to the Amended PNC Credit Facility. The amendment, among other things, waived compliance with the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, minimum average liquidity and minimum EBITDA financial covenants for the quarters ending on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, 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, added a financial covenant that requires a minimum liquidity of not less than $10.0 million at the end of each quarter, beginning with the quarter ending June 30, 2021 and 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. The Amended PNC Credit Facility continues to include a covenant that requires a minimum of $5.0 million of PNC qualified cash at all times. Senior Secured Term Loan We are also party to a senior secured term loan facility in an aggregate principal amount of $185.2 million as of September 30, 2020 (the “Senior Secured Term Loan” and together with the Amended PNC Credit Agreement, the “Credit Agreements”). The Senior Secured Term Loan initially provided for borrowings of $165.0 million. The proceeds of the Senior Secured Term Loan were used to repay our previously outstanding long-term debt and fund our working capital requirements. On June 16, 2020, we entered into an amendment to the Senior Secured Term Loan (the "June 2020 Term Loan Amendment"). The amendment provides an additional borrowing of $20.0 million which was immediately drawn in full. The amendment, among other things, 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, 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 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. Paycheck Protection Program On April 13, 2020, we entered into a Paycheck Protection Program (the “PPP”) Term Loan (the “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, we may apply for forgiveness of the amount due on the PPP Loan. We used the proceeds from the PPP Loan for qualifying expenses and have applied for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, we cannot assure at this time that the PPP Loan will be forgiven partially, or in full. Commitments and Contingencies Our contingent liabilities consist primarily of certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. We have little history of costs associated with such indemnification requirements and contingent liabilities associated with product liability may be mitigated by our insurance coverage. In the normal course of business to facilitate transactions of our services and products, we indemnify certain parties with respect to certain matters, such as intellectual property infringement or other claims. We also have indemnification agreements with our current and former officers and directors. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of our indemnification claims, and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our operating results, financial position or cash flows. 29 Table of Contents We are also subject to ordinary course litigation and potential costs related to our financial statement restatement activities and related legal costs. Off Balance Sheet Arrangements Except for the indemnification commitments described under “—Commitments and Contingencies” above, we do not currently have any other off-balance sheet arrangements and do not have any holdings in variable interest entities. Contractual Obligations We have contractual obligations and commercial commitments, some of which, such as purchase obligations, are not recognized as liabilities in our financial statements. There have not been any other material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020. Critical Accounting Estimates and Policies The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. On an ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider certain accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change. Our accounting policies that include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain are summarized in our most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2020 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Critical Accounting Policies.” For additional information on our significant accounting policies, see Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Recently Issued and Adopted Accounting Pronouncements See Note 1 to the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our most recently filed Annual Report on Form 10-K.