QUANTUM CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS QUANTUM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts, unaudited) December 31, 2020 March 31, 2020 Assets Current assets: Cash and cash equivalents $ 11,632 $ 6,440 Restricted cash 766 830 Accounts receivable, net of allowance for doubtful accounts of $ 1,430 and $ 1,247 as of December 31, 2020 and March 31, 2020, respectively 69,440 70,370 Manufacturing inventories 33,854 29,196 Service parts inventories 22,998 20,502 Other current assets 7,946 8,489 Total current assets 146,636 135,827 Property and equipment, net 9,855 9,046 Intangible assets, net 5,503 — Goodwill 3,447 — Restricted cash 5,000 5,000 Right-of-use assets, net 10,096 12,689 Other long-term assets 5,244 3,433 Total assets $ 185,781 $ 165,995 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 30,027 $ 36,949 Deferred revenue 75,442 81,492 Long-term debt, current portion 1,850 7,321 Accrued compensation 19,225 14,957 Other accrued liabilities 18,449 17,535 Total current liabilities 144,993 158,254 Deferred revenue 34,565 37,443 Long-term debt, net of current portion 178,276 146,847 Operating lease liabilities 8,500 10,822 Other long-term liabilities 13,423 11,154 Total liabilities 379,757 364,520 Commitments and contingencies (Note 10) Stockholders' deficit Preferred stock, 20,000 shares authorized; no shares issued as of December 31, 2020 and March 31, 2020, respectively — — Common stock, $ 0.01 par value; 125,000 shares authorized; 41,554 shares issued and outstanding as of December 31, 2020 and 39,905 as of March 31, 2020, respectively 416 399 Additional paid-in capital 526,307 505,762 Accumulated deficit ( 721,161 ) ( 703,164 ) Accumulated other comprehensive income (loss) 462 ( 1,522 ) Total stockholders’ deficit ( 193,976 ) ( 198,525 ) Total liabilities and stockholders’ deficit $ 185,781 $ 165,995 See accompanying Notes to Condensed Consolidated Financial Statements. 1 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts, unaudited) Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Revenue: Product $ 63,021 $ 66,435 $ 153,557 $ 200,361 Service 31,169 32,892 93,049 98,673 Royalty 3,833 3,988 10,543 15,700 Total revenue 98,023 103,315 257,149 314,734 Cost of revenue: Product 43,311 43,672 108,691 140,337 Service 12,433 12,567 36,593 37,972 Total cost of revenue 55,744 56,239 145,284 178,309 Gross profit 42,279 47,076 111,865 136,425 Operating expenses: Research and development 9,589 9,325 29,983 27,058 Sales and marketing 15,294 15,421 40,019 46,101 General and administrative 11,103 10,719 32,928 43,623 Restructuring charges 200 ( 64 ) 2,837 1,020 Total operating expenses 36,186 35,401 105,767 117,802 Income from operations 6,093 11,675 6,098 18,623 Other expense, net ( 698 ) ( 611 ) ( 1,395 ) ( 446 ) Interest expense ( 7,808 ) ( 6,425 ) ( 21,823 ) ( 19,079 ) Net income (loss) before income taxes ( 2,413 ) 4,639 ( 17,120 ) ( 902 ) Income tax provision (benefit) 256 ( 110 ) 877 471 Net income (loss) $ ( 2,669 ) $ 4,749 $ ( 17,997 ) $ ( 1,373 ) Net income (loss) per share - basic $ ( 0.07 ) $ 0.12 $ ( 0.45 ) $ ( 0.04 ) Net income (loss) per share - diluted $ ( 0.07 ) $ 0.10 $ ( 0.45 ) $ ( 0.04 ) Weighted average shares - basic 40,927 38,134 40,374 36,828 Weighted average shares - diluted 40,927 46,567 40,374 36,828 Net income (loss) $ ( 2,669 ) $ 4,749 $ ( 17,997 ) $ ( 1,373 ) Foreign currency translation adjustments, net 975 839 1,984 449 Total comprehensive income (loss) $ ( 1,694 ) $ 5,588 $ ( 16,013 ) $ ( 924 ) See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Nine Months Ended December 31, 2020 2019 Operating activities Net loss $ ( 17,997 ) $ ( 1,373 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 3,898 3,119 Amortization of debt issuance costs 4,906 3,012 Long-term debt related costs 167 — Provision for product and service inventories 4,764 4,946 Stock-based compensation 6,428 5,408 Bad debt expense 123 220 Deferred income taxes 6 242 Unrealized foreign exchange loss 1,984 479 Changes in assets and liabilities: Accounts receivable, net 1,342 11,731 Manufacturing inventories ( 7,732 ) ( 8,915 ) Service parts inventories ( 4,559 ) ( 2,881 ) Accounts payable ( 7,022 ) 7,676 Accrued restructuring charges 210 ( 2,876 ) Accrued compensation 4,268 ( 2,345 ) Deferred revenue ( 9,727 ) ( 17,176 ) Other assets and liabilities ( 1,323 ) ( 6,233 ) Net cash used in operating activities ( 20,264 ) ( 4,966 ) Investing activities Purchases of property and equipment ( 4,665 ) ( 2,327 ) Business acquisition, net of cash acquired ( 2,636 ) — Net cash used in investing activities ( 7,301 ) ( 2,327 ) Financing activities Borrowings of long-term debt, net of debt issuance costs 19,400 — Borrowings of credit facility 232,663 245,590 Repayments of credit facility ( 229,847 ) ( 241,539 ) 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 32,755 3,880 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 62 ) ( 3 ) Net change in cash, cash equivalents and restricted cash 5,128 ( 3,416 ) Cash, cash equivalents, and restricted cash at beginning of period 12,270 16,855 Cash, cash equivalents, and restricted cash at end of period $ 17,398 $ 13,439 Supplemental disclosure of cash flow information Cash paid for interest $ 19,992 $ 15,942 Cash paid (received) for income taxes, net of refunds $ ( 2,464 ) $ 155 Non-cash transactions Purchases of property and equipment included in accounts payable $ 67 $ 178 Purchases of property and equipment included in accrued liabilities $ 1,255 $ — Transfer of inventory to property and equipment $ 372 $ 253 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 $ 11,632 $ 7,542 Restricted cash, current 766 897 Restricted cash, long-term 5,000 5,000 Total cash, cash equivalents and restricted cash at the end of period $ 17,398 $ 13,439 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 Income (Loss) Total Stockholders' Deficit Three Months Ended Shares Amount Balance, September 30, 2019 36,717 $ 368 $ 502,398 $ ( 704,076 ) $ ( 1,800 ) $ ( 203,110 ) Net income — — — 4,749 — 4,749 Foreign currency translation adjustments, net — — — — 839 839 Shares issued under employee incentive plans, net 355 3 ( 4 ) — — ( 1 ) Warrants exercised related to long-term debt, net 2,783 28 ( 28 ) — — — Stock-based compensation — — 2,056 — — 2,056 Balance, December 31, 2019 39,855 $ 399 $ 504,422 $ ( 699,327 ) $ ( 961 ) $ ( 195,467 ) Balance, September 30, 2020 40,740 $ 408 $ 522,357 $ ( 718,492 ) $ ( 513 ) $ ( 196,240 ) Net loss — — — ( 2,669 ) — ( 2,669 ) Foreign currency translation adjustments, net — — — — 975 975 Shares issued under employee incentive plans, net 453 5 ( 5 ) — — — Shares issued in connection with business acquisition 361 3 2,077 — — 2,080 Stock-based compensation — — 1,878 — — 1,878 Balance, December 31, 2020 41,554 $ 416 $ 526,307 $ ( 721,161 ) $ 462 $ ( 193,976 ) See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Deficit Nine Months Ended Shares Amount Balance, March 31, 2019 36,040 $ 360 $ 499,224 $ ( 697,954 ) $ ( 1,410 ) $ ( 199,780 ) Net loss — — — ( 1,373 ) — ( 1,373 ) Foreign currency translation adjustments, net — — — — 449 449 Shares issued under employee incentive plans, net 1,032 11 ( 182 ) — ( 171 ) Warrants exercised related to long-term debt, net 2,783 28 ( 28 ) — — — Stock-based compensation — — 5,408 — — 5,408 Balance, December 31, 2019 39,855 $ 399 $ 504,422 $ ( 699,327 ) $ ( 961 ) $ ( 195,467 ) Balance, March 31, 2020 39,905 $ 399 $ 505,762 $ ( 703,164 ) $ ( 1,522 ) $ ( 198,525 ) Net loss — — — ( 17,997 ) — ( 17,997 ) Foreign currency translation adjustments — — — — 1,984 1,984 Shares issued under employee stock purchase plan 133 2 537 — — 539 Shares issued under employee incentive plans, net 1,155 12 ( 12 ) — — — Shares issued in connection with business acquisition 361 3 2,077 — — 2,080 Shares surrendered for employees' tax liability upon settlement of restricted stock units — — — — — — Warrants exercised related to long-term debt — — 11,515 — — 11,515 Stock-based compensation — — 6,428 — — 6,428 Balance, December 31, 2020 41,554 $ 416 $ 526,307 $ ( 721,161 ) $ 462 $ ( 193,976 ) 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 9 Note 3: Inventories 10 Note 4: Business Combination 11 Note 5: Long-Term Debt 12 Note 6: Leases 14 Note 7: Restructuring Charges 15 Note 8: Net Income (Loss) Per Share 15 Note 9: Income Taxes 16 Note 10: Commitments and Contingencies 16 Note 11: Fair Value of Financial Instruments 17 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 December 31, 2020, the results of operations and comprehensive income (loss) and changes in stockholder's deficit for the three and nine months ended December 31, 2020 and 2019, and the statement of cash flows for the nine months ended December 31, 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 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 the Company’s 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 the Company’s supply chain remains intact and operating, it has experienced issues related to its 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. Common Stock On November 25, 2020, the Company filed a shelf registration statement on Form S-3 for the issuance common stock, preferred stock, debt securities, warrants, units or rights, from time to time, in one or more offerings up to an aggregate of $ 200 million (the “Registration Statement”). On November 25, 2020 the Company entered into a Sales Agreement with B.Riley Securities, Inc. (“B. Riley”) and filed a prospectus supplement to the Registration Statement to establish an at-the-market equity offering program (the “ATM Program”) pursuant to which the Company may, from time to time, sell shares of the Company’s common stock up to an aggregate of $ 50 million through B. Riley, as the Company’s sales agent. The Company pays B. Riley a commission equal to 3 % of the gross proceeds the Company receives from sales of common stock under the ATM Program. During the three and nine months ended December 31, 2020, the Company did not issue any shares under the ATM Program. As of December 31, 2020, the Company had $ 50 million available for sale of common stock under the ATM Program. 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 8 Table of Contents 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 ending March 31, 2022, and we do not expect it to have a material effect on our consolidated financial statements. NOTE 2: REVENUE 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 December 31, Nine Months Ended December 31, 2020 2019 1 2020 2019 1 Americas 2 Primary storage systems $ 18,755 $ 17,744 $ 42,547 $ 43,516 Secondary storage systems 11,124 9,465 29,117 49,761 Device and media 5,347 6,467 17,777 24,486 Service 18,913 20,628 56,907 62,563 Total revenue 54,139 54,304 146,348 180,326 EMEA Primary storage systems 3,680 5,320 8,774 12,545 Secondary storage systems 10,113 11,297 23,081 29,273 Device and media 5,900 7,933 14,668 18,106 Service 10,339 10,063 30,380 29,115 Total revenue 30,032 34,613 76,903 89,039 APAC Primary storage systems 1,219 2,555 3,157 5,480 Secondary storage systems 4,074 4,612 10,507 12,856 Device and media 2,809 1,042 3,929 4,338 Service 1,917 2,201 5,762 6,995 Total revenue 10,019 10,410 23,355 29,669 Consolidated Primary storage systems 23,654 25,619 54,478 61,541 Secondary storage systems 25,311 25,374 62,705 91,890 Device and media 14,056 15,442 36,374 46,930 Service 31,169 32,892 93,049 98,673 Royalty 3 3,833 3,988 10,543 15,700 Total revenue $ 98,023 $ 103,315 $ 257,149 $ 314,734 9 Table of Contents 1 Primary and Secondary storage system revenue has been adjusted for December 31, 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 nine months ended December 31, 2020 (in thousands): December 31, 2020 Contract liabilities (deferred revenue) $ 110,007 Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period 69,355 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 December 31, 2020 $ 89,655 $ 37,169 $ 126,824 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 December 31, 2020 March 31, 2020 Finished goods: Manufactured finished goods $ 15,578 $ 15,790 Distributor inventory 237 504 Total finished goods 15,815 16,294 Work in progress 2,315 1,001 Raw materials 15,724 11,901 Total manufacturing inventories $ 33,854 $ 29,196 Service parts inventories December 31, 2020 March 31, 2020 Finished goods $ 17,707 $ 15,845 Component parts 5,291 4,657 Total service parts inventories $ 22,998 $ 20,502 10 Table of Contents NOTE 4: BUSINESS COMBINATION On December 12, 2020 (the “Close Date”), the Company entered into a Stock Purchase Agreement (the “SPA”) to acquire all of the issued and outstanding shares of Square Box Systems Limited (“SBS”). The acquisition builds on Quantum's recently expanded portfolio that classifies, manages, and protects data across its lifecycle by adding technology advancements to further enrich video, digital images and other forms of unstructured data. The purchase price of approximately $ 7.7 million was comprised of (a) $ 2.6 million cash (net of cash acquired); (b) approximately 0.4 million shares of the Company’s common stock, with a fair value of $ 2.1 million; (c) $ 2.0 million cash payable at the first anniversary of the Closing date; and (d) $ 1.0 million cash payable at the second anniversary of the Closing Date. The purchase price was allocated to tangible assets of approximately $ 0.8 million, intangible assets of approximately $ 5.6 million based on their fair values on the acquisition date, liabilities of approximately $ 1.0 million, and a net deferred tax liability of $ 1.1 million. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed was approximately $ 3.4 million, which has been recorded as goodwill. The historical results of operations for SBS were not significant to the Company's consolidated results of operations for the periods presented. Certain estimated values for the acquisition, including goodwill and intangible assets, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed. The following table summarizes intangible assets related to the SBS acquisition as of December 31, 2020: Three and Nine Months Ended December 31, 2020 Gross Carrying Value Accumulated Amortization Net Carrying Amount Developed technology $ 4,700 $ ( 81 ) $ 4,619 Customer lists 900 ( 16 ) 884 Intangible assets, net $ 5,600 $ ( 97 ) $ 5,503 Intangible assets amortization expense for the three and nine months ended December 31, 2020 was $ 0.1 million. As of December 31, 2020, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 3.0 years. As of December 31, 2020, the future expected amortization expense for intangible assets is as follows (in thousands): Fiscal year ending Estimated future amortization expense Remainder of 2021 $ 465 2022 1,867 2023 1,867 2024 1,304 2025 — Thereafter — Total $ 5,503 11 Table of Contents NOTE 5: LONG-TERM DEBT The Company’s long-term debt consisted of the following (in thousands): December 31, 2020 March 31, 2020 Senior Secured Term Loan $ 185,208 $ 165,208 Amended PNC Credit Facility 5,960 2,620 Paycheck Protection Program Loan 10,000 — Less: current portion ( 1,850 ) ( 7,321 ) Less: unamortized debt issuance costs (1) ( 21,042 ) ( 13,660 ) Long-term debt, net $ 178,276 $ 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 12 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. On December 10, 2020, the Company amended the Senior Secured Term Loan agreement to, among other things, allow the SBS acquisition. 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. On December 10, 2020, the Company amended the Amended PNC Credit Facility to, among other things, allow the SBS acquisition. The amendment added a covenant requiring the Company to maintain at least $ 30.0 million average liquidity (the “Average Liquidity Requirement”), as defined in the Amended PNC Credit Facility, for the preceding thirty days measured as of the last day of each month. If the Average Liquidity Requirement has not been satisfied during the period prior to the payment of the SBS Deferred Purchase Price, a reserve will be established to reduce borrowings availability under the Amended PNC Credit Facility in an amount equal to (a) $ 2.0 million during the period from the amendment date through the first anniversary of the amendment, and, (b) $ 1.0 million during the period from the first anniversary of the amendment through the second anniversary of the amendment Registration Rights Agreement 13 Table of Contents 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. As of December 31, 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 December 31, 2020, the Amended PNC Credit Facility had a borrowing base of $ 27.0 million, of which $ 19.2 million was available at that date. As of December 31, 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 December 31, 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. The PPP Loan has an initial term of two years and is unsecured and guaranteed by the Small Business Administration. The Company used the proceeds from the PPP Loan for qualifying expenses as defined in the PPP Loan 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 6: LEASES Supplemental balance sheet information related to leases is as follows (in thousands): Operating leases December 31, 2020 March 31, 2020 Operating lease right-of-use asset $ 10,096 $ 12,689 Other accrued liabilities 2,806 3,065 Operating lease liability 8,500 10,822 Total operating lease liabilities $ 11,306 $ 13,887 Components of lease cost were as follows (in thousands): Three Months Ended December 31, 2020 Nine Months Ended December 31, Lease Cost 2020 2019 2020 2019 Operating lease cost $ 1,018 $ 1,259 $ 3,688 $ 3,835 Variable lease cost 198 109 620 321 Short-term lease cost 37 58 129 89 Total lease cost $ 1,253 $ 1,426 $ 4,437 $ 4,245 14 Table of Contents Maturity of Lease Liabilities Operating Leases For the fiscal year ended March 31, 2021, excluding the nine months ended December 31, 2020 $ 1,051 2022 3,863 2023 2,799 2024 2,630 2025 2,330 Thereafter 2,948 Total lease payments $ 15,621 Less: imputed interest ( 4,315 ) Present value of lease liabilities $ 11,306 Lease Term and Discount Rate December 31, 2020 March 31, 2020 Weighted average remaining operating lease term (years) 4.66 4.99 Weighted average discount rate for operating leases 13.97 % 13.91 % Operating cash outflows related to operating leases totaled $ 4.4 million and $ 3.4 million for the nine months ended December 31, 2020 and 2019, respectively. NOTE 7: 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 nine months ended December 31, 2020 and 2019 (in thousands): Severance and Benefits Facilities Total Balance as of March 31, 2020 $ — $ — $ — Restructuring costs 2,837 — 2,837 Cash payments ( 2,627 ) — ( 2,627 ) Balance as of December 31, 2020 $ 210 $ — $ 210 Balance as of March 31, 2019 $ — $ 2,876 $ 2,876 Restructuring costs — — — Adjustments to prior estimates — 1,020 1,020 Cash payments — ( 3,659 ) ( 3,659 ) Other non-cash 63 63 Balance as of December 31, 2019 $ — $ 300 $ 300 NOTE 8: NET INCOME (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): 15 Table of Contents Three Months Ended December 31, 2020 Nine Months Ended December 31, 2020 2019 2020 2019 8,311 — 7,557 7,385 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 nine months ended December 31, 2020, there were 1.5 million and 0.4 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 9: INCOME TAXES The effective tax rate for the three and nine months ended December 31, 2020 was - 10.6 % and - 5.1 %, respectively as compared to - 2.7 % and - 52.2 % in the three and nine months ended December 31, 2019, respectively. The effective tax rates differed from the federal statutory tax rate of 21% during each of these 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 December 31, 2020, including interest and penalties, the Company had $ 110.4 million of unrecognized tax benefits, $ 92.1 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of December 31, 2020, the Company had accrued interest and penalties related to these unrecognized tax benefits of $ 1.3 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 December 31, 2020, $ 103.6 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 $ 6.8 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 10: 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 December 31, 2020, the Company had issued non-cancelable commitments for $ 18.9 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. 16 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, the United States District Court for the District of Delaware issued a decision finding that all claims of the ’728 patent, the ’530 patent, and the ’908 patent are invalid under 35 U.S.C. § 101 (the “Delaware Action”). On appeal, the Federal Circuit vacated the decision in the Delaware Action and remanded for the Court to “elaborate on its ruling.” As of now, the case pending against Quantum in the Northern District of California remains stayed. The Court in the Northern District of California has scheduled a Case Management Conference for March 29, 2021 and will decide at that point whether to keep the stay in place pending further developments in the Delaware Action or lift the stay and set a schedule for discovery and other proceedings. 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. On November 19, 2020, Starboard filed a first amended complaint, in which Quantum was not named as a defendant and therefore, in effect Quantum has been dismissed from the action and is no longer a party. The first amended complaint reasserts with only minor modifications the existing claims against Messrs. Gacek and Auvil, and adds a new claim against Messrs. Gacek and Auvil, alleging that they aided and abetted Quantum in committing a fraud on plaintiffs by intentionally or recklessly misrepresenting its financial performance and concealing the misstatements to allow the alleged fraud to continue. The amended complaint seeks no relief from Quantum. However, Quantum expects to continue to incur expenses related to this litigation, subject to potential offset from insurance. At this time, the Company is unable to estimate the range of possible 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 11: 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. 17 Table of Contents No impairments charges were recognized for non-financial assets in the nine months ended December 31, 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 December 31, 2020 and 2019. The fair value has been classified as Level 2 within the fair value hierarchy. December 31, 2020 2019 Carrying Value Fair Value Carrying Value Fair Value Senior Secured Term Loan $ 185,208 $ 188,471 $ 163,350 $ 159,054 Amended PNC Credit Facility 5,960 5,812 5,289 3,880