What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-01-27 · 96 added, 256 removed, 132 unchanged (73% of the section changed)

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Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements.

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:

• CatDV Asset Management Software —An agile asset management and workflow automation platform that helps organizations with large amounts of video and digital image content to communicate and collaborate more effectively.

• StorNext high performance file system —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.

• Quantum All - Terrain File System (ATFS)—An easy to deploy, easy to use network attached storage (“NAS”) platform with integrated data classification.

• 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 sell tape media under the Quantum brand.

• 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.

• 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.

We are a technology company whose mission is to deliver innovative solutions to organizations across the world.

We design, manufacture and sell technology and services that help customers capture, create and share digital content, and protect it for decades.

We emphasize innovative technology in the design and manufacture of our products to help our customers unlock the value in their video and unstructured data in new ways to solve their most pressing business challenges.

We generate revenue by designing, manufacturing, and selling technology and services.

Our most significant expenses are related to compensating employees;

designing, manufacturing, marketing, and selling our products and services;

data center costs in support of our cloud-based services;

and income taxes.

Highlights from first quarter of fiscal year 2022 included:

• Revenue increased 22% year-over-year to $89 million.

• Gross profit was $37 million, an increase of 21% from $31 million.

Product gross profit was $13 million, an increase of 230 basis-points from $9 million in the same quarter last year.

• Operating expenses were 42% of revenue compared to 47% in the same quarter last year.

• We increased research and development investment 11% over the prior year, as we announced a new StorNext architecture and new line of StorNext appliances with the H4000.

• We announced a new partnership with Supermicro and our ActiveScale 6.0 software and storage platform, as we expand our Object Storage line of business.

• We increased Sales & Marketing expense 21% over the prior year as we see accelerated customer activity and invested for growth in strategic markets.

• We continue to hire new leadership across the organization, including industry veterans in our Emerging Markets business unit, and our General Council & Chief Compliance Officer.

COVID-19 IMPACT AND ASSOCIATED ACTIONS

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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.

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 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 meetings, reducing the number of people in our sites at any one time, and suspending employee travel.

This was then followed by a gradual stabilization in our business during the second half of fiscal 2021 as customers increasingly adapted to the COVID-19 environment.

Partially offsetting the headwinds from COVID-19 were reduced operating expenses in the areas of travel and

marketing costs.

In addition, we effected certain restructuring activities to streamline our operations, such as limited workforce realignments and vacating certain office leases.

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.

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 our Annual Report on Form 10-K for the year ended March 31, 2020, 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, business acquisition costs, costs related to the financial restatement and related activities described in the Annual Report on Form 10-K for the year ended March 31, 2020 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 other 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.

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.

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;

(7) potential future costs related to business acquisitions;

or (8) 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;

(4) potential future costs related to business acquisitions;

(5) potential future costs related to our financial statement restatement and other related activities;

• 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.

The following is a reconciliation of Adjusted EBITDA to the most comparable U.S.

GAAP financial measure, Net Loss (in thousands):

Three Months Ended Nine Months Ended

December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019

Net income (loss) $ (2,669) $ 4,749 $ (17,997) $ (1,373)

Interest expense 7,808 6,425 21,823 19,079

Provision for income taxes 256 (110) 877 471

Depreciation and amortization expense 1,347 1,081 3,898 3,119

Stock-based compensation expense 1,878 2,056 6,428 5,408

Long-term debt related costs 208 — 1,377 —

Acquisition related costs 393 — 393 —

Restructuring charges 200 (64) 2,837 1,020

Cost related to financial restatement and related activities — 564 — 12,743

Adjusted EBITDA $ 9,421 $ 14,701 $ 19,636 $ 40,467

The following is a reconciliation of Adjusted Net Income (Loss) to the most comparable U.S.

GAAP financial measure, Net Income (Loss) (in thousands):

Three Months Ended Nine Months Ended

December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019

Net income ( loss) $ (2,669) $ 4,749 $ (17,997) $ (1,373)

Restructuring charges 200 (64) 2,837 1,020

Stock-based compensation 1,878 2,056 6,428 5,408

Long-term debt related costs 208 — 1,377 —

Acquisition related costs 393 — 393 —

Cost related to financial restatement and related activities — 564 — 12,743

Adjusted net income (loss) $ 10 $ 7,305 $ (6,962) $ 17,798

Adjusted net income (loss) per share:

Basic $ 0.00 $ 0.19 $ (0.17) $ 0.48

Diluted $ 0.00 $ 0.16 $ (0.15) $ 0.40

Weighted average shares outstanding:

Basic 40,927 38,134 40,374 36,828

Diluted 49,238 46,567 47,931 44,213

RESULTS OF OPERATIONS

Three Months Ended December 31, 2020 Nine Months Ended December 31,

Three Months Ended June 30,

(in thousands) 2021 2020

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Total operating expenses 37,334 34,347

Income from operations 6,093 11,675 6,098 18,623

Other income (expense) (698) (611) (1,395) (446)

Loss from operations (56) (3,495)

Other expense (198) (385)

Interest expense (3,886) (6,437)

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(1) Includes stock-based compensation as follows:

Three Months Ended September 30, Nine Months Ended December 31,

Three Months Ended June 30,

(in thousands) 2021 2020

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Total $ 3,201 $ 1,958

Comparison of the Three Months Ended December 31, 2020 and 2019

Three Months Ended December 31,

(dollars in thousands) 2020 % of

revenue 2019 1

revenue $ Change % Change

Product revenue

Primary storage systems $ 23,654 24 % $ 25,619 24 % $ (1,965) (8) %

Secondary storage systems 25,311 26 25,374 25 (63) —

Devices and media 14,056 14 15,442 15 (1,386) (9)

Total product revenue $ 63,021 64 % $ 66,435 64 % $ (3,414) (5)

Service revenue 31,169 32 32,892 32 (1,723) (5)

Royalty revenue 3,833 4 3,988 4 (155) (4)

Total revenue $ 98,023 100 % $ 103,315 100 % $ (5,292) (5)

1 Primary and Secondary storage system revenue has been adjusted for the three months ended December 31, 2019 due to certain reclassifications from Primary to Secondary storage systems.

Product revenue

In the three months ended December 31, 2020, product revenue decreased $3.4 million, or 5%, as compared to the same period in 2019.

Primary storage systems represented $2.0 million of the decrease, driven by a decrease in sales to the US federal government due to related purchasing activity.

Devices and media represented $1.4 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 5% in the three months ended December 31, 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 $0.2 million, or 4%, in the three months ended December 31, 2020 compared to the same period in 2019 due to lower overall market volume .

Gross Profit and Margin

Three Months Ended December 31,

(dollars in thousands) 2020 Gross

margin % 2019 Gross

margin % $ Change Basis point change

Product gross profit $ 19,709 31.3 % $ 22,763 34.3 % $ (3,054) (300)

Service gross profit 18,737 60.1 20,325 61.8 (1,588) (170)

Royalty gross profit 3,833 100.0 3,988 100.0 (155) —

Gross profit $ 42,279 43.1 % $ 47,076 45.6 % $ (4,797) (250)

Product Gross Margin

Product gross margin decreased 300 basis points for the three months ended December 31, 2020, as compared with the same period in 2019.

This decrease was due primarily to a less favorable mix of enterprise products sold, along with a relatively flat operations departmental expense.

Service Gross Margin

Service gross margin decreased 170 basis points for the three months ended December 31, 2020, as compared with the same period in 2019.

This decrease was primarily the effect of lower service revenue on a relatively flat expense profile

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating expenses

Three Months Ended December 31,

(dollars in thousands) 2020 % of

revenue 2019 % of

revenue $ Change % Change

Research and development $ 9,589 9.8 % $ 9,325 9.0 % $ 264 3 %

Sales and marketing 15,294 15.6 15,421 14.9 (127) (1)

General and administrative 11,103 11.3 10,719 10.4 384 4

Restructuring charges 200 0.2 (64) (0.1) 264 (413)

Total operating expenses $ 36,186 36.9 % $ 35,401 34.3 % $ 785 2

In the three months ended December 31, 2020, research and development expense increased $0.3 million, or 3%, 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 December 31, 2020, sales and marketing expenses decreased $0.1 million, or 1%, as compared with the same period in 2019.

This decrease was largely driven by suspended travel and entertainment expense due to current COVID-19 related restrictions.

In the three months ended December 31, 2020, general and administrative expenses increased $0.4 million, or 4% as compared with the same period in 2019.

This increase was due primarily to increased legal and other expenses related to our long-term debt amendments and business acquisition related activities.

In the three months ended December 31, 2020, restructuring expenses increased $0.3 million, or 413% 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 December 31,

(dollars in thousands) 2020 % of

revenue 2019 % of

revenue $ Change % Change

Other income (expense) $ (698) (1) % $ (611) (1) % $ (87) (14) %

Interest expense (7,808) (8) (6,425) 6 (1,383) 22

Other income (expense), net during the three months ended December 31, 2020 and 2019 were related primarily to fluctuations in foreign currency exchange rates.

In the three months ended December 31, 2020, interest expense increased $1.4 million, or 22%, as compared with the same period in 2019 due primarily to a higher principal balance.

Three Months Ended December 31,

Comparison of the Three Months Ended June 30, 2021 and 2020

Three Months Ended June 30,

(dollars in thousands) 2021 % of

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revenue $ Change % Change

Income tax provision $ 256 1 % $ (110) — % $ 366 (333) %

The income tax provision for the three months ended December 31, 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.

Comparison of the Nine Months Ended December 31, 2020 and 2019

Nine Months Ended December 31,

(dollars in thousands) 2020 % of

revenue 2019 1

revenue $ Change % Change

Product revenue

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Total revenue $ 89,099 100 $ 73,305 100 $ 15,794 22

1 Primary and Secondary storage system revenue has been adjusted for the six months ended December 31, 2019 due to certain reclassifications from Primary to Secondary storage systems.

Product revenue

In the nine months ended December 31, 2020, product revenue decreased $46.8 million, or 23%, as compared to the same period in 2019.

Secondary storage systems represented $29.2 million of the decrease, driven primarily by fluctuating purchase cycles with our hyperscale customers in addition to the impact of decreased purchasing due to COVID-19.

Devices and media represented $10.6 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 $7.1 million of the decrease, driven by declines in the media and entertainment industry as a result of the COVID-19 pandemic.

In the three months ended June 30, 2021, product revenue increased $12.4 million, or 31%, as compared to the same period in 2020.

Primary storage systems represented $1.1 million of the increase, driven by market improvements across the media & entertainment industries.

Secondary storage systems represented $9.7 million of the increase, driven by higher demand in our hyperscale, backup and archive use cases.

Devices and media represented $1.6 million of the increase, driven by a higher volume of LTO media sold through our high-volume channel partners.

Service revenue

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Standard service contracts may be extended or include enhanced service, such as faster service response times.

Service revenue decreased $5.6 million, or 6% in the nine months ended December 31, 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.

Service revenue increased 8% in the three months ended June 30, 2021 compared to the same period in 2020 largely driven by increased demand for installation and professional services as well as increases in our managed service offerings.

Royalty revenue

We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium.

Royalty revenue decreased $5.2 million, or 33%, in the nine months ended December 31, 2020 compared to the same period in 2019 due to lower overall market volume .

Royalty revenue increased $0.9 million, or 28%, in the three months ended June 30, 2021 compared to the same period in 2020 due to increased market volume of LTO media.

Gross Profit and Margin

Nine Months Ended December 31,

Three Months Ended June 30,

(dollars in thousands) 2021 Gross

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Product Gross Margin

Product gross margin decreased 70 basis points for the nine months ended December 31, 2020, as compared with the same period in 2019.

This decrease was primarily the result of a less favorable product mix to our enterprise customers.

Product gross margin increased 230 basis points for the three months ended June 30, 2021, as compared with the same period in 2020.

This increase was due primarily to a more favorable mix of products towards our enterprise solutions, as well as overall gross margin improvements in our secondary storage business line.

Service Gross Margin

Service gross margin decreased 80 basis points for the nine months ended December 31, 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.

Service gross margin remained consistent with the prior year.

Royalty Gross Margin

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Operating expenses

Nine Months Ended December 31,

Three Months Ended June 30,

(dollars in thousands) 2021 % of

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Total operating expenses $ 37,334 41.9 $ 34,347 46.9 $ 2,987 9

In the nine months ended December 31, 2020, research and development expense increased $2.9 million, or 11%, 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 nine months ended December 31, 2020, sales and marketing expenses decreased $6.1 million, or 13%, 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 nine months ended December 31, 2020, general and administrative expenses decreased $10.7 million, or 25% 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 nine months ended December 31, 2020, restructuring expenses increased $1.8 million, or 178% 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.

In the three months ended June 30, 2021, research and development expense increased $1.1 million, or 11%, as compared with the same period in 2020.

This increase was primarily driven by an increase in personnel costs due to increased headcount focused on new product development.

This increase in headcount includes those employees added through acquisitions over the year.

In the three months ended June 30, 2021, sales and marketing expenses increased $2.4 million, or 21%, as compared with the same period in 2020.

This increase was driven by increases to marketing spend as we see higher levels of customer interaction since the outbreak of the Covid-19 pandemic, as well as increases in personnel costs as we invest for growth in strategic markets.

In the three months ended June 30, 2021, general and administrative expenses increased $0.3 million, or 2%, as compared with the same period in 2020.

This increase was due primarily to increased legal and other expenses related to our long-term debt amendments and business acquisition related activities.

In the three months ended June 30, 2021, restructuring expenses decreased $0.8 million, or 75%, as compared with the same period in 2020.

The decrease was the result of one-time workforce reductions in the prior year.

Other Income (Expense)

Nine Months Ended December 31,

Three Months Ended June 30,

(dollars in thousands) 2021 % of

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Interest expense (3,886) (4) (6,437) 9 2,551 (40)

Other income (expense), net during the nine months ended December 31, 2020 and 2019 were related primarily to fluctuations in foreign currency exchange rates.

In the nine months ended December 31, 2020, interest expense increased $2.7 million, or 14%, as compared with the same period in 2019 due primarily to a higher principal balance.

Nine Months Ended December 31,

The increase in other income (expense), net during the three months ended June 30, 2021 compared with the same period in 2020 was related primarily to fluctuations in foreign currency exchange rates.

In the three months ended June 30, 2021, interest expense decreased $2.6 million, or 40%, as compared with the same period in 2020 due to a lower principal balance.

Three Months Ended June 30,

(dollars in thousands) 2021 % of

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Income tax provision $ 13 — $ 419 1 $ (406) (97)

The income tax provision for the nine months ended December 31, 2020 and 2019 is primarily influenced by foreign and state income taxes.

The income tax provision for the three months ended June 30, 2021 and 2020 is primarily influenced by foreign and state income taxes.

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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).

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.

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.

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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.

We believe that these social and economic impacts have had a negative effect on sales due to disruptions in our supply chain and a 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 $11.6 million as of December 31, 2020, compared to $6.4 million as of March 31, 2020.

We expect the impact of COVID-19 to continue to have a significant impact on our liquidity and capital resources.

We had cash and cash equivalents of $19.1 million as of June 30, 2021, compared to $27.4 million as of March 31, 2021.

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 $0.5 million of short-term restricted cash.

Our outstanding long-term debt amounted to $178.3 million as of December 31, 2020, net of $21.0 million in unamortized debt issuance costs and $1.9 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 December 31, 2020 is $10.0 million borrowed under the Paycheck Protection Program which was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

December 31, 2020, we had $19.2 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 outstanding long-term debt amounted to $81.3 million as of June 30, 2021, net of $8.8 million in unamortized debt issuance costs and $11.9 million in current portion of long-term debt, and $90.9 million as of March 31, 2021, net of $9.7 million in unamortized debt issuance costs and $1.9 million in current portion of long-term debt.

Included in long-term debt as of June 30, 2021 is $10.0 million borrowed under the Paycheck Protection Program (“PPP Loan”) which was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

In July 2021, we received notice from PNC Bank that the PPP Loan and related accrued interest was approved for forgiveness in full by the U.S.

As of June 30, 2021, we had $20.4 million of borrowing availability on our Amended PNC Credit Facility (subject to change based on certain financial metrics).

On August 5, 2021 (the “Closing Date”), the Company entered into a senior secured term loan of $100.0 million, million (the “Term Loan”).

A portion of the proceeds were used to prepay all outstanding borrowings under the Senior Secured Term Loan.

Borrowings under the Term Loan mature on August 5, 2026.

Principal is payable at a rate per annum equal to (a) 2.5% of the original principal balance thereof during the first year following the Closing Date and (b) 5% of the original principal balance thereof thereafter.

Principal and interest payments are payable on a quarterly basis.

Loans under the Term Loan Credit Agreement designated as “Prime Rate Loans” will bear interest at a rate per annum equal to the greatest of (i) 1.75%, (ii) the Federal funds rate plus 0.50%, (iii) the LIBOR Rate based upon an interest period of 1 month plus 1.0%, and (iv) the “Prime Rate” last quoted by the Wall Street Journal, plus an applicable margin of 5.00%.

Loans designated as “LIBOR Rate Loans” will bear interest at a rate per annum equal to the LIBOR Rate plus an applicable margin of 6.00%.

The “LIBOR Rate” is subject to a floor of 0.75%.

The Company can designate a loan as a Prime Rate Loan or LIBOR Rate Loan in its discretion.

The Term Loan Credit Agreement contains certain customary covenants, including requirements to prepay the loans in an amount equal to (i) 100% of the net cash proceeds from certain asset dispositions, extraordinary receipts, debt issuances and equity issuances, subject to certain reinvestment rights and other exceptions and (ii) 75% of certain

excess cash flow of the Company and its subsidiaries, subject to certain exceptions, including reductions to the percentage of such excess cash flow that is required to prepay the loans to 50% and 0%, based on the Company’s applicable total net leverage ratio.

Amounts outstanding under the Term Loan may become due and payable upon the occurrence of specified events, which among other things include (subject to certain exceptions and cure periods):

(i) failure to pay principal, interest, or any fees when due;

(ii) breach of any representation or warranty, covenant, or other agreement in the Term Loan and other related loan documents;

(iii) the occurrence of a bankruptcy or insolvency proceeding with respect to the Company or certain of its subsidiaries;

(iv) any “Event of Default” with respect to other indebtedness involving an aggregate amount of $3,000,000 or more;

(v) any lien created by the Term Loan or any related security documents ceasing to be valid and perfected;

(vi) the Term Loan Credit Agreement or any related security documents or guarantees ceasing to be legal, valid, and binding upon the parties thereto;

or (vii) a change of control shall occur.

The Term Loan contains financial covenants relating to minimum liquidity and total net leverage ratio.

We are subject to various debt covenants under our Credit Agreements.

Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations.

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The following table summarizes our consolidated cash flows for the periods indicated.

Nine Months Ended December 31,

Three Months Ended June 30,

(Dollars in thousands) 2021 2020

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Cash Used In Operating Activities

Net cash used in operating activities was $20.3 million for the nine months ended December 31, 2020.

This use of cash is primarily attributable to changes in working capital of $26.3 million driven by the increase in manufacturing and service inventory of $12.3 million, a decrease in deferred revenue of $9.7 million, and a decrease in accounts payable of $5.0 million.

Net cash used in operating activities was $6.9 million for the three months ended June 30, 2021.

This use of cash is primarily attributable to changes in working capital of $10.0 million driven by an increase in manufacturing and service parts inventories of $4.4 million, an increase in accounts payable, accrued compensation, deferred revenue of $3.2 million, $4.9 million and $6.3 million, respectively, in addition to miscellaneous changes in other current and non-current assets and liabilities, partially offset by a reduction in accounts receivable of $15.2 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 $5.0 million for the nine months ended December 31, 2019 which is primarily attributable to a decrease of $17.1 million in deferred revenue related to the timing of service contract renewals which are historically more heavily weighted to our third and fourth fiscal quarters, a decrease in manufacturing and service inventory of $11.7 million and a decrease in accounts receivable of $11.7 million, partially offset by an increase in accounts payable of $7.6 million.

Net cash used in operating activities was $9.0 million for the three months ended June 30, 2020.

This use of cash is primarily attributable to the net loss adjusted for non-cash items of $4.0 million and changes in working capital of $4.9 million.

Cash used related to working capital was driven by a decrease of $21.0 million in accounts receivable more than offset by the increase in manufacturing and service inventory of $3.2 million and decreases in accounts payable, deferred revenue and other assets and liabilities of $9.9 million, $8.2 million and $4.2 million, respectively.

The decrease in deferred revenue reflects the seasonal nature of service contract renewals which peak in the fourth fiscal quarter.

Cash Used in Investing Activities

Net cash used in investing activities was $7.3 million in the nine months ended December 31, 2020, which included approximately $3.1 million related to the Square Box Systems acquisition and capital expenditures.

Net cash used in investing activities in the nine months ended December 31, 2019 consisted of fixed asset purchases.

Cash Provided by Financing Activities

Net cash provided by financing activities was $32.8 million in the nine months ended December 31, 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 $3.9 million in the nine months ended December 31, 2019 related primarily to borrowings under our credit facility.

Debt Profile and Covenants

PNC Credit Facility

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 $27.0 million as of December 31, 2020, $19.2 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.

On December 10, 2020, we amended the Amended PNC Credit Facility to, among other things, allow the SBS acquisition.

The amendment added a covenant requiring the us 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 deferred payments related to the Square Box Systems acquisition, 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

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 December 31, 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.

On December 10, 2020, we amended the Senior Secured Term Loan to, among other things, allow the SBS acquisition.

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.

The PPP Loan has an initial term of two years and is unsecured and guaranteed by the Small Business Administration.

We 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, we cannot assure at this time that the PPP Loan will be forgiven partially or in full.

Net cash used in investing activities was $1.2 million in the three months ended June 30, 2021, which included approximately $1.0 million related to new ERP systems software.

Net cash used in investing activities was $0.5 million in the three months ended June 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 (Used In) Financing Activities

Net cash used in financing activities was $0.5 million in the three months ended June 30, 2021 related to debt principal amortization payment.

Net cash provided by financing activities was $26.3 million in the three months ended June 30, 2020 which included new 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.

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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis