QUANTUM CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS QUANTUM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts, unaudited) June 30, 2021 March 31, 2021 Assets Current assets: Cash and cash equivalents $ 19,102 $ 27,430 Restricted cash 542 707 Accounts receivable, net of allowance for doubtful accounts of $ 422 and $ 406 57,895 73,102 Manufacturing inventories 27,672 24,467 Service parts inventories 23,532 23,421 Other current assets 11,953 6,939 Total current assets 140,696 156,066 Property and equipment, net 9,068 10,051 Intangible assets, net 4,572 5,037 Goodwill 3,466 3,466 Restricted cash 5,000 5,000 Right-of-use assets, net 8,565 9,383 Other long-term assets 6,813 5,921 Total assets $ 178,180 $ 194,924 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 31,946 $ 35,245 Deferred revenue 78,332 84,027 Accrued restructuring charges 126 580 Long-term debt, current portion 11,850 1,850 Accrued compensation 14,362 19,214 Other accrued liabilities 16,630 18,174 Total current liabilities 153,246 159,090 Deferred revenue 35,514 36,126 Long-term debt, net of current portion 81,305 90,890 Operating lease liabilities 7,282 8,005 Other long-term liabilities 13,763 13,058 Total liabilities 291,110 307,169 Commitments and contingencies ( Note 9) Stockholders' deficit Preferred stock, 20,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.01 par value; 125,000 shares authorized; 57,280 and 56,915 shares issued and outstanding 573 570 Additional paid-in capital 629,862 626,664 Accumulated deficit ( 742,776 ) ( 738,623 ) Accumulated other comprehensive loss ( 589 ) ( 856 ) Total stockholders’ deficit ( 112,930 ) ( 112,245 ) Total liabilities and stockholders’ deficit $ 178,180 $ 194,924 See accompanying Notes to Condensed Consolidated Financial Statements. 1 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share amounts, unaudited) Three Months Ended June 30, 2021 2020 Revenue: Product $ 52,131 $ 39,687 Service 32,831 30,386 Royalty 4,137 3,232 Total revenue 89,099 73,305 Cost of revenue: Product 38,741 30,382 Service 13,080 12,071 Total cost of revenue 51,821 42,453 Gross profit 37,278 30,852 Operating expenses: Research and development 11,291 10,162 Sales and marketing 13,952 11,570 General and administrative 11,825 11,563 Restructuring charges 266 1,052 Total operating expenses 37,334 34,347 Loss from operations ( 56 ) ( 3,495 ) Other expense, net ( 198 ) ( 385 ) Interest expense ( 3,886 ) ( 6,437 ) Net loss before income taxes ( 4,140 ) ( 10,317 ) Income tax provision 13 419 Net loss $ ( 4,153 ) $ ( 10,736 ) Net loss per share - basic and diluted $ ( 0.07 ) $ ( 0.27 ) Weighted average shares - basic and diluted 57,129 39,905 Net loss $ ( 4,153 ) $ ( 10,736 ) Foreign currency translation adjustments, net 267 287 Total comprehensive loss $ ( 3,886 ) $ ( 10,449 ) See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Three Months Ended June 30, 2021 2020 Operating activities Net loss $ ( 4,153 ) $ ( 10,736 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 1,809 1,286 Amortization of debt issuance costs 1,004 1,124 Long-term debt related costs — 167 Provision for product and service inventories 976 1,629 Stock-based compensation 3,201 1,958 Deferred income taxes ( 68 ) 13 Unrealized foreign exchange loss 394 482 Changes in assets and liabilities: Accounts receivable, net 15,207 20,993 Manufacturing inventories ( 3,769 ) ( 1,745 ) Service parts inventories ( 588 ) ( 1,399 ) Accounts payable ( 3,178 ) ( 9,967 ) Accrued restructuring charges ( 454 ) 458 Accrued compensation ( 4,852 ) ( 864 ) Deferred revenue ( 6,306 ) ( 8,188 ) Other assets and liabilities ( 6,089 ) ( 4,198 ) Net cash used in operating activities ( 6,866 ) ( 8,987 ) Investing activities Purchases of property and equipment ( 1,150 ) ( 484 ) Net cash used in investing activities ( 1,150 ) ( 484 ) Financing activities Borrowings of long-term debt, net of debt issuance costs — 19,400 Repayments of long-term debt ( 463 ) — Borrowings of credit facility 56,544 78,582 Repayments of credit facility ( 56,544 ) ( 81,653 ) Borrowings of payment protection program — 10,000 Net cash provided by (used) in financing activities ( 463 ) 26,329 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 14 ) ( 16 ) Net change in cash, cash equivalents and restricted cash ( 8,493 ) 16,842 Cash, cash equivalents, and restricted cash at beginning of period 33,137 12,270 Cash, cash equivalents, and restricted cash at end of period $ 24,644 $ 29,112 Cash, Cash Equivalents and Restricted Cash at end of period Cash and cash equivalents $ 19,102 $ 23,307 Restricted cash, current 542 805 Restricted cash, long-term 5,000 5,000 Cash, cash equivalents and restricted cash at the end of period $ 24,644 $ 29,112 Supplemental disclosure of cash flow information Cash paid for interest $ 2,860 $ 8,445 Cash paid (received) for income taxes, net $ 294 $ ( 1,964 ) Non-cash transactions Purchases of property and equipment included in accounts payable $ 146 $ 262 Purchases of property and equipment included in accrued liabilities $ — $ 1,315 Transfer of inventory to property and equipment $ 65 $ 159 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, March 31, 2020 39,905 $ 399 $ 505,762 $ ( 703,164 ) $ ( 1,522 ) ( 198,525 ) Net loss — — — ( 10,736 ) — ( 10,736 ) Foreign currency translation adjustments, net — — — — 287 287 Warrants issued related to long-term debt, net — — 11,348 — — 11,348 Warrants issued to consultants — — 167 — — 167 Stock-based compensation — — 1,958 — — 1,958 Balance, June 30, 2020 39,905 $ 399 $ 519,235 $ ( 713,900 ) $ ( 1,235 ) $ ( 195,501 ) Balance, March 31, 2021 56,915 $ 570 $ 626,664 $ ( 738,623 ) $ ( 856 ) $ ( 112,245 ) Net loss — — — ( 4,153 ) — ( 4,153 ) Foreign currency translation adjustments, net — — — — 267 267 Shares issued under employee incentive plans, net 365 3 ( 3 ) — — — Stock-based compensation — — 3,201 — — 3,201 Balance, June 30, 2021 57,280 $ 573 $ 629,862 $ ( 742,776 ) $ ( 589 ) $ ( 112,930 ) See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Page Note 1: Description of Business and Summary of Significant Accounting Policies 6 Note 2: Revenue 6 Note 3: Balance Sheet Information 8 Note 4: Long-Term Debt 9 Note 5: Leases 11 Note 6: Restructuring Charges 12 Note 7: Net Loss Per Share 12 Note 8: Income Taxes 12 Note 9: Commitments and Contingencies 13 Note 10: Fair Value of Financial Instruments 14 Note 11: Subsequent Events 15 5 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Quantum is a technology company whose mission is to deliver innovative solutions to organizations around 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. 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 June 30, 2021, the results of operations and comprehensive loss, statements of cash flows, and changes in stockholder's deficit for the three months ended June 30, 2021 and 2020. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations. Use of Estimates 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 the 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. Recent Accounting Pronouncements Recent accounting pronouncements issued by the Financial Accounting Standards Board (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not have, or are not expected to have, a material impact on our present or future 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 6 Table of Contents 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 June 30, 2021 2020 Americas 1 Primary storage systems $ 7,194 $ 6,859 Secondary storage systems 16,712 8,676 Device and media 6,521 6,362 Service 20,193 18,595 Total revenue 50,620 40,492 EMEA Primary storage systems 2,777 2,296 Secondary storage systems 7,760 6,616 Device and media 5,381 4,022 Service 10,813 9,815 Total revenue 26,731 22,749 APAC Primary storage systems 1,341 1,059 Secondary storage systems 3,733 3,200 Device and media 712 597 Service 1,825 1,976 Total revenue 7,611 6,832 Consolidated Primary storage systems 11,312 10,214 Secondary storage systems 28,205 18,492 Device and media 12,614 10,981 Service 32,831 30,386 Royalty 2 4,137 3,232 Total revenue $ 89,099 $ 73,305 1 Revenue for Americas geographic region outside of the United States is not significant. 2 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 three months ended June 30, 2021 (in thousands): June 30, 2021 Contract liabilities (deferred revenue) $ 113,846 Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period 29,704 Remaining Performance Obligations Remaining performance obligations consisted of the following (in thousands): 7 Table of Contents Current Non-Current Total As of June 30, 2021 $ 112,462 $ 37,846 $ 150,308 The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months. NOTE 3: BALANCE SHEET INFORMATION Certain significant amounts included in the Company's consolidated balance sheets consist of the following (in thousands): Manufacturing inventories June 30, 2021 March 31, 2021 Finished goods: Manufactured finished goods $ 12,948 $ 12,452 Distributor inventory 255 238 Total finished goods 13,203 12,690 Work in progress 2,419 2,074 Raw materials 12,050 9,703 Total manufacturing inventories $ 27,672 $ 24,467 Service parts inventories June 30, 2021 March 31, 2021 Finished goods $ 18,195 $ 18,773 Component parts 5,337 4,648 Total service parts inventories $ 23,532 $ 23,421 Intangibles, net June 30, 2021 March 31, 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Developed technology $ 4,700 $ ( 863 ) $ 3,837 $ 4,700 $ ( 473 ) $ 4,227 Customer lists 900 ( 165 ) 735 900 ( 90 ) 810 Intangible assets, net $ 5,600 $ ( 1,028 ) $ 4,572 $ 5,600 $ ( 563 ) $ 5,037 Intangible assets amortization expense for the three months ended June 30, 2021 and 2020 was $ 0.5 million and $ 0 , respectively. As of June 30, 2021, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 2.5 years. As of June 30, 2021, the future expected amortization expense for intangible assets is as follows (in thousands): 8 Table of Contents Fiscal year ending Estimated future amortization expense Remainder of 2022 1,402 2023 1,867 2024 1,303 Thereafter — Total $ 4,572 NOTE 4: LONG-TERM DEBT The Company’s long-term debt consisted of the following (in thousands): June 30, 2021 March 31, 2021 Senior Secured Term Loan $ 91,963 $ 92,426 Paycheck Protection Program Loan 10,000 10,000 Less: current portion ( 11,850 ) ( 1,850 ) Less: unamortized debt issuance costs (1) ( 8,808 ) ( 9,686 ) Long-term debt, net $ 81,305 $ 90,890 (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 and Amended PNC Credit Facility On December 27, 2018, the Company entered into a senior secured term loan of $ 150.0 million with U.S. Bank, National Association (“U.S. Bank”), drawn on the Closing Date, and a senior secured delayed draw term loan of $ 15.0 million (“Senior Secured Term Loan”) which was drawn in January 2019. In connection with the Senior Secured Term Loan, the Company amended its existing PNC Credit Facility (the “Amended PNC Credit Facility”) providing for borrowings up to a maximum principal amount of the lesser of: (a) $ 45.0 million or (b) the amount of the borrowing base, as defined in the PNC Credit Facility agreement. Borrowings under the Senior Secured Term Loan and Amended PNC Credit Facility (collectively, the “December 2018 Credit Agreements”) mature on December 27, 2023. Borrowings under the Senior Secured Term Loan bear interest at a rate per annum, at the Company’s option, equal to (a) the greater of (i) 3.00 %, (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 as quoted by the Wall Street Journal, plus an applicable margin of 9.00 % or (b) LIBOR Rate plus an applicable margin of 10.00 %. Interest on the Senior Secured Term Loan is payable quarterly. Principal payments of 0.25 % of the original balance of the Senior Secured Term Loan are due quarterly with the remaining principal balance due at maturity. Additionally, on an annual basis the Company is required to perform a calculation of excess cash flow, as defined in the Senior Secured Term Loan agreement, which may require an additional payment of the principal in certain circumstances (the "ECF Payment"). Borrowings under the Amended PNC Credit Facility bear interest, at the Company’s option, equal to (a) the greater of (i) the base rate, as defined in the PNC Credit Facility, (ii) the daily Overnight Bank Funding Rate plus 0.5 % and (iii) the daily LIBOR rate plus 1.0 %, plus an applicable margin of (a) 4.50 % for the period from the Amendment Date 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, as defined, or (b) the LIBOR Rate plus an applicable margin of (a) 5.00 % for the period from the Amendment Date 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 5.00 % based on the Company’s applicable total leverage ratio, as defined in the Amended PNC Credit Facility agreement. Interest on the Amended PNC Credit Facility is payable quarterly. 9 Table of Contents On March 30, 2020, March 31, 2020 and April 3, 2020, the Company entered into amendments to the December 2018 Credit Agreements 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; payment of $ 1.9 million of the interest due on April 1, 2020 in-kind rather than in cash, and (b) the waiver of compliance with the total net leverage ratio covenant, as defined in the Senior Secured Term Loan agreement, for the quarter ended March 31, 2020. On June 16, 2020, the Company entered into an amendment to the December 2018 Credit Agreements (the "June 2020 Amendment" and collectively with the March 30, 2020, March 31, 2020 and April 3, 2020 amendments, (the “2020 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 ECF Payment 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. In connection with the June 2020 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 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 2020 Amendments related to the Senior Secured Term Loan were accounted for as modifications. 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. The 2020 Amendments related to the Amended PNC Credit Facility were accounted for as modifications. Fees paid to PNC of approximately $ 0.5 million were recorded to other assets and are amortized to interest expense over the remaining term of the agreement. Approximately $ 0.8 million in third party costs were expensed related to the 2020 Amendments. As of June 30, 2021, the interest rates on the Senior Secured Term Loan and the Amended PNC Credit Facility were 12.0 % and 7.8 %, respectively, and Amended PNC Credit Facility had a borrowing base of $ 20.4 million, all of which was available at that date. The Company was required to maintain a $ 5.0 million restricted cash reserve as part of the Amended PNC Credit Facility, which is presented as long-term restricted cash within the accompanying condensed consolidated balance sheet as of June 30, 2021. Registration Rights Agreement In connection with the June 2020 Term Loan Amendment, the Company entered into an amended and restated registration rights agreement (the “Amended Registration Rights Agreement”) with the holders of the warrants previously issued to the Senior Secured Term Loan lenders in December 2018 and the 2020 Term Loan Warrants (collectively, the “Term Loan Warrants”). The Amended Registration Rights Agreement grants the holders of the Term Loan Warrants certain registration rights for the shares of common stock issuable upon the exercise of the applicable Term Loan Warrants, including (a) the ability of a holder to request that the Company file a Form S-1 registration statement with respect to at least 40 % of the registrable securities held by such holder as of the issuance date of the applicable Term Loan Warrants; (b) the ability of a holder to request that the Company file a Form S-3 registration statement with respect to outstanding registrable securities if at any time the Company is eligible to use a Form S-3 registration statement; and (c) certain piggyback registration rights related to potential future equity offerings of the Company, subject to certain limitations. 10 Table of Contents Paycheck Protection Program Loan On April 13, 2020, the Company entered into a Paycheck Protection Program 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 U.S. Small Business Administration (“SBA”). 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. In July 2021, the Company received notice from PNC that the PPP Loan and related accrued interest was approved for forgiveness in full by the U.S. SBA. NOTE 5: LEASES Supplemental balance sheet information related to leases is as follows (in thousands): Operating leases June 30, 2021 March 31, 2021 Operating lease right-of-use asset $ 8,565 $ 9,383 Other accrued liabilities 2,375 2,581 Operating lease liability 7,282 8,005 Total operating lease liabilities $ 9,657 $ 10,586 Components of lease cost were as follows (in thousands): Three Months Ended June 30, Lease Cost 2021 2020 Operating lease cost $ 1,135 $ 1,331 Variable lease cost 174 212 Short-term lease cost — 53 Total lease cost $ 1,309 $ 1,596 Maturity of Lease Liabilities Operating Leases 2022, excluding the three months ended June 30, 2021 $ 2,759 2023 2,714 2024 2,555 2025 2,270 2026 1,827 Thereafter 696 Total lease payments $ 12,821 Less: imputed interest ( 3,164 ) Present value of lease liabilities $ 9,657 11 Table of Contents Lease Term and Discount Rate June 30, 2021 March 31, 2021 Weighted average remaining operating lease term (years) 4.25 4.53 Weighted average discount rate for operating leases 13.66 % 13.96 % Operating cash outflows related to operating leases totaled $ 1.1 million and $ 1.4 million for the three months ended June 30, 2021 and 2020, respectively. NOTE 6: RESTRUCTURING CHARGES The following table summarizes the restructuring activities for the three months ended June 30, 2021 and 2020 (in thousands): Severance and Benefits Facilities Total Balance as of March 31, 2021 $ 580 $ — $ 580 Restructuring costs 266 — 266 Adjustments to prior estimates ( 49 ) — ( 49 ) Cash payments ( 671 ) — ( 671 ) Balance as of June 30, 2021 $ 126 $ — $ 126 Balance as of March 31, 2020 $ — $ — $ — Restructuring costs 1,052 — 1,052 Cash payments ( 594 ) — ( 594 ) Balance as of June 30, 2020 $ 458 $ — $ 458 NOTE 7: NET LOSS PER SHARE The following outstanding stock-based instruments which are comprised of performance share units, restricted stock units, and warrants were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive (in thousands): Three Months Ended June 30, 2021 2020 11,436 6,340 The dilutive impact related to common shares from restricted stock units, 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 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. NOTE 8: INCOME TAXES The effective tax rate for the three months ended June 30, 2021 and 2020 was ( 0.3 )% and 1.0 %, 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. 12 Table of Contents As of June 30, 2021, including interest and penalties, the Company had $ 102.8 million of unrecognized tax benefits, $ 84.4 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of June 30, 2021, the Company had accrued interest and penalties related to these unrecognized tax benefits of $ 1.2 million. The Company recognizes interest and penalties related to income tax matters in the income tax provision in the condensed consolidated statements of operations. As of June 30, 2021, $ 95.5 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 $ 7.3 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 $ 9.1 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations. NOTE 9: COMMITMENTS AND CONTINGENCIES Commitments to Purchase Inventory The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon the Company’s forecast of customer demand. The Company has similar arrangements with certain other suppliers. The Company is responsible for the financial impact on the supplier or contract manufacturer of any reduction or product mix shift in the forecast relative to materials that the third party had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for inventory in excess of current customer demand or for costs of excess or obsolete inventory. As of June 30, 2021, the Company had issued non-cancelable commitments for $ 57.5 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. 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 the outcome of 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 not eligible for patent protection 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.” The case pending against Quantum in the Northern District of California remains stayed pending the final outcome in the Delaware Action. On May 4, 2021, the Court in the Delaware Action reaffirmed its earlier ruling and granted defendants’ motions to dismiss under Section 101. The Court also granted Realtime Data fourteen days to file amended complaints in the Delaware Action where they sought leave to do so. On May 19, 2021, Realtime Data filed amended complaints including revised bases for claims of infringement of the same patents. On June 29, 2021, Quantum filed a renewed motion to dismiss under Section 101. Realtime Data filed its opposition to the motion to dismiss on July 13, 2021. Quantum expects it will be late summer or early fall before the motion to dismiss is resolved. Quantum 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 13 Table of Contents as Quantum met certain performance objectives by the end of fiscal 2015. The complaint further alleges that Quantum hid its failure to meet those performance objectives by improperly recognizing revenue in fiscal 2015. 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 an SEC investigation, the settlement of which Quantum 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). On September 14, 2020, defendants filed a motion to dismiss the California 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, in effect dismissing Quantum from the California action. On January 8, 2021, Messrs. Gacek and Auvil moved to dismiss the amended complaint in California on grounds of forum non conveniens and the mandatory Delaware forum selection clauses set forth in the contracts between Starboard and Quantum. On March 11, 2021, the California Superior Court stayed the California action. On April 14, 2021, Starboard filed a new action in the Delaware Court of Chancery, naming as defendants Messrs. Gacek and Auvil and Quantum. The new action largely repeats the allegations of the California action, alleging claims for fraud against all defendants, fraudulent concealment against all defendants, negligent misrepresentation against all defendants, breach of contract against Quantum, breach of the implied covenant of good faith and fair dealing against Quantum, and breach of fiduciary duty against Messrs. Gacek and Auvil. The complaint prays for unspecified damages in an amount to be determined at trial, costs and attorneys’ fees, and any other relief deemed just or appropriate by the court. On May 10, 2021, Quantum filed a motion to dismiss this Delaware action, as did Messrs. Gacek and Auvil. Briefing on the motion is underway, and oral arguments have been set for September 28, 2021. The motion to dismiss is pending. At this time, Quantum 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 10: FAIR VALUE OF FINANCIAL INSTRUMENTS The Company’s assets, measured and recorded at fair value on a recurring basis, may consist of money market funds which are included in cash and cash equivalents in the Condensed Consolidated Balance Sheets and are valued using quoted market prices (level 1 fair value measurements) at the respective balance sheet dates. No impairment charges were recognized for non-financial assets in the three months ended June 30, 2021 and 2020. 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 June 30, 2021 and 2020. The fair value has been classified as Level 2 within the fair value hierarchy. June 30, 2021 2020 Carrying Value Fair Value Carrying Value Fair Value Senior Secured Term Loan $ 91,963 $ 97,047 $ 185,208 $ 185,208 14 Table of Contents NOTE 11: SUBSEQUENT EVENTS Long-term Debt Refinancing 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. Additionally, the Term Loan contains financial covenants relating to minimum liquidity and total net leverage ratio. PPP Loan Forgiveness In July 2021, the Company received notice from PNC that the PPP Loan and related accrued interest was approved for forgiveness in full by the U.S. SBA. Asset Purchase On July 20, 2021, the Company purchased specified assets related to the video surveillance business of PV3 (an ABC) LLC, a Delaware limited liability company as assignee for the benefit of Pivot3, Inc., a Delaware corporation (“Pivot3”). The Company paid approximately $ 5.0 million in cash and 459,720 shares of common stock and assumed certain liabilities related to the video surveillance business. Pivot3 has also agreed to license to the Company certain intellectual property rights related to the business. The Company is currently in the process of determining the purchase price allocation and will record the estimated fair values when all required information has been obtained and evaluated.