QUANTUM CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS QUANTUM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts, unaudited) September 30, 2021 March 31, 2021 Assets Current assets: Cash and cash equivalents $ 22,757 $ 27,430 Restricted cash 450 707 Accounts receivable, net of allowance for doubtful accounts of $ 350 and $ 406 63,098 73,102 Manufacturing inventories 28,848 24,467 Service parts inventories 23,564 23,421 Other current assets 11,451 6,939 Total current assets 150,168 156,066 Property and equipment, net 12,295 10,051 Intangible assets, net 9,132 5,037 Goodwill 10,262 3,466 Restricted cash — 5,000 Right-of-use assets, net 7,917 9,383 Other long-term assets 8,684 5,921 Total assets $ 198,458 $ 194,924 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 36,991 $ 35,245 Deferred revenue 78,105 84,027 Accrued restructuring charges 20 580 Long-term debt, current portion 3,125 1,850 Accrued compensation 15,435 19,214 Other accrued liabilities 18,750 18,174 Total current liabilities 152,426 159,090 Deferred revenue 40,766 36,126 Long-term debt, net of current portion 101,368 90,890 Operating lease liabilities 6,818 8,005 Other long-term liabilities 13,073 13,058 Total liabilities 314,451 307,169 Commitments and contingencies ( Note 10) Stockholders' deficit Preferred stock, 20,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.01 par value; 125,000 shares authorized; 59,272 and 56,915 shares issued and outstanding 593 570 Additional paid-in capital 636,538 626,664 Accumulated deficit ( 752,029 ) ( 738,623 ) Accumulated other comprehensive loss ( 1,095 ) ( 856 ) Total stockholders’ deficit ( 115,993 ) ( 112,245 ) Total liabilities and stockholders’ deficit $ 198,458 $ 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 September 30, Six Months Ended September 30, 2021 2020 2021 2020 Revenue: Product $ 54,655 $ 50,850 $ 106,786 $ 90,537 Service 34,359 31,494 67,189 61,880 Royalty 4,166 3,477 8,303 6,709 Total revenue 93,180 85,821 182,278 159,126 Cost of revenue: Product 41,124 34,998 79,864 65,380 Service 13,669 12,089 26,748 24,160 Total cost of revenue 54,793 47,087 106,612 89,540 Gross profit 38,387 38,734 75,666 69,586 Operating expenses: Research and development 12,389 10,233 23,680 20,395 Sales and marketing 15,462 13,153 29,414 24,723 General and administrative 11,466 10,263 23,293 21,825 Restructuring charges 8 1,585 274 2,637 Total operating expenses 39,325 35,234 76,661 69,580 Income (loss) from operations ( 938 ) 3,500 ( 995 ) 6 Other income (expense), net 126 ( 312 ) ( 71 ) ( 697 ) Interest expense ( 3,070 ) ( 7,578 ) ( 6,956 ) ( 14,015 ) Loss on debt extinguishment, net ( 4,960 ) — ( 4,960 ) — Net loss before income taxes ( 8,842 ) ( 4,390 ) ( 12,982 ) ( 14,706 ) Income tax provision 411 202 424 622 Net loss $ ( 9,253 ) $ ( 4,592 ) $ ( 13,406 ) $ (15,328) Net loss per share - basic and diluted $ ( 0.16 ) $ ( 0.11 ) $ ( 0.23 ) $ ( 0.38 ) Weighted average shares - basic and diluted 58,567 40,286 57,852 40,097 Net loss $ ( 9,253 ) $ ( 4,592 ) $ ( 13,406 ) $ ( 15,328 ) Foreign currency translation adjustments, net ( 506 ) 722 ( 239 ) 1,009 Total comprehensive loss $ ( 9,759 ) $ ( 3,870 ) $ ( 13,645 ) $ ( 14,319 ) See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Six Months Ended September 30, 2021 2020 Operating activities Net loss $ ( 13,406 ) $ ( 15,328 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 3,967 2,580 Amortization of debt issuance costs 1,629 3,015 Long-term debt related costs — 167 Provision for product and service inventories 2,418 3,588 Stock-based compensation 6,273 4,550 Paycheck Protection Program loan forgiveness ( 10,000 ) — Non-cash loss on debt extinguishment 8,471 — Other ( 20 ) 1,268 Changes in assets and liabilities: Accounts receivable, net 10,024 7,568 Manufacturing inventories ( 5,199 ) ( 8,858 ) Service parts inventories ( 1,818 ) ( 4,333 ) Accounts payable 1,559 1,601 Accrued restructuring charges ( 560 ) 240 Accrued compensation ( 3,779 ) 2,922 Deferred revenue ( 9,032 ) ( 12,584 ) Other assets and liabilities ( 5,789 ) ( 5,693 ) Net cash used in operating activities ( 15,262 ) ( 19,297 ) Investing activities Purchases of property and equipment ( 2,396 ) ( 1,434 ) Business acquisition, net of cash acquired ( 5,000 ) — Net cash used in investing activities ( 7,396 ) ( 1,434 ) Financing activities Borrowings of long-term debt, net of debt issuance costs 94,961 19,400 Repayments of long-term debt ( 93,051 ) — Borrowings of credit facility 126,084 140,987 Repayments of credit facility ( 116,084 ) ( 144,058 ) Borrowings of payment protection program — 10,000 Proceeds from issuance of common stock 806 537 Net cash provided by financing activities 12,716 26,866 Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 ( 96 ) Net change in cash, cash equivalents and restricted cash ( 9,930 ) 6,039 Cash, cash equivalents, and restricted cash at beginning of period 33,137 12,270 Cash, cash equivalents, and restricted cash at end of period $ 23,207 $ 18,309 Cash, Cash Equivalents and Restricted Cash at end of period Cash and cash equivalents $ 22,757 $ 12,517 Restricted cash, current 450 792 Restricted cash, long-term — 5,000 Cash, cash equivalents and restricted cash at the end of period $ 23,207 $ 18,309 Supplemental disclosure of cash flow information Cash paid for interest $ 5,198 $ 14,181 Cash paid (received) for income taxes, net $ 480 $ ( 1,578 ) Non-cash transactions Purchases of property and equipment included in accounts payable $ 309 $ 294 Purchases of property and equipment included in accrued liabilities $ — $ 1,255 Transfer of inventory to property and equipment $ 76 $ 207 See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (in thousands, unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit Three Months Ended Shares Amount Balance, June 30, 2020 39,905 $ 399 $ 519,235 $ ( 713,900 ) $ ( 1,235 ) $ ( 195,501 ) Net loss — — — ( 4,592 ) — ( 4,592 ) Foreign currency translation adjustments, net — — — — 722 722 Shares issued under employee stock purchase plan 133 2 537 — — 539 Shares issued under employee incentive plans, net 702 7 ( 7 ) — — — Stock-based compensation — — 2,592 — — 2,592 Balance, September 30, 2020 40,740 $ 408 $ 522,357 $ ( 718,492 ) $ ( 513 ) $ ( 196,240 ) Balance, June 30, 2021 57,280 $ 573 $ 629,862 $ ( 742,776 ) $ ( 589 ) ( 112,930 ) Net loss — — — ( 9,253 ) — ( 9,253 ) Foreign currency translation adjustments, net — — — — ( 506 ) ( 506 ) Shares issued under employee stock purchase plan 145 1 805 — — 806 Shares issued under employee incentive plans, net 1,387 14 ( 14 ) — — — Shares issued in connection with business acquisition 460 5 2,813 — — 2,818 Stock-based compensation — — 3,072 — — 3,072 Balance, September 30, 2021 59,272 $ 593 $ 636,538 $ ( 752,029 ) $ ( 1,095 ) $ ( 115,993 ) 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 Six Months Ended Shares Amount Balance, March 31, 2020 39,905 $ 399 $ 505,762 $ ( 703,164 ) $ ( 1,522 ) ( 198,525 ) Net loss — — — ( 15,328 ) — ( 15,328 ) Foreign currency translation adjustments, net — — — — 1,009 1,009 Shares issued under employee stock purchase plan 133 2 537 539 Shares issued under employee incentive plans, net 702 7 ( 7 ) — — Warrants issued related to long-term debt, net — — 11,515 — — 11,515 Stock-based compensation — — 4,550 — — 4,550 Balance, September 30, 2020 40,740 $ 408 $ 522,357 $ ( 718,492 ) $ ( 513 ) $ ( 196,240 ) Balance, March 31, 2021 56,915 $ 570 $ 626,664 $ ( 738,623 ) $ ( 856 ) $ (112,245) Net loss — — — ( 13,406 ) — ( 13,406 ) Foreign currency translation adjustments, net — — — — ( 239 ) ( 239 ) Shares issued under employee stock purchase plan 145 1 805 — 806 Shares issued under employee incentive plans, net 1,752 17 ( 17 ) — — — Shares issued in connection with business acquisition 460 5 2,813 — — 2,818 Stock-based compensation — 6,273 — — 6,273 Balance, September 30, 2021 59,272 $ 593 $ 636,538 $ ( 752,029 ) $ ( 1,095 ) $ ( 115,993 ) 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 7 Note 3: Business Combination 9 Note 4: Balance Sheet Information 9 Note 5: Long-Term Debt 11 Note 6: Leases 13 Note 7: Restructuring Charges 14 Note 8: Net Loss Per Share 15 Note 9: Income Taxes 15 Note 10: Commitments and Contingencies 15 Note 11: Fair Value of Financial Instruments 17 Note 12: Subsequent Events 17 6 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 September 30, 2021, the results of operations and comprehensive loss, statements of cash flows, and changes in stockholder's deficit for the three and six months ended September 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 7 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 September 30, Six Months Ended September 30, 2021 2020 2021 2020 Americas 1 Primary storage systems $ 11,264 $ 16,933 $ 18,458 $ 23,792 Secondary storage systems 12,174 9,317 28,886 17,993 Device and media 5,269 6,069 11,791 12,431 Service 21,341 19,399 41,534 37,994 Total revenue 50,048 51,718 100,669 92,210 EMEA Primary storage systems 4,244 2,798 7,020 5,094 Secondary storage systems 9,720 6,352 17,479 12,968 Device and media 4,513 4,745 9,894 8,767 Service 11,035 10,227 21,847 20,042 Total revenue 29,512 24,122 56,240 46,871 APAC Primary storage systems 1,175 879 2,516 1,938 Secondary storage systems 4,365 3,234 8,098 6,434 Device and media 1,931 523 2,644 1,120 Service 1,983 1,868 3,808 3,844 Total revenue 9,454 6,504 17,066 13,336 Consolidated Primary storage systems 16,683 20,610 27,994 30,824 Secondary storage systems 26,259 18,903 54,463 37,395 Device and media 11,713 11,337 24,329 22,318 Service 34,359 31,494 67,189 61,880 Royalty 2 4,166 3,477 8,303 6,709 Total revenue $ 93,180 $ 85,821 $ 182,278 $ 159,126 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 six months ended September 30, 2021 (in thousands): September 30, 2021 Contract liabilities (deferred revenue) $ 118,871 Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period 53,833 Remaining Performance Obligations Remaining performance obligations consisted of the following (in thousands): 8 Table of Contents Current Non-Current Total As of September 30, 2021 $ 130,708 $ 42,855 $ 173,563 The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months. NOTE 3: BUSINESS ACQUISITION 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 (“Pivot 3”). The transaction costs associated with the acquisition were not material and expensed as incurred. Goodwill generated from this acquisition is primarily attributable to the expected post-acquisition synergies from integrating Pivot3's video surveillance portfolio and assets with our platform to expand our video surveillance portfolio with hardware and software offerings that will be offered under the Quantum VS-Series portfolio. Goodwill obtained in an asset acquisition is deductible for tax purposes. The total purchase consideration for the acquisition of Pivot3 was $ 7.8 million, which consisted of the following (in thousands): Cash $ 5,000 Fair value of stock consideration 2,818 Total $ 7,818 The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of the acquisition (in thousands): Amount Estimated Useful Life Goodwill $ 6,796 Identified intangible assets: Developed technology 1,700 2 years Customer lists 3,700 4 years Property, plant and equipment 4,300 3 years Net liabilities assumed ( 8,678 ) Total $ 7,818 Pivot 3 has also agreed to license to the Company certain intellectual property rights related to the business. The historical results of operations for Pivot 3 were not significant to the Company's consolidated results of operations for the periods presented. NOTE 4: BALANCE SHEET INFORMATION Certain significant amounts included in the Company's consolidated balance sheets consist of the following (in thousands): Manufacturing inventories 9 Table of Contents September 30, 2021 March 31, 2021 Finished goods: Manufactured finished goods $ 11,013 $ 12,452 Distributor inventory 136 238 Total finished goods 11,149 12,690 Work in progress 3,653 2,074 Raw materials 14,046 9,703 Total manufacturing inventories $ 28,848 $ 24,467 Service parts inventories September 30, 2021 March 31, 2021 Finished goods $ 17,817 $ 18,773 Component parts 5,747 4,648 Total service parts inventories $ 23,564 $ 23,421 Intangibles, net September 30, 2021 March 31, 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Developed technology $ 6,400 $ ( 1,425 ) $ 4,975 $ 4,700 $ ( 473 ) $ 4,227 Customer lists 4,600 ( 443 ) 4,157 900 ( 90 ) 810 Intangible assets, net $ 11,000 $ ( 1,868 ) $ 9,132 $ 5,600 $ ( 563 ) $ 5,037 Intangible assets amortization expense was $ 0.8 million and $ 0 for the three months ended September 30, 2021 and 2020, respectively, and $ 1.3 million and $ 0 for the six months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 2.8 years. As of September 30, 2021, the future expected amortization expense for intangible assets is as follows (in thousands): Fiscal year ending Estimated future amortization expense Remainder of 2022 $ 1,796 2023 3,641 2024 2,490 Thereafter 1,205 Total $ 9,132 Goodwill Amount Balance at March 31, 2021 $ 3,466 Goodwill acquired 6,796 Balance at September 30, 2021 $ 10,262 There were no impairments to goodwill during the second quarter and first two quarters of fiscal 2021 and 2022. 10 Table of Contents NOTE 5: LONG-TERM DEBT The Company’s long-term debt consisted of the following (in thousands): September 30, 2021 March 31, 2021 Term Loan $ 99,375 $ — Senior Secured Term Loan — 92,426 PNC Credit Facility 10,000 — Paycheck Protection Program Loan — 10,000 Less: current portion ( 3,125 ) ( 1,850 ) Less: unamortized debt issuance costs (1) ( 4,882 ) ( 9,686 ) Long-term debt, net $ 101,368 $ 90,890 (1) The unamortized debt issuance costs related to the Senior Secured Term Loan and the 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 PNC Credit Facility are presented within other assets on the accompanying condensed consolidated balance sheets. On December 27, 2018, the Company entered into a senior secured term loan to borrow an aggregate of $ 165.0 million (the “Senior Secured Term Loan”). In connection with the Senior Secured Term Loan, the Company amended its existing revolving credit facility with PNC (the PNC Credit Facility together with the Senior Secured Term Loan, the “December 2018 Credit Agreements”) 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. On June 16, 2020, the Company entered into amendments to the December 2018 Credit Agreements (the "June 2020 Amendment" and collectively with the amendments to the December 2018 Credit Agreements occurring on March 30, 2020, March 31, 2020 and April 3, 2020, the “2020 Amendments”). The June 2020 Amendment provided an additional borrowing of $ 20.0 million which was immediately drawn in full. 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 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. 11 Table of Contents On August 5, 2021 (the “Closing Date”), the Company entered into a senior secured term loan to borrow an aggregate of $ 100.0 million, (the “Term Loan”). A portion of the proceeds were used to repay in full 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. The Company incurred $ 5.1 million in costs related to the Term Loan. These debt issuance costs are reflected as a reduction of the carrying amount of the Term Loan and are being recognized as interest expense over the term of the Term Loan. The Company recorded a loss on debt extinguishment of $ 15.0 million related to the repayment of the Senior Secured Term Loan which was comprised of $ 6.4 million in prepayment penalties, $ 0.1 million in legal fees, and the write-off of unamortized debt issuance costs of $ 8.4 million. Loans under the Term Loan 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 one 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 contains certain covenants, including requirements to prepay the Term Loan 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 beginning in the fiscal year ended March 31, 2023, 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. On September 30, 2021, the Company amended the PNC Credit Facility (the PNC Credit Facility together with the Term Loan, the “Credit Agreements”). The amendment, among other things (a) extended the maturity date to August 5, 2026; (b) reduced the principal amount of the revolving commitments to a maximum amount equal to the lesser of: (i) $ 30.0 million or (ii) the amount of the borrowing base, as defined in the PNC Credit Facility agreement;(c) replaced existing debt covenants with net leverage ratio, minimum liquidity and fixed charges coverage ratio covenants; and, (d) removed the requirement to maintain a $ 5.0 million restricted cash reserve with PNC. The interest rate under the PNC Credit Facility is 2.25 % per annum for LIBOR Rate Loans and 1.25 % per annum for Domestic Rate Loans and Swing Loans through December 31, 2021, and effective as of January 1, 2022 on the first day of each fiscal quarter ending thereafter (the “Applicable Margin Adjustment Date”), between 1.75 % and 2.25 % per annum for LIBOR Rate Loans and between 0.75 % and 1.25 % per annum for Domestic Rate Loans and Swing Loans, based on the percentage of Average Undrawn Availability (as defined in the PNC Credit Agreement) for the most recently completed fiscal quarter prior to the Applicable Margin Adjustment Date (the “Applicable Interest Rate”). With respect to any LIBOR Rate Loan, the Company has agreed to pay affiliates of certain Term Loan lenders a fee equal to a percentage per annum equal to the sum of (x) 6.00 %, minus (y) the Applicable Interest Rate, plus (z) if the LIBOR Rate applicable to such interest payment is less than 0.75 %, (i) 0.75 % minus (ii) such LIBOR Rate. With respect to any Domestic Rate Loan or Swing Loan, the Company has agreed to pay an affiliate of Blue Torch a fee equal to a percentage per annum equal to the sum of (x) 5.00 %, minus (y) the Applicable Interest Rate, plus (z) if the Alternative Base Rate applicable to such interest payment is less than 1.00 %, (i) 1.00 % minus (ii) such Alternative Base Rate. If on the last day of any calendar quarter, the average “Usage Amount” during such calendar quarter does not equal the “Maximum Revolving Advance Amount” (as such terms are defined in the PNC Credit 12 Table of Contents Facility), then the Company has agreed to pay affiliates of certain Term Loan lenders a fee at a rate per annum equal to 1.00 % minus a fee percentage between 0.25 % to 0.375 % on the amount by which the Maximum Revolving Advance Amount exceeds such average Usage Amount. As of September 30, 2021, the interest rates on the Term Loan and the PNC Credit Facility were 6.75 % and 2.34 %, respectively, and PNC Credit Facility had a borrowing base of $ 20.0 million, of which $ 8.6 million was available at that date. As of March 31, 2021, the Company was required to maintain a $ 5.0 million restricted cash reserve as part of the PNC Credit Facility, which was presented as long-term restricted cash within the accompanying condensed consolidated balance sheet as of March 31, 2021. The September 30, 2021 amendment to the PNC Credit Facility removed the restricted cash reserve requirement. Registration Rights Agreement In connection with the June 2020 Amendment to the Senior Secured Term Loan, 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. 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. 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. Small Business Administration (the “SBA”). The Company recorded the amount forgiven as gain on debt extinguishment of $ 10.0 million in the three and six months ended September 30, 2021. NOTE 6: LEASES Supplemental balance sheet information related to leases is as follows (in thousands): Operating leases September 30, 2021 March 31, 2021 Operating lease right-of-use asset $ 7,917 $ 9,383 Other accrued liabilities 2,092 2,581 Operating lease liability 6,818 8,005 Total operating lease liabilities $ 8,910 $ 10,586 Components of lease cost were as follows (in thousands): 13 Table of Contents Three Months Ended September 30, Six Months Ended September 30, Lease Cost 2021 2020 2021 2020 Operating lease cost $ 994 $ 1,338 $ 2,129 $ 2,669 Variable lease cost 177 211 351 423 Short-term lease cost 4 39 4 92 Total lease cost $ 1,175 $ 1,588 $ 2,484 $ 3,184 Maturity of Lease Liabilities Operating Leases 2022, excluding the six months ended September 30, 2021 $ 1,734 2023 2,695 2024 2,543 2025 2,264 2026 1,827 Thereafter 698 Total lease payments $ 11,761 Less: imputed interest ( 2,851 ) Present value of lease liabilities $ 8,910 Lease Term and Discount Rate September 30, 2021 March 31, 2021 Weighted average remaining operating lease term (years) 4.15 4.53 Weighted average discount rate for operating leases 13.64 % 13.96 % Operating cash outflows related to operating leases totaled $ 1.0 million and $ 1.3 million for the six months ended September 30, 2021 and 2020, respectively. NOTE 7: RESTRUCTURING CHARGES The following table summarizes the restructuring activities for the six months ended September 30, 2021 and 2020 (in thousands): Severance and Benefits Facilities Total Balance as of March 31, 2021 $ 580 $ — $ 580 Restructuring costs 274 — 274 Adjustments to prior estimates ( 50 ) — ( 50 ) Cash payments ( 784 ) — ( 784 ) Balance as of September 30, 2021 $ 20 $ — $ 20 Balance as of March 31, 2020 $ — $ — $ — Restructuring costs 2,637 — 2,637 Cash payments ( 2,397 ) — ( 2,397 ) Balance as of September 30, 2020 $ 240 $ — $ 240 14 Table of Contents NOTE 8: 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 September 30, Six Months Ended September 30, 2021 2020 2021 2020 9,195 8,020 10,315 7,180 The dilutive impact related to common shares from restricted stock units and warrants is determined by applying the treasury stock method 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. For the three and six months ended September 30, 2020, there were 1.6 million and 0.5 million of 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 were earned based on the Company’s achievement of certain average stock price and performance targets in addition to a time-based vesting period. There were no contingently issuable market based and performance based restricted stock units excluded from the diluted net loss per share as of September 30, 2021. NOTE 9: INCOME TAXES The effective tax rate for the three and six months ended September 30, 2021 and 2020 was ( 4.6 )% and ( 3.2 )% and 1.0 % and 0.0 %, 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. As of September 30, 2021, including interest and penalties, the Company had $ 108.4 million of unrecognized tax benefits, $ 89.9 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. After taking into account the valuation allowance, of the $ 89.9 million, only $ 7.5 million, if recognized, would favorably affect the effective tax rate. As of September 30, 2021, 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 September 30, 2021, $ 100.9 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 $ 7.5 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 $ 14.0 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. After taking into account the valuation allowance, of the $ 14.0 million, only $ 1.0 million would affect the effective tax rate. 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 15 Table of Contents obsolete inventory. As of September 30, 2021, the Company had issued non-cancelable commitments for $ 57.3 million to purchase inventory from its contract manufacturers and suppliers. Legal Proceedings On July 22, 2016, Realtime Data LLC d/b/a IXO (“Realtime Data”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patents Nos. 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, defendants in the Delaware Action filed a renewed motion to dismiss under Section 101. Realtime Data filed its opposition to the motion to dismiss on July 13, 2021. On August 23, 2021, the Court again reaffirmed its earlier ruling and granted defendants’ motions to dismiss under Section 101. Realtime Data has appealed that decision to the Federal Circuit. 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 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. Under the briefing schedule agreed to by the parties and approved by the Court of 16 Table of Contents Chancery, briefing on the motions ended July 26, 2021. The Court set oral argument on the motions for September 28, 2021, but on August 4, 2021, on its own motion, postponed the hearing to November 1, 2021. 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 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. No impairment charges were recognized for non-financial assets in the six months ended September 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 September 30, 2021 and 2020. The fair value has been classified as Level 2 within the fair value hierarchy. September 30, 2021 2020 Carrying Value Fair Value Carrying Value Fair Value Senior Secured Term Loan $ 99,375 $ 99,375 $ 185,208 $ 185,208 Amended PNC Credit Facility 10,000 10,000 — — NOTE 12: SUBSEQUENT EVENTS On October 1, 2021, the Company acquired the assets of EnCloudEn, an early stage hyperconverged infrastructure software company, for $ 2.3 million in cash.