QUANTUM CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS QUANTUM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts, unaudited) December 31, 2021 March 31, 2021 Assets Current assets: Cash and cash equivalents $ 4,004 $ 27,430 Restricted cash 331 707 Accounts receivable, net of allowance for doubtful accounts of $ 347 and $ 406 66,070 73,102 Manufacturing inventories 33,912 24,467 Service parts inventories 22,532 23,421 Other current assets 14,082 6,939 Total current assets 140,931 156,066 Property and equipment, net 13,020 10,051 Intangible assets, net 10,738 5,037 Goodwill 10,262 3,466 Restricted cash — 5,000 Right-of-use assets, net 3,483 9,383 Other long-term assets 9,202 5,921 Total assets $ 187,636 $ 194,924 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 42,041 $ 35,245 Deferred revenue 78,115 84,027 Accrued restructuring charges 597 580 Long-term debt, current portion 3,750 1,850 Accrued compensation 16,193 19,214 Other accrued liabilities 15,451 18,174 Total current liabilities 156,147 159,090 Deferred revenue 41,190 36,126 Long-term debt, net of current portion 97,928 90,890 Operating lease liabilities 2,714 8,005 Other long-term liabilities 12,440 13,058 Total liabilities 310,419 307,169 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; 59,816 and 56,915 shares issued and outstanding 599 570 Additional paid-in capital 640,839 626,664 Accumulated deficit ( 763,089 ) ( 738,623 ) Accumulated other comprehensive loss ( 1,132 ) ( 856 ) Total stockholders’ deficit ( 122,783 ) ( 112,245 ) Total liabilities and stockholders’ deficit $ 187,636 $ 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 December 31, Nine Months Ended December 31, 2021 2020 2021 2020 Revenue: Product $ 58,522 $ 63,021 $ 165,308 $ 153,557 Service 33,162 31,169 100,352 93,049 Royalty 3,660 3,833 11,963 10,543 Total revenue 95,344 98,023 277,623 257,149 Cost of revenue: Product 45,118 43,311 124,982 108,691 Service 15,016 12,433 41,764 36,593 Total cost of revenue 60,134 55,744 166,746 145,284 Gross profit 35,210 42,279 110,877 111,865 Operating expenses: Research and development 14,607 9,589 38,287 29,983 Sales and marketing 16,714 15,294 46,128 40,019 General and administrative 10,538 11,103 33,830 32,928 Restructuring charges 576 200 850 2,837 Total operating expenses 42,435 36,186 119,095 105,767 Income (loss) from operations ( 7,225 ) 6,093 ( 8,218 ) 6,098 Other expense, net ( 150 ) ( 698 ) ( 223 ) ( 1,395 ) Interest expense ( 2,431 ) ( 7,808 ) ( 9,387 ) ( 21,823 ) Loss on debt extinguishment, net — — ( 4,960 ) — Net loss before income taxes ( 9,806 ) ( 2,413 ) ( 22,788 ) ( 17,120 ) Income tax provision 1,254 256 1,678 877 Net loss $ ( 11,060 ) $ ( 2,669 ) $ ( 24,466 ) $ ( 17,997 ) Net loss per share - basic and diluted $ ( 0.19 ) $ ( 0.07 ) $ ( 0.42 ) $ ( 0.45 ) Weighted average shares - basic and diluted 59,486 40,927 58,399 40,374 Net loss $ ( 11,060 ) $ ( 2,669 ) $ ( 24,466 ) $ ( 17,997 ) Foreign currency translation adjustments, net ( 37 ) 975 ( 276 ) 1,984 Total comprehensive loss $ ( 11,097 ) $ ( 1,694 ) $ ( 24,742 ) $ ( 16,013 ) See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Nine Months Ended December 31, 2021 2020 Operating activities Net loss $ ( 24,466 ) $ ( 17,997 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 6,795 3,898 Amortization of debt issuance costs 1,981 4,906 Long-term debt related costs — 167 Provision for product and service inventories 4,016 4,764 Stock-based compensation 10,580 6,428 Paycheck Protection Program loan forgiveness ( 10,000 ) — Non-cash loss on debt extinguishment 8,471 — Other 282 2,113 Changes in assets and liabilities: Accounts receivable, net 7,008 1,342 Manufacturing inventories ( 10,672 ) ( 7,732 ) Service parts inventories ( 2,281 ) ( 4,559 ) Accounts payable 5,369 ( 7,022 ) Accrued restructuring charges 17 210 Accrued compensation ( 3,021 ) 4,268 Deferred revenue ( 8,598 ) ( 9,727 ) Other current assets ( 7,047 ) 846 Other non-current assets ( 1,148 ) 133 Other current liabilities ( 3,350 ) ( 2,432 ) Other non-current liabilities ( 617 ) 130 Net cash used in operating activities ( 26,681 ) ( 20,264 ) Investing activities Purchases of property and equipment ( 3,971 ) ( 4,665 ) Business acquisition, net of cash acquired ( 7,808 ) ( 2,636 ) Net cash used in investing activities ( 11,779 ) ( 7,301 ) Financing activities Borrowings of long-term debt, net of debt issuance costs 94,961 19,400 Repayments of long-term debt ( 93,677 ) — Borrowings of credit facility 207,563 232,663 Repayments of credit facility ( 200,007 ) ( 229,847 ) Borrowings of payment protection program — 10,000 Proceeds from issuance of common stock 806 539 Net cash provided by financing activities 9,646 32,755 Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 ( 62 ) Net change in cash, cash equivalents and restricted cash ( 28,802 ) 5,128 Cash, cash equivalents, and restricted cash at beginning of period 33,137 12,270 Cash, cash equivalents, and restricted cash at end of period $ 4,335 $ 17,398 Cash, Cash Equivalents and Restricted Cash at end of period Cash and cash equivalents $ 4,004 $ 11,632 Restricted cash, current 331 766 Restricted cash, long-term — 5,000 Cash, cash equivalents and restricted cash at the end of period $ 4,335 $ 17,398 Supplemental disclosure of cash flow information Cash paid for interest $ 7,180 $ 19,992 Cash paid (received) for income taxes, net $ 541 $ ( 2,464 ) Non-cash transactions Purchases of property and equipment included in accounts payable $ 1,148 $ 67 Purchases of property and equipment included in accrued liabilities $ 1,212 $ 1,255 Transfer of inventory to property and equipment $ 382 $ 372 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, September 30, 2020 40,740 $ 408 $ 522,357 $ ( 718,492 ) $ ( 513 ) $ ( 196,240 ) Net loss — — — ( 2,669 ) — ( 2,669 ) Foreign currency translation adjustments, net — — — — 975 975 Shares issued under employee stock purchase plan 453 5 ( 5 ) — — — Shares issued under employee incentive plans, net 361 3 2,077 — — 2,080 Stock-based compensation — — 1,878 — — 1,878 Balance, December 31, 2020 41,554 $ 416 $ 526,307 $ ( 721,161 ) $ 462 $ ( 193,976 ) Balance, September 30, 2021 59,272 $ 593 $ 636,538 $ ( 752,029 ) $ ( 1,095 ) $ ( 115,993 ) Net loss — — — ( 11,060 ) — ( 11,060 ) Foreign currency translation adjustments, net — — — — ( 37 ) ( 37 ) Shares issued under employee stock purchase plan — — — — — — Shares issued under employee incentive plans, net 183 2 ( 2 ) — — — Shares issued in connection with business acquisition 361 4 ( 4 ) — — — Stock-based compensation — — 4,307 — — 4,307 Balance, December 31, 2021 59,816 $ 599 $ 640,839 $ ( 763,089 ) $ ( 1,132 ) $ ( 122,783 ) See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Deficit Nine Months Ended Shares Amount Balance, March 31, 2020 39,905 $ 399 $ 505,762 $ ( 703,164 ) $ ( 1,522 ) $ ( 198,525 ) Net loss — — — ( 17,997 ) — ( 17,997 ) Foreign currency translation adjustments, net — — — — 1,984 1,984 Shares issued under employee stock purchase plan 133 2 537 — — 539 Shares issued under employee incentive plans, net 1,155 12 ( 12 ) — — — Shares issued in connection with business acquisition 361 3 2,077 — — 2,080 Warrants issued related to long-term debt — — 11,515 — — 11,515 Stock-based compensation — — 6,428 — — 6,428 Balance, December 31, 2020 41,554 $ 416 $ 526,307 $ ( 721,161 ) $ 462 $ ( 193,976 ) Balance, March 31, 2021 56,915 $ 570 $ 626,664 $ ( 738,623 ) $ ( 856 ) $ ( 112,245 ) Net loss — — — ( 24,466 ) — ( 24,466 ) Foreign currency translation adjustments, net — — — — ( 276 ) ( 276 ) Shares issued under employee stock purchase plan 145 1 805 — — 806 Shares issued under employee incentive plans, net 1,935 19 ( 19 ) — — — Shares issued in connection with business acquisition 821 9 2,809 — — 2,818 Stock-based compensation — — 10,580 — — 10,580 Balance, December 31, 2021 59,816 $ 599 $ 640,839 $ ( 763,089 ) $ ( 1,132 ) $ ( 122,783 ) 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 8 Note 3: Business Combination 10 Note 4: Balance Sheet Information 10 Note 5: Long-Term Debt 12 Note 6: Leases 14 Note 7: Restructuring Charges 15 Note 8: Net Loss Per Share 15 Note 9: Income Taxes 15 Note 10: Commitments and Contingencies 16 Note 11: Fair Value of Financial Instruments 17 6 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), 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 December 31, 2021, the results of operations and comprehensive loss, statements of cash flows, and changes in stockholder's deficit for the three and nine months ended December 31, 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 Not Yet Adopted In October 2021, the Financial Accounting Standards Board ("FASB") issued ASU No. 2021-08, Business Combinations (Topic 805); Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This new guidance affects all entities that enter into a business combination within the scope of ASC 805-10. Under this new guidance, the acquirer should determine what contract assets and/or liabilities it would have recorded under ASC 606 (Revenue Guidance) as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquirer. Under current GAAP, contract assets and contract liabilities acquired in a business combination are recorded by the acquirer at fair value. This update will be effective for the Company for the fiscal year beginning April 1, 2023. Early adoption is permitted including adoption in interim periods. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures. 7 Table of Contents NOTE 2: REVENUE Based on how the Company manages its business, the Company has determined that it currently operates in one reportable segment. The Company operates in three geographic regions: (a) Americas; (b) Europe, Middle East and Africa (“EMEA”); and (c) Asia Pacific (“APAC”). Revenue by geography is based on the location of the customer from which the revenue is earned. In the following table, revenue is disaggregated by major product offering and geographies (in thousands): Three Months Ended December 31, Nine Months Ended December 31, 2021 2020 2021 2020 Americas 1 Primary storage systems $ 8,768 $ 18,755 $ 27,228 $ 42,547 Secondary storage systems 15,060 11,124 43,946 29,117 Device and media 7,737 5,347 19,527 17,777 Service 19,470 18,913 61,003 56,907 Total revenue 51,035 54,139 151,704 146,348 EMEA Primary storage systems 3,305 3,680 10,325 8,774 Secondary storage systems 10,377 10,113 27,856 23,081 Device and media 5,125 5,900 15,018 14,668 Service 11,606 10,339 33,454 30,380 Total revenue 30,413 30,032 86,653 76,903 APAC Primary storage systems 1,718 1,219 4,234 3,157 Secondary storage systems 5,193 4,074 13,291 10,507 Device and media 1,239 2,809 3,883 3,929 Service 2,086 1,917 5,895 5,762 Total revenue 10,236 10,019 27,303 23,355 Consolidated Primary storage systems 13,791 23,654 41,787 54,478 Secondary storage systems 30,630 25,311 85,093 62,705 Device and media 14,101 14,056 38,428 36,374 Service 33,162 31,169 100,352 93,049 Royalty 2 3,660 3,833 11,963 10,543 Total revenue $ 95,344 $ 98,023 $ 277,623 $ 257,149 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 nine months ended December 31, 2021 (in thousands): 8 Table of Contents December 31, 2021 Contract liabilities (deferred revenue) $ 119,305 Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period 72,383 Remaining Performance Obligations Remaining performance obligations consisted of the following (in thousands): Current Non-Current Total As of December 31, 2021 $ 102,726 $ 43,276 $ 146,002 The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months. 9 Table of Contents NOTE 3: BUSINESS COMBINATION Pivot3 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 were 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. EnCloudEn On October 1, 2021 the Company acquired all intellectual property rights and certain other assets of EnCloudEn, an early stage hyperconverged infrastructure software company. The transaction costs associated with the acquisition were not material and were expensed as incurred. The total purchase consideration for the acquisition was $ 2.8 million with $ 2.6 million paid at closing and an additional $ 0.2 million paid in two equal quarterly installments after closing. The fair value of the assets acquired was allocated to developed technology with an estimate useful life of three years . NOTE 4: BALANCE SHEET INFORMATION Certain significant amounts included in the Company's consolidated balance sheets consist of the following (in thousands): Manufacturing inventories 10 Table of Contents December 31, 2021 March 31, 2021 Finished goods: Manufactured finished goods $ 13,111 $ 12,452 Distributor inventory 170 238 Total finished goods 13,281 12,690 Work in progress 2,820 2,074 Raw materials 17,811 9,703 Total manufacturing inventories $ 33,912 $ 24,467 Service parts inventories December 31, 2021 March 31, 2021 Finished goods $ 17,389 $ 18,773 Component parts 5,143 4,648 Total service parts inventories $ 22,532 $ 23,421 Intangibles, net December 31, 2021 March 31, 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Developed technology $ 9,208 $ ( 2,293 ) $ 6,915 $ 4,700 $ ( 473 ) $ 4,227 Customer lists 4,600 ( 777 ) 3,823 900 ( 90 ) 810 Intangible assets, net $ 13,808 $ ( 3,070 ) $ 10,738 $ 5,600 $ ( 563 ) $ 5,037 Intangible assets amortization expense was $ 1.2 million and $ 0.1 for the three months ended December 31, 2021 and 2020, respectively, and $ 2.5 million and $ 0.1 for the nine months ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 2.6 years. As of December 31, 2021, the future expected amortization expense for intangible assets is as follows (in thousands): Fiscal year ending Estimated future amortization expense Remainder of 2022 $ 1,129 2023 4,568 2024 3,417 Thereafter 1,624 Total $ 10,738 Goodwill Amount Balance at March 31, 2021 $ 3,466 Goodwill acquired 6,796 Balance at December 31, 2021 $ 10,262 11 Table of Contents NOTE 5: LONG-TERM DEBT The Company’s long-term debt consisted of the following (in thousands): December 31, 2021 March 31, 2021 Term Loan $ 98,750 $ — Senior Secured Term Loan — 92,426 PNC Credit Facility 7,556 — Paycheck Protection Program Loan — 10,000 Less: current portion ( 3,750 ) ( 1,850 ) Less: unamortized debt issuance costs (1) ( 4,628 ) ( 9,686 ) Long-term debt, net $ 97,928 $ 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 (the “PNC Credit Facility”) with PNC Bank, National Association (“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 (the “PNC Credit Agreement”). On June 16, 2020, the Company entered into amendments to the December 2018 Credit Agreements, which, among other things, provided an additional borrowing of $ 20.0 million. 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. On August 5, 2021, 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 of the Term Loan 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. 12 Table of Contents The Term Loan credit agreement (the “Term Loan Credit Agreement” and, together with the PNC Credit Agreement, the “Credit Agreements”) 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 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 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 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 December 31, 2021, the interest rates on the Term Loan was 6.75 % and the interest rate on the PNC Credit Facility was 4.50 %. The PNC Credit Facility had a borrowing base of $ 15.1 million, of which $ 7.6 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. 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 nine months ended December 31, 2021. 13 Table of Contents NOTE 6: LEASES Supplemental balance sheet information related to leases is as follows (in thousands): Operating leases December 31, 2021 March 31, 2021 Operating lease right-of-use asset $ 3,483 $ 9,383 Other accrued liabilities 1,141 2,581 Operating lease liability 2,714 8,005 Total operating lease liabilities $ 3,855 $ 10,586 Components of lease cost were as follows (in thousands): Three Months Ended December 31, Nine Months Ended December 31, Lease Cost 2021 2020 2021 2020 Operating lease cost $ 3,016 $ 1,018 $ 5,145 $ 3,688 Variable lease cost 527 198 877 620 Short-term lease cost 17 37 17 129 Total lease cost $ 3,560 $ 1,253 $ 6,039 $ 4,437 Maturity of Lease Liabilities Operating Leases 2022, excluding the nine months ended December 31, 2021 $ 451 2023 1,449 2024 1,228 2025 918 2026 444 Thereafter 460 Total lease payments $ 4,950 Less: imputed interest ( 1,095 ) Present value of lease liabilities $ 3,855 Lease Term and Discount Rate December 31, 2021 March 31, 2021 Weighted average remaining operating lease term (years) 3.63 4.53 Weighted average discount rate for operating leases 13.16 % 13.96 % Operating cash outflows related to operating leases totaled $ 3.1 million and $ 4.4 million for the nine months ended December 31, 2021 and 2020, respectively. During the quarter ended December 31, 2021, the Company exited an office location which resulted in a reduction of $ 3.8 million in the right-of-use asset and $ 3.7 million in the operating lease liability. 14 Table of Contents NOTE 7: RESTRUCTURING CHARGES The following table summarizes the restructuring activities for the nine months ended December 31, 2021 and 2020 (in thousands): Severance and Benefits Balance as of March 31, 2021 $ 580 Restructuring costs 850 Adjustments to prior estimates ( 28 ) Cash payments ( 785 ) Other non-cash ( 20 ) Balance as of December 31, 2021 $ 597 Balance as of March 31, 2020 $ — Restructuring costs 2,837 Cash payments ( 2,627 ) Balance as of December 31, 2020 $ 210 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 December 31, Nine Months Ended December 31, 2021 2020 2021 2020 8,802 8,311 9,811 7,557 The dilutive impact related to common stock 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 stock from contingently issuable performance share units is determined by applying a two-step approach using both the contingently issuable share guidance and the treasury stock method. For the three and nine months ended December 31, 2021 there were 0.2 million contingently issuable market based restricted stock units excluded from the calculation of diluted net loss per share as their market conditions had not yet been achieved. For the three and nine months ended December 31, 2020 there were 1.5 million and 0.4 million of contingently issuable market based and performance based restricted stock units excluded from the calculation of diluted net income (loss) per share as their market and performance conditions had not yet been achieved. These shares will be earned based on the Company’s achievement of certain average stock price and performance targets in addition to a time-based vesting period. NOTE 9: INCOME TAXES The effective tax rate for the three and nine months ended December 31, 2021 and 2020 was ( 12.6 )% and ( 7.3 )% and ( 10.6 )% and ( 5.1 )%, 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. 15 Table of Contents As of December 31, 2021, including interest and penalties, the Company had $ 109.2 million of unrecognized tax benefits, $ 90.6 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of December 31, 2021 the Company had accrued interest and penalties related to these unrecognized tax benefits of $ 1.4 million. The Company recognizes interest and penalties related to income tax matters in the income tax provision in the condensed consolidated statements of operations. As of December 31, 2021, $ 101.4 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 $ 7.8 million (including interest and penalties) were recorded in other long-term liabilities in the condensed consolidated balance sheets. During the next 12 months, it is reasonably possible that approximately $ 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. NOTE 10: COMMITMENTS AND CONTINGENCIES Commitments to Purchase Inventory The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon the Company’s forecast of customer demand. The Company has similar arrangements with certain other suppliers. The Company is responsible for the financial impact on the supplier or contract manufacturer of any reduction or product mix shift in the forecast relative to materials that the third party had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for inventory in excess of current customer demand or for costs of excess or obsolete inventory. As of December 31, 2021, the Company had issued non-cancelable commitments for $ 66.3 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 September 7, 2021, the case against Quantum in the Northern District of California was stayed pending the outcome of Realtime Data’s appeal in the Delaware Action. 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, 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 16 Table of Contents 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. A further status conference in that action is set for March 10, 2022. 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 motions ended July 26, 2021. The Court held oral argument on the motions on November 1, 2021 and on January 28, 2022, the Court granted the motions to dismiss the breach of fiduciary duty claims against Messrs. Gacek and Auvil and denied the motions to dismiss the remaining claims. 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 nine months ended December 31, 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 December 31, 2021 and 2020. The fair value has been classified as Level 2 within the fair value hierarchy. December 31, 2021 2020 Carrying Value Fair Value Carrying Value Fair Value Term Loan $ 98,750 $ 98,750 $ 185,208 $ 188,471 PNC Credit Facility 7,556 7,556 5,960 5,289 17 Table of Contents