QUANTUM CORP /DE/ - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ___ to ___
Commission File Number 001-13449
Quantum Corporation | ||
(Exact name of registrant as specified in its charter) | ||
| Delaware | 94-2665054 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 224 Airport Parkway | Suite 550 | |||||||||||||
| San Jose | CA | 95110 | ||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
| (408) | 944-4000 | ||||
| Registrant's telephone number, including area code | |||||
| (Former name, former address and former fiscal year, if changed since last report) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value per share | QMCO | Nasdaq Global Market | ||||||||||||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | x | Yes | ¨ | No | ||||||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | x | Yes | ¨ | No | ||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | x | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised | ||||||||||||||
☐ | ||||||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | ||||||||||||||
| ☐ | Yes | x | No | |||||||||||
As of the close of business on July 31, 2020, there were 39,907,956 shares of Quantum Corporation’s common stock issued and outstanding.
QUANTUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2020
Table of Contents
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
As used in this Quarterly Report on Form 10-Q (this "Quarterly Report"), the terms "Quantum," "we," "us," and "our" refer to Quantum Corporation and its subsidiaries taken as a whole, unless otherwise noted or unless the context indicates otherwise.
Note Regarding Forward-Looking Statements
This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding COVID-19's anticipated impacts on our business, our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Item 1A. Moreover, we operate in a competitive and changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, you should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this report or to conform these statements to actual results or revised expectations.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts, unaudited)
| June 30, 2020 | March 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 23,307 | $ | 6,440 | |||||||
| Restricted cash | 805 | 830 | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $1,348 and $1,247 as of June 30, 2020 and March 31, 2020, respectively | 49,339 | 70,370 | |||||||||
| Manufacturing inventories | 29,981 | 29,196 | |||||||||
| Service parts inventories | 21,111 | 20,502 | |||||||||
| Other current assets | 8,766 | 8,489 | |||||||||
| Total current assets | 133,309 | 135,827 | |||||||||
| Property and equipment, net | 9,980 | 9,046 | |||||||||
| Restricted cash | 5,000 | 5,000 | |||||||||
| Right-of-use assets, net | 12,325 | 12,689 | |||||||||
| Other long-term assets | 4,329 | 3,433 | |||||||||
| Total assets | $ | 164,943 | $ | 165,995 | |||||||
| Liabilities and Stockholders’ Deficit | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 26,957 | $ | 36,949 | |||||||
| Deferred revenue | 76,003 | 81,492 | |||||||||
| Accrued restructuring charges | 458 | — | |||||||||
| Long-term debt, current portion | 925 | 7,321 | |||||||||
| Accrued compensation | 14,092 | 14,957 | |||||||||
| Other accrued liabilities | 15,773 | 17,535 | |||||||||
| Total current liabilities | 134,208 | 158,254 | |||||||||
| Deferred revenue | 34,743 | 37,443 | |||||||||
| Long-term debt, net of current portion | 169,705 | 146,847 | |||||||||
| Operating lease liabilities | 10,402 | 10,822 | |||||||||
| Other long-term liabilities | 11,386 | 11,154 | |||||||||
| Total liabilities | 360,444 | 364,520 | |||||||||
| Commitments and contingencies (Note 9) | |||||||||||
| Stockholders' deficit | |||||||||||
Preferred stock, 20,000 shares authorized; no shares issued as of June 30, 2020 and March 31, 2020, respectively | — | — | |||||||||
Common stock, $0.01 par value; 125,000 shares authorized; 39,905 shares issued and outstanding as of June 30, 2020 and March 31, 2020, respectively | 399 | 399 | |||||||||
| Additional paid-in capital | 519,235 | 505,762 | |||||||||
| Accumulated deficit | (713,900) | (703,164) | |||||||||
| Accumulated other comprehensive loss | (1,235) | (1,522) | |||||||||
| Total stockholders’ deficit | (195,501) | (198,525) | |||||||||
| Total liabilities and stockholders’ deficit | $ | 164,943 | $ | 165,995 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts, unaudited)
| Three Months Ended June 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Revenue: | |||||||||||
| Product | $ | 39,687 | $ | 65,796 | |||||||
| Service | 30,386 | 33,381 | |||||||||
| Royalty | 3,232 | 6,454 | |||||||||
| Total revenue | 73,305 | 105,631 | |||||||||
| Cost of revenue: | |||||||||||
| Product | 30,382 | 47,200 | |||||||||
| Service | 12,071 | 12,605 | |||||||||
| Total cost of revenue | 42,453 | 59,805 | |||||||||
| Gross profit | 30,852 | 45,826 | |||||||||
| Operating expenses: | |||||||||||
| Research and development | 10,162 | 8,383 | |||||||||
| Sales and marketing | 11,570 | 15,856 | |||||||||
| General and administrative | 11,563 | 18,576 | |||||||||
| Restructuring charges | 1,052 | 263 | |||||||||
| Total operating expenses | 34,347 | 43,078 | |||||||||
| Income (loss) from operations | (3,495) | 2,748 | |||||||||
| Other income (expense), net | (385) | 89 | |||||||||
| Interest expense | (6,437) | (6,306) | |||||||||
| Net loss before income taxes | (10,317) | (3,469) | |||||||||
| Income tax provision | 419 | 338 | |||||||||
| Net loss | $ | (10,736) | $ | (3,807) | |||||||
| Net loss per share - basic and diluted | $ | (0.27) | $ | (0.11) | |||||||
| Weighted average shares - basic and diluted | 39,905 | 36,045 | |||||||||
| Net loss | $ | (10,736) | $ | (3,807) | |||||||
| Foreign currency translation adjustments, net | 287 | 84 | |||||||||
| Total comprehensive loss | $ | (10,449) | $ | (3,723) | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
| Three Months Ended June 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | (10,736) | $ | (3,807) | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||||||
| Depreciation and amortization | 1,286 | 1,021 | |||||||||
| Amortization of debt issuance costs | 1,124 | 1,004 | |||||||||
| Long-term debt related costs | 167 | — | |||||||||
| Provision for product and service inventories | 1,629 | 1,572 | |||||||||
| Stock-based compensation | 1,958 | 987 | |||||||||
| Bad debt expense | 39 | 214 | |||||||||
| Deferred income taxes | 13 | (49) | |||||||||
| Unrealized foreign exchange loss | 482 | 130 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | 20,993 | 19,360 | |||||||||
| Manufacturing inventories | (1,784) | (7,141) | |||||||||
| Service parts inventories | (1,399) | (639) | |||||||||
| Accounts payable | (9,967) | 2,593 | |||||||||
| Accrued restructuring charges | 458 | (471) | |||||||||
| Accrued compensation | (864) | (3,838) | |||||||||
| Deferred revenue | (8,188) | (7,648) | |||||||||
| Other assets and liabilities | (4,198) | (2,385) | |||||||||
| Net cash provided by (used in) operating activities | (8,987) | 903 | |||||||||
| Investing activities | |||||||||||
| Purchases of property and equipment | (484) | (444) | |||||||||
| Net cash used in investing activities | (484) | (444) | |||||||||
| Financing activities | |||||||||||
| Senior Secured Term Loan borrowings, net of debt issuance costs | 19,400 | — | |||||||||
| PNC Credit Facility borrowings | 78,582 | (413) | |||||||||
| PNC Credit Facility repayments | (81,653) | — | |||||||||
| Paycheck Protection Program borrowing | 10,000 | — | |||||||||
| Net cash provided by (used in) financing activities | 26,329 | (413) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (16) | (53) | |||||||||
| Net change in cash, cash equivalents and restricted cash | 16,842 | (7) | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 12,270 | 16,855 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 29,112 | $ | 16,848 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid for interest | $ | 8,445 | $ | 5,129 | |||||||
| Cash paid (received) for income taxes, net of refunds | $ | (1,964) | $ | 126 | |||||||
| Non-cash transactions | |||||||||||
| Purchases of property and equipment included in accounts payable | $ | 262 | $ | 155 | |||||||
| Purchases of property and equipment included in accrued liabilities | $ | 1,315 | $ | — | |||||||
| Transfer of inventory to property and equipment | $ | 159 | $ | 118 | |||||||
| The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows: | |||||||||||
| Cash and cash equivalents | $ | 23,307 | $ | 10,806 | |||||||
| Restricted cash, current | 805 | 1,042 | |||||||||
| Restricted cash, long-term | 5,000 | 5,000 | |||||||||
| Total cash, cash equivalents and restricted cash at the end of period | $ | 29,112 | $ | 16,848 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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 | ||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | 36,040 | $ | 360 | $ | 499,224 | $ | (697,954) | $ | (1,410) | $ | (199,780) | |||||||||||||||||||||||||||
| Net income | — | — | — | (3,807) | — | (3,807) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net | — | — | — | — | 84 | 84 | ||||||||||||||||||||||||||||||||
| Shares issued under employee incentive plans, net | 6 | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 987 | — | — | 987 | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 36,046 | $ | 360 | $ | 500,211 | $ | (701,761) | $ | (1,326) | $ | (202,516) | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | 287 | 287 | ||||||||||||||||||||||||||||||||
| Warrants issued related to long-term debt | — | — | 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) | |||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||||||
| Note 1: | ||||||||
| Note 2: | ||||||||
| Note 3: | ||||||||
| Note 4: | ||||||||
| Note 5: | ||||||||
| Note 6: | ||||||||
| Note 7: | ||||||||
| Note 8: | ||||||||
| Note 9: | ||||||||
| Note 10: | ||||||||
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), was founded in 1980 and reincorporated in Delaware in 1987, and is headquartered in San Jose, California. The Company is a leader in storing and managing digital video and other forms of unstructured data, delivering top streaming performance for video and rich media applications, along with low-cost, long-term storage systems for data protection and archiving. The Company helps customers around the world capture, create and share digital data and preserve and protect it for decades. The Company’s software-defined, hyperconverged storage solutions span from non-violate memory express (“NVMe”), to solid state drives, (“SSD”), hard disk drives, (“HDD”), tape and the cloud and are tied together leveraging a single namespace view of the entire data environment. The Company works closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving needs.
Basis of Presentation
The accompanying interim 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 accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of June 30, 2020, results of operations and comprehensive loss and changes in stockholder's deficit for the three months ended June 30, 2020 and 2019. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.
COVID-19 Risks and Uncertainties
Quantum is subject to the risks arising from COVID-19 which have caused substantial financial market volatility and have adversely affected both the U.S. and the global economy. For many of our customers, the COVID-19 pandemic has significantly affected their business. Movie and television production has been paused, professional and collegiate sports seasons have been postponed or cancelled, and many corporations and enterprises have put information technology spending on hold while they assess the short- and long-term impact of the pandemic. While our supply chain remains intact and operating, we have experienced issues related to our logistics network. The reduced capacity within and across freight lanes (aircraft, personnel, customs clearance, etc.) has caused late deliveries from re-routes and mis-shipments, as well as increased expedite and other charges to deliver and receive products. To date, the Company has experienced minimal impact on product availability, although future capacity constraints across the network due to lost capacity from factory down time, closures, as well as reduced staff and demand signal fluctuations are expected to impact product availability in the months and possibly quarters to come.
Quantum believes that these social and economic impacts have had a negative effect on sales due to the decline in customers' ability or willingness to purchase its products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. The Company’s management continues to actively monitor the situation and may take further actions altering its business operations that tare determined to be in the best interests of its employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.
Use of Estimates
6
Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with GAAP. These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented with consideration given to the potential impacts of COVID-19 pandemic. However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
| Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities. | |||||||
| Level 2: | Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |||||||
| Level 3: | Inputs are unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. | |||||||
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our financial instruments consist of Level 2 liabilities.
Recently Adopted Accounting Pronouncements
The Company adopted the guidance in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses of Financial Instruments ("CECL") on April 1, 2020. The ASU requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses over the lifetime of the asset rather than incurred losses. The adoption of ASU 2016-13 did not have a material impact on the condensed consolidated financial statements.
The Company adopted the guidance in ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract on April 1, 2020. The ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancelable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The adoption of ASU 2018-15 did not have a material impact on the condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
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
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, 2020 | June 30, 20191 | ||||||||||
Americas2 | |||||||||||
| Primary storage systems | $ | 6,859 | $ | 9,418 | |||||||
| Secondary storage systems | 8,676 | 24,292 | |||||||||
| Device and media | 6,362 | 8,671 | |||||||||
| Service | 18,595 | 21,571 | |||||||||
| Total revenue | 40,492 | 63,952 | |||||||||
| EMEA | |||||||||||
| Primary storage systems | 2,296 | 3,838 | |||||||||
| Secondary storage systems | 6,616 | 9,897 | |||||||||
| Device and media | 4,022 | 3,533 | |||||||||
| Service | 9,815 | 9,223 | |||||||||
| Total revenue | 22,749 | 26,491 | |||||||||
| APAC | |||||||||||
| Primary storage systems | 1,059 | 1,366 | |||||||||
| Secondary storage systems | 3,200 | 3,523 | |||||||||
| Device and media | 597 | 1,258 | |||||||||
| Service | 1,976 | 2,587 | |||||||||
| Total revenue | 6,832 | 8,734 | |||||||||
| Consolidated | |||||||||||
| Primary storage systems | 10,214 | 14,622 | |||||||||
| Secondary storage systems | 18,492 | 37,712 | |||||||||
| Device and media | 10,981 | 13,462 | |||||||||
| Service | 30,386 | 33,381 | |||||||||
Royalty3 | 3,232 | 6,454 | |||||||||
| Total revenue | $ | 73,305 | $ | 105,631 | |||||||
1 Primary and Secondary storage system revenue has been adjusted for June 30, 2019 due to certain reclassifications from Primary to Secondary storage systems.
2 Revenue for Americas geographic region outside of the United States is not significant.
3 Royalty revenue is not allocable to geographic regions.
Contract Balances
The following table presents the Company’s contract liabilities and certain information related to this balance as of and for the three months ended June 30, 2020 (in thousands):
| June 30, 2020 | ||||||||
| Contract liabilities (deferred revenue) | $ | 110,746 | ||||||
| Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period | 28,812 | |||||||
Remaining Performance Obligations
8
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and contractually agreed upon amounts, yet to be invoiced, that will be recognized as revenue in future periods. Remaining performance obligations are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, adjustments for revenue that have not materialized and foreign exchange adjustments. The Company applied the practical expedient in accordance within ASC 606, Revenue from Contracts with Customers (“ASC 606”), to exclude amounts for variable consideration constituting a sale- or usage-based royalty promised in exchange for a license of intellectual property from remaining performance obligations.
Remaining performance obligation consisted of the following (in thousands):
| Current | Non-Current | Total | ||||||||||||||||||
| As of June 30, 2020 | $ | 89,965 | $ | 45,122 | $ | 135,087 | ||||||||||||||
The Company expects to recognize approximately 67% of the remaining performance obligations within the next 12 months. The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months.
NOTE 3: INVENTORIES
Manufacturing and service inventories consist of the following (in thousands):
Manufacturing inventories
| June 30, 2020 | March 31, 2020 | ||||||||||
| Finished goods: | |||||||||||
| Manufactured finished goods | $ | 14,912 | $ | 15,790 | |||||||
| Distributor inventory | 284 | 504 | |||||||||
| Total finished goods | 15,196 | 16,294 | |||||||||
| Work in progress | 1,415 | 1,001 | |||||||||
| Raw materials | 13,370 | 11,901 | |||||||||
| Total manufacturing inventories | $ | 29,981 | $ | 29,196 | |||||||
Service parts inventories
| June 30, 2020 | March 31, 2020 | ||||||||||
| Finished goods | $ | 16,685 | $ | 15,845 | |||||||
| Component parts | 4,426 | 4,657 | |||||||||
| Total service parts inventories | $ | 21,111 | $ | 20,502 | |||||||
9
NOTE 4: LONG-TERM DEBT
The Company’s long-term debt consisted of the following (in thousands):
| June 30, 2020 | March 31, 2020 | ||||||||||
| Senior Secured Term Loan | $ | 185,208 | $ | 165,208 | |||||||
| Amended PNC Credit Facility | — | 2,620 | |||||||||
| Paycheck Protection Program Loan | 10,000 | — | |||||||||
| Less: current portion | (925) | (7,321) | |||||||||
Less: unamortized debt issuance costs (1) | (24,578) | (13,660) | |||||||||
| Long-term debt, net | $ | 169,705 | $ | 146,847 | |||||||
(1) The unamortized debt issuance costs related to the Senior Secured Term Loan are presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying condensed consolidated balance sheets. Unamortized debt issuance costs related to the Amended PNC Credit Facility are presented within other assets on the accompanying condensed consolidated balance sheets.
Senior Secured Term Loan
On December 27, 2018, the Company entered into a senior secured term loan totaling $165.0 million with U.S. Bank, National Association (the “the Senior Secured Term Loan”). In connection with the Senior Secured Term Loan, the Company amended its existing Revolving Credit Facility with PNC, providing for borrowing under loans up to a maximum principal amount of the lesser of: (a) $45.0 million or (b) the amount of the borrowing base (the “Amended PNC Credit Facility”). The maturity date under the Senior Secured Term Loan and the Amended PNC Credit Facility (collectively, the “Credit Agreements”) is December 27, 2023.
On March 30, 2020, the Company entered into an amendment to the Senior Secured Term Loan (the “March 30, 2020 Amendment”) which included deferral of payment of the scheduled amortization payment of $0.4 million due on March 31, 2020 to April 1, 2020; and, (b) deferral of payment of the interest due on March 31, 2020 to April 1, 2020. On March 31, 2020, the Company entered into an additional amendment to the Senior Secured Term Loan (the “March 31, 2020 Amendment”) which, among other things, included (a) payment deferral of the scheduled amortization payment of $0.4 million due on April 1, 2020 to June 30, 2020; (b) payment of $1.9 million of the interest due on April 1, 2020 (of the total interest due of $5.0 million) in kind rather than in cash; and (c) the waiver of compliance with the total net leverage ratio covenant, as defined in the Senior Secured Term Loan agreement.
On June 16, 2020, the Company entered into an amendment to the Senior Secured Term Loan (the "June 2020 Amendment" and collectively with the March 30, 2020 Amendment and March 31, 2020 Amendment, (the “Term Loan Amendments”). The June 2020 Amendment provided an additional borrowing of $20.0 million which was immediately drawn in full. The amendment also (a) waived the excess cash flow payment (the “ECF Payment”), as defined in the Senior Secured Term Loan agreement, of $5.3 million for the year ended March 31, 2020; (b) deferred payment of the scheduled amortization payments due on June 30, 2020, September 30, 2020, and December 31, 2020 until the maturity date; (c) amended the definition of “EBITDA” to, among other things, add an add-back for certain costs, expenses and fees incurred in connection with the transactions contemplated by the amendment; (d) waived compliance with the total net leverage ratio, fixed charge coverage ratio, minimum liquidity and minimum EBITDA financial covenants for the quarters ending on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021; (e) added a financial covenant that requires a minimum monthly average undrawn availability of $7.0 million under the Amended PNC Credit Facility during the period from June 30, 2020 through and including May 31, 2021; and (f) amended the covenant levels for the total net leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter ending June 30, 2021. The June 2020 Amendment modified the equity clawback provision to allow the Company to prepay up to 50% of the aggregate principal amount of the outstanding Senior Secured Term Loan balance with cash proceeds of a public offering of the Company’s common stock at a prepayment premium of 5% of the principal amount being repaid (the “Equity Clawback”). The amendment also added an exit fee of 2% of the aggregate principal amount repaid excluding amounts repaid that are subject to the Equity Clawback.
In connection with the June 2020 Term Loan Amendment, the Company issued to the lenders warrants (the “2020 Term Loan Warrants”) to purchase 3,400,000 shares of the Company’s common stock, at an exercise price of $3.00 per share. The exercise price and the number of shares underlying the 2020 Term Loan Warrants are subject to adjustment in the event of specified events, including dilutive issuances of common stock linked equity instruments at a price lower than the exercise price of the warrants, a subdivision or combination of the Company’s common
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stock, a reclassification of the Company’s common stock or specified dividend payments. The 2020 Term Loan Warrants are exercisable until June 16, 2030. Upon exercise, the aggregate exercise price may be paid, at each warrant holder’s election, in cash or on a net issuance basis, based upon the fair market value of the Company’s common stock at the time of exercise.
The Company accounted for the Term Loan Amendments as modifications of the Senior Secured Term Loan. In connection with the modifications, the Company incurred $11.9 million in costs including $11.3 million related to the value of the 2020 Term Loan Warrants and $0.6 million in fees paid to the lenders. These debt issuance costs are reflected as a reduction to the carrying amount of the Senior Secured Term Loan and are amortized to interest expense over the remaining loan term. Approximately $0.8 million in third party costs were expensed related to the Term Loan Amendments.
Amended PNC Credit Facility
On April 3, 2020, the Company entered into an amendment to the Amended PNC Credit Facility (the “April 2020 PNC Amendment”), which amended certain terms, including to waive compliance with the total net leverage ratio and total leverage ratio covenants for the quarter ending March 31, 2020.
On June 16, 2020, the Company entered into an amendment to the Amended PNC Credit Facility (the “June 2020 PNC Amendment” and collectively with the April 2020 PNC Amendment, the “PNC Amendments” and including the Term Loan Amendments, the “Amendments”). The amendment amended certain terms, including: (a) the definition of “EBITDA” to, among other things, add an add-back for certain costs, expenses and fees incurred in connection with the transactions contemplated by the amendment; (b) waived compliance with the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, minimum liquidity and minimum EBITDA financial covenants for the quarters ending on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021; (c) added a financial covenant that requires a minimum monthly average undrawn availability level of $7.0 million for the period from June 30, 2020 through and including May 31, 2021; (d) added a financial covenant that requires a minimum liquidity of not less than $10.0 million at the end of each quarter and a minimum average liquidity level $10.0 million for the ninety days preceding the last day of each quarter, beginning with the quarter ending June 30, 2021; (e) amended the covenant levels for the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter ending June 30, 2021; and (f) continued to include a covenant that requires a minimum of $5.0 million of PNC qualified cash at all times. The June 2020 PNC Amendment also adjusted the applicable margin for advances under the Amended PNC Credit Facility such that (i) advances designated as “Domestic Rate Loans” and “Swing Loans” will have an applicable margin of (a) 4.50% for the period from the June 16, 2020 until the date quarterly financial statements are delivered to PNC for the fiscal quarter ending June 30, 2021 and (b) thereafter, ranging from 3.50% to 4.50% based on the Company’s applicable total leverage ratio and (ii) advances designated as “LIBOR Rate Loans” will have an applicable margin of (a) 5.50% for the period from June 16, 2020, until the date quarterly financial statements are delivered to PNC for the fiscal quarter ending June 30, 2021 and (b) thereafter, ranging from 4.50% to 5.50% based on the Company’s applicable total leverage ratio.
The Company accounted for the PNC Amendments as modifications of the Amended PNC Credit Facility. In connection with the modifications, the Company incurred $0.5 million in fees paid to the lenders which was recorded to other assets and is amortized to interest expense over the remaining term of the Amended PNC Credit Facility.
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 (i) 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; (ii) 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 (iii) certain piggyback registration rights related to potential future equity offerings of the Company, subject to certain limitations.
As of June 30, 2020, the interest rates on the Senior Secured Term Loan and the Amended PNC Credit Facility were 12.0% and 7.8%, respectively. As of June 30, 2020, the Amended PNC Credit Facility had a borrowing base of $26.8 million, $25.4 million of which was available at that date.
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As of June 30, 2020, the Company was required to maintain a $5.0 million restricted cash reserve as part of the Amended PNC Credit Facility. This balance is presented as long-term restricted cash within the accompanying condensed consolidated balance sheet as of June 30, 2020.
Paycheck Protection Program
On April 13, 2020, the Company entered into a Paycheck Protection Program (“PPP”) Term Loan (“PPP Loan”) effective April 11, 2020 with PNC in an aggregate principal amount of $10.0 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The PPP Loan bears interest at a fixed rate of 1% per annum, with interest deferred up to a maximum of 10 months after the expiration of the covered period, as defined in the PPP Loan agreement, payable monthly thereafter. The PPP Loan has an initial term of two years and is unsecured and guaranteed by the Small Business Administration. Under the terms of the PPP Note, the Company may apply for forgiveness of the amount due on the PPP Loan. The Company used the proceeds from the PPP Loan for qualifying expenses as defined in the PPP, and intends to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, the Company cannot assure at this time that the PPP Loan will be forgiven partially or in full.
NOTE 5: LEASES
Supplemental balance sheet information related to leases was as follows:
| June 30, 2020 | March 31, 2020 | |||||||||||||
| Operating lease right-of-use asset | $ | 12,325 | $ | 12,689 | ||||||||||
| Other accrued liabilities | 3,075 | 3,065 | ||||||||||||
| Operating lease liability | 10,402 | 10,822 | ||||||||||||
| Total operating lease liabilities | $ | 13,477 | $ | 13,887 | ||||||||||
Components of lease cost were as follows (in thousands):
| Three Months Ended June 30, | ||||||||||||||
| Lease Cost | 2020 | 2019 | ||||||||||||
| Operating lease cost | $ | 1,331 | $ | 1,272 | ||||||||||
| Variable lease cost | 212 | 66 | ||||||||||||
| Short-term lease cost | 53 | 2 | ||||||||||||
| Total lease cost | $ | 1,596 | $ | 1,340 | ||||||||||
| Maturity of Lease Liabilities | Operating Leases | |||||||
| For the fiscal year ended March 31, | ||||||||
2021, excluding the three months ended June 30, 2020 | $ | 3,574 | ||||||
| 2022 | 4,048 | |||||||
| 2023 | 3,022 | |||||||
| 2024 | 2,888 | |||||||
| 2025 | 2,290 | |||||||
| Thereafter | 2,901 | |||||||
| Total lease payments | $ | 18,723 | ||||||
| Less: imputed interest | (5,246) | |||||||
| Present value of lease liabilities | $ | 13,477 | ||||||
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| Lease Term and Discount Rate | June 30, 2020 | March 31, 2020 | ||||||||||||
| Weighted average remaining operating lease term (years) | 4.81 | 4.99 | ||||||||||||
| Weighted average discount rate for operating leases | 13.98 | % | 13.91 | % | ||||||||||
Operating cash outflows related to operating leases totaled $1.4 million and $1.3 million for the three months ended June 30, 2020 and 2019.
NOTE 6: RESTRUCTURING CHARGES
The following table summarizes the restructuring activities for the three months ended June 30, 2020 and 2019 (in thousands):
| Balance as of March 31, 2020 | Severance and Benefits | Facilities | Total | |||||||||||||||||
| Restructuring costs | $ | 1,052 | $ | — | $ | 1,052 | ||||||||||||||
| Cash payments | (594) | — | (594) | |||||||||||||||||
| Balance as of June 30, 2020 | $ | 458 | $ | — | $ | 458 | ||||||||||||||
| Balance as of March 31, 2019 | $ | — | $ | 2,876 | $ | 2,876 | ||||||||||||||
| Restructuring costs | — | 33 | 33 | |||||||||||||||||
| Adjustments to prior estimates | — | 230 | 230 | |||||||||||||||||
| Cash payments | — | (734) | (734) | |||||||||||||||||
| Balance as of June 30, 2019 | $ | — | $ | 2,405 | $ | 2,405 | ||||||||||||||
During the three months ended June 30, 2020, the Company initiated a restructuring plan to improve operational efficiency and rationalized its cost structure. The restructuring plan included a reduction in workforce which resulted in severance and other benefits of $1.0 million.
NOTE 7: NET LOSS PER SHARE
The following outstanding stock-based instruments which are comprised of performance share units, restricted stock units, stock options and warrants were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive (in thousands):
| Three Months Ended | ||||||||
| June 30, 2020 | June 30, 2019 | |||||||
| 6,340 | 5,481 | |||||||
The dilutive impact related to common shares from restricted stock units, stock options and warrants is determined by applying the treasury stock method of determining value to the assumed vesting of outstanding restricted stock units and the exercise of outstanding options and warrants. The dilutive impact related to common shares from contingently issuable performance share units is determined by applying a two-step approach using both the contingently issuable share guidance and the treasury stock method.
For the three months ended June 30, 2020, there were 0.8 million contingently issuable market based restricted stock units excluded from the calculation of diluted net income (loss) per share, respectively, as their market
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performance condition had not yet been achieved. These shares will be earned based on the Company’s achievement of certain average stock price targets in addition to a time-based vesting period.
NOTE 8: INCOME TAXES
The effective tax rate for the three months ended June 30, 2020 and 2019 was -4.1% and -9.7%, respectively. Income tax provisions for each of these periods reflect expenses for foreign and state taxes and differed from the federal statutory tax rate of 21% in both 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 June 30, 2020, including interest and penalties, the Company had $109.1 million of unrecognized tax benefits, $90.8 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of June 30, 2020, 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, 2020, $102.7 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the condensed consolidated balance sheets and $6.4 million (including interest and penalties) were recorded in other long-term liabilities in the condensed consolidated balance sheets. During the next 12 months, it is reasonably possible that approximately $9.2 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations.
NOTE 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 our 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, 2020, the Company had issued non-cancelable commitments for $19.2 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 decision in Inter Partes Review proceedings before the Patent Trial and Appeal Board relating to the Realtime patents. In those proceedings the asserted claims of the ’506 patent, the ’992 patent, and the ’513 patent were found unpatentable. In addition, on July 19, 2019, all claims of the ’728 patent, the ’530 patent, and the ’908 patent were found invalid under 35 U.S.C. § 101. The stay remains in effect pending Realtime’s appeal of those rulings. The Company believes the probability that this lawsuit will have a material adverse effect on our business, operating results or financial condition is remote.
On July 14, 2020, Starboard Value LP, Starboard Value and Opportunity Master Fund Ltd., Starboard Value and Opportunity S LLC, and Starboard Value and Opportunity C LP (collectively, “Starboard”) filed a lawsuit against Quantum Corporation, Quantum’s former CEO and board member Jon Gacek, and former Quantum board member Paul Auvil in the California Superior Court in Santa Clara County. The complaint alleges that between 2012 and
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2014, Starboard purchased a large number of shares of Quantum’s common stock, obtained three seats on Quantum’s board of directors and then, in July 2014, entered into an agreement with Quantum whereby Starboard would not seek control of Quantum’s board but would instead support Quantum’s slate of board nominees so long as Quantum met certain performance objectives by the end of fiscal 2015. The complaint further alleges that Quantum did not meet those performance objectives but hid that by improperly recognizing revenue in fiscal 2015, with the alleged objective of entrenching Messrs. Gacek and Auvil and then-current management. Mr. Gacek resigned from the board effective May 1, 2017 and as CEO effective November 7, 2017; Mr. Auvil resigned from the board effective November 8, 2017. The complaint’s accounting allegations largely repeat allegations made in now-concluded shareholder class actions, shareholder derivative actions and SEC investigation, the settlement of which we previously reported in the Company’s Form 10-Q filed with the SEC on January 29, 2020 and Form 10-K filed with the SEC on August 6, 2019 (among other SEC filings). Based on these allegations, the complaint asserts putative claims for intentional misrepresentation/fraud in the inducement, intentional misrepresentation/fraud and negligent misrepresentation against Quantum, Gacek and Auvil, false promise/promissory fraud and unjust enrichment against Quantum and breach of fiduciary duty against Gacek and Auvil. Starboard is demanding a jury trial, and seeks unspecified damages including punitive damages, an award of rescission or rescissory damages, and award of restitution in an amount necessary to compensate for the alleged unjust enrichment of Quantum, attorney fees and costs and other relief deemed just or appropriate by the court. At this time the Company is unable to estimate the range of possible outcomes with respect to this matter.
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 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 impairments charges were recognized for non-financial assets in the three months ended June 30, 2020 and 2019. The Company has no non-financial liabilities measured and recorded at fair value on a non-recurring basis.
Long-term Debt
The table below represents the carrying value and total estimated fair value of long-term debt as of June 30, 2020 and 2019. The fair value has been classified as Level 2 within the fair value hierarchy.
| June 30, | ||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||
| Senior Secured Term Loan | $ | 185,208 | $ | 185,208 | $ | 164,175 | $ | 156,918 | ||||||||||||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and other information included in this quarterly report and our annual report for the year ended March 31, 2020. In particular, the disclosure contained in Item 1A in our annual report, as updated by Part II, Item 1A in this quarterly report, may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources.
The following discussion contains forward-looking statements, such as statements regarding COVID-19's anticipated impacts on our business, our future operating results and financial position, our business strategy and
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plans, and our objectives for future operations. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements.
OVERVIEW
We are a leader in storing and managing digital video and other forms of unstructured data. We help customers around the world to ingest, process, and analyze digital data at high speed, and preserve and protect it for decades. Our customers include some of the world’s largest corporations, government agencies, service providers, broadcasters, movie studios, sports leagues and teams, and enterprises in all industries. We work closely with a broad network of distributors, VARs, DMRs, OEMs and other suppliers to solve our customers most pressing business challenges.
We earn our revenue from the sale of products and services through our channel partners and our sales force. Our products are sold under both the Quantum brand name and the names of various OEM providers. Our portfolio of solutions includes:
•StorNext scale out file storage: We offer a line of products designed for the highest speed ingest, processing, and analysis of video and other forms of unstructured data. Powered by the StorNext file system software and data management platform, this product line includes new NVMe flash storage servers (F-series) and hybrid SSD/HDD storage arrays.
•Video Surveillance Systems: We offer a broad portfolio of solutions designed for video surveillance and physical security, including network video recording servers (NVRs), hyperconverged (HCI) storage servers to host multiple physical security workloads, GPU-based analytics servers, and file and object storage systems for large scale surveillance archives.
•ActiveScale Object Storage: We also sell massively scalable object storage systems used to preserve and protect data with high levels of data durability.
•Tape Storage: We provide low cost, secure storage systems for long term archiving and ransomware protection. We provide both the storage systems and sells tape media under the Quantum brand.
•Backup Storage Systems: high-performance, scalable storage for backup and multi-site disaster recovery.
•Quantum Services: We offer a full line of services including managed services and Storage-as-a-Service offerings, as well as maintenance, implementation, training and consulting services.
COVID-19 IMPACT AND ASSOCIATED ACTIONS
Since the beginning of March 2020, COVID-19 has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders. These measures may remain in place for a significant period of time.
In light of these events, we have taken actions to protect the health and safety of our employees while continuing to serve our global customers as an essential business. We have implemented more thorough sanitation practices as outlined by health organizations and instituted social distancing policies at our locations around the world, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel.
For many of our customers, the COVID-19 pandemic has significantly affected their business. Movie and television production has been paused, professional and collegiate sports seasons have been postponed or cancelled, and many corporations and enterprises have put information technology spending on hold while they assess the short- and long-term impact of the pandemic. While our supply chain remains intact and operating, we have experienced issues related to our logistics network. The reduced capacity within and across freight lanes (aircraft, personnel, customs clearance, etc.) has caused late deliveries from re-routes and mis-shipments, as well as increased expedite and other charges to deliver and receive products. To date, we have experienced minimal impact on product availability, although future capacity constraints across the network due to lost capacity from factory down time, closures, as well as reduced staff and demand signal fluctuations are expected to impact product availability in the months and possibly quarters to come.
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We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. We expect COVID-19 to significantly impact our financial condition, results of operations, and liquidity through at least our second quarter and likely much longer.
We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See “The recent COVID-19 pandemic could adversely affect our business, results of operations and financial condition” in Part II, Item 1A, Risk Factors, of our most recent Annual Report on Form 10-K for more information regarding the risks we face as a result of the COVID-19 pandemic.
NON-U.S. GAAP FINANCIAL MEASURES
To provide investors with additional information regarding our financial results, we have presented Adjusted EBITDA and Adjusted Net Income (Loss), non-U.S. GAAP financial measures defined below.
Adjusted EBITDA is a non-U.S. GAAP financial measure defined by us as net loss before interest expense, net, provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring charges, long-term debt related costs, costs related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: – Restatement in our Annual Report on Form 10-K for the year ended March 31, 2019, and other non-recurring expenses.
Adjusted Net Income (Loss) is a non-U.S. GAAP financial measure defined by us as net loss before restructuring charges, stock-based compensation expense, long-term debt related costs, costs related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: – Restatement in the Annual Report on Form 10-K for the year ended March 31, 2019 and other non-recurring (income) expenses. The Company calculates Adjusted Net Income (Loss) per Basic and Diluted share using the Company’s above-referenced definition of Adjusted Net Income (Loss).
The Company considers non-recurring expenses to be expenses that have not been incurred within the prior two years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses.
We have provided below a reconciliation of Adjusted EBITDA and Adjusted Net Income (Loss) to Net Income (Loss), the most directly comparable U.S. GAAP financial measure. We have presented Adjusted EBITDA because it is a key measure used by our management and the board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operating plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business performance. We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Basic and Diluted Share serve as appropriate measures to be used in evaluating the performance of our business and help our investors better compare our operating performance over multiple periods. Accordingly, we believe that Adjusted EBITDA and Adjusted Net Income (Loss) provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and our board of directors.
Our use of Adjusted EBITDA and Adjusted Net Income (Loss) have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows:
•Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect: (1) interest and tax payments that may represent a reduction in cash available to us; (2) capital expenditures, future requirements for capital expenditures or contractual commitments; (3) changes in, or cash requirements for, working capital needs; (4) the potentially dilutive impact of stock-based compensation expense; (5) potential future costs related to our long-term debt; (6)
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potential future restructuring expenses; or (6) potential future costs related to our financial statement restatement and other related activities;
•Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) the potentially dilutive impact of stock-based compensation expense; (3) potential future costs related to our long-term debt; or (4) potential future costs related to our financial statement restatement and other related activities; and
•Other companies, including companies in our industry, may calculate Adjusted EBITDA, Adjusted Net Income (Loss) or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider Adjusted EBITDA and Adjusted Net Income (Loss) along with other U.S. GAAP-based financial performance measures, including various cash flow metrics and our U.S. GAAP financial results.
The following is a reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure, Net Loss (in thousands):
| Three Months Ended | |||||||||||
| June 30, 2020 | June 30, 2019 | ||||||||||
| Net loss | $ | (10,736) | $ | (3,807) | |||||||
| Interest expense, net | 6,437 | 6,306 | |||||||||
| Provision for income taxes | 419 | 338 | |||||||||
| Depreciation and amortization expense | 1,286 | 1,021 | |||||||||
| Stock-based compensation expense | 1,958 | 987 | |||||||||
| Long-term debt related costs | 965 | — | |||||||||
| Restructuring charges | 1,052 | 263 | |||||||||
| Cost related to financial restatement and related activities | — | 7,990 | |||||||||
| Adjusted EBITDA | $ | 1,381 | $ | 13,098 | |||||||
| The following is a reconciliation of Adjusted Net Income (Loss) to the most comparable U.S. GAAP financial measure, Net Loss (in thousands): | |||||||||||
| Three Months Ended | |||||||||||
| June 30, 2020 | June 30, 2019 | ||||||||||
| Net loss | $ | (10,736) | $ | (3,807) | |||||||
| Restructuring charges | 1,052 | 263 | |||||||||
| Stock-based compensation | 1,958 | 987 | |||||||||
| Long-term debt related costs | 965 | — | |||||||||
| Cost related to financial restatement and related activities | — | 7,990 | |||||||||
| Adjusted net income (loss) | $ | (6,761) | $ | 5,433 | |||||||
| Adjusted net income per share: | |||||||||||
| Basic | $ | (0.17) | $ | 0.15 | |||||||
| Diluted | $ | (0.17) | $ | 0.13 | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 39,905 | 36,045 | |||||||||
| Diluted | 39,905 | 40,973 | |||||||||
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RESULTS OF OPERATIONS
| Three Months Ended | |||||||||||
| (in thousands) | June 30, 2020 | June 30, 2019 | |||||||||
| Total revenue | $ | 73,305 | $ | 105,631 | |||||||
Total cost of revenue (1) | 42,453 | 59,805 | |||||||||
| Gross profit | 30,852 | 45,826 | |||||||||
| Operating expenses | |||||||||||
Research and development (1) | 10,162 | 8,383 | |||||||||
Sales and marketing (1) | 11,570 | 15,856 | |||||||||
General and administrative (1) | 11,563 | 18,576 | |||||||||
| Restructuring charges | 1,052 | 263 | |||||||||
| Total operating expenses | 34,347 | 43,078 | |||||||||
| Income (loss) from operations | (3,495) | 2,748 | |||||||||
| Other income (expense) | (385) | 89 | |||||||||
| Interest expense | (6,437) | (6,306) | |||||||||
| Income (loss) before income taxes | (10,317) | (3,469) | |||||||||
| Income tax provision | 419 | 338 | |||||||||
| Net loss | $ | (10,736) | $ | (3,807) | |||||||
(1) Includes stock-based compensation as follows:
| Three Months Ended | |||||||||||
| (in thousands) | June 30, 2020 | June 30, 2019 | |||||||||
| Cost of revenue | $ | 169 | $ | 92 | |||||||
| Research and development | 471 | 123 | |||||||||
| Sales and marketing | 336 | 117 | |||||||||
| General and administrative | 982 | 655 | |||||||||
| Total | $ | 1,958 | $ | 987 | |||||||
Comparison of the Three Months Ended June 30, 2020 and 2019
Revenue
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | June 30, 2020 | % of revenue | June 30, 20191 | % of revenue | $ Change | % Change | |||||||||||||||||||||||||||||
| Product revenue | |||||||||||||||||||||||||||||||||||
| Primary storage systems | $ | 10,214 | 14 | % | $ | 14,622 | 14 | % | $ | (4,408) | (30) | % | |||||||||||||||||||||||
| Secondary storage systems | 18,492 | 25 | 37,712 | 36 | (19,220) | (51) | |||||||||||||||||||||||||||||
| Devices and media | 10,981 | 15 | 13,462 | 13 | (2,481) | (18) | |||||||||||||||||||||||||||||
| Total product revenue | $ | 39,687 | 54 | % | $ | 65,796 | 62 | % | $ | (26,109) | (40) | ||||||||||||||||||||||||
| Service revenue | 30,386 | 42 | 33,381 | 32 | (2,995) | (9) | |||||||||||||||||||||||||||||
| Royalty revenue | 3,232 | 4 | 6,454 | 6 | (3,222) | (50) | |||||||||||||||||||||||||||||
| Total revenue | $ | 73,305 | 100 | % | $ | 105,631 | 100 | % | $ | (32,326) | (31) | ||||||||||||||||||||||||
1 Primary and Secondary storage system revenue has been adjusted for June 30, 2019 due to certain reclassifications from Primary to Secondary storage systems.
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Product revenue
In the three months ended June 30, 2020, product revenue decreased $26.1 million, or 40%, as compared to the same period in 2019. Primary storage systems represented $4.4 million of the decrease, driven by declines in the media and entertainment industry as a result of the COVID-19 pandemic. Secondary storage systems represented $19.2 million of the decrease, driven primarily by fluctuating purchase cycles with our hyperscale customers. Devices and media represented $2.5 million of the decrease, driven by lower than expected volume of LTO media sold through our high-volume channel partners.
Service revenue
We offer a broad range of services including maintenance, implementation and training. Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware. Standard service contracts may be extended or include enhanced service, such as faster service response times.
Service revenue decreased 9% in the three months ended June 30, 2020 compared to the same period in 2019 due to a combination of reduced new customer installations and reduced support renewals from our legacy customers.
Royalty revenue
We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $3.2 million, or 50%, in the three months ended June 30, 2020 compared to the same period in 2019 due to lower overall market volume.
Gross Profit and Margin
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | June 30, 2020 | Gross margin % | June 30, 2019 | Gross margin % | $ Change | Basis point change | |||||||||||||||||||||||||||||
| Product gross profit | $ | 9,305 | 23.4 | % | $ | 18,596 | 28.3 | % | $ | (9,291) | (490) | ||||||||||||||||||||||||
| Service gross profit | 18,315 | 60.3 | 20,776 | 62.2 | (2,461) | (190) | |||||||||||||||||||||||||||||
| Royalty gross profit | 3,232 | 100.0 | 6,454 | 100.0 | (3,222) | — | |||||||||||||||||||||||||||||
| Gross profit | $ | 30,852 | 42.1 | % | $ | 45,826 | 43.4 | % | $ | (14,974) | (130) | ||||||||||||||||||||||||
Product Gross Margin
Product gross margin decreased 490 basis points for the three months ended June 30, 2020, as compared with the same period in 2019. This decrease was due primarily to a total product revenue decrease of 40%, with relatively flat operations departmental expense.
Service Gross Margin
Service gross margin decreased 190 basis points for the three months ended June 30, 2020, as compared with the same period in 2019. This decrease was due primarily to total service revenue decreases of 9% with relatively flat corresponding departmental expense.
Royalty Gross Margin
Royalties do not have significant related cost of sales.
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Operating expenses
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | June 30, 2020 | % of revenue | June 30, 2019 | % of revenue | $ Change | % Change | |||||||||||||||||||||||||||||
| Research and development | 10,162 | 13.9 | % | 8,383 | 7.9 | % | $ | 1,779 | 21 | % | |||||||||||||||||||||||||
| Sales and marketing | 11,570 | 15.8 | 15,856 | 15.0 | (4,286) | (27) | |||||||||||||||||||||||||||||
| General and administrative | 11,563 | 15.8 | 18,576 | 17.6 | (7,013) | (38) | |||||||||||||||||||||||||||||
| Restructuring charges | 1,052 | 1.4 | 263 | 0.2 | 789 | 300 | |||||||||||||||||||||||||||||
| Total operating expenses | $ | 34,347 | 46.9 | % | $ | 43,078 | 40.8 | % | $ | (8,731) | (20) | ||||||||||||||||||||||||
In the three months ended June 30, 2020, research and development expense increased $1.8 million, or 21%, as compared with the same period in 2019. This increase was partially attributable to an increase in research and development headcount focused on new product development.
In the three months ended June 30, 2020, sales and marketing expenses decreased $4.3 million, or 27%, as compared with the same period in 2019. This decrease was largely driven by an overall decrease in compensation and benefits as the result of lower headcount, a decrease in marketing programs and professional services costs, and reduced travel and entertainment expense due to current COVID-19 related restrictions.
In the three months ended June 30, 2020, general and administrative expenses decreased $7.0 million, or 38% as compared with the same period in 2019. This decrease was due primarily to higher costs in 2019 related to the financial restatement and related activities, IT infrastructure expense, and bad debt expense. This was partially offset by an increase in headcount and stock compensation expense.
In the three months ended June 30, 2020, restructuring expenses increased $0.8 million, or 300% as compared with the same period in 2019. The increase was the result of a reduction in force during the three months ended June 30, 2020 to improve operational efficiency and rationalized its cost structure
Other Income (Expense)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | June 30, 2020 | % of revenue | June 30, 2019 | % of revenue | $ Change | % Change | |||||||||||||||||||||||||||||
| Other income (expense) | $ | (385) | (1) | % | $ | 89 | — | % | $ | 474 | (533) | % | |||||||||||||||||||||||
| Interest expense | (6,437) | (9) | (6,306) | 6 | 131 | (2) | |||||||||||||||||||||||||||||
Other income (expense), net during the three months ended June 30, 2020 and 2019 were related primarily to fluctuations in foreign currency exchange rates.
In the three months ended June 30, 2020, interest expense increased $0.1 million, or 2%, as compared with the same period in 2019 due primarily to a higher principal balance.
Income Taxes
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | June 30, 2020 | % of revenue | June 30, 2019 | % of revenue | $ Change | % Change | |||||||||||||||||||||||||||||
| Income tax provision | $ | 419 | 1 | % | $ | 338 | — | % | $ | 81 | 24 | % | |||||||||||||||||||||||
The income tax provision for the three months ended June 30, 2020 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgement is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. Our
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income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
We consider liquidity in terms of the sufficiency of internal and external cash resources to fund our operating, investing and financing activities. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our balance sheet and amounts available under our Amended PNC Credit Facility (as defined below). We require significant cash resources to meet obligations to pay principal and interest on our outstanding debt, provide for our research and development activities, fund our working capital needs, and make capital expenditures. Our future liquidity requirements will depend on multiple factors, including our research and development plans and capital asset needs. We are subject to the risks arising from COVID-19 which have caused substantial financial market volatility and have adversely affected both the U.S. and the global economy. We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. We expect the impact of COVID-19 to have a significant impact on our liquidity and capital resources.
We had cash and cash equivalents of $23.3 million as of June 30, 2020, compared to $6.4 million as of March 31, 2020. These amounts exclude, as of both dates, $5.0 million in restricted cash that we are required to maintain under the Credit Agreements (as defined below), and $0.8 million of short-term restricted cash.
Our outstanding long-term debt amounted to $169.7 million as of June 30, 2020, net of $24.6 million in unamortized debt issuance costs and $0.9 million in current portion of long-term debt, and $146.8 million as of March 31, 2020, net of $13.7 million in unamortized debt issuance costs and $7.3 million in current portion of long-term debt. Included in long-term debt as of June 30, 2020 is $10.0 million borrowed under the Paycheck Protection Program which was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As of June 30, 2020 we had $25.4 million of borrowing availability on our Amended PNC Credit Facility (subject to change based on certain financial metrics). See “—Debt Profile and Covenants” and “—Contractual Obligations” below for further information about our outstanding debt.
We are subject to various debt covenants under our Credit Agreements (as defined below). Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations. For additional information about our debt, see the sections entitled “Risk Factors—Risks Related to Our Business Operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.
Cash Flows
The following table summarizes our consolidated cash flows for the periods indicated.
| Three Months Ended June 30, | |||||||||||
| (Dollars in thousands) | 2020 | 2019 | |||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | (8,987) | $ | 903 | |||||||
| Investing activities | (484) | (444) | |||||||||
| Financing activities | 26,329 | (413) | |||||||||
| Effect of exchange rate changes | (16) | (53) | |||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 16,842 | $ | (7) | |||||||
Cash Provided by (Used In) Operating Activities
Net cash used in operating activities was $9.0 million for the three months ended June 30, 2020. This use of cash is primarily attributable to the net loss adjusted for non-cash items of $4.0 million and changes in working capital of
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$4.9 million. Cash used related to working capital was driven by a decrease of $21.0 million in accounts receivable more than offset by the increase in manufacturing and service inventory of $3.2 million and decreases in accounts payable, deferred revenue and other assets and liabilities of $9.9 million, $8.2 million and $4.2 million, respectively. The decrease in deferred revenue reflects the seasonal nature of service contract renewals which peak in the fourth fiscal quarter.
Net cash provided by operating activities was $0.9 million for the three months ended June 30, 2019 which is primarily attributable to net loss adjusted for non-cash items of $1.1 million.
Cash Provided by (Used in) Investing Activities
Net cash used in investing activities was $0.5 million in the three months ended June 30, 2020, which was mostly flat compared to the same period in the prior year. Our capital expenditures in both periods consisted primarily of tooling purchases and leasehold improvements.
Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $26.3 million in the three months ended June 30, 2020 which included new Senior Secured Term Loan borrowings of $19.4 million (net of lender fees of $0.6 million), $10.0 million in borrowings under the Paycheck Protection Program and the net pay-down of our Amended PNC Credit Facility.
Debt Profile and Covenants
PNC Credit Facility
We are party to the Amended PNC Credit Agreement, a senior secured revolving credit facility in an available principal amount equal to the lesser of (i) $45.0 million and (ii) the “borrowing base” (as defined under the Amended PNC Credit Agreement). The Amended PNC Credit Facility had a borrowing base of $26.8 million as of June 30, 2020, $25.4 million of which was available to us at that date.
Senior Secured Term Loan
We are also party to a senior secured term loan facility in an aggregate principal amount of $185.2 million as of June 30, 2020 (the “Senior Secured Term Loan” and together with the Amended PNC Credit Agreement, the “Credit Agreements”). The Senior Secured Term Loan initially provided for borrowings of $165.0 million. The proceeds of the Senior Secured Term Loan were used to repay our previously outstanding long-term debt and fund our working capital requirements.
On June 16, 2020, we entered into an amendment to the Senior Secured Term Loan (the "June 2020 Term Loan Amendment"). The amendment provides an additional borrowing of $20.0 million which was immediately drawn in full. The amendment, among other things, waived compliance with the total net leverage ratio, fixed charge coverage ratio, minimum liquidity and minimum EBITDA financial covenants for the quarters ending on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, added a financial covenant that requires a minimum monthly average undrawn availability of $7.0 million under the Amended PNC Credit Facility during the period from June 30, 2020 through and including May 31, 2021 and amended the covenant levels for the total net leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter ending June 30, 2021.
On June 16, 2020, we entered into an additional amendment to the Amended PNC Credit Facility. The amendment, among other things, waived compliance with the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, minimum average liquidity and minimum EBITDA financial covenants for the quarters ending on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, added a financial covenant that requires a minimum monthly average undrawn availability level of $7.0 million for the period from June 30, 2020 through and including May 31, 2021, added a financial covenant that requires a minimum liquidity of not less than $10.0 million at the end of each quarter, beginning with the quarter ending June 30, 2021 and amended the covenant levels for the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter ending June 30, 2021. The Amended PNC Credit Facility continues to include a covenant that requires a minimum of $5.0 million of PNC qualified cash at all times.
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Paycheck Protection Program
On April 13, 2020, we entered into a Paycheck Protection Program (the “PPP”) Term Loan (the “PPP Loan”) effective April 11, 2020 with PNC in an aggregate principal amount of $10.0 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act ). The PPP Loan bears interest at a fixed rate of 1% per annum, with interest deferred up to a maximum of 10 months after the expiration of the covered period, as defined in the PPP Loan agreement, payable monthly thereafter. The PPP Loan has an initial term of two years and is unsecured and guaranteed by the Small Business Administration. Under the terms of the PPP Note, we may apply for forgiveness of the amount due on the PPP Loan. We used the proceeds from the PPP Loan for qualifying expenses and intend to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, we cannot assure at this time that the PPP Loan will be forgiven partially, or in full.
Commitments and Contingencies
Our contingent liabilities consist primarily of certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. We have little history of costs associated with such indemnification requirements and contingent liabilities associated with product liability may be mitigated by our insurance coverage. In the normal course of business to facilitate transactions of our services and products, we indemnify certain parties with respect to certain matters, such as intellectual property infringement or other claims. We also have indemnification agreements with our current and former officers and directors. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of our indemnification claims, and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our operating results, financial position or cash flows.
We are also subject to ordinary course litigation and potential costs related to our financial statement restatement activities and related legal costs.
Off Balance Sheet Arrangements
Except for the indemnification commitments described under “—Commitments and Contingencies” above, we do not currently have any other off-balance sheet arrangements and do not have any holdings in variable interest entities.
Contractual Obligations
We have contractual obligations and commercial commitments, some of which, such as purchase obligations, are not recognized as liabilities in our financial statements. There have not been any other material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.
Critical Accounting Estimates and Policies
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. On an ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider certain accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change. Our accounting policies that include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain are summarized in our most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2020 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Critical Accounting Policies.” For additional information on our significant accounting policies, see Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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Recently Issued and Adopted Accounting Pronouncements
See Note 1 to the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our most recently filed Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our quantitative and qualitative disclosures about market risk from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K, which such section is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report. Based on such evaluation, our principal executive and principal financial officers have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described below.
Changes in Internal Control
In connection with the evaluation required by Rule 13a-15(d) under the Securities Exchange Act of 1934, there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 14, 2020, Starboard Value LP, Starboard Value and Opportunity Master Fund Ltd., Starboard Value and Opportunity S LLC, and Starboard Value and Opportunity C LP (collectively “Starboard”) filed a lawsuit against Quantum Corporation, Quantum’s former CEO and board member Jon Gacek, and former Quantum board member Paul Auvil in the California Superior Court in Santa Clara County. The complaint alleges that between 2012 and 2014, Starboard purchased a large number of shares of Quantum’s common stock, obtained three seats on Quantum’s board of directors and then, in July 2014, entered into an agreement with Quantum whereby Starboard would not seek control of Quantum’s board but would instead support Quantum’s slate of board nominees so long as Quantum met certain performance objectives by the end of fiscal 2015. The complaint further alleges that Quantum did not meet those performance objectives but hid that by improperly recognizing revenue in fiscal 2015, with the alleged objective of entrenching Messrs. Gacek and Auvil and then-current management. Mr. Gacek resigned from the board effective May 1, 2017 and as CEO effective November 7, 2017; Mr. Auvil resigned from the board effective November 8, 2017. The complaint’s accounting allegations largely repeat allegations made in now-concluded shareholder class actions, shareholder derivative actions and SEC investigation, the settlement of which we previously reported in our Form 10-Q filed with the SEC on January 29, 2020 and our Form 10-K filed with the
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SEC on August 6, 2019 (among other SEC filings). Based on these allegations, the complaint asserts putative claims for intentional misrepresentation/fraud in the inducement, intentional misrepresentation/fraud and negligent misrepresentation against Quantum, Gacek and Auvil, false promise/promissory fraud and unjust enrichment against Quantum and breach of fiduciary duty against Gacek and Auvil. Starboard is demanding a jury trial, and seeks unspecified damages including punitive damages, an award of rescission or rescissory damages, and award of restitution in an amount necessary to compensate for the alleged unjust enrichment of Quantum, attorney fees and costs and other relief deemed just or appropriate by the court. At this time the Company is unable to estimate the range of possible outcomes with respect to this matter.
ITEM 1A. RISK FACTORS
There have been no material changes to the previously disclosed risk factors discussed in Part 1 “Part I, Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2020. You should consider carefully these factors, together with all of the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, before making an investment decision.
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ITEM 6. EXHIBITS
The exhibits required to be filed or furnished as part of this Quarterly Report are listed below. Notwithstanding any language to the contrary, exhibits 32.1 and 32.2 shall not be deemed to be filed as part of this Quarterly Report for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933, except to the extent that The Company specifically incorporates it by reference.
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | Filing Date | Exhibit | Filed or Furnished Herewith | |||||||||||||||||||||||||||
| 4.1 | 8-K | 6/16/2020 | 4.1 | |||||||||||||||||||||||||||||
| 4.2 | 8-K | 6/16/2020 | 4.2 | |||||||||||||||||||||||||||||
| 4.3 | 8-K | 6/16/2020 | 4.3 | |||||||||||||||||||||||||||||
| 4.4 | 8-K | 6/16/2020 | 4.4 | |||||||||||||||||||||||||||||
| 4.5 | 8-K | 6/16/2020 | 4.5 | |||||||||||||||||||||||||||||
| 10.1 | 8-K | 6/16/2020 | 10.1 | |||||||||||||||||||||||||||||
| 10.2 | 8-K | 6/16/2020 | 10.2 | |||||||||||||||||||||||||||||
| 10.3 | 8-K | 4/16/2020 | 10.1 | |||||||||||||||||||||||||||||
| 10.4 | 8-K | 4/16/2020 | 10.2 | |||||||||||||||||||||||||||||
| 10.5 | 8-K | 4/16/2020 | 10.3 | |||||||||||||||||||||||||||||
| 10.6 | 8-K | 4/6/2020 | 10.2 | |||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||
| 101 | Interactive data files | X | ||||||||||||||||||||||||||||||
| 104 | Cover page interactive data file, submitted using inline XBRL (contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Quantum Corporation | ||||||||||||||
| (Registrant) | ||||||||||||||
| August 5, 2020 | /s/ J. Michael Dodson | |||||||||||||
| (Date) | J. Michael Dodson | |||||||||||||
| Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer) | ||||||||||||||
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