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QMCO Quantum

Filed: 3 Nov 21, 4:12pm
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 September 30, 2021
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

qtm-20210930_g1.jpg
Quantum Corporation
(Exact name of registrant as specified in its charter)
Delaware94-2665054
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
224 Airport ParkwaySuite 550
San JoseCA95110
(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 classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par value per shareQMCONasdaq 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.xYes
 ¨
 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).
xYes
 ¨
 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 filerAccelerated filerx
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).
Yesx No
As of the close of business on November 1, 2021, there were 59,281,377 shares of Quantum Corporation’s common stock issued and outstanding.


QUANTUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2021

Table of Contents



As used in this Quarterly Report on Form 10-Q, 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 do not intend 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, except as required by law.




PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts, unaudited)
September 30, 2021March 31, 2021
Assets
Current assets:
Cash and cash equivalents$22,757 $27,430 
Restricted cash450 707 
Accounts receivable, net of allowance for doubtful accounts of $350 and $40663,098 73,102 
Manufacturing inventories28,848 24,467 
Service parts inventories23,564 23,421 
Other current assets11,451 6,939 
Total current assets150,168 156,066 
Property and equipment, net12,295 10,051 
Intangible assets, net9,132 5,037 
Goodwill10,262 3,466 
Restricted cash— 5,000 
Right-of-use assets, net7,917 9,383 
Other long-term assets8,684 5,921 
Total assets$198,458 $194,924 
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable$36,991 $35,245 
Deferred revenue78,105 84,027 
Accrued restructuring charges20 580 
Long-term debt, current portion3,125 1,850 
Accrued compensation15,435 19,214 
Other accrued liabilities18,750 18,174 
Total current liabilities152,426 159,090 
Deferred revenue40,766 36,126 
Long-term debt, net of current portion101,368 90,890 
Operating lease liabilities6,818 8,005 
Other long-term liabilities13,073 13,058 
Total liabilities314,451 307,169 
Commitments and contingencies (Note 10)
00
Stockholders' deficit
Preferred stock, 20,000 shares authorized; no shares issued and outstanding— — 
Common stock, $0.01 par value; 125,000 shares authorized; 59,272 and 56,915 shares issued and outstanding593 570 
Additional paid-in capital636,538 626,664 
Accumulated deficit(752,029)(738,623)
Accumulated other comprehensive loss(1,095)(856)
Total stockholders’ deficit(115,993)(112,245)
Total liabilities and stockholders’ deficit$198,458 $194,924 
See accompanying Notes to Condensed Consolidated Financial Statements.


1


QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts, unaudited)

Three Months Ended September 30,Six Months Ended September 30,
2021202020212020
Revenue:
   Product$54,655 $50,850 $106,786 $90,537 
   Service34,359 31,494 67,189 61,880 
   Royalty4,166 3,477 8,303 6,709 
      Total revenue93,180 85,821 182,278 159,126 
Cost of revenue:
   Product41,124 34,998 79,864 65,380 
   Service13,669 12,089 26,748 24,160 
      Total cost of revenue54,793 47,087 106,612 89,540 
Gross profit38,387 38,734 75,666 69,586 
Operating expenses:
   Research and development12,389 10,233 23,680 20,395 
   Sales and marketing15,462 13,153 29,414 24,723 
   General and administrative11,466 10,263 23,293 21,825 
   Restructuring charges1,585 274 2,637 
      Total operating expenses39,325 35,234 76,661 69,580 
Income (loss) from operations(938)3,500 (995)
Other income (expense), net126 (312)(71)(697)
Interest expense(3,070)(7,578)(6,956)(14,015)
Loss on debt extinguishment, net(4,960)— (4,960)— 
Net loss before income taxes(8,842)(4,390)(12,982)(14,706)
Income tax provision411 202 424 622 
Net loss$(9,253)$(4,592)$(13,406)$(15,328)
Net loss per share - basic and diluted$(0.16)$(0.11)$(0.23)$(0.38)
Weighted average shares - basic and diluted58,567 40,286 57,852 40,097 
Net loss$(9,253)$(4,592)$(13,406)$(15,328)
Foreign currency translation adjustments, net(506)722 (239)1,009 
Total comprehensive loss$(9,759)$(3,870)$(13,645)$(14,319)
See accompanying Notes to Condensed Consolidated Financial Statements.
2

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six Months Ended September 30,
20212020
Operating activities
Net loss$(13,406)$(15,328)
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization3,967 2,580 
Amortization of debt issuance costs1,629 3,015 
Long-term debt related costs— 167 
Provision for product and service inventories2,418 3,588 
Stock-based compensation6,273 4,550 
Paycheck Protection Program loan forgiveness(10,000)— 
Non-cash loss on debt extinguishment8,471 — 
Other(20)1,268 
Changes in assets and liabilities:
Accounts receivable, net10,024 7,568 
Manufacturing inventories(5,199)(8,858)
Service parts inventories(1,818)(4,333)
Accounts payable1,559 1,601 
Accrued restructuring charges(560)240 
Accrued compensation(3,779)2,922 
Deferred revenue(9,032)(12,584)
Other assets and liabilities(5,789)(5,693)
Net cash used in operating activities(15,262)(19,297)
Investing activities
Purchases of property and equipment(2,396)(1,434)
Business acquisition, net of cash acquired(5,000)— 
Net cash used in investing activities(7,396)(1,434)
Financing activities
Borrowings of long-term debt, net of debt issuance costs94,961 19,400 
Repayments of long-term debt(93,051)— 
Borrowings of credit facility126,084 140,987 
Repayments of credit facility(116,084)(144,058)
Borrowings of payment protection program— 10,000 
Proceeds from issuance of common stock806 537 
Net cash provided by financing activities12,716 26,866 
Effect of exchange rate changes on cash, cash equivalents and restricted cash12 (96)
Net change in cash, cash equivalents and restricted cash(9,930)6,039 
Cash, cash equivalents, and restricted cash at beginning of period33,137 12,270 
Cash, cash equivalents, and restricted cash at end of period$23,207 $18,309 
Cash, Cash Equivalents and Restricted Cash at end of period
Cash and cash equivalents$22,757 $12,517 
Restricted cash, current450 792 
Restricted cash, long-term— 5,000 
Cash, cash equivalents and restricted cash at the end of period$23,207 $18,309 
Supplemental disclosure of cash flow information
      Cash paid for interest$5,198 $14,181 
      Cash paid (received) for income taxes, net$480 $(1,578)
   Non-cash transactions
      Purchases of property and equipment included in accounts payable$309 $294 
      Purchases of property and equipment included in accrued liabilities$— $1,255 
      Transfer of inventory to property and equipment$76 $207 
See accompanying Notes to Condensed Consolidated Financial Statements.
3

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands, unaudited)

Common StockAdditional
Paid-in Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal Stockholders' Deficit
Three Months EndedSharesAmount
Balance, June 30, 202039,905 $399 $519,235 $(713,900)$(1,235)$(195,501)
Net loss— — — (4,592)— (4,592)
Foreign currency translation adjustments, net— — — — 722 722 
Shares issued under employee stock purchase plan133 537 — — 539 
Shares issued under employee incentive plans, net702 (7)— — — 
Stock-based compensation— — 2,592 — — 2,592 
Balance, September 30, 202040,740 $408 $522,357 $(718,492)$(513)$(196,240)
Balance, June 30, 202157,280 $573 $629,862 $(742,776)$(589)(112,930)
Net loss— — — (9,253)— (9,253)
Foreign currency translation adjustments, net— — — — (506)(506)
Shares issued under employee stock purchase plan145 805 — — 806 
Shares issued under employee incentive plans, net1,387 14 (14)— — — 
Shares issued in connection with business acquisition460 2,813 — — 2,818 
Stock-based compensation— — 3,072 — — 3,072 
Balance, September 30, 202159,272 $593 $636,538 $(752,029)$(1,095)$(115,993)
See accompanying Notes to Condensed Consolidated Financial Statements.

4

Common StockAdditional
Paid-in Capital
Accumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders' Deficit
Six Months EndedSharesAmount
Balance, March 31, 202039,905 $399 $505,762 $(703,164)$(1,522)(198,525)
Net loss— — — (15,328)— (15,328)
Foreign currency translation adjustments, net— — — — 1,009 1,009 
Shares issued under employee stock purchase plan133 537 539 
Shares issued under employee incentive plans, net702 (7)— — 
Warrants issued related to long-term debt, net— — 11,515 — — 11,515 
Stock-based compensation— — 4,550 — — 4,550 
Balance, September 30, 202040,740 $408 $522,357 $(718,492)$(513)$(196,240)
Balance, March 31, 202156,915 $570 $626,664 $(738,623)$(856)$(112,245)
Net loss— — — (13,406)— (13,406)
Foreign currency translation adjustments, net— — — — (239)(239)
Shares issued under employee stock purchase plan145 805 — 806 
Shares issued under employee incentive plans, net1,752 17 (17)— — — 
Shares issued in connection with business acquisition460 2,813 — — 2,818 
Stock-based compensation— 6,273 — — 6,273 
Balance, September 30, 202159,272 $593 $636,538 $(752,029)$(1,095)$(115,993)
See accompanying Notes to Condensed Consolidated Financial Statements.







5

INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business

Quantum is a technology company whose mission is to deliver innovative solutions to organizations around the world. We design, manufacture and sell technology and services that help customers capture, create and share digital content, and protect it for decades. We emphasize innovative technology in the design and manufacture of our products to help our customers unlock the value in their video and unstructured data in new ways to solve their most pressing business challenges.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. All intercompany balances and transactions have been eliminated. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included within the Company's most recent Annual Report on Form 10-K.

The unaudited consolidated interim financial statements reflect all adjustments, consisting only of normal and recurring items, necessary to present fairly our financial position as of September 30, 2021, the results of operations and comprehensive loss, statements of cash flows, and changes in stockholder's deficit for the three and six months ended September 30, 2021 and 2020. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

Use of Estimates

Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with GAAP. These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented with consideration given to the potential impacts of the COVID-19 pandemic. However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that may result from the pandemic.

Recent Accounting Pronouncements

Recent accounting pronouncements issued by the Financial Accounting Standards Board (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not have, or are not expected to have, a material impact on our present or future consolidated financial statements.




NOTE 2: REVENUE

Based on how the Company manages its business, the Company has determined that it currently operates in 1 reportable segment. The Company operates in 3 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 September 30,Six Months Ended September 30,
2021202020212020
Americas1
   Primary storage systems$11,264 $16,933 $18,458 $23,792 
   Secondary storage systems12,174 9,317 28,886 17,993 
   Device and media5,269 6,069 11,791 12,431 
   Service21,341 19,399 41,534 37,994 
Total revenue50,048 51,718 100,669 92,210 
EMEA
   Primary storage systems4,244 2,798 7,020 5,094 
   Secondary storage systems9,720 6,352 17,479 12,968 
   Device and media4,513 4,745 9,894 8,767 
   Service11,035 10,227 21,847 20,042 
Total revenue29,512 24,122 56,240 46,871 
APAC
   Primary storage systems1,175 879 2,516 1,938 
   Secondary storage systems4,365 3,234 8,098 6,434 
   Device and media1,931 523 2,644 1,120 
   Service1,983 1,868 3,808 3,844 
Total revenue9,454 6,504 17,066 13,336 
Consolidated
   Primary storage systems16,683 20,610 27,994 30,824 
   Secondary storage systems26,259 18,903 54,463 37,395 
   Device and media11,713 11,337 24,329 22,318 
   Service34,359 31,494 67,189 61,880 
   Royalty2
4,166 3,477 8,303 6,709 
Total revenue$93,180 $85,821 $182,278 $159,126 

1 Revenue for Americas geographic region outside of the United States is not significant.
2 Royalty revenue is not allocable to geographic regions.


Contract Balances

The following table presents the Company’s contract liabilities and certain information related to this balance as of and for the six months ended September 30, 2021 (in thousands): 
September 30, 2021
Contract liabilities (deferred revenue)$118,871 
Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period53,833 

Remaining Performance Obligations

Remaining performance obligations consisted of the following (in thousands):
8

CurrentNon-CurrentTotal
As of September 30, 2021$130,708 $42,855 $173,563 

The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months.



NOTE 3: BUSINESS ACQUISITION
On July 20, 2021, the Company purchased specified assets related to the video surveillance business of PV3 (an ABC) LLC, a Delaware limited liability company as assignee for the benefit of Pivot3, Inc., a Delaware corporation (“Pivot 3”). The transaction costs associated with the acquisition were not material and expensed as incurred. Goodwill generated from this acquisition is primarily attributable to the expected post-acquisition synergies from integrating Pivot3's video surveillance portfolio and assets with our platform to expand our video surveillance portfolio with hardware and software offerings that will be offered under the Quantum VS-Series portfolio. Goodwill obtained in an asset acquisition is deductible for tax purposes.

The total purchase consideration for the acquisition of Pivot3 was $7.8 million, which consisted of the following (in thousands):
Cash$5,000 
Fair value of stock consideration2,818 
   Total$7,818 
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of the acquisition (in thousands):
AmountEstimated Useful Life
Goodwill$6,796 
Identified intangible assets: 
   Developed technology1,700 2 years
   Customer lists3,700 4 years
Property, plant and equipment4,300 3 years
Net liabilities assumed(8,678)
   Total$7,818 
Pivot 3 has also agreed to license to the Company certain intellectual property rights related to the business. The historical results of operations for Pivot 3 were not significant to the Company's consolidated results of operations for the periods presented.




NOTE 4: BALANCE SHEET INFORMATION
Certain significant amounts included in the Company's consolidated balance sheets consist of the following (in thousands):

Manufacturing inventories
9

September 30, 2021March 31, 2021
   Finished goods:
      Manufactured finished goods$11,013 $12,452 
      Distributor inventory136 238 
         Total finished goods11,149 12,690 
   Work in progress3,653 2,074 
   Raw materials14,046 9,703 
Total manufacturing inventories$28,848 $24,467 

Service parts inventories
September 30, 2021March 31, 2021
   Finished goods$17,817 $18,773 
   Component parts5,747 4,648 
Total service parts inventories$23,564 $23,421 

Intangibles, net
September 30, 2021March 31, 2021
GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
   Developed technology$6,400 $(1,425)$4,975 $4,700 $(473)$4,227 
   Customer lists4,600 (443)4,157 900 (90)810 
Intangible assets, net$11,000 $(1,868)$9,132 $5,600 $(563)$5,037 

Intangible assets amortization expense was $0.8 million and $0 for the three months ended September 30, 2021 and 2020, respectively, and $1.3 million and $0 for the six months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 2.8 years.

As of September 30, 2021, the future expected amortization expense for intangible assets is as follows (in thousands):

Fiscal year endingEstimated future amortization expense
Remainder of 2022$1,796 
20233,641 
20242,490 
Thereafter1,205 
Total$9,132 


Goodwill
Amount
Balance at March 31, 2021$3,466 
Goodwill acquired6,796 
Balance at September 30, 2021$10,262 


There were no impairments to goodwill during the second quarter and first two quarters of fiscal 2021 and 2022.
10


NOTE 5: LONG-TERM DEBT
The Company’s long-term debt consisted of the following (in thousands):
 September 30, 2021March 31, 2021
Term Loan$99,375 $— 
Senior Secured Term Loan— 92,426 
PNC Credit Facility10,000 — 
Paycheck Protection Program Loan— 10,000 
Less: current portion(3,125)(1,850)
Less: unamortized debt issuance costs (1)
(4,882)(9,686)
Long-term debt, net$101,368 $90,890 
(1) The unamortized debt issuance costs related to the Senior Secured Term Loan and the Term Loan are presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying condensed consolidated balance sheets. Unamortized debt issuance costs related to the PNC Credit Facility are presented within other assets on the accompanying condensed consolidated balance sheets.

On December 27, 2018, the Company entered into a senior secured term loan to borrow an aggregate of $165.0 million (the “Senior Secured Term Loan”). In connection with the Senior Secured Term Loan, the Company amended its existing revolving credit facility with PNC (the PNC Credit Facility together with the Senior Secured Term Loan, the “December 2018 Credit Agreements”) providing for borrowings up to a maximum principal amount of the lesser of: (a) $45.0 million or (b) the amount of the borrowing base, as defined in the PNC Credit Facility agreement.

On June 16, 2020, the Company entered into amendments to the December 2018 Credit Agreements (the "June 2020 Amendment" and collectively with the amendments to the December 2018 Credit Agreements occurring on March 30, 2020, March 31, 2020 and April 3, 2020, the “2020 Amendments”). The June 2020 Amendment provided an additional borrowing of $20.0 million which was immediately drawn in full.

In connection with the June 2020 Amendment, the Company issued to the lenders warrants (the “2020 Term Loan Warrants”) to purchase 3,400,000 shares of the Company’s common stock, at an exercise price of $3.00 per share. The exercise price and the number of shares underlying the 2020 Term Loan Warrants are subject to adjustment in the event of specified events, including dilutive issuances of common stock linked equity instruments at a price lower than the exercise price of the warrants, a subdivision or combination of the Company’s common stock, a reclassification of the Company’s common stock or specified dividend payments. The 2020 Term Loan Warrants are exercisable until June 16, 2030. Upon exercise, the aggregate exercise price may be paid, at each warrant holder’s election, in cash or on a net issuance basis, based upon the fair market value of the Company’s common stock at the time of exercise.

The 2020 Amendments related to the Senior Secured Term Loan were accounted for as modifications. In connection with the modifications, the Company incurred $11.9 million in costs including $11.3 million related to the value of the 2020 Term Loan Warrants and $0.6 million in fees paid to the lenders. These debt issuance costs are reflected as a reduction to the carrying amount of the Senior Secured Term Loan and are amortized to interest expense over the remaining loan term. The 2020 Amendments related to the PNC Credit Facility were accounted for as modifications. Fees paid to PNC of approximately $0.5 million were recorded to other assets and are amortized to interest expense over the remaining term of the agreement.
11

On August 5, 2021 (the “Closing Date”), the Company entered into a senior secured term loan to borrow an aggregate of $100.0 million, (the “Term Loan”). A portion of the proceeds were used to repay in full all outstanding borrowings under the Senior Secured Term Loan. Borrowings under the Term Loan mature on August 5, 2026. Principal is payable at a rate per annum equal to (a) 2.5% of the original principal balance thereof during the first year following the Closing Date and (b) 5% of the original principal balance thereof thereafter. Principal and interest payments are payable on a quarterly basis. The Company incurred $5.1 million in costs related to the Term Loan. These debt issuance costs are reflected as a reduction of the carrying amount of the Term Loan and are being recognized as interest expense over the term of the Term Loan.
The Company recorded a loss on debt extinguishment of $15.0 million related to the repayment of the Senior Secured Term Loan which was comprised of $6.4 million in prepayment penalties, $0.1 million in legal fees, and the write-off of unamortized debt issuance costs of $8.4 million.

Loans under the Term Loan designated as “Prime Rate Loans” will bear interest at a rate per annum equal to the greatest of (i) 1.75%, (ii) the Federal funds rate plus 0.50%, (iii) the LIBOR Rate based upon an interest period of one month plus 1.0%, and (iv) the “Prime Rate” last quoted by the Wall Street Journal, plus an applicable margin of 5.00%. Loans designated as “LIBOR Rate Loans” will bear interest at a rate per annum equal to the LIBOR Rate plus an applicable margin of 6.00%. The “LIBOR Rate” is subject to a floor of 0.75%. The Company can designate a loan as a Prime Rate Loan or LIBOR Rate Loan in its discretion.

The Term Loan contains certain covenants, including requirements to prepay the Term Loan in an amount equal to (i) 100% of the net cash proceeds from certain asset dispositions, extraordinary receipts, debt issuances and equity issuances, subject to certain reinvestment rights and other exceptions and (ii) 75% of certain excess cash flow of the Company and its subsidiaries beginning in the fiscal year ended March 31, 2023, subject to certain exceptions, including reductions to the percentage of such excess cash flow that is required to prepay the loans to 50% and 0%, based on the Company’s applicable total net leverage ratio. Amounts outstanding under the Term Loan may become due and payable upon the occurrence of specified events, which among other things include (subject to certain exceptions and cure periods): (i) failure to pay principal, interest, or any fees when due; (ii) breach of any representation or warranty, covenant, or other agreement in the Term Loan and other related loan documents; (iii) the occurrence of a bankruptcy or insolvency proceeding with respect to the Company or certain of its subsidiaries; (iv) any “Event of Default” with respect to other indebtedness involving an aggregate amount of $3,000,000 or more; (v) any lien created by the Term Loan or any related security documents ceasing to be valid and perfected; (vi) the Term Loan Credit Agreement or any related security documents or guarantees ceasing to be legal, valid, and binding upon the parties thereto; or (vii) a change of control shall occur. Additionally, the Term Loan contains financial covenants relating to minimum liquidity and total net leverage.

On September 30, 2021, the Company amended the PNC Credit Facility (the PNC Credit Facility together with the Term Loan, the “Credit Agreements”). The amendment, among other things (a) extended the maturity date to August 5, 2026; (b) reduced the principal amount of the revolving commitments to a maximum amount equal to the lesser of: (i) $30.0 million or (ii) the amount of the borrowing base, as defined in the PNC Credit Facility agreement;(c) replaced existing debt covenants with net leverage ratio, minimum liquidity and fixed charges coverage ratio covenants; and, (d) removed the requirement to maintain a $5.0 million restricted cash reserve with PNC.

The interest rate under the PNC Credit Facility is 2.25% per annum for LIBOR Rate Loans and 1.25% per annum for Domestic Rate Loans and Swing Loans through December 31, 2021, and effective as of January 1, 2022 on the first day of each fiscal quarter ending thereafter (the “Applicable Margin Adjustment Date”), between 1.75% and 2.25% per annum for LIBOR Rate Loans and between 0.75% and 1.25% per annum for Domestic Rate Loans and Swing Loans, based on the percentage of Average Undrawn Availability (as defined in the PNC Credit Agreement) for the most recently completed fiscal quarter prior to the Applicable Margin Adjustment Date (the “Applicable Interest Rate”).

With respect to any LIBOR Rate Loan, the Company has agreed to pay affiliates of certain Term Loan lenders a fee equal to a percentage per annum equal to the sum of (x) 6.00%, minus (y) the Applicable Interest Rate, plus (z) if the LIBOR Rate applicable to such interest payment is less than 0.75%, (i) 0.75% minus (ii) such LIBOR Rate. With respect to any Domestic Rate Loan or Swing Loan, the Company has agreed to pay an affiliate of Blue Torch a fee equal to a percentage per annum equal to the sum of (x) 5.00%, minus (y) the Applicable Interest Rate, plus (z) if the Alternative Base Rate applicable to such interest payment is less than 1.00%, (i) 1.00% minus (ii) such Alternative Base Rate. If on the last day of any calendar quarter, the average “Usage Amount” during such calendar quarter does not equal the “Maximum Revolving Advance Amount” (as such terms are defined in the PNC Credit
12

Facility), then the Company has agreed to pay affiliates of certain Term Loan lenders a fee at a rate per annum equal to 1.00% minus a fee percentage between 0.25% to 0.375% on the amount by which the Maximum Revolving Advance Amount exceeds such average Usage Amount.

As of September 30, 2021, the interest rates on the Term Loan and the PNC Credit Facility were 6.75% and 2.34%, respectively, and PNC Credit Facility had a borrowing base of $20.0 million, of which $8.6 million was available at that date. As of March 31, 2021, the Company was required to maintain a $5.0 million restricted cash reserve as part of the PNC Credit Facility, which was presented as long-term restricted cash within the accompanying condensed consolidated balance sheet as of March 31, 2021. The September 30, 2021 amendment to the PNC Credit Facility removed the restricted cash reserve requirement.

Registration Rights Agreement

In connection with the June 2020 Amendment to the Senior Secured Term Loan, the Company entered into an amended and restated registration rights agreement (the “Amended Registration Rights Agreement”) with the holders of the warrants previously issued to the Senior Secured Term Loan lenders in December 2018 and the 2020 Term Loan Warrants (collectively, the “Term Loan Warrants”). The Amended Registration Rights Agreement grants the holders of the Term Loan Warrants certain registration rights for the shares of common stock issuable upon the exercise of the applicable Term Loan Warrants, including (a) the ability of a holder to request that the Company file a Form S-1 registration statement with respect to at least 40% of the registrable securities held by such holder as of the issuance date of the applicable Term Loan Warrants; (b) the ability of a holder to request that the Company file a Form S-3 registration statement with respect to outstanding registrable securities if at any time the Company is eligible to use a Form S-3 registration statement; and (c) certain piggyback registration rights related to potential future equity offerings of the Company, subject to certain limitations.

Paycheck Protection Program Loan

On April 13, 2020, the Company entered into a Paycheck Protection Program Term Loan (“PPP Loan”) effective April 11, 2020 with PNC in an aggregate principal amount of $10.0 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. In July 2021, the Company received notice from PNC that the PPP Loan and related accrued interest was approved for forgiveness in full by the U.S. Small Business Administration (the “SBA”). The Company recorded the amount forgiven as gain on debt extinguishment of $10.0 million in the three and six months ended September 30, 2021.




NOTE 6: LEASES
Supplemental balance sheet information related to leases is as follows (in thousands):
Operating leasesSeptember 30, 2021March 31, 2021
Operating lease right-of-use asset  $7,917 $9,383 
Other accrued liabilities  2,092 2,581 
Operating lease liability  6,818 8,005 
   Total operating lease liabilities  $8,910 $10,586 


Components of lease cost were as follows (in thousands):
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Three Months Ended September 30,Six Months Ended September 30,
Lease Cost2021202020212020
Operating lease cost  $994 $1,338 $2,129 $2,669 
Variable lease cost  177 211 351 423 
Short-term lease cost  39 92 
Total lease cost  $1,175 $1,588 $2,484 $3,184 

Maturity of Lease LiabilitiesOperating Leases
   2022, excluding the six months ended September 30, 2021$1,734 
   20232,695 
   20242,543 
   20252,264 
   20261,827 
   Thereafter698 
Total lease payments$11,761 
Less: imputed interest(2,851)
Present value of lease liabilities$8,910 



Lease Term and Discount RateSeptember 30, 2021March 31, 2021
Weighted average remaining operating lease term (years)4.154.53
Weighted average discount rate for operating leases13.64 %13.96 %

Operating cash outflows related to operating leases totaled $1.0 million and $1.3 million for the six months ended September 30, 2021 and 2020, respectively.


NOTE 7: RESTRUCTURING CHARGES
The following table summarizes the restructuring activities for the six months ended September 30, 2021 and 2020 (in thousands):

 Severance and BenefitsFacilitiesTotal
Balance as of March 31, 2021$580 $— $580 
   Restructuring costs 274   274
   Adjustments to prior estimates(50)— (50)
   Cash payments (784)  — (784)
Balance as of September 30, 2021 $20 $—  $20 
Balance as of March 31, 2020 $— $— $— 
   Restructuring costs 2,637 — 2,637
   Cash payments (2,397)— (2,397)
Balance as of September 30, 2020 $240   $—  $240 


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NOTE 8: NET LOSS PER SHARE
The following outstanding stock-based instruments which are comprised of performance share units, restricted stock units, and warrants were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive (in thousands):

Three Months Ended September 30,Six Months Ended September 30,
2021202020212020
9,195 8,020 10,315 7,180 

The dilutive impact related to common shares from restricted stock units and warrants is determined by applying the treasury stock method to the assumed vesting of outstanding restricted stock units and the exercise of outstanding warrants. The dilutive impact related to common shares from contingently issuable performance share units is determined by applying a two-step approach using both the contingently issuable share guidance and the treasury stock method.

For the three and six months ended September 30, 2020, there were 1.6 million and 0.5 million of contingently issuable market based and performance based restricted stock units, respectively, excluded from the calculation of diluted net income (loss) per share, as their market and performance conditions had not yet been achieved. These shares were earned based on the Company’s achievement of certain average stock price and performance targets in addition to a time-based vesting period. There were no contingently issuable market based and performance based restricted stock units excluded from the diluted net loss per share as of September 30, 2021.



NOTE 9: INCOME TAXES
The effective tax rate for the three and six months ended September 30, 2021 and 2020 was (4.6)% and (3.2)% and 1.0% and 0.0%, respectively. The effective tax rates differed from the federal statutory tax rate of 21% during each of these periods due primarily to unbenefited losses experienced in jurisdictions with valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions.

As of September 30, 2021, including interest and penalties, the Company had $108.4 million of unrecognized tax benefits, $89.9 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. After taking into account the valuation allowance, of the $89.9 million, only $7.5 million, if recognized, would favorably affect the effective tax rate. As of September 30, 2021, the Company had accrued interest and penalties related to these unrecognized tax benefits of $1.3 million. The Company recognizes interest and penalties related to income tax matters in the income tax provision in the condensed consolidated statements of operations. As of September 30, 2021, $100.9 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the condensed consolidated balance sheets and $7.5 million (including interest and penalties) were recorded in other long-term liabilities in the condensed consolidated balance sheets. During the next 12 months, it is reasonably possible that approximately $14.0 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations. After taking into account the valuation allowance, of the $14.0 million, only $1.0 million would affect the effective tax rate.



NOTE 10: COMMITMENTS AND CONTINGENCIES
Commitments to Purchase Inventory
The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon the Company’s forecast of customer demand. The Company has similar arrangements with certain other suppliers. The Company is responsible for the financial impact on the supplier or contract manufacturer of any reduction or product mix shift in the forecast relative to materials that the third party had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for inventory in excess of current customer demand or for costs of excess or
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obsolete inventory. As of September 30, 2021, the Company had issued non-cancelable commitments for $57.3 million to purchase inventory from its contract manufacturers and suppliers.


Legal Proceedings
On July 22, 2016, Realtime Data LLC d/b/a IXO (“Realtime Data”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patents Nos. 7,161,506, 7,378,992, 7,415,530, 8,643,513, 9,054,728, and 9,116,908. The lawsuit has been transferred to the U.S. District Court for the Northern District of California for further proceedings. Realtime Data asserts that the Company has incorporated Realtime Data’s patented technology into its compression products and services. Realtime Data seeks unspecified monetary damages and other relief that the Court deems appropriate. On July 31, 2017, the District Court stayed proceedings in this litigation pending the outcome of Inter Partes Review proceedings before the Patent Trial and Appeal Board relating to the Realtime patents. In those proceedings the asserted claims of the ’506 patent, the ’992 patent, and the ’513 patent were found unpatentable. In addition, on July 19, 2019, the United States District Court for the District of Delaware issued a decision finding that all claims of the ’728 patent, the ’530 patent, and the ’908 patent are not eligible for patent protection under 35 U.S.C. § 101 (the “Delaware Action”). On appeal, the Federal Circuit vacated the decision in the Delaware Action and remanded for the Court to “elaborate on its ruling.” The case pending against Quantum in the Northern District of California remains stayed pending the final outcome in the Delaware Action. On May 4, 2021, the Court in the Delaware Action reaffirmed its earlier ruling and granted defendants’ motions to dismiss under Section 101. The Court also granted Realtime Data fourteen days to file amended complaints in the Delaware Action where they sought leave to do so. On May 19, 2021, Realtime Data filed amended complaints including revised bases for claims of infringement of the same patents. On June 29, 2021, defendants in the Delaware Action filed a renewed motion to dismiss under Section 101. Realtime Data filed its opposition to the motion to dismiss on July 13, 2021. On August 23, 2021, the Court again reaffirmed its earlier ruling and granted defendants’ motions to dismiss under Section 101. Realtime Data has appealed that decision to the Federal Circuit. Quantum believes the probability that this lawsuit will have a material adverse effect on our business, operating results or financial condition is remote.

On July 14, 2020, Starboard Value LP, Starboard Value and Opportunity Master Fund Ltd., Starboard Value and Opportunity S LLC, and Starboard Value and Opportunity C LP (collectively, “Starboard”) filed a lawsuit against Quantum Corporation, Quantum’s former CEO and board member Jon Gacek, and former Quantum board member Paul Auvil in the California Superior Court in Santa Clara County. The complaint alleges that between 2012 and 2014, Starboard purchased a large number of shares of Quantum’s common stock, obtained three seats on Quantum’s board of directors and then, in July 2014, entered into an agreement with Quantum whereby Starboard would not seek control of Quantum’s board but would instead support Quantum’s slate of board nominees so long as Quantum met certain performance objectives by the end of fiscal 2015. The complaint further alleges that Quantum hid its failure to meet those performance objectives by improperly recognizing revenue in fiscal 2015. Mr. Gacek resigned from the board effective May 1, 2017, and as CEO effective November 7, 2017; Mr. Auvil resigned from the board effective November 8, 2017. The complaint’s accounting allegations largely repeat allegations made in now-concluded shareholder class actions, shareholder derivative actions and an SEC investigation, the settlement of which Quantum previously reported in the Company’s Form 10-Q filed with the SEC on January 29, 2020 and Form 10-K filed with the SEC on August 6, 2019 (among other SEC filings). On September 14, 2020, defendants filed a motion to dismiss the California action on grounds of forum non conveniens and the mandatory Delaware forum selection clauses set forth in the contracts between Starboard and Quantum. On November 19, 2020, Starboard filed a first amended complaint in which Quantum was not named as a defendant, in effect dismissing Quantum from the California action. On January 8, 2021, Messrs. Gacek and Auvil moved to dismiss the amended complaint in California on grounds of forum non conveniens and the mandatory Delaware forum selection clauses set forth in the contracts between Starboard and Quantum. On March 11, 2021, the California Superior Court stayed the California action.

On April 14, 2021, Starboard filed a new action in the Delaware Court of Chancery, naming as defendants Messrs. Gacek and Auvil and Quantum. The new action largely repeats the allegations of the California action, alleging claims for fraud against all defendants, fraudulent concealment against all defendants, negligent misrepresentation against all defendants, breach of contract against Quantum, breach of the implied covenant of good faith and fair dealing against Quantum, and breach of fiduciary duty against Messrs. Gacek and Auvil. The complaint prays for unspecified damages in an amount to be determined at trial, costs and attorneys’ fees, and any other relief deemed just or appropriate by the court. On May 10, 2021, Quantum filed a motion to dismiss this Delaware action, as did Messrs. Gacek and Auvil. Under the briefing schedule agreed to by the parties and approved by the Court of
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Chancery, briefing on the motions ended July 26, 2021. The Court set oral argument on the motions for September 28, 2021, but on August 4, 2021, on its own motion, postponed the hearing to November 1, 2021. At this time, Quantum is unable to estimate the range of possible outcomes with respect to this matter.

Other Commitments
Additionally, from time to time, the Company is a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, the Company does not expect that the ultimate outcome of any of these other currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, cash flows or financial position.



NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s assets, measured and recorded at fair value on a recurring basis, may consist of money market funds which are included in cash and cash equivalents in the Condensed Consolidated Balance Sheets and are valued using quoted market prices (level 1 fair value measurements) at the respective balance sheet dates.

No impairment charges were recognized for non-financial assets in the six months ended September 30, 2021 and 2020. The Company has no non-financial liabilities measured and recorded at fair value on a non-recurring basis.


Long-term Debt

The table below represents the carrying value and total estimated fair value of long-term debt as of September 30, 2021 and 2020. The fair value has been classified as Level 2 within the fair value hierarchy.

September 30,
20212020
Carrying ValueFair ValueCarrying ValueFair Value
Senior Secured Term Loan$99,375 $99,375 $185,208 $185,208 
Amended PNC Credit Facility10,000 10,000 — — 



NOTE 12: SUBSEQUENT EVENTS
On October 1, 2021, the Company acquired the assets of EnCloudEn, an early stage hyperconverged infrastructure software company, for $2.3 million in cash.


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, 2021. 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 technology company whose mission is to deliver innovative solutions to organizations across the world. We design, manufacture and sell technology and services that help customers capture, create and share digital content, and protect it for decades. We emphasize innovative technology in the design and manufacture of our products to help our customers unlock the value in their video and unstructured data in new ways to solve their most pressing business challenges.

We generate revenue by designing, manufacturing, and selling technology and services. Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; data center costs in support of our cloud-based services; interest associated with our long term debt and income taxes.

Highlights from second quarter of fiscal year 2022 included:
Revenue increased 5% from the prior quarter and 9% year-over-year to $93 million.
We completed the Pivot3 assets acquisition, which adds a portfolio of industry leading hyperconverged infrastructure (HCI) and intelligent software solutions for the security and surveillance markets.
We completed the EnClouden assets acquisition which will enable us to expand the addressable market for our video surveillance portfolio, offering customers a solution using their server hardware of choice with a flexible subscription-based software model.
We completed the refinancing of our term loan, significantly reducing our annual debt service and greatly increasing our financial flexibility related to covenants and restrictions.
We brought on industry veteran John Hurley as Chief Revenue Officer. John brings extensive experience working with the largest global enterprise, commercial, and service provider customers.


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.

We have seen a gradual stabilization in our business during the second half of fiscal 2021 and into fiscal 2022 as customers increasingly adapted to the COVID-19 environment. The pervasive disruption in the global supply chain continues to have an impact on our business. Before the current disruptions in the global supply chain our historical backlog was very limited and typically represented less than 5% of quarterly revenues. During our second fiscal quarter our backlog grew to $50 million from $30 million at the end of the prior quarter. This unprecedented backlog is a result of the strong demand we have been seeing across our business but limited by the ongoing supply constraints. Of the $50 million ending backlog, just over 70% of the backlog was from hyperscaler customers and just over 85% of the backlog was related to tape products. Approximately two-thirds of the backlog is expected to be shipped in the second half of fiscal 2022 and the remaining one-third of the backlog has ship dates early in fiscal 2023.

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We will continue to actively monitor the impact of COVID-19 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.



RESULTS OF OPERATIONS
Three Months Ended September 30,Six Months Ended September 30,
(in thousands)2021202020212020
Total revenue$93,180 $85,821 $182,278 $159,126 
Total cost of revenue (1)
54,793 47,087 106,612 89,540 
Gross profit38,387 38,734 75,666 69,586 
Operating expenses
Research and development (1)
12,389 10,233 23,680 20,395 
Sales and marketing (1)
15,462 13,153 29,414 24,723 
General and administrative (1)
11,466 10,263 23,293 21,825 
Restructuring charges1,585 274 2,637 
Total operating expenses39,325 35,234 76,661 69,580 
Income (loss) from operations(938)3,500 (995)
Other income (expense), net126 (312)(71)(697)
Interest expense(3,070)(7,578)(6,956)(14,015)
Loss on debt extinguishment, net(4,960)— (4,960)— 
Net loss before income taxes(8,842)(4,390)(12,982)(14,706)
Income tax provision411 202 424 622 
Net loss$(9,253)$(4,592)$(13,406)$(15,328)
(1) Includes stock-based compensation as follows:
Three Months Ended September 30,Six Months Ended September 30,
(in thousands)2021202020212020
Cost of revenue$298 $227 $591 $396 
Research and development1,331 591 2,863 1,062 
Sales and marketing613 495 1,113 832 
General and administrative830 1,279 1,706 2,260 
   Total$3,072 $2,592 $6,273 $4,550 

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

Revenue
Three Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Product revenue
   Primary storage systems$16,683 18 $20,610 24 $(3,927)(19)
   Secondary storage systems26,259 28 18,903 22 7,356 39 
   Devices and media11,713 13 11,337 13 376 
      Total product revenue54,655 59 50,850 59 3,805 
Service revenue34,359 37 31,494 37 2,865 
Royalty revenue4,166 3,477 689 20 
Total revenue$93,180 100 $85,821 100 $7,359 


Product revenue
In the three months ended September 30, 2021, product revenue increased $3.8 million, or 7%, as compared to the same period in 2020. Secondary storage systems represented $7.4 million, or a 39% increase, driven by higher demand in our hyperscale, backup and archive use cases. Primary storage systems decreased $3.9 million, or 19%, partially driven by our transition to a recurring software subscription licensing model which results in a shift from product to services revenue.
Service revenue
We offer a broad range of services including product maintenance, implementation, and training as well as software subscriptions. 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 increased 9% in the three months ended September 30, 2021 compared to the same period in 2020 driven partially by growing sales of our recurring software subscription offerings as well as service revenue associated with newly acquired businesses.
Royalty revenue
We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue increased $0.7 million, or 20%, in the three months ended September 30, 2021 compared to the same period in 2020 due to increased market volume of LTO media.

Gross Profit and Margin
Three Months Ended September 30,
(dollars in thousands)2021Gross
margin %
2020Gross
margin %
$ ChangeBasis point change
Product gross profit$13,531 24.8 $15,852 31.2 $(2,321)(640)
Service gross profit20,690 60.2 19,405 61.6 1,285 (140)
Royalty gross profit4,166 100.0 3,477 100.0 689 — 
Gross profit$38,387 41.2 $38,734 45.1 $(347)(390)

Product Gross Margin
Product gross margin decreased 640 basis points for the three months ended September 30, 2021, as compared with the same period in 2020. This decrease was due primarily to a product mix weighted towards lower margin offerings and cost pressures as a result of constraints in the global supply chain.
20

Service Gross Margin
Service gross margins decreased 140 basis points for the three months ended September 30, 2021, as compared with the same period in 2020. This was partially driven by cost pressures as a result of certain constraints in the global supply chain.
Royalty Gross Margin
Royalties do not have significant related cost of sales.

Operating expenses
Three Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Research and development$12,389 13.3 $10,233 11.9 $2,156 21 
Sales and marketing15,462 16.6 13,153 15.3 2,309 18 
General and administrative11,466 12.3 10,263 12.0 1,203 12 
Restructuring charges— 1,585 1.8 (1,577)(99)
   Total operating expenses$39,325 42.2 $35,234 41.1 $4,091 12 

In the three months ended September 30, 2021, research and development expense increased $2.2 million, or 21%, as compared with the same period in 2020. This increase was primarily driven by an increase in personnel costs due to increased headcount focused on new product development. This increase in headcount includes those employees added through acquisitions over the year.
In the three months ended September 30, 2021, sales and marketing expenses increased $2.3 million, or 18%, as compared with the same period in 2020. This increase was driven by increased headcount as we invest in strategic areas to accelerate growth. This increase in headcount includes those employees added through acquisitions over the year. Both marketing expense and travel expense have also increased over the prior year as COVID-19 restrictions ease.
In the three months ended September 30, 2021, general and administrative expenses increased $1.2 million, or 12%, as compared with the same period in 2020. This increase was due primarily to increased legal and other expenses related to our long-term debt amendments and business acquisition related activities.
In the three months ended September 30, 2021, restructuring expenses decreased $1.6 million, or 99%, as compared with the same period in 2020. The decrease was the result of one-time workforce reductions in the prior year.

Other Income (Expense)
Three Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Other income (expense)$126 $(312)— $438 140 
Interest expense(3,070)(7,578)4,508 59 
Loss on debt extinguishment(4,960)— — (4,960)n/a

The increase in other income (expense), net during the three months ended September 30, 2021 compared with the same period in 2020 was related primarily to fluctuations in foreign currency exchange rates.
In the three months ended September 30, 2021, interest expense decreased $4.5 million, or 59%, as compared with the same period in 2020 due to a lower principal balance and a lower effective interest rate.
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Loss on debt extinguishment, net during the three months ended September 30, 2021 was related to prepayment of our Senior Secured Term Loan that occurred during the period offset by the $10.0 million gain on the forgiveness of the Paycheck Protection Program Loan.

Income Taxes
Three Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Income tax provision$411 — $202 — $209 103 

The income tax provision for the three months ended September 30, 2021 and 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 income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance.

Comparison of the Six Months Ended September 30, 2021 and 2020
Revenue
Six Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Product revenue
   Primary storage systems27,994 15 %$30,824 19 %$(2,830)(9)%
   Secondary storage systems54,463 30 37,395 24 17,068 46 
   Devices and media24,329 13 22,318 14 2,011 
      Total product revenue$106,786 58 %$90,537 57 %$16,249 18 
Service revenue67,189 37 61,880 39 5,309 
Royalty revenue8,303 6,709 1,594 24 
Total revenue$182,278 100 %$159,126 100 %$23,152 15 


Product revenue
In the six months ended September 30, 2021, product revenue increased $16.2 million, or 18%, as compared to the same period in 2020. Secondary storage systems represented $17.1 million of the increase, driven primarily by a growing customer base in the hyperscale segment. Devices and media represented $2.0 million of the increase, driven by higher volume of LTO media sold through our high-volume channel partners. Primary storage systems decreased $2.8 million driven partially by driven by our transition to a recurring software subscription licensing model which results in a shift from product to services revenue.
Service revenue
We offer a broad range of services including product maintenance, implementation, and training as well as software subscriptions. 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 increased $5.3 million, or 9% in the six months ended September 30, 2021 compared to the same period in 2020, driven partially by the increase in recurring software subscription revenue. Growth is also driven by a higher level of installation and professional services attached to our product sales.
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Royalty revenue
We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue increased $1.6 million, or 24%, in the six months ended September 30, 2021 compared to the same period in 2020 due to higher overall market volume.

Gross Profit and Margin
Six Months Ended September 30,
(dollars in thousands)2021Gross
margin %
2020Gross
margin %
$ ChangeBasis point change
Product gross profit$26,922 25.2 %$25,157 27.8 %$1,765 (260)
Service gross profit40,441 60.2 37,720 61.0 2,721 (80)
Royalty gross profit8,303 100.0 6,709 100.0 1,594 — 
Gross profit$75,666 41.5 %$69,586 43.7 %$6,080 (220)

Product Gross Margin
Product gross margin decreased 260 basis points for the six months ended September 30, 2021, as compared with the same period in 2020. This decrease was primarily the result of a less favorable product mix to our enterprise customers, as well as cost pressures as a result of constraints in the global supply chain.
Service Gross Margin
Service gross margin decreased 80 basis points for the six months ended September 30, 2021, as compared with the same period in 2020. This decrease was partially due to cost pressures as a result of constraints in the global supply chain.
Royalty Gross Margin
Royalties do not have significant related cost of sales.

Operating expenses
Six Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Research and development$23,680 12.9 %$20,395 12.8 %$3,285 16 %
Sales and marketing29,414 16.1 24,723 15.5 4,691 19 
General and administrative23,293 12.8 21,825 13.7 1,468 
Restructuring charges274 0.2 2,637 1.7 (2,363)(90)
   Total operating expenses$76,661 42.1 %$69,580 43.7 %$7,081 10 

In the six months ended September 30, 2021, research and development expense increased $3.3 million, or 16%, as compared with the same period in 2020. This increase was primarily driven by an increase in personnel costs due to increased headcount focused on new product development. This increase in headcount includes those employees added through acquisitions over the year.
In the six months ended September 30, 2021, sales and marketing expenses increased $4.7 million, or 19%, as compared with the same period in 2020. This increase was driven by increased headcount as we invest in strategic areas to accelerate growth. This increase in headcount includes those employees added through acquisitions over the year. Both marketing expense and travel expense have also increased over the prior year as COVID-19 restrictions ease.
In the six months ended September 30, 2021, general and administrative expenses increased $1.5 million, or 7% as compared with the same period in 2020. This increase was due primarily to increased legal and other expenses related to our long-term debt amendments and business acquisition related activities.

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In the six months ended September 30, 2021, restructuring expenses decreased $2.4 million, or 90% as compared with the same period in 2020. The decrease was the result of a reduction in workforce to improve operational efficiency and rationalize our cost structure in the prior year.

Other Income (Expense)
Six Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Other income (expense)$(71)$(697)— %$626 90 %
Interest expense(6,956)(4)(14,015)(9)7,059 (50)
Loss on debt extinguishment(4,960)(3)— — (4,960)n/a

The change in other income (expense), net during the six months ended September 30, 2021 and 2020 was related primarily to fluctuations in foreign currency exchange rates.

In the six months ended September 30, 2021, interest expense decreased $7.1 million, or 50%, as compared with the same period in 2020 due primarily to a lower principal balance and a lower effective interest rate on the term debt.

Loss on debt extinguishment, net during the six months ended September 30, 2021 was related to prepayment of our Senior Secured Term Loan that occurred during the period offset by the $10.0 million gain on the forgiveness of the Paycheck Protection Program loan.

Income Taxes
Six Months Ended September 30,
(dollars in thousands)2021% of
revenue
2020% of
revenue
$ Change% Change
Income tax provision$424 — %$622 — %$(198)(32)%

The income tax provision for the six months ended September 30, 2021 and 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 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.



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LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $22.8 million as of September 30, 2021, which consisted primarily of bank deposits and money market accounts.
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 PNC Credit Facility. We require significant cash resources to meet obligations to pay principal and interest on our outstanding debt, provide for our research and development activities, fund our working capital needs, and make capital expenditures. 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 disruptions in our supply chain and a decline in our customers' ability or willingness to purchase our products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. We expect the impact of COVID-19 to continue to have a significant impact on our liquidity and capital resources.
We are subject to various debt covenants under our Credit Agreements. Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations. 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, 2021.

Term Loan
On August 5, 2021 (the “Closing Date”), we entered into a senior secured term loan to borrow an aggregate of $100.0 million, (the “Term Loan”). A portion of the proceeds were used to repay in full all outstanding borrowings under the Senior Secured Term Loan. Borrowings under the Term Loan mature on August 5, 2026. Principal is payable at a rate per annum equal to (a) 2.5% of the original principal balance thereof during the first year following the Closing Date and (b) 5% of the original principal balance thereof thereafter. Principal and interest payments are payable on a quarterly basis.

Revolving Credit Facility
On September 30, 2021, we amended the PNC Credit Facility. The amendment, among other things (a) extended the maturity date to August 5, 2026; (b) reduced the principal amount of the revolving commitments to a maximum amount equal to the lesser of: (i) $30.0 million or (ii) the amount of the borrowing base, as defined in the PNC Credit Facility agreement;(c) replaced existing debt covenants with net leverage ratio, minimum liquidity and fixed charges coverage ratio covenants; and, (d) removed the requirement to maintain a $5.0 million restricted cash reserve with PNC.

Paycheck Protection Program Loan
In July 2021, we received notice from PNC that the Paycheck Protection Program Loan and related accrued interest was approved for forgiveness in full by the U.S. Small Business Administration. We recorded the amount forgiven as gain on debt extinguishment of $10.0 million in the three and six months ended September 30, 2021.

Cash Flows

The following table summarizes our consolidated cash flows for the periods indicated.
 
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 Six Months Ended September 30,
(in thousands)20212020
Cash provided by (used in):
   Operating activities$(15,262)$(19,297)
   Investing activities(7,396)(1,434)
   Financing activities12,716 26,866 
   Effect of exchange rate changes12 (96)
Net increase (decrease) in cash and cash equivalents and restricted cash$(9,930)$6,039 

Cash Used In Operating Activities

Net cash used in operating activities was $15.3 million for the six months ended September 30, 2021. This use of cash was primarily attributable to changes in working capital of $14.6 million driven by increases in manufacturing and service part inventories of $7.0 million, a decrease in deferred revenue of $9.0 million and a net changes in other assets and liabilities of $5.8 million. These were partially offset by cash generated by a $10.0 million decrease in accounts receivables. The decrease in deferred revenue reflects the seasonal nature of service contract renewals.

Net cash used in operating activities was $19.3 million for the six months ended September 30, 2020. This use of cash was primarily attributable to changes in working capital of $19.1 million driven by the increases in manufacturing and service inventory of $13.2 million and a decrease in deferred revenue of $12.6 million. These were partially offset by a decrease in accounts receivable of $7.6 million. The decrease in deferred revenue reflects the seasonal nature of service contract renewals which peak in the fourth fiscal quarter.

Cash Used in Investing Activities

Net cash used in investing activities for the six months ended September 30, 2021 was attributable to cash paid for our acquisition of Pivot3 of $5.0 million and capital expenditures of $2.4 million.

Net cash used in investing activities was $1.4 million in the six months ended September 30, 2020 related to capital expenditures.

Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended September 30, 2021 was related primarily to borrowings under our credit facility, and proceeds from the new Term Loan offset by the repayment in full of the Senior Secured Term Loan.

Net cash provided by financing activities was $26.9 million in the six months ended September 30, 2020 which included Senior Secured Term Loan borrowings of $19.4 million, $10.0 million in borrowings under the Paycheck Protection Program and the net pay-down of our Amended PNC Credit Facility.

Commitments and Contingencies

Our contingent liabilities consist primarily of certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. We have little history of costs associated with such indemnification requirements and contingent liabilities associated with product liability may be mitigated by our insurance coverage. 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.

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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, 2021.

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, 2021 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.

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

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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 September 30, 2021 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
See Note 10, Commitments and Contingencies, of the notes to the unaudited consolidated financial statements for a discussion of our legal matters.



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, 2021. 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 DescriptionFormFiling DateExhibitFiled or Furnished Herewith
2.18-K7/22/20212.1
10.1X
10.28-K8/5/2110.1
10.38-K10/6/2110.2
10.48-K10/6/2110.1
31.1X
31.2X
32.1X
32.2X
101Interactive data filesX
104Cover page interactive data file, submitted using inline XBRL (contained in Exhibit 101)X
* Schedules and attachments to the Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and attachments upon request by the Securities and Exchange Commission.
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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)
 
November 3, 2021/s/ James J. Lerner
(Date)James J. Lerner
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
November 3, 2021/s/ J. Michael Dodson
(Date)J. Michael Dodson
Chief Financial Officer
(Principal Financial Officer)
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