QUANTUM CORPORATION FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this report usually contain the words "will," "estimate," "anticipate," "expect," "believe," "project" or similar expressions and variations or negatives of these words. All such forward-looking statements including, but not limited to (1) our belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures and debt service, and sustain our operations for at least the next 12 months; (2) our expectations regarding the outcome of any litigation or investigations in which we are involved; and (3) our business goals, objectives, key focuses, opportunities and prospects, are inherently uncertain as they are based on management's expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, about which we speak only as of the date hereof. As a result, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include but are not limited to those factors discussed under "Risk Factors" in Part II, Item 1A. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. OVERVIEWQuantum Corporation ("Quantum", the "Company", "us" or "we"), is a leader in storing and managing video and video-like data. We deliver top streaming performance for video and rich media applications, along with low cost, high density massive-scale data protection and archive systems. We help customers capture, create and share digital data and preserve and protect it for decades. We work closely with a broad network of distributors, VARs, DMRs, OEMs and other suppliers to meet customers' evolving needs. 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 customers. Our high-performance shared storage systems are powered by our StorNext software that provides high-performance and availability to enable movie and TV production, analysis of patient records, analysis of video and image data for government and military applications, and more. Our tape storage provides low cost, long-term data storage for archiving and retention, as well as offline storage to protect against ransomware. Our DXi backup systems provide high-performance, scalable storage for backup and multi-site disaster recovery. We offer a broad range of services including maintenance, implementation and training. We recently introduced a new line of Distributed Cloud Services designed to provide the benefits of our products and technology with a cloud-like user experience, either via fully managed Operational Services, or via Storage-as-a-Service, or STaaS offerings.
We are also a member of the consortium that develops, patents, and licenses LTO® tape technology to media manufacturing companies. We receive royalty payments for LTO media technology sold under licensing agreements.
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, costs related to the financial restatement and related activities described in the Explanatory Paragraph and Note 2: - Restatement in our most recently filed Annual Report on Form 10-K 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, 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 and other 15
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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 comparableU.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 underU.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; (5) potential
ongoing costs related to the financial restatement and related activities;
(6) loss on debt extinguishment or (7) potential future restructuring
expenses; and
• Adjusted Net Income (Loss) does not reflect: (1) potential future
restructuring activities; (2) the potentially dilutive impact of stock-based
compensation; (3) potential ongoing costs related to the financial
restatement and related activities; (4) loss on debt extinguishment; or (5)
potential future restructuring expenses; 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
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The following is a reconciliation of Adjusted EBITDA to the most comparable
Three Months Ended Nine Months Ended
December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Net income (loss) $ 4,749 $ (4,286 ) $ (1,373 ) $ (33,386 ) Interest expense, net
6,425 6,238 19,079 14,809
Provision (benefit) for income
taxes (110 ) 337 471 739
Depreciation and amortization
expense 1,081 1,047 3,119 3,228
Stock-based compensation expense 2,055 1,100 5,407 2,818
Restructuring charges (64 ) 1,227 1,020 5,428
Loss on debt extinguishment - 5,033 - 17,458
Cost related to financial
restatement and related
activities 564 4,297 12,743 12,743
Other non-recurring (income)
expense, net - (3,925 ) - (3,176 )
Adjusted EBITDA $ 14,700 $ 11,068 $ 40,466 $ 20,661
The following is a reconciliation of Adjusted Net Income to the most comparable
Three Months Ended Nine Months Ended
December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Net income (loss) $ 4,749 $ (4,286 ) $ (1,373 ) $ (33,386 ) Restructuring charges
(64 ) 1,227 1,020 5,428
Loss on debt extinguishment - 5,033 - 17,458
Stock-based compensation 2,055 1,100 5,407 2,818
Cost related to financial
restatement and related
activities 564 4,297 12,743 12,743
Other non-recurring (income)
expense, net - (3,925 ) - (3,176 )
Adjusted Net income $ 7,304 $ 3,446 $ 17,797 $ 1,885
Adjusted Net Income per share:
Basic $ 0.19 $ 0.10 $ 0.48 $ 0.05
Diluted $ 0.16 $ 0.08 $ 0.40 $ 0.05
Weighted average shares
outstanding:
Basic 38,134 35,552 36,828 35,500
Diluted 46,567 41,033 44,213 41,747
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RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
(in thousands) December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Total revenue $ 103,315 $ 101,979 $ 314,734 $ 299,403 Total cost of revenue (1)
56,239 58,897 178,309 174,455
Gross profit 47,076 43,082 136,425 124,948
Operating expenses
Research and development (1) 9,325 7,907 27,058 24,030
Sales and marketing (1) 15,421 16,991 46,101 52,797
General and administrative (1) 10,719 13,481 43,623 46,943
Restructuring charges (64 ) 1,227 1,020 5,428
Total operating expenses 35,401 39,606 117,802 129,198
Income (loss) from operations 11,675 3,476 18,623 (4,250 )
Other income (expense) (611 ) 3,846 (446 ) 3,870
Interest expense (6,425 ) (6,238 ) (19,079 ) (14,809 )
Loss on debt extinguishment, net - (5,033 ) - (17,458 )
Income (loss) before income taxes 4,639 (3,949 ) (902 ) (32,647 )
Income tax provision (benefit) (110 ) 337 471 739
Net income (loss) $ 4,749 $ (4,286 ) $ (1,373 ) $ (33,386 )
(1) Includes stock-based compensation as follows:
Three Months Ended Nine Months Ended
(in thousands) December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Cost of revenue $ 162 $ 99 $ 335 $ 285
Research and development 480 118 745 335
Sales and marketing 300 195 708 262
General and administrative 1,114 688 3,620 1,936
Total $ 2,056 $ 1,100 $ 5,408 $ 2,818
Comparison of the Three Months Ended December 31, 2019 and 2018
Revenue
Three Months Ended
(dollars in % of % of
thousands) December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Product revenue
Primary storage
systems $ 25,687 25 % $ 15,888 16 % $ 9,799 62 %
Secondary storage
systems 25,306 24 % 35,869 35 % (10,563 ) (29 )%
Devices and media 15,442 15 % 11,229 11 % 4,213 38 %
Total product
revenue $ 66,435 64 % $ 62,986 62 % $ 3,449 5 %
Service revenue 32,892 32 % 34,097 33 % (1,205 ) (4 )%
Royalty revenue 3,988 4 % 4,896 5 % (908 ) (19 )%
Total revenue $ 103,315 100 % $ 101,979 100 % $ 1,336 1 %
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Product revenue In the three months endedDecember 31, 2019 , product revenue increased$3.4 million , or 5%, as compared to the same period in 2018. Primary storage systems represented$9.8 million of the increase, driven by growth in ourU.S. business. Secondary storage systems represented a$(10.6) million decrease, driven by fluctuating purchase cycles with our hyperscale customers. Devices and media represented$4.2 million of the increase, driven by the resolution of a legal dispute, which had caused a constraint on LTO tape supply between the two principal suppliers in the market. Service revenue We offer a broad range of services including maintenance, implementation and training. Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware. Standard service contracts may be extended or include enhanced service, such as faster service response times. Service revenue was relatively flat, decreasing 4% in the three months endedDecember 31, 2019 compared to the same period in 2018 due to a combination of reduced new customer installations and reduced support renewals from our legacy customers. Royalty revenue We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased$(0.9) million , or 19%, in the three months endedDecember 31, 2019 compared to the same period in 2018 due to lower overall market volume. Gross Profit and Margin Three Months Ended (dollars in Basis thousands) Gross Gross point December 31, 2019 margin % December 31, 2018 margin % $ Change change Product gross profit $ 22,763 34.3 % $ 17,167 27.3 %$ 5,596 700 Service gross profit 20,325 61.8 % 21,019 61.6 % (694 ) 20 Royalty gross profit 3,988 100.0 % 4,896 100.0 % (908 ) - Gross profit $ 47,076 45.6 % $ 43,082 42.2 %$ 3,994 340 Product Gross Margin Product gross margin increased 700 basis points for the three months endedDecember 31, 2019 , as compared with the same period in 2018. This increase was due primarily to cost reductions across a wide range of product offerings and a sales mix weighted towards more profitable product lines. Service Gross Margin Service gross margin increased 20 basis points for the three months endedDecember 31, 2019 , as compared with the same period in 2018. This increase was due primarily to weighting towards higher margin offerings. Royalty Gross Margin Royalties do not have significant related cost of sales. 19
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Operating expenses
Three Months Ended
(dollars in % of % of
thousands) December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Research and
development $ 9,325 9 % $ 7,907 8 % $ 1,418 18 %
Sales and marketing 15,421 15 % 16,991 17 % (1,570 ) (9 )%
General and
administrative 10,719 10 % 13,481 13 % (2,762 ) (20 )%
Restructuring
charges (64 ) - % 1,227 1 % (1,291 ) (105 )%
Total operating
expenses $ 35,401 34 % $ 39,606 39 % $ (4,205 ) (11 )%
In the three months ended December 31, 2019 , research and development expense
increased $1.4 million , or 18%, as compared with the same period in 2018. This
increase was partially attributable to an increase in research and development
headcount focused on new product development.
In the three months ended December 31, 2019 , sales and marketing expenses
decreased $1.6 million , or 9%, as compared with the same period in 2018. This
decrease was largely driven by an overall decrease in compensation and benefits
as the result of lower headcount and a decrease in marketing programs and
professional services costs.
In the three months ended December 31, 2019 , general and administrative expenses
decreased $2.8 million , or 20% as compared with the same period in 2018. This
decrease was due primarily to higher costs in 2018 related to the financial
restatement and related activities, bad debt expense, and bank fees. This was
partially offset by an increase in headcount and stock compensation.
In the three months ended December 31, 2019 , restructuring expenses decreased
$1.3 million , or 105% as compared with the same period in 2018. The decrease was
the result of no material restructuring activity incurred during the current
quarter.
Other Income (Expense)
Three Months Ended
(dollars in % of % of
thousands) December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Other income
(expense) $ (611 ) (1 )% $ 3,846 4 % $ 4,457 (116 )%
Interest expense (6,425 ) (6 )% (6,238 ) (6 )% 187 (3 )%
Loss on debt
extinguishment - - % (5,033 ) - % (5,033 ) (100 )%
Other (income) expense, net during the three months ended December 31, 2019 and
2018 were related primarily to a $2.8 million gain on investment, and a $1.1
million gain in the fair value of warrants.
In the three months ended
In the three months ended
Three Months Ended
(dollars in thousands) % of % of
December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Income tax provision $ (110 ) - % $ 337 - % $ (447 ) (133 )%
The income tax provision for the three months ended December 31, 2019 is
primarily influenced by foreign and state income taxes. Due to our history of
net losses in the U.S. , 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
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full valuation allowance against ourU.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 Nine Months Ended
Revenue
Nine Months Ended
(dollars in % of % of
thousands) December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Product revenue
Primary storage
systems $ 65,150 21 % $ 50,358 17 % $ 14,792 29 %
Secondary storage
systems 88,281 28 % 87,468 28 % 813 1 %
Devices and media 46,930 15 % 43,651 15 % 3,279 8 %
Total product
revenue $ 200,361 64 % $ 181,477 60 % $ 18,884 10 %
Service revenue 98,673 31 % 101,013 34 % (2,340 ) (2 )%
Royalty revenue 15,700 5 % 16,913 6 % (1,213 ) (7 )%
Total revenue $ 314,734 100 % $ 299,403 100 % $ 15,331 5 %
Product Revenue
In the nine months ended December 31, 2019 , product revenue increased $18.9
million , or 10%, as compared to the same period in the prior year. Primary
storage systems represented $14.8 million of the increase, driven by growth in
our U.S. domestic business. Secondary storage systems represented $0.8 million
of the increase, driven by growth with our hyperscale customers. Devices and
media increased $3.3 million driven by the resolution of a legal dispute, which
had caused a constraint on LTO tape supply between the two principal suppliers
in the market.
Service Revenue
Service revenue was relatively flat, decreasing 2% in the nine months ended
December 31, 2019 compared to the same period in the prior year. This decrease
was 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 $1.2
million , or 7%, in the nine months ended December 31, 2019 as compared to the
same period in the prior year.
Gross Profit and Margin
Nine Months Ended
(dollars in thousands) Basis
Gross Gross point
December 31, 2019 margin % December 31, 2018 margin % $ Change change
Product gross profit $ 60,024 30.0 % $ 48,901 26.9 % $ 11,123 310
Service gross profit 60,701 61.5 % 59,134 58.5 % 1,567 300
Royalty gross profit 15,700 100.0 % 16,913 100.0 % (1,213 ) -
Gross profit $ 136,425 43.3 % $ 124,948 41.7 % $ 11,477 160
Product Gross Margin
Product gross margin increased 310 basis points for the nine months ended
December 31, 2019 , as compared with the same period in 2018. This increase was
due primarily to cost reductions across a wide range of product offerings, and a
mix weighted towards more profitable products.
Service Gross Margin
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Service gross margin increased 300 basis points for the nine months endedDecember 31, 2019 , as compared with the same period in 2018. This increase was due primarily to reductions in cost of service. Royalty Gross Margin Royalties do not have significant related cost of sales.
Operating expenses
Nine Months Ended
(dollars in % of % of
thousands) December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Research and
development $ 27,058 9 % $ 24,030 8 % $ 3,028 13 %
Sales and marketing 46,101 15 % 52,797 18 % (6,696 ) (13 )%
General and
administrative 43,623 14 % 46,943 16 % (3,320 ) (7 )%
Restructuring
charges 1,020 - % 5,428 2 % (4,408 ) (81 )%
Total operating
expenses $ 117,802 37 % $ 129,198 43 % $ (11,396 ) (9 )%
In the nine months ended December 31, 2019 , research and development expense
increased $3.0 million , or 13%, as compared with the same period in 2018. This
increase was partially attributable to an increase in research and development
headcount and professional services cost related to new product development.
In the nine months ended December 31, 2019 , sales and marketing expenses
decreased $6.7 million , or 13%, as compared with the same period in 2018. This
decrease was driven by a decrease in compensation and benefits as the result of
lower headcount and a decrease in marketing programs and professional services
costs.
In the nine months ended December 31, 2019 , general and administrative expenses
decreased $3.3 million , or 7%, as compared with the same period in 2018. This
decrease was driven primarily by lower costs related to the financial
restatement and related activities, lower software expenses as we streamline our
processes and tools throughout the company, decreased facilities expenses as we
consolidate our physical footprint, and decreased bank fees. These decreases
were partially offset by increases to stock compensation expense.
In the nine months ended December 31, 2019 , restructuring expenses decreased
$4.4 million , or 81%, as compared with the same period in 2018. This decrease
was primarily due to the high level of headcount reductions that occurred during
2018.
Other Income (Expense)
Nine Months Ended
(dollars in % of % of
thousands) December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Other income
(expense) $ (446 ) 0 % $ 3,870 1 % $ 4,316 (112 )%
Interest expense (19,079 ) (6 )% (14,809 ) (5 )% 4,270 (29 )%
Loss on debt
extinguishment, net - - % (17,458 ) (6 )% (17,458 ) (100 )%
Other (income) expense, net during the nine months ended December 31, 2019 and
2018 were related primarily to a $2.8 million gain on investment, and a $1.1
million gain in the fair value of warrants.
In the nine months ended
In the nine months ended
Nine Months Ended
(dollars in thousands) % of % of
December 31, 2019 revenue December 31, 2018 revenue $ Change % Change
Income tax provision $ 471 - % $ 739 - % (268 ) (36 )%
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The income tax provision for the nine months endedDecember 31, 2019 is primarily influenced by foreign and state income taxes. Due to our history of net losses in theU.S. , 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 ourU.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. 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). Management believes that current working capital and borrowings available under the PNC Credit Facility will provide us with sufficient capital to fund operations for at least one year. 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 may need or decide to seek additional funding through equity or debt financings but cannot guarantee that additional funds would be available on terms acceptable to us, if at all. We had cash and cash equivalents of$7.5 million as ofDecember 31, 2019 , compared to$10.8 million as ofMarch 31, 2019 . 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$0.9 million and$1.1 million of short-term restricted cash, respectively. Our outstanding long-term debt amounted to$152.4 million as ofDecember 31, 2019 , net of$14.6 million in unamortized debt issuance costs and$1.7 million in current portion of long-term debt, and$145.6 million as ofMarch 31, 2019 , net of$17.3 million in unamortized debt issuance costs and$1.7 million in current portion of long-term debt. Included in long-term debt as ofDecember 31, 2019 was$5.3 million of borrowings under our Amended PNC Credit Facility. After drawing down$5.3 million under our Amended PNC Credit Facility, there was an additional$16.7 million of borrowing availability as ofDecember 31, 2019 (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), including financial maintenance covenants that require progressive improvements in metrics related to our financial condition and results of operations. 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 endedMarch 31, 2019 . Cash Flows
The following table summarizes our consolidated cash flows for the periods indicated.
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Nine Months Ended December 31,
(Dollars in thousands) 2019 2018
Cash provided by (used in):
Operating activities $ (4,966 ) $ (7,353 )
Investing activities (2,327 ) (1,755 )
Financing activities 3,880 9,008
Effect of exchange rate changes (3 ) (83 )
Net decrease in cash and cash equivalents and
restricted cash $ (3,416 ) $ (183 )
Cash Used In Operating Activities
Net cash used in operating activities was$5.0 million for the nine months endedDecember 31, 2019 , a change of$2.4 million from the same period in the prior year. Operating cash flow after adjustments to net loss excluding changes in assets and liabilities was$16.1 million and$0.4 million during the nine months endedDecember 31, 2019 and 2018, respectively. The increase is primarily attributable to an increase in gross profit of$11.5 million , a decrease in operating expenses of$11.4 million , a decrease in other income (expense) of$4.3 million and an increase in interest expense of$4.2 million . Cash used in operating activities related to changes in assets and liabilities was$21.0 million and$7.8 million during the nine months endedDecember 31, 2019 and 2018, respectively.
Cash Used in Investing Activities
Net cash used in investing activities was$2.3 million in the nine months endedDecember 31, 2019 , which was mostly flat compared to the same period the prior year. Our capital expenditures in both periods consisted primarily of tooling purchases and leasehold improvements.
Cash Used in Financing Activities
Net cash provided by financing activities was$3.9 million in the nine months ended endedDecember 31, 2019 , a decrease of$5.1 million compared to the same period in the prior year. In the fiscal quarter endedDecember 31, 2019 , we had net borrowings on our credit facility net of payments related to long-term debt of$4.1 million compared to net borrowings of$9.0 million during the prior comparable period.
Debt Profile and Covenants
We are party to 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") under an Amended and Restated Revolving Credit and Security Agreement (the "Amended PNC Credit Agreement") with certain lenders andPNC Bank, National Association , as administrative agent. We are also party to a senior secured term loan facility in an aggregate principal amount of$165.0 million (the "Senior Secured Term Loan") under a Term Loan Credit and Security Agreement between us, certain lenders andU.S. Bank, National Association , as disbursing and collateral agent, entered into inDecember 2018 (the "Senior Secured Credit Agreement" and together with the Amended PNC Credit Agreement, the "Credit Agreements"). The key terms of the Credit Agreements and material financial covenants are described under "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 endedMarch 31, 2019 .
We believe we were in compliance with all covenants under the Credit Agreements as of the date of filing of this Quarterly Report on Form 10-Q.
Covenant EBITDA
Covenant EBITDA is identical to "EBITDA" as defined under the Credit Agreements
and we are required to report it to our lenders pursuant to the covenants
contained in the Credit Agreements. Covenant EBITDA is a key component of
compliance metrics under certain covenants in the Credit Agreement, as described
above.
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Consequently, we consider Covenant EBITDA to be an important measure of our financial condition. Covenant EBITDA reflects further adjustments to Adjusted EBITDA as discussed below.
Covenant EBITDA is calculated under the Credit Agreements as our GAAP net income (loss) for a given fiscal period, adjusted for certain items, including without limitation: taxes and tax credits, interest expense, depreciation and amortization, certain non-cash compensation and other charges, certain refinancing-related costs (up to certain aggregate limits), certain severance and facility closure costs (up to certain aggregate limits), transaction-related costs and purchase accounting and other adjustments with respect to acquisitions permitted under the Credit Agreements and, certain expenses in connection with the financial restatement activities (up to certain aggregate limits) that will be added back to Covenant EBITDA.
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
We entered into a registration rights agreement with the holders of the warrants issued to the lenders under the Senior Secured Term Loan, described under "-Contractual Obligations" below.
The warrant holders have the right to require us to prepare and file a registration statement with theSEC within 45 days of a demand and use commercially reasonable efforts to cause the registration statement to be declared effective as soon as practicable. If we are unable to file a registration statement in accordance with the terms of the registration rights agreement, we would be required to make a monthly filing delay penalty payment to each warrant holder in an amount of cash equal to (i)$300,000 multiplied by (ii) such holder's pro rata share of all outstanding warrants until such filing delay is cured. In the event we fail to make the filing delay penalty payments in a timely manner, such outstanding payments shall bear interest at 5.0% until paid in full. We expect to meet all registration requirements and determined that such a payment was not probable at the time the agreement was entered into, nor was such a payment probable as ofDecember 31, 2019 or as of the date of filing of this Quarterly Report on Form 10-Q.
Except for this registration rights contingency and 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. As a result of our adoption of ASC Topic 842 as ofApril 1, 2019 , certain operating lease obligations that were previously not reflected on our balance sheet have been reflected on the balance sheet at their fair values. See Note 5: Leases, to our unaudited condensed consolidated financial statements for further details. 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 endedMarch 31, 2019 . In connection with our entry into the Senior Secured Term Loan, we issued warrants to purchase approximately 7.1 million shares of our common stock, at an exercise price of$1.33 per share, to the lenders under the Senior Secured Term Loan (the "Senior Secured Term Loan Warrants"). The exercise price and the number of shares 25
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underlying the Senior Secured Term Loan Warrants are subject to adjustment in the event of specified events, including dilutive issuances of common stock or common stock linked equity instruments at a price lower than the exercise price of the warrants, a subdivision, combination or reclassification of our common stock, or specified dividend payments. The Senior Secured Term Loan Warrants are exercisable untilDecember 27, 2028 . 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 our common stock at the time of exercise. Critical Accounting Estimates and Policies The preparation of our consolidated financial statements in accordance with generally accepted accounting principles (GAAP) 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 26
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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 endedMarch 31, 2019 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
We adopted ASC Topic 842, Leases, effective onApril 1, 2019 . As a result, we recorded lease liabilities of$13.0 million and related right of use assets of$11.9 million on our balance sheet as ofDecember 31, 2019 . See Note 5: Leases, to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. For other 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 Note 3 to our consolidated financial statements included in our most recently filed Annual Report on Form 10-K.
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