QUANTUM CORPORATION 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 endedMarch 31, 2020 . In particular, the disclosure contained in Item 1A in our annual report, as updated by Part II, Item 1A in this quarterly report, may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources. The following discussion contains forward-looking statements, such as statements regarding COVID-19's anticipated impacts on our business, our future operating results and financial position, our business strategy and plans, and our objectives for future operations. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements.
OVERVIEW
We are a leader in storing and managing digital video and other forms of
unstructured data. We help customers around the world to ingest, process, and
analyze digital data at high speed, and preserve and protect it for decades. Our
customers include some of the world's largest corporations, government agencies,
service providers, broadcasters, movie studios, sports leagues and teams, and
enterprises in all industries. We work closely with a broad network of
distributors, VARs, DMRs, OEMs and other suppliers to solve our customers most
pressing business challenges.
We earn our revenue from the sale of products and services through our channel
partners and our sales force. Our products are sold under both the Quantum brand
name and the names of various OEM providers. Our portfolio of solutions
includes:
•CatDV Asset Management Software-An agile asset management and workflow
automation platform that helps organizations with large amounts of video and
digital image content to communicate and collaborate more effectively.
•StorNext high performance file system-We offer a line of products designed for
the highest speed ingest, processing, and analysis of video and other forms of
unstructured data. Powered by the StorNext file system software and data
management platform, this product line includes new NVMe flash storage servers
(F-series) and hybrid SSD/HDD storage arrays.
•Quantum All - Terrain File System (ATFS)-An easy to deploy, easy to use network
attached storage ("NAS") platform with integrated data classification.
•ActiveScale Object Storage-We also sell massively scalable object storage
systems used to preserve and protect data with high levels of data durability.
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•Tape Storage-We provide low cost, secure storage systems for long term
archiving and ransomware protection. We provide both the storage systems and
sell tape media under the Quantum brand.
•Video Surveillance Systems-We offer a broad portfolio of solutions designed for
video surveillance and physical security, including network video recording
servers (NVRs), hyperconverged (HCI) storage servers to host multiple physical
security workloads, GPU-based analytics servers, and file and object storage
systems for large scale surveillance archives.
•Backup Storage Systems-We offer high-performance, scalable storage for backup
and multi-site disaster recovery.
•Quantum Services-We offer a full line of services including managed services
and Storage-as-a-Service offerings, as well as maintenance, implementation,
training and consulting services.
COVID-19 IMPACT AND ASSOCIATED ACTIONS
Since the beginning ofMarch 2020 , COVID-19 has led governments and other authorities around the world, including federal, state and local authorities inthe 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 in person meetings, reducing the number of people in our sites at any one time, and suspending employee travel. For many of our customers, the COVID-19 pandemic has significantly affected their business. Movie and television production has been paused, professional and collegiate sports seasons have been postponed or cancelled, and many corporations and enterprises have put information technology spending on hold while they assess the short- and long-term impact of the pandemic. While our supply chain remains intact and operating, we have experienced issues related to our logistics network. The reduced capacity within and across freight lanes (aircraft, personnel, customs clearance, etc.) has caused late deliveries from re-routes and mis-shipments, as well as increased expedite and other charges to deliver and receive products. To date, we have experienced minimal impact on product availability, although future capacity constraints across the network due to lost capacity from factory down time, closures, as well as reduced staff and demand signal fluctuations are expected to impact product availability in the months and possibly quarters to come. We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. We expect COVID-19 to significantly impact our financial condition, results of operations, and liquidity through at least our third quarter and likely much longer. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See "The recent COVID-19 pandemic could adversely affect our business, results of operations and financial condition" in Part II, Item 1A, Risk Factors, of our most recent Annual Report on Form 10-K for more information regarding the risks we face as a result of the COVID-19 pandemic.
NON-
To provide investors with additional information regarding our financial
results, we have presented Adjusted EBITDA and Adjusted Net Income (Loss),
non-
Adjusted EBITDA is a non-U.S. GAAP financial measure defined by us as net loss before interest expense (net), provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring charges, long-term debt related costs, costs related to the financial restatement and related activities 19 -------------------------------------------------------------------------------- Table of Contents described in our Annual Report on Form 10-K for the year endedMarch 31, 2020 , and other non-recurring expenses. Adjusted Net Income (Loss) is a non-U.S. GAAP financial measure defined by us as net loss before restructuring charges, stock-based compensation expense, long-term debt related costs, business acquisition costs, costs related to the financial restatement and related activities described in the Annual Report on Form 10-K for the year endedMarch 31, 2020 and other non-recurring (income) expenses. The Company calculates Adjusted Net Income (Loss) per Basic and Diluted share using the Company's above-referenced definition of Adjusted Net Income (Loss). The Company considers other 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 expense; (5) potential future costs related to our long-term debt; (6) potential future restructuring expenses; (7) potential future costs related to business acquisitions; or (8) potential future costs related to our financial statement restatement and other related activities; •Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) the potentially dilutive impact of stock-based compensation expense; (3) potential future costs related to our long-term debt; (4) potential future costs related to business acquisitions; (5) potential future costs related to our financial statement restatement and other related activities; and •Other companies, including companies in our industry, may calculate Adjusted EBITDA, Adjusted Net Income (Loss) or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider Adjusted EBITDA and
Adjusted Net Income (Loss) along with other
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The following is a reconciliation of Adjusted EBITDA to the most comparable U.S.
GAAP financial measure, Net Loss (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31, December 31,
December 31, 2020 2019 2020 2019
Net income (loss) $ (2,669) $ 4,749 $ (17,997) $ (1,373)
Interest expense 7,808 6,425 21,823 19,079
Provision for income taxes 256 (110) 877 471
Depreciation and amortization expense 1,347 1,081 3,898 3,119
Stock-based compensation expense 1,878 2,056 6,428 5,408
Long-term debt related costs 208 - 1,377 -
Acquisition related costs 393 - 393 -
Restructuring charges 200 (64) 2,837 1,020
Cost related to financial restatement
and related activities - 564 - 12,743
Adjusted EBITDA $ 9,421 $ 14,701 $ 19,636 $ 40,467 The following is a reconciliation of Adjusted Net Income (Loss) to the most comparable
Three Months Ended Nine Months Ended
December 31, December 31, December 31,
December 31, 2020 2019 2020 2019
Net income ( loss) $ (2,669) $ 4,749 $ (17,997) $ (1,373)
Restructuring charges 200 (64) 2,837 1,020
Stock-based compensation 1,878 2,056 6,428 5,408
Long-term debt related costs 208 - 1,377 -
Acquisition related costs 393 - 393 -
Cost related to financial restatement
and related activities - 564 - 12,743
Adjusted net income (loss) $ 10 $ 7,305 $ (6,962) $ 17,798 Adjusted net income (loss) per share:
Basic $ 0.00 $
0.19
Diluted $ 0.00 $
0.16
Weighted average shares outstanding:
Basic 40,927 38,134 40,374 36,828
Diluted 49,238 46,567 47,931 44,213
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RESULTS OF OPERATIONS
Three Months Ended December 31, 2020 Nine Months Ended December 31,
(in thousands) 2020 2019 2020 2019
Total revenue $ 98,023 $
103,315
55,744 56,239 145,284 178,309
Gross profit 42,279 47,076 111,865 136,425
Operating expenses
Research and development (1) 9,589 9,325 29,983 27,058
Sales and marketing (1) 15,294 15,421 40,019 46,101
General and administrative (1) 11,103 10,719 32,928 43,623
Restructuring charges 200 (64) 2,837 1,020
Total operating expenses 36,186 35,401 105,767 117,802
Income from operations 6,093 11,675 6,098 18,623
Other income (expense) (698) (611) (1,395) (446)
Interest expense (7,808) (6,425) (21,823) (19,079)
Loss before income taxes (2,413) 4,639 (17,120) (902)
Income tax provision 256 (110) 877 471
Net loss $ (2,669) $ 4,749 $ (17,997) $ (1,373) (1) Includes stock-based compensation as follows:
Three Months Ended September 30, Nine Months Ended December 31,
(in thousands) 2020 2019 2020 2019
Cost of revenue $ 172 $ 162 $ 569 $ 335
Research and development 186 480 1,249 745
Sales and marketing 474 300 1,306 708
General and administrative 1,046 1,114 3,304 3,620
Total $ 1,878 $ 2,056 $ 6,428 $ 5,408
Comparison of the Three Months Ended December 31, 2020 and 2019
Revenue
Three Months Ended December 31,
(dollars in thousands) % of % of
2020 revenue
2019 1 revenue $ Change % ChangeProduct revenue Primary storage systems$ 23,654 24 %$ 25,619 24 %$ (1,965) (8) % Secondary storage systems 25,311 26 25,374 25 (63) - Devices and media 14,056 14 15,442 15 (1,386) (9) Total product revenue$ 63,021 64 %$ 66,435 64 %$ (3,414) (5) Service revenue 31,169 32 32,892 32 (1,723) (5) Royalty revenue 3,833 4 3,988 4 (155) (4) Total revenue$ 98,023 100 %$ 103,315 100 %$ (5,292) (5) 1 Primary and Secondary storage system revenue has been adjusted for the three months endedDecember 31, 2019 due to certain reclassifications from Primary to Secondary storage systems. Product revenue 22
-------------------------------------------------------------------------------- Table of Contents In the three months endedDecember 31, 2020 , product revenue decreased$3.4 million , or 5%, as compared to the same period in 2019. Primary storage systems represented$2.0 million of the decrease, driven by a decrease in sales to the US federal government due to related purchasing activity. Devices and media represented$1.4 million of the decrease, driven by a lower volume of LTO media sold through our high-volume channel partners. The prior year included a spike in volume as supply issues were resolved between two major vendors 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 decreased 5% in the three months endedDecember 31, 2020 compared to the same period in 2019 due to a combination of reduced new customer installations and reduced support renewals from our legacy customers. Royalty revenue We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased$0.2 million , or 4%, in the three months endedDecember 31, 2020 compared to the same period in 2019 due to lower overall market volume. Gross Profit and Margin Three Months Ended December 31, (dollars in thousands) Gross Gross 2020 margin %
2019 margin % $ Change Basis pointchange Product gross profit$ 19,709 31.3 %$ 22,763 34.3 %$ (3,054) (300) Service gross profit 18,737 60.1 20,325 61.8 (1,588) (170) Royalty gross profit 3,833 100.0 3,988 100.0 (155) - Gross profit$ 42,279 43.1 %$ 47,076 45.6 %$ (4,797) (250) Product Gross Margin Product gross margin decreased 300 basis points for the three months endedDecember 31, 2020 , as compared with the same period in 2019. This decrease was due primarily to a less favorable mix of enterprise products sold, along with a relatively flat operations departmental expense. Service Gross Margin Service gross margin decreased 170 basis points for the three months endedDecember 31, 2020 , as compared with the same period in 2019. This decrease was primarily the effect of lower service revenue on a relatively flat expense profile Royalty Gross Margin Royalties do not have significant related cost of sales. 23 --------------------------------------------------------------------------------
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Operating expenses
Three Months Ended December 31,
(dollars in thousands) % of % of
2020 revenue 2019 revenue $ Change % ChangeResearch and development$ 9,589 9.8 %$ 9,325 9.0 %$ 264 3 % Sales and marketing 15,294 15.6 15,421 14.9 (127) (1) General and administrative 11,103 11.3 10,719 10.4 384 4 Restructuring charges 200 0.2 (64) (0.1) 264 (413) Total operating expenses$ 36,186 36.9 %$ 35,401 34.3 %$ 785 2 In the three months endedDecember 31, 2020 , research and development expense increased$0.3 million , or 3%, as compared with the same period in 2019. This increase was due in part to an increase in personnel costs due to increased headcount focused on new product development. In the three months endedDecember 31, 2020 , sales and marketing expenses decreased$0.1 million , or 1%, as compared with the same period in 2019. This decrease was largely driven by suspended travel and entertainment expense due to current COVID-19 related restrictions. In the three months endedDecember 31, 2020 , general and administrative expenses increased$0.4 million , or 4% as compared with the same period in 2019. 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 endedDecember 31, 2020 , restructuring expenses increased$0.3 million , or 413% as compared with the same period in 2019. The increase was the result of a reduction in workforce to improve operational efficiency and rationalize our cost structure. Other Income (Expense) Three Months Ended December 31, (dollars in thousands) % of % of 2020 revenue 2019 revenue $ Change % Change Other income (expense) $ (698) (1) %$ (611) (1) %$ (87) (14) % Interest expense (7,808) (8) (6,425) 6 (1,383) 22
Other income (expense), net during the three months ended
In the three months endedDecember 31, 2020 , interest expense increased$1.4 million , or 22%, as compared with the same period in 2019 due primarily to a higher principal balance. Income Taxes Three Months Ended December 31, (dollars in thousands) % of % of 2020 revenue 2019 revenue $ Change % Change Income tax provision $ 256 1 %$ (110) - %$ 366 (333) % The income tax provision for the three months endedDecember 31, 2020 and 2019 is primarily influenced by foreign and state income taxes. Due to our history of net losses inthe 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 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. 24 -------------------------------------------------------------------------------- Table of Contents 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 EndedDecember 31, 2020 and 2019 Revenue Nine Months Ended December 31, (dollars in thousands) % of % of 2020 revenue 2019 1 revenue $ Change % Change Product revenue Primary storage systems$ 54,478 21 %$ 61,541 20 %$ (7,063) (11) % Secondary storage systems 62,705 24 91,890 29 (29,185) (32) Devices and media 36,374 14 46,930 15 (10,556) (22) Total product revenue$ 153,557 60 %$ 200,361 64 %$ (46,804) (23) Service revenue 93,049 36 98,673 31 (5,624) (6) Royalty revenue 10,543 4 15,700 5 (5,157) (33) Total revenue$ 257,149 100 %$ 314,734 100 %$ (57,585) (18) 1 Primary and Secondary storage system revenue has been adjusted for the six months endedDecember 31, 2019 due to certain reclassifications from Primary to Secondary storage systems. Product revenue In the nine months endedDecember 31, 2020 , product revenue decreased$46.8 million , or 23%, as compared to the same period in 2019. Secondary storage systems represented$29.2 million of the decrease, driven primarily by fluctuating purchase cycles with our hyperscale customers in addition to the impact of decreased purchasing due to COVID-19. Devices and media represented$10.6 million of the decrease, driven by lower volume of LTO media sold through our high-volume channel partners. The prior year included a spike in volume as supply issues were resolved between two major vendors in the market. Primary storage systems represented$7.1 million of the decrease, driven by declines in the media and entertainment industry as a result of the COVID-19 pandemic. Service revenue We offer a broad range of services including maintenance, implementation, and training. Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware. Standard service contracts may be extended or include enhanced service, such as faster service response times. Service revenue decreased$5.6 million , or 6% in the nine months endedDecember 31, 2020 compared to the same period in 2019 due to a combination of reduced new customer installations and reduced support renewals from our legacy customers. Royalty revenue We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased$5.2 million , or 33%, in the nine months endedDecember 31, 2020 compared to the same period in 2019 due to lower overall market volume. 25
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Gross Profit and Margin
Nine Months Ended December 31,
(dollars in thousands) Gross Gross
2020 margin % 2019 margin % $ Change Basis point change
Product gross profit $ 44,866 29.2 % $ 60,024 30.0 % $ (15,158) (80)
Service gross profit 56,456 60.7 60,701 61.5 (4,245) (80)
Royalty gross profit 10,543 100.0 15,700 100.0 (5,157) -
Gross profit $ 111,865 43.5 % $ 136,425 43.3 % $ (24,560) 20
Product Gross Margin
Product gross margin decreased 70 basis points for the nine months ended
December 31, 2020 , as compared with the same period in 2019. This decrease was
primarily the result of a less favorable product mix to our enterprise
customers.
Service Gross Margin
Service gross margin decreased 80 basis points for the nine months ended
December 31, 2020 , as compared with the same period in 2019. This decrease was
due primarily to total service revenue decreases of 6% with relatively flat
corresponding departmental expense.
Royalty Gross Margin
Royalties do not have significant related cost of sales.
Operating expenses
Nine Months Ended December 31,
(dollars in thousands) % of % of
2020 revenue 2019 revenue $ Change % Change
Research and development $ 29,983 11.6 % $ 27,058 8.6 % $ 2,925 11 %
Sales and marketing 40,019 15.6 46,101 14.6 (6,082) (13)
General and administrative 32,928 12.8 43,623 13.9 (10,695) (25)
Restructuring charges 2,837 1.1 1,020 0.3 1,817 178
Total operating expenses $ 105,767 41.1 % $ 117,802 37.4 % $ (12,035) (10)
In the nine months ended December 31, 2020 , research and development expense
increased $2.9 million , or 11%, as compared with the same period in 2019. This
increase was due in part to an increase in personnel costs due to increased
headcount focused on new product development.
In the nine months ended December 31, 2020 , sales and marketing expenses
decreased $6.1 million , or 13%, as compared with the same period in 2019. This
decrease was due primarily to a decrease in personnel costs due to lower
headcount, a decrease in marketing programs and professional services costs, and
suspended travel and entertainment expense due to current COVID-19 related
restrictions.
In the nine months ended December 31, 2020 , general and administrative expenses
decreased $10.7 million , or 25% as compared with the same period in 2019. This
decrease was due primarily to higher costs in 2019 related to the financial
restatement and related activities.
In the nine months ended December 31, 2020 , restructuring expenses increased
$1.8 million , or 178% as compared with the same period in 2019. The increase was
the result of a reduction in workforce to improve operational efficiency and
rationalize our cost structure.
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Other Income (Expense)
Nine Months Ended December 31,
(dollars in thousands) % of % of
2020 revenue
2019 revenue $ Change % ChangeOther income (expense)$ (1,395) (1) %$ (446) - %$ (949) (213) % Interest expense (21,823) (8) (19,079) 6 (2,744) 14
Other income (expense), net during the nine months ended
In the nine months endedDecember 31, 2020 , interest expense increased$2.7 million , or 14%, as compared with the same period in 2019 due primarily to a higher principal balance. Income Taxes Nine Months Ended December 31, (dollars in thousands) % of % of 2020 revenue 2019 revenue $ Change % Change Income tax provision $ 877 - %$ 471 - %$ 406 86 % The income tax provision for the nine months endedDecember 31, 2020 and 2019 is primarily influenced by foreign and state income taxes. Due to our history of net losses inthe 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 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). 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 theU.S. and the global economy. We believe that these social and economic impacts have had a negative effect on sales due to the decline in our customers' ability or willingness to purchase our products and services. The extent of the impact will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. We expect the impact of COVID-19 to have a significant impact on our liquidity and capital resources. We had cash and cash equivalents of$11.6 million as ofDecember 31, 2020 , compared to$6.4 million as ofMarch 31, 2020 . These amounts exclude, as of both dates,$5.0 million in restricted cash that we are required to maintain under the Credit Agreements (as defined below), and$0.8 million of short-term restricted cash. Our outstanding long-term debt amounted to$178.3 million as ofDecember 31, 2020 , net of$21.0 million in unamortized debt issuance costs and$1.9 million in current portion of long-term debt, and$146.8 million as ofMarch 31, 2020 , net of$13.7 million in unamortized debt issuance costs and$7.3 million in current portion of long-term debt. Included in long-term debt as ofDecember 31, 2020 is$10.0 million borrowed under the Paycheck Protection Program which was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As of 27 -------------------------------------------------------------------------------- Table of ContentsDecember 31, 2020 , we had$19.2 million of borrowing availability on our Amended PNC Credit Facility (subject to change based on certain financial metrics). See "-Debt Profile and Covenants" and "-Contractual Obligations" below for further information about our outstanding debt. We are subject to various debt covenants under our Credit Agreements (as defined below). Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations. For additional information about our debt, see the sections entitled "Risk Factors-Risks Related to Our Business Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 . Cash Flows The following table summarizes our consolidated cash flows for the periods indicated. Nine Months Ended December 31, (Dollars in thousands) 2020 2019 Cash provided by (used in): Operating activities $
(20,264)
Investing activities (7,301) (2,327) Financing activities 32,755 3,880 Effect of exchange rate changes (62) (3) Net increase (decrease) in cash and cash equivalents and restricted cash $ 5,128$ (3,416)
Cash Used In Operating Activities
Net cash used in operating activities was$20.3 million for the nine months endedDecember 31, 2020 . This use of cash is primarily attributable to changes in working capital of$26.3 million driven by the increase in manufacturing and service inventory of$12.3 million , a decrease in deferred revenue of$9.7 million , and a decrease in accounts payable of$5.0 million . The decrease in deferred revenue reflects the seasonal nature of service contract renewals which peak in the fourth fiscal quarter. Net cash used in operating activities was$5.0 million for the nine months endedDecember 31, 2019 which is primarily attributable to a decrease of$17.1 million in deferred revenue related to the timing of service contract renewals which are historically more heavily weighted to our third and fourth fiscal quarters, a decrease in manufacturing and service inventory of$11.7 million and a decrease in accounts receivable of$11.7 million , partially offset by an increase in accounts payable of$7.6 million .
Cash Used in Investing Activities
Net cash used in investing activities was$7.3 million in the nine months endedDecember 31, 2020 , which included approximately$3.1 million related to the Square Box Systems acquisition and capital expenditures. Net cash used in investing activities in the nine months endedDecember 31, 2019 consisted of fixed asset purchases.
Cash Provided by Financing Activities
Net cash provided by financing activities was$32.8 million in the nine months endedDecember 31, 2020 which included Senior Secured Term Loan borrowings of$19.4 million (net of lender fees of$0.6 million ),$10.0 million in borrowings under the Paycheck Protection Program and the net pay-down of our Amended PNC Credit Facility.
Net cash provided by financing activities was
Debt Profile and Covenants
PNC Credit Facility
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We are party to the Amended PNC Credit Agreement, a senior secured revolving credit facility in an available principal amount equal to the lesser of (i)$45.0 million and (ii) the "borrowing base" (as defined under the Amended PNC Credit Agreement). The Amended PNC Credit Facility had a borrowing base of$27.0 million as ofDecember 31, 2020 ,$19.2 million of which was available to us at that date. OnJune 16, 2020 , we entered into an amendment to the Amended PNC Credit Facility. The amendment, among other things, waived compliance with the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, minimum average liquidity and minimum EBITDA financial covenants for the quarters ending onJune 30, 2020 ,September 30, 2020 ,December 31, 2020 , andMarch 31, 2021 , added a financial covenant that requires a minimum monthly average undrawn availability level of$7.0 million for the period fromJune 30, 2020 through and includingMay 31, 2021 , added a financial covenant that requires a minimum liquidity of not less than$10.0 million at the end of each quarter, beginning with the quarter endingJune 30, 2021 and amended the covenant levels for the total net leverage ratio, total leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter endingJune 30, 2021 . The Amended PNC Credit Facility continues to include a covenant that requires a minimum of$5.0 million of PNC qualified cash at all times. OnDecember 10, 2020 , we amended the Amended PNC Credit Facility to, among other things, allow the SBS acquisition. The amendment added a covenant requiring the us to maintain at least$30.0 million average liquidity (the "Average Liquidity Requirement"), as defined in the Amended PNC Credit Facility, for the preceding thirty days measured as of the last day of each month. If the Average Liquidity Requirement has not been satisfied during the period prior to the payment of the deferred payments related to the Square Box Systems acquisition, a reserve will be established to reduce borrowings availability under the Amended PNC Credit Facility in an amount equal to (a)$2.0 million during the period from the amendment date through the first anniversary of the amendment, and, (b)$1.0 million during the period from the first anniversary of the amendment through the second anniversary of the amendment
Senior Secured Term Loan
We are also party to a senior secured term loan facility in an aggregate principal amount of$185.2 million as ofDecember 31, 2020 (the "Senior Secured Term Loan" and together with the Amended PNC Credit Agreement, the "Credit Agreements"). The Senior Secured Term Loan initially provided for borrowings of$165.0 million . The proceeds of the Senior Secured Term Loan were used to repay our previously outstanding long-term debt and fund our working capital requirements. OnJune 16, 2020 , we entered into an amendment to the Senior Secured Term Loan (the "June 2020 Term Loan Amendment"). The amendment provides an additional borrowing of$20.0 million which was immediately drawn in full. The amendment, among other things, waived compliance with the total net leverage ratio, fixed charge coverage ratio, minimum liquidity and minimum EBITDA financial covenants for the quarters ending onJune 30, 2020 ,September 30, 2020 ,December 31, 2020 , andMarch 31, 2021 , added a financial covenant that requires a minimum monthly average undrawn availability of$7.0 million under the Amended PNC Credit Facility during the period fromJune 30, 2020 through and includingMay 31, 2021 and amended the covenant levels for the total net leverage ratio, fixed charge coverage ratio, and minimum EBITDA financial covenants, commencing with the quarter endingJune 30, 2021 . OnDecember 10, 2020 , we amended the Senior Secured Term Loan to, among other things, allow the SBS acquisition.
Paycheck Protection Program
OnApril 13, 2020 , we entered into a Paycheck Protection Program (the "PPP") Term Loan (the "PPP Loan") effectiveApril 11, 2020 with PNC in an aggregate principal amount of$10.0 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act ). The PPP Loan bears interest at a fixed rate of 1% per annum. The PPP Loan has an initial term of two years and is unsecured and guaranteed by theSmall Business Administration . We used the proceeds from the PPP Loan for qualifying expenses as defined in the PPP Loan and has applied for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, we cannot assure at this time that the PPP Loan will be forgiven partially or in full.
Commitments and Contingencies
Our contingent liabilities consist primarily of certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. We have little history of costs associated with
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such indemnification requirements and contingent liabilities associated with
product liability may be mitigated by our insurance coverage. In the normal
course of business to facilitate transactions of our services and products, we
indemnify certain parties with respect to certain matters, such as intellectual
property infringement or other claims. We also have indemnification agreements
with our current and former officers and directors. It is not possible to
determine the maximum potential amount under these indemnification agreements
due to the limited history of our indemnification claims, and the unique facts
and circumstances involved in each particular agreement. Historically, payments
made by us under these agreements have not had a material impact on our
operating results, financial position or cash flows.
We are also subject to ordinary course litigation and potential costs related to our financial statement restatement activities and related legal costs.
Off Balance Sheet Arrangements
Except for the indemnification commitments described under "-Commitments and Contingencies" above, we do not currently have any other off-balance sheet arrangements and do not have any holdings in variable interest entities.
Contractual Obligations
We have contractual obligations and commercial commitments, some of which, such as purchase obligations, are not recognized as liabilities in our financial statements. There have not been any other material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 . Critical Accounting Estimates and Policies The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. On an ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider certain accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change. Our accounting policies that include estimates that require management's subjective or complex judgments about the effects of matters that are inherently uncertain are summarized in our most recently filed Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Critical Accounting Policies." For additional information on our significant accounting policies, see Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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.
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