Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts, unaudited)
September 30, 2022 March 31, 2022
Assets
Current assets:
Cash and cash equivalents $ 25,698 $ 5,210
Restricted cash 223 283
Accounts receivable, net of allowance for doubtful accounts of $ 195 and $ 422
61,309 69,354
Manufacturing inventories 23,671 33,546
Service parts inventories 25,458 24,254
Prepaid expenses 9,241 7,853
Other current assets 4,839 4,697
Total current assets 150,439 145,197
Property and equipment, net 15,973 12,853
Intangible assets, net 7,245 9,584
Goodwill 12,969 12,969
Right-of-use assets, net 10,579 11,107
Other long-term assets 12,477 9,925
Total assets $ 209,682 $ 201,635
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable $ 34,263 $ 34,220
Deferred revenue 70,184 86,517
Long-term debt, current portion 5,000 4,375
Accrued compensation 13,192 16,141
Other accrued liabilities 14,502 16,562
Total current liabilities 137,141 157,815
Deferred revenue 40,165 41,580
Revolving credit facility 21,500 17,735
Long-term debt, net of current portion 68,250 89,448
Operating lease liabilities 10,315 9,891
Other long-term liabilities 11,653 11,849
Total liabilities 289,024 328,318
Commitments and contingencies ( Note 9)
Stockholders' deficit
Preferred stock, 20,000 shares authorized; no shares issued and outstanding
— —
Common stock, $ 0.01 par value; 225,000 shares authorized; 92,158 and 60,433 shares issued and outstanding
922 605
Additional paid-in capital 716,800 645,038
Accumulated deficit ( 793,067 ) ( 770,903 )
Accumulated other comprehensive loss ( 3,997 ) ( 1,423 )
Total stockholders’ deficit ( 79,342 ) ( 126,683 )
Total liabilities and stockholders’ deficit $ 209,682 $ 201,635
See accompanying Notes to Condensed Consolidated Financial Statements.
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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,
2022 2021 2022 2021
Revenue:
Product $ 62,967 $ 54,655 $ 123,178 $ 106,786
Service and subscription 32,692 34,359 66,116 67,189
Royalty 3,478 4,166 6,918 8,303
Total revenue 99,137 93,180 196,212 182,278
Cost of revenue:
Product 56,561 41,124 104,482 79,864
Service and subscription 14,745 13,669 29,850 26,748
Total cost of revenue 71,306 54,793 134,332 106,612
Gross profit 27,831 38,387 61,880 75,666
Operating expenses:
Research and development 10,546 12,389 22,671 23,680
Sales and marketing 15,593 15,462 31,555 29,414
General and administrative 11,940 11,466 24,254 23,293
Restructuring charges 921 8 1,646 274
Total operating expenses 39,000 39,325 80,126 76,661
Loss from operations ( 11,169 ) ( 938 ) ( 18,246 ) ( 995 )
Other income (expense), net 2,431 126 3,182 ( 71 )
Interest expense ( 2,745 ) ( 3,070 ) ( 4,836 ) ( 6,956 )
Loss on debt extinguishment — ( 4,960 ) ( 1,392 ) ( 4,960 )
Net loss before income taxes ( 11,483 ) ( 8,842 ) ( 21,292 ) ( 12,982 )
Income tax provision 461 411 872 424
Net loss $ ( 11,944 ) $ ( 9,253 ) $ ( 22,164 ) $ ( 13,406 )
Deemed dividend on warrants — — ( 389 ) —
Net loss attributable to common stockholders $ ( 11,944 ) $ ( 9,253 ) $ ( 22,553 ) $ ( 13,406 )
Net loss per share attributable to common stockholders $ ( 0.13 ) $ ( 0.16 ) $ ( 0.26 ) $ ( 0.23 )
Weighted average shares - basic and diluted 91,550 58,567 87,617 57,852
Net loss $ ( 11,944 ) $ ( 9,253 ) $ ( 22,164 ) $ ( 13,406 )
Foreign currency translation adjustments, net ( 1,298 ) ( 506 ) ( 2,574 ) ( 239 )
Total comprehensive loss $ ( 13,242 ) $ ( 9,759 ) $ ( 24,738 ) $ ( 13,645 )
See accompanying Notes to Condensed Consolidated Financial Statements.
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QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six Months Ended September 30,
2022 2021
Operating activities
Net loss $ ( 22,164 ) $ ( 13,406 )
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 5,133 3,967
Amortization of debt issuance costs 768 1,629
Loss on debt extinguishment 992 —
Provision for product and service inventories 9,946 2,418
Stock-based compensation 5,357 6,273
Paycheck Protection Program loan forgiveness — ( 10,000 )
Non-cash loss on debt extinguishment — 8,471
Other ( 152 ) 41
Unrealized foreign exchange loss ( 2,766 ) ( 61 )
Changes in assets and liabilities:
Accounts receivable, net 8,264 10,024
Manufacturing inventories 416 ( 5,199 )
Service parts inventories ( 1,971 ) ( 1,818 )
Prepaid expenses ( 1,208 ) ( 3,224 )
Accounts payable 293 1,559
Accrued restructuring charges 115 ( 560 )
Accrued compensation ( 2,949 ) ( 3,779 )
Deferred revenue ( 17,747 ) ( 9,032 )
Other current assets ( 486 ) ( 962 )
Other non-current assets ( 349 ) ( 1,266 )
Other current liabilities 769 ( 353 )
Other non-current liabilities ( 196 ) 16
Net cash used in operating activities ( 17,935 ) ( 15,262 )
Investing activities
Purchases of property and equipment ( 7,795 ) ( 2,396 )
Business acquisition payments ( 2,000 ) ( 5,000 )
Net cash used in investing activities ( 9,795 ) ( 7,396 )
Financing activities
Borrowings of long-term debt, net of debt issuance costs — 94,961
Repayments of long-term debt and payment of amendment fees ( 22,096 ) ( 93,051 )
Borrowings of credit facility 229,605 126,084
Repayments of credit facility and payment of amendment fees ( 226,240 ) ( 116,084 )
Proceeds from issuance of common stock, net 66,723 806
Net cash provided by financing activities 47,992 12,716
Effect of exchange rate changes on cash, cash equivalents and restricted cash 166 12
Net change in cash, cash equivalents and restricted cash 20,428 ( 9,930 )
Cash, cash equivalents, and restricted cash at beginning of period 5,493 33,137
Cash, cash equivalents, and restricted cash at end of period $ 25,921 $ 23,207
Cash, Cash Equivalents and Restricted Cash at end of period
Cash and cash equivalents $ 25,698 $ 22,757
Restricted cash, current 223 450
Cash and cash equivalents at the end of period $ 25,921 $ 23,207
Supplemental disclosure of cash flow information
Cash paid for interest $ 4,114 $ 5,198
Cash paid for income taxes, net $ 465 $ 480
Non-cash transactions
Purchases of property and equipment included in accounts payable $ 548 $ 309
Transfer of manufacturing inventory to services inventory $ 1,905 $ —
Transfer of manufacturing inventory to property and equipment $ 279 $ 76
Paid-in-kind interest $ 319 $ —
Deemed dividend on warrants $ 389 $ —
See accompanying Notes to Condensed Consolidated Financial Statements.
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QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands, unaudited)
Common Stock Additional
Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Loss Total Stockholders' Deficit
Shares Amount
Balance, June 30, 2021 57,280 $ 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 plan 145 1 805 — — 806
Shares issued under employee incentive plans, net 1,387 14 ( 14 ) — — —
Shares issued in connection with business acquisition 460 5 2,813 — — 2,818
Stock-based compensation — — 3,072 — — 3,072
Balance, September 30, 2021
59,272 $ 593 $ 636,538 $ ( 752,029 ) $ ( 1,095 ) $ ( 115,993 )
Balance, June 30, 2022 90,606 $ 907 $ 714,128 $ ( 781,123 ) $ ( 2,699 ) $ ( 68,787 )
Net loss — — — ( 11,944 ) — ( 11,944 )
Foreign currency translation adjustments, net — — — — ( 1,298 ) ( 1,298 )
Shares issued under employee stock purchase plan 300 2 469 — — 471
Shares issued under employee incentive plans, net 1,252 13 ( 13 ) — — —
Rights offering expenses — — ( 71 ) — — ( 71 )
Stock-based compensation — — 2,287 — — 2,287
Balance, September 30, 2022
92,158 $ 922 $ 716,800 $ ( 793,067 ) $ ( 3,997 ) $ ( 79,342 )
See accompanying Notes to Condensed Consolidated Financial Statements.
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Common Stock Additional
Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit
Shares Amount
Balance, March 31, 2021 56,915 $ 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 plan 145 1 805 — — 806
Shares issued under employee incentive plans, net 1,752 17 ( 17 ) — — —
Shares issued in connection with business acquisition 460 5 2,813 — — 2,818
Stock-based compensation — — 6,273 — — 6,273
Balance, September 30, 2021 59,272 $ 593 $ 636,538 $ ( 752,029 ) $ ( 1,095 ) $ ( 115,993 )
Balance, March 31, 2022 60,433 $ 605 $ 645,038 $ ( 770,903 ) $ ( 1,423 ) $ ( 126,683 )
Net loss — — — ( 22,164 ) — ( 22,164 )
Foreign currency translation adjustments, net — — — — ( 2,574 ) ( 2,574 )
Shares issued under employee stock purchase plan 300 3 469 — — 472
Shares issued under employee incentive plans, net 1,425 14 ( 14 ) — — —
Shares issued in connection with rights offering, net 30,000 300 65,950 — — 66,250
Settlement of warrant down round provision — — 389 — — 389
Deemed dividend on warrants — — ( 389 ) — — ( 389 )
Stock-based compensation — — 5,357 — — 5,357
Balance, September 30, 2022 92,158 $ 922 $ 716,800 $ ( 793,067 ) $ ( 3,997 ) $ ( 79,342 )
See accompanying Notes to Condensed Consolidated Financial Statements.
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INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Note 1: Description of Business and Summary of Significant Accounting Policies
7
Note 2: Revenue
8
Note 3: Balance Sheet Information
9
Note 4: Long-Term Debt
10
Note 5: Leases
11
Note 6: Common Stock
12
Note 7: Net Loss Per Share
13
Note 8: Income Taxes
13
Note 9: Commitments and Contingencies
13
Note 10: Fair Value of Financial Instruments
15
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), is a leader in storing and managing digital video and other forms of unstructured data, delivering top streaming performance for video and rich media applications, along with low-cost, long-term storage systems for data protection and archiving. The Company helps customers around the world capture, create and share digital data and preserve and protect it for decades. The Company’s software-defined, hyperconverged storage solutions span from non-violate memory express (“NVMe”), to solid state drives (“SSD”) hard disk drives (“HDD”) tape, the cloud, and video surveillance and are tied together leveraging a single namespace view of the entire data environment. The Company works closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving needs.
Basis of Presentation
The accompanying 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, 2022, 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, 2022 and 2021. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment from the ongoing COVID-19 pandemic. Such estimates include, but are not limited to, the determination of standalone selling price for revenue arrangements with multiple performance obligations, useful lives of intangible assets and property and equipment, stock-based compensation and provision for income taxes including related reserves. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recently Issued but not Adopted Accounting Pronouncements
In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Program s. The amendments in this update require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in this update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
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NOTE 2: REVENUE
Based on how the Company manages its business, the Company has determined that it currently operates in one reportable segment. The Company operates in three geographic regions: (a) Americas; (b) Europe, Middle East and Africa (“EMEA”); and (c) Asia Pacific (“APAC”). Revenue by geography is based on the location of the customer from which the revenue is earned.
In the following table, revenue is disaggregated by major product offerings and geographies (in thousands):
Three Months Ended September 30, Six Months Ended September 30,
2022 2021 2022 2021
Americas 1
Primary storage systems $ 6,839 $ 11,264 $ 18,253 $ 18,458
Secondary storage systems 31,019 12,174 53,738 28,886
Device and media 4,694 5,269 9,666 11,791
Service and subscription 19,417 21,341 39,563 41,534
Total revenue 61,969 50,048 121,220 100,669
EMEA
Primary storage systems 1,901 4,244 4,747 7,020
Secondary storage systems 7,440 9,720 15,283 17,479
Device and media 3,702 4,513 8,765 9,894
Service and subscription 10,742 11,035 21,759 21,847
Total revenue 23,785 29,512 50,554 56,240
APAC
Primary storage systems 1,104 1,175 2,402 2,516
Secondary storage systems 5,634 4,365 8,109 8,098
Device and media 634 1,931 2,215 2,644
Service and subscription 2,533 1,983 4,794 3,808
Total revenue 9,905 9,454 17,520 17,066
Consolidated
Primary storage systems 9,844 16,683 25,402 27,994
Secondary storage systems 44,093 26,259 77,130 54,463
Device and media 9,030 11,713 20,646 24,329
Service and subscription 32,692 34,359 66,116 67,189
Royalty 2
3,478 4,166 6,918 8,303
Total revenue $ 99,137 $ 93,180 $ 196,212 $ 182,278
1 Revenue for Americas geographic region outside of the United States is not significant.
2 Royalty revenue is not allocatable 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, 2022 (in thousands):
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September 30, 2022
Contract liabilities (deferred revenue) $ 110,349
Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period 54,329
Remaining Performance Obligations
Remaining performance obligations consisted of the following (in thousands):
Current Non-Current Total
As of September 30, 2022
$ 120,040 $ 42,104 $ 162,144
The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months.
NOTE 3: BALANCE SHEET INFORMATION
Certain significant amounts included in the Company's condensed consolidated balance sheets consist of the following (in thousands):
Manufacturing inventories
September 30, 2022 March 31, 2022
Finished goods $ 11,443 $ 14,607
Work in progress 1,618 2,546
Raw materials 10,610 16,393
Total manufacturing inventories $ 23,671 $ 33,546
Service parts inventories
September 30, 2022 March 31, 2022
Finished goods $ 20,435 $ 19,234
Component parts 5,023 5,020
Total service parts inventories $ 25,458 $ 24,254
Intangibles, net
September 30, 2022 March 31, 2022
Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Developed technology $ 9,208 $ ( 4,796 ) $ 4,412 $ 9,208 $ ( 3,121 ) $ 6,087
Customer lists 4,600 ( 1,767 ) 2,833 4,600 ( 1,103 ) 3,497
Intangible assets, net $ 13,808 $ ( 6,563 ) $ 7,245 $ 13,808 $ ( 4,224 ) $ 9,584
Intangible assets amortization expense was $ 1.2 million and $ 0.8 for the three months ended September 30, 2022 and 2021, respectively and $ 2.3 million and $ 1.3 million for the six months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 1.9 years.
As of September 30, 2022, the future expected amortization expense for intangible assets is as follows (in thousands):
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Fiscal year ending Estimated future amortization expense
Remainder of 2023 $ 2,229
2024 3,417
2025 1,599
Thereafter —
Total $ 7,245
Goodwill
As of September 30, 2022 and March 31, 2022, goodwill was $ 13.0 million. There were no impairments to goodwill during the quarters ended September 30, 2022 and 2021.
NOTE 4: LONG-TERM DEBT
The Company’s long-term debt consisted of the following (in thousands):
September 30, 2022 March 31, 2022
Term Loan $ 77,167 $ 98,723
PNC Credit Facility 21,500 17,735
Less: current portion ( 5,000 ) ( 4,375 )
Less: unamortized debt issuance costs (1)
( 3,917 ) ( 4,899 )
Long-term debt, net $ 89,750 $ 107,184
(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 (the "Senior Secured Term Loan”) and amended its existing PNC Bank Credit Facility Agreement (the "PNC Credit Facility"). On February 11, 2021, the Company prepaid $ 92.3 million of its outstanding Senior Secured Term Loan.
On August 5, 2021, the Company entered into a new senior secured term loan to borrow an aggregate of $ 100.0 million (the “Term Loan”). A portion of the proceeds were used to repay in full all outstanding borrowings under the Senior Secured Term Loan. Borrowings under the Term Loan mature on August 5, 2026. Principal is payable at a rate per annum equal to (a) 2.5 % of the original principal balance thereof during the first year following the closing date of the Term Loan and (b) 5 % of the original principal balance thereof thereafter. Principal and interest payments are payable on a quarterly basis.
On April 25, 2022, the Company entered into amendments to the Term Loan and the PNC Credit Facility. The Term Loan amendment, among other things, (a) amended the total net leverage ratio financial covenant and the minimum liquidity financial covenant commencing with the fiscal quarter ended June 30, 2022; and; (b) replaced the benchmark rate for LIBOR Rate Loans with a rate based on the Secured Overnight Financing Rate ("SOFR"). The amendment to the Term Loan was accounted for as a modification. The Company incurred $ 0.4 million in costs related to the modification which are reflected as a reduction to the carrying amount of the Term Loan and amortized to interest expense over the remaining loan term.
Loans under the Term Loan designated as ABR Loans 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 SOFR 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 SOFR Rate Loans bear interest at a rate per annum equal to the SOFR Rate plus an applicable margin of 6.00 %. The SOFR Rate is subject to a floor of 0.75 %. The Company can designate a loan as an ABR Rate Loan or SOFR Rate Loan in its discretion.
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The PNC Credit Facility amendment, among other things, (a) increased the principal amount of revolving commitments from $ 30.0 million to $ 40.0 million; (b) waived compliance with the fixed charge coverage ratio financial covenant until the fiscal quarter ended March 31, 2025; (c) amended the total net leverage ratio financial covenant and the minimum liquidity financial covenant commencing with the fiscal quarter ended June 30, 2022; and (d) replaced the benchmark rate for PNC LIBOR Rate Loans with a rate based on SOFR. The amendment to the PNC Credit Facility was accounted for as a modification. The Company incurred $ 0.4 million in costs which were recorded to other assets and amortized to interest expense over the remaining term of the agreement.
Loans designated as PNC SOFR Loans bear interest at a rate per annum equal to the SOFR Rate plus 2.75 % until December 31, 2023 and thereafter between 2.25 % and 2.75 % determined based on the Company’s Total Net Leverage Ratio, (as defined in the PNC Credit Facility Agreement) for the most recently completed fiscal quarter (the "PNC SOFR Loan Interest Rate"). Loans under the PNC Credit Facility designated as PNC Domestic Rate Loans and Swing Loans bear interest at a rate per annum equal to the greatest of (i) the base commercial lending rate of PNC Bank; (ii) the Overnight Bank Funding Rate plus 0.5 %; and (iii) the daily SOFR Rate plus 1.0 %, plus 1.75 % until December 31, 2023 and thereafter between 1.25 % and 1.75 % determined based on the Company’s Total Net Leverage Ratio (the “PNC Domestic Loan Interest Rate”).
With respect to any PNC SOFR 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) 6.50 %, minus (y) the PNC SOFR Loan Interest Rate, plus (z) if the SOFR Rate applicable to such interest payment is less than 0.75 %, (i) 0.75 % minus (ii) such SOFR Rate. With respect to any Domestic Rate Loan or Swing Loan, the Company has agreed to pay an affiliate of certain Term Loan lenders a fee equal to a percentage per annum equal to the sum of (x) 5.50 %, minus (y) the PNC Domestic Loan 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.
During the three months ended June 30, 2022, the Company recorded a loss on debt extinguishment of $ 1.4 million related to a $ 20.0 million prepayment of the Term Loan which was comprised of a $ 0.4 million prepayment penalty and the write-off of unamortized debt issuance costs of $ 1.0 million.
As of September 30, 2022, the interest rate on the Term Loan was 8.32 % and the interest rate on the PNC Credit Facility for Domestic Rate Loans and Swing Loans was 8.00 %. As of September 30, 2022, the PNC Credit Facility had an available borrowing base of $ 30.6 million, of which $ 9.1 million was available to borrow at that date.
NOTE 5: LEASES
Supplemental balance sheet information related to leases is as follows (in thousands):
Operating leases September 30, 2022 March 31, 2022
Operating lease right-of-use asset $ 10,579 $ 11,107
Other accrued liabilities 1,293 1,727
Operating lease liability 10,315 9,891
Total operating lease liabilities $ 11,608 $ 11,618
Components of lease cost were as follows (in thousands):
Three Months Ended September 30, Six Months Ended September 30,
Lease Cost 2022 2021 2022 2021
Operating lease cost $ 1,003 $ 994 $ 2,029 $ 2,129
Variable lease cost 179 177 337 351
Short-term lease cost — 4 — 4
Total lease cost $ 1,182 $ 1,175 $ 2,366 $ 2,484
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Maturity of Lease Liabilities Operating Leases
Remainder of 2023 $ 1,495
2024 2,305
2025 2,062
2026 1,644
2027 1,542
Thereafter 14,670
Total lease payments $ 23,718
Less: imputed interest ( 12,110 )
Present value of lease liabilities $ 11,608
Lease Term and Discount Rate September 30, 2022 March 31, 2022
Weighted average remaining operating lease term (years) 11.20 10.88
Weighted average discount rate for operating leases 12.8 % 12.9 %
Operating cash outflows related to operating leases totaled $ 2.2 million and $ 1.0 million for the six months ended September 30, 2022 and 2021, respectively.
NOTE 6: COMMON STOCK
In the quarter ended September 30, 2022, the Company’s shareholders approved an increase in its authorized shares of common stock from 125 million to 225 million.
Common Stock Rights Offering
On April 22, 2022, the Company completed a rights offering of 30 million shares of its common stock for $ 2.25 per share (the “Rights Offering”). The proceeds net of offering expenses was $ 66.0 million. A portion of the proceeds from the Rights Offering was used to prepay $ 20.0 million of the Company’s Term Loan.
Warrants
As of the date of the Rights Offering, the Company had outstanding warrants to purchase 7,110,616 shares of the Company’s common stock at an exercise price of $ 1.33 per share and outstanding warrants to purchase 3,400,000 shares of the Company's common stock at an exercise price of $ 3.00 per share (the “$ 3.00 Warrants"). The exercise price and the number of shares underlying these 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 “Down Round Feature”).
On April 22, 2022, the Down Round Feature was triggered for the $ 3.00 Warrants due to the price per share received in the Rights Offering. The exercise price for the $ 3.00 Warrants was adjusted to $ 2.79 per share and an additional 256,113 warrants were subsequently issued with an exercise price of $ 2.79 . The Company calculated the difference between the $ 3.00 Warrants’ fair value before and after the Down Round Feature was triggered using the original exercise price and the new exercise price in addition to the value of the newly issued warrants. The difference in fair value of the effect of the Down Round Feature of $ 0.4 million was reflected as a deemed dividend and a reduction to income available to common stockholders in the basic earnings per share calculation. The Company used the Black-Scholes-Merton option-pricing model to determine the fair value of the deemed dividend.
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The assumptions used in the model are as follows: dividend rate of 0 %; expected term of 8 years; volatility of 56 %; and a risk-free rate 2.85 %.
NOTE 7: 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,
2022 2021 2022 2021
2,110 9,195 2,480 10,315
The dilutive impact related to common stock from restricted stock units and warrants is determined by applying the treasury stock method to the assumed vesting of outstanding restricted stock units and the exercise of outstanding warrants. The dilutive impact related to common stock from contingently issuable performance share units is determined by applying a two-step approach using both the contingently issuable share guidance and the treasury stock method.
NOTE 8: INCOME TAXES
The effective tax rate for the three and six months ended September 30, 2022 was ( 11.6 )% and ( 6.5 )%, respectively, as compared to ( 4.6 )% and ( 3.2 )%, respectively, for the three and six months ended September 30, 2021. 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, 2022, including interest and penalties, the Company had $ 102.3 million of unrecognized tax benefits, $ 83.6 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of September 30, 2022, 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, 2022, $ 94.5 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 $ 7.7 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 $ 10.8 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. Upon recognition of the tax benefit related to the expiring statutes of limitation, $ 10.1 million will be offset by the establishment of a related valuation allowance. The net tax benefit recognized in the statements of operation is estimated to be $ 0.7 million.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Commitments to Purchase Inventory
The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon 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
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to materials that the third party had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for inventory in excess of current customer demand or for costs of excess or obsolete inventory. As of September 30, 2022, the Company had issued non-cancelable commitments for $ 42.6 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 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. On September 7, 2021, the case against Quantum in the Northern District of California was stayed pending the outcome of Realtime Data™ appeal in the Delaware Action. The Federal Circuit Court has not yet heard oral arguments. 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 March 11, 2021, after several rounds of motion practice, the California Superior Court stayed the California action. On March 4, 2022, Starboard filed a request for dismissal without prejudice of the California action because the matter is proceeding in Delaware (as described below). On March 10, 2022, the California Superior Court entered a minute order dismissing the action without prejudice.
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
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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. On January 28, 2022, via a bench ruling, the Court granted the motions to dismiss the breach of fiduciary duty claims against Messrs. Gacek and Auvil and denied the motions to dismiss the remaining claims. On March 28, 2022, Quantum filed an answer and affirmative defenses to the complaint, as did Messrs. Gacek and Auvil. On May 3, 2022, the Court filed a stipulated order governing case schedule, setting trial for June 6-9, 2023, and also setting a number of pretrial deadlines. The parties have begun the discovery phase in the case. 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 currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on its results of operations, cash flows or financial position.
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s assets, measured and recorded at fair value on a recurring basis, may consist of money market funds which are included in cash and cash equivalents in the Condensed Consolidated Balance Sheets and are valued using quoted market prices (level 1 fair value measurements) at the respective balance sheet dates.
No impairment charges were recognized for non-financial assets in the six months ended September 30, 2022 and 2021. 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, 2022 and 2021. The fair value has been classified as Level 2 within the fair value hierarchy.
September 30,
2022 2021
Carrying Value Fair Value Carrying Value Fair Value
Term Loan $ 77,167 $ 77,167 $ 99,375 $ 99,375
PNC Credit Facility 21,500 21,500 10,000 10,000
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.