QUANTUM CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS QUANTUM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts, unaudited) December 31, 2022 March 31, 2022 Assets Current assets: Cash and cash equivalents $ 26,028 $ 5,210 Restricted cash 219 283 Accounts receivable, net of allowance for doubtful accounts of $ 219 and $ 422 72,911 69,354 Manufacturing inventories 32,402 33,546 Service parts inventories 25,822 24,254 Prepaid expenses 7,198 7,853 Other current assets 7,489 4,697 Total current assets 172,069 145,197 Property and equipment, net 16,794 12,853 Intangible assets, net 6,497 9,584 Goodwill 12,969 12,969 Right-of-use assets, net 10,468 11,107 Other long-term assets 13,600 9,925 Total assets $ 232,397 $ 201,635 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 41,788 $ 34,220 Deferred revenue 72,669 86,517 Long-term debt, current portion 5,000 4,375 Accrued compensation 15,527 16,141 Other accrued liabilities 15,852 16,562 Total current liabilities 150,836 157,815 Deferred revenue 41,076 41,580 Revolving credit facility 27,736 17,735 Long-term debt, net of current portion 67,306 89,448 Operating lease liabilities 10,346 9,891 Other long-term liabilities 12,150 11,849 Total liabilities 309,450 328,318 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; 93,144 and 60,433 shares issued and outstanding 932 605 Additional paid-in capital 719,769 645,038 Accumulated deficit ( 795,237 ) ( 770,903 ) Accumulated other comprehensive loss ( 2,517 ) ( 1,423 ) Total stockholders’ deficit ( 77,053 ) ( 126,683 ) Total liabilities and stockholders’ deficit $ 232,397 $ 201,635 See accompanying Notes to Condensed Consolidated Financial Statements. 1 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share amounts, unaudited) Three Months Ended December 31, Nine Months Ended December 31, 2022 2021 2022 2021 Revenue: Product $ 75,420 $ 58,522 $ 198,597 $ 165,308 Service and subscription 32,950 33,162 99,066 100,352 Royalty 2,826 3,660 9,744 11,963 Total revenue 111,196 95,344 307,407 277,623 Cost of revenue: Product 58,528 45,118 163,010 124,982 Service and subscription 12,379 15,016 42,229 41,764 Total cost of revenue 70,907 60,134 205,239 166,746 Gross profit 40,289 35,210 102,168 110,877 Operating expenses: Research and development 11,254 14,607 33,925 38,287 Sales and marketing 16,339 16,714 47,894 46,128 General and administrative 10,969 10,538 35,223 33,830 Restructuring charges ( 41 ) 576 1,605 850 Total operating expenses 38,521 42,435 118,647 119,095 Income (loss) from operations 1,768 ( 7,225 ) ( 16,479 ) ( 8,218 ) Other income (expense), net ( 544 ) ( 150 ) 2,638 ( 223 ) Interest expense ( 2,701 ) ( 2,431 ) ( 7,537 ) ( 9,387 ) Loss on debt extinguishment — — ( 1,392 ) ( 4,960 ) Net loss before income taxes ( 1,477 ) ( 9,806 ) ( 22,770 ) ( 22,788 ) Income tax provision 693 1,254 1,564 1,678 Net loss $ ( 2,170 ) $ ( 11,060 ) $ ( 24,334 ) $ ( 24,466 ) Deemed dividend on warrants — — ( 389 ) — Net loss attributable to common stockholders $ ( 2,170 ) $ ( 11,060 ) $ ( 24,723 ) $ ( 24,466 ) Net loss per share attributable to common stockholders $ ( 0.02 ) $ ( 0.19 ) $ ( 0.28 ) $ ( 0.42 ) Weighted average shares - basic and diluted 92,752 59,486 89,335 58,399 Net loss $ ( 2,170 ) $ ( 11,060 ) $ ( 24,334 ) $ ( 24,466 ) Foreign currency translation adjustments, net 1,480 ( 37 ) ( 1,094 ) ( 276 ) Total comprehensive loss $ ( 690 ) $ ( 11,097 ) $ ( 25,428 ) $ ( 24,742 ) See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents QUANTUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Nine Months Ended December 31, 2022 2021 Operating activities Net loss $ ( 24,334 ) $ ( 24,466 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 7,235 6,795 Amortization of debt issuance costs 1,201 1,981 Loss on debt extinguishment 992 — Provision for product and service inventories 11,334 4,016 Stock-based compensation 8,340 10,580 Paycheck Protection Program loan forgiveness — ( 10,000 ) Non-cash loss on debt extinguishment — 8,471 Other ( 2,059 ) 282 Unrealized foreign exchange loss ( 1,134 ) — Changes in assets and liabilities: Accounts receivable, net ( 3,367 ) 7,008 Manufacturing inventories ( 9,352 ) ( 10,672 ) Service parts inventories ( 2,671 ) ( 2,281 ) Prepaid expenses 654 ( 5,653 ) Accounts payable 7,015 5,369 Accrued restructuring charges 130 17 Accrued compensation ( 614 ) ( 3,021 ) Deferred revenue ( 14,351 ) ( 8,598 ) Other current assets ( 2,812 ) ( 1,394 ) Other non-current assets 1,357 ( 1,148 ) Other current liabilities 2,540 ( 3,350 ) Other non-current liabilities 300 ( 617 ) Net cash used in operating activities ( 19,596 ) ( 26,681 ) Investing activities Purchases of property and equipment ( 10,644 ) ( 3,971 ) Business acquisition payments ( 2,000 ) ( 7,808 ) Net cash used in investing activities ( 12,644 ) ( 11,779 ) Financing activities Borrowings of long-term debt, net of debt issuance costs — 94,961 Repayments of long-term debt and payment of amendment fees ( 23,346 ) ( 93,677 ) Borrowings of credit facility 363,103 207,563 Repayments of credit facility and payment of amendment fees ( 353,502 ) ( 200,007 ) Proceeds from issuance of common stock, net 66,718 806 Net cash provided by financing activities 52,973 9,646 Effect of exchange rate changes on cash, cash equivalents and restricted cash 21 12 Net change in cash, cash equivalents and restricted cash 20,754 ( 28,802 ) Cash, cash equivalents, and restricted cash at beginning of period 5,493 33,137 Cash, cash equivalents, and restricted cash at end of period $ 26,247 $ 4,335 Cash, Cash Equivalents and Restricted Cash at end of period Cash and cash equivalents $ 26,028 $ 4,004 Restricted cash, current 219 331 Cash and cash equivalents at the end of period $ 26,247 $ 4,335 Supplemental disclosure of cash flow information Cash paid for interest $ 6,270 $ 7,180 Cash paid for income taxes, net $ 837 $ 541 Non-cash transactions Purchases of property and equipment included in accounts payable $ 1,198 $ 1,148 Transfer of manufacturing inventory to services inventory $ 2,308 $ 1,212 Transfer of manufacturing inventory to property and equipment $ 264 $ 382 Paid-in-kind interest $ 319 $ — Deemed dividend on warrants $ 389 $ — See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents 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, September 30, 2021 59,272 $ 593 $ 636,538 $ ( 752,029 ) $ ( 1,095 ) $ ( 115,993 ) Net loss — — — ( 11,060 ) — ( 11,060 ) Foreign currency translation adjustments, net — — — — ( 37 ) ( 37 ) Shares issued under employee stock purchase plan — — — — — — Shares issued under employee incentive plans, net 183 2 ( 2 ) — — — Shares issued in connection with business acquisition 361 4 ( 4 ) — — — Stock-based compensation — — 4,307 — — 4,307 Balance, December 31, 2021 59,816 $ 599 $ 640,839 $ ( 763,089 ) $ ( 1,132 ) $ ( 122,783 ) Balance, September 30, 2022 92,158 $ 922 $ 716,800 ( 793,067 ) $ ( 3,997 ) $ ( 79,342 ) Net loss — — — ( 2,170 ) — ( 2,170 ) Foreign currency translation adjustments, net — — — — 1,480 1,480 Shares issued under employee stock purchase plan — — — — — — Shares issued under employee incentive plans, net 625 6 ( 6 ) — — — Shares issued in connection with business acquisition 361 4 ( 4 ) — — — Rights offering expenses — — ( 2 ) — — ( 2 ) Stock-based compensation — — 2,981 — — 2,981 Balance, December 31, 2022 93,144 $ 932 $ 719,769 $ ( 795,237 ) $ ( 2,517 ) $ ( 77,053 ) See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents 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 — — — ( 24,466 ) — ( 24,466 ) Foreign currency translation adjustments, net — — — — ( 276 ) ( 276 ) Shares issued under employee stock purchase plan 145 1 805 — — 806 Shares issued under employee incentive plans, net 1,935 19 ( 19 ) — — — Shares issued in connection with business acquisition 821 9 2,809 — — 2,818 Stock-based compensation — — 10,580 — — 10,580 Balance, December 31, 2021 59,816 $ 599 $ 640,839 $ ( 763,089 ) $ ( 1,132 ) $ ( 122,783 ) Balance, March 31, 2022 60,433 $ 605 $ 645,038 $ ( 770,903 ) $ ( 1,423 ) $ ( 126,683 ) Net loss — — — ( 24,334 ) — ( 24,334 ) Foreign currency translation adjustments, net — — — — ( 1,094 ) ( 1,094 ) Shares issued under employee stock purchase plan 300 3 469 — — 472 Shares issued under employee incentive plans, net 2,050 20 ( 20 ) — — — Shares issued in connection with business acquisition 361 4 ( 4 ) — — — Shares issued in connection with rights offering, net 30,000 300 65,946 — — 66,246 Settlement of warrant down round provision — — 389 — — 389 Deemed dividend on warrants — — ( 389 ) — — ( 389 ) Stock-based compensation — — 8,340 — — 8,340 Balance, December 31, 2022 93,144 $ 932 $ 719,769 $ ( 795,237 ) $ ( 2,517 ) $ ( 77,053 ) See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Page Note 1: Description of Business and Summary of Significant Accounting Policies 7 Note 2: Revenue 7 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 Note 11: Subsequent Event 15 6 Table of Contents 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 December 31, 2022, the results of operations and comprehensive loss, statements of cash flows, and changes in stockholder's deficit for the three and nine months ended December 31, 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 None. NOTE 2: REVENUE 7 Table of Contents 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 December 31, Nine Months Ended December 31, 2022 2021 2022 2021 Americas 1 Primary storage systems $ 10,668 $ 8,768 $ 28,921 $ 27,228 Secondary storage systems 35,085 15,060 88,821 43,946 Device and media 4,107 7,737 13,773 19,527 Service and subscription 19,756 19,470 59,319 61,003 Total revenue 69,616 51,035 190,834 151,704 EMEA Primary storage systems 2,332 3,305 7,078 10,325 Secondary storage systems 10,096 10,377 25,380 27,856 Device and media 6,029 5,125 14,794 15,018 Service and subscription 10,989 11,606 32,748 33,454 Total revenue 29,446 30,413 80,000 86,653 APAC Primary storage systems 974 1,718 3,376 4,234 Secondary storage systems 5,541 5,193 13,651 13,291 Device and media 588 1,239 2,803 3,883 Service and subscription 2,205 2,086 6,999 5,895 Total revenue 9,308 10,236 26,829 27,303 Consolidated Primary storage systems 13,974 13,791 39,375 41,787 Secondary storage systems 50,722 30,630 127,852 85,093 Device and media 10,724 14,101 31,370 38,428 Service and subscription 32,950 33,162 99,066 100,352 Royalty 2 2,826 3,660 9,744 11,963 Total revenue $ 111,196 $ 95,344 $ 307,407 $ 277,623 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 nine months ended December 31, 2022 (in thousands): December 31, 2022 Contract liabilities (deferred revenue) $ 113,745 Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period 71,669 Remaining Performance Obligations 8 Table of Contents Remaining performance obligations consisted of the following (in thousands): Current Non-Current Total As of December 31, 2022 $ 105,981 $ 42,645 $ 148,626 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 December 31, 2022 March 31, 2022 Finished goods $ 13,639 $ 14,607 Work in progress 2,268 2,546 Raw materials 16,495 16,393 Total manufacturing inventories $ 32,402 $ 33,546 Service parts inventories December 31, 2022 March 31, 2022 Finished goods $ 21,215 $ 19,234 Component parts 4,607 5,020 Total service parts inventories $ 25,822 $ 24,254 Intangibles, net December 31, 2022 March 31, 2022 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Developed technology $ 9,013 $ ( 5,442 ) $ 3,571 $ 9,013 $ ( 2,926 ) $ 6,087 Customer lists 4,398 ( 1,472 ) 2,926 4,398 ( 901 ) 3,497 Intangible assets, net $ 13,411 $ ( 6,914 ) $ 6,497 $ 13,411 $ ( 3,827 ) $ 9,584 Intangible assets amortization expense was $ 0.7 million and $ 1.2 million for the three months ended December 31, 2022 and 2021, respectively and $ 3.1 million and $ 2.5 million for the nine months ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 1.8 years. As of December 31, 2022, the future expected amortization expense for intangible assets is as follows (in thousands): 9 Table of Contents Fiscal year ending Estimated future amortization expense Remainder of 2023 $ 1,147 2024 3,523 2025 1,827 Thereafter — Total $ 6,497 Goodwill As of December 31, 2022 and March 31, 2022, goodwill was $ 13.0 million. There were no impairments to goodwill during the nine months ended December 31, 2022 and 2021. NOTE 4: LONG-TERM DEBT The Company’s long-term debt consisted of the following (in thousands): December 31, 2022 March 31, 2022 Term Loan $ 75,917 $ 98,722 PNC Credit Facility 27,736 17,735 Less: current portion ( 5,000 ) ( 4,375 ) Less: unamortized debt issuance costs (1) ( 3,611 ) ( 4,899 ) Long-term debt, net $ 95,042 $ 107,183 (1) The unamortized debt issuance costs related to the Term Loan is 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. 10 Table of Contents 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 nine months ended December 31, 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 December 31, 2022, the interest rate on the Term Loan was 9.81 % and the interest rate on the PNC Credit Facility for Domestic Rate Loans and Swing Loans was 9.25 %. As of December 31, 2022, the PNC Credit Facility had an available borrowing base of $ 33.4 million, of which $ 5.7 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 December 31, 2022 March 31, 2022 Operating lease right-of-use asset $ 10,468 $ 11,107 Other accrued liabilities 1,202 1,727 Operating lease liability 10,346 9,891 Total operating lease liabilities $ 11,548 $ 11,618 Components of lease cost were as follows (in thousands): Three Months Ended December 31, Nine Months Ended December 31, Lease Cost 2022 2021 2022 2021 Operating lease cost $ 994 $ 887 $ 3,023 $ 3,016 Variable lease cost 176 176 513 527 Short-term lease cost — 13 — 17 Total lease cost $ 1,170 $ 1,076 $ 3,536 $ 3,560 11 Table of Contents Maturity of Lease Liabilities Operating Leases Remainder of 2023 $ 657 2024 2,495 2025 2,185 2026 1,717 2027 1,586 Thereafter 14,696 Total lease payments $ 23,336 Less: imputed interest ( 11,788 ) Present value of lease liabilities $ 11,548 Lease Term and Discount Rate December 31, 2022 March 31, 2022 Weighted average remaining operating lease term (years) 11.11 10.88 Weighted average discount rate for operating leases 12.6 % 12.9 % Operating cash outflows related to operating leases totaled $ 2.4 million and $ 3.1 million for the nine months ended December 31, 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. On December 30, 2022 the Leadership and Compensation Committee of the Board approved an amendment to the 2021 Inducement Plan to increase the number of shares of common stock of the Company authorized for issuance thereunder from 770,000 to 1.5 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 12 Table of Contents 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. 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 %. As of December 31, 2022, there were approximately 10.8 million warrants outstanding. 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 December 31, Nine Months Ended December 31, 2022 2021 2022 2021 5,450 8,802 3,763 9,811 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 nine months ended December 31, 2022 was ( 7.1 )% and ( 6.7 )%, respectively, as compared to ( 12.6 )% and ( 7.3 )%, respectively, for the three and nine months ended December 31, 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 December 31, 2022, including interest and penalties, the Company had $ 103.0 million of unrecognized tax benefits, $ 84.3 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of December 31, 2022, the Company had accrued interest and penalties related to these unrecognized tax benefits of $ 1.4 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 December 31, 2022, $ 95.0 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 $ 8.0 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 13 Table of Contents The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon the Company’s forecast of customer demand. The Company has similar arrangements with certain other suppliers. The Company is responsible for the financial impact on the supplier or contract manufacturer of any reduction or product mix shift in the forecast relative to materials that the third party had already purchased under a prior forecast. Such a variance in forecasted demand could require a cash payment for inventory in excess of current customer demand or for costs of excess or obsolete inventory. As of December 31, 2022, the Company had issued non-cancelable commitments for $ 36.7 million to purchase inventory from its contract manufacturers and suppliers. Legal Proceedings On July 22, 2016, Realtime Data LLC d/b/a IXO (“Realtime Data”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patents Nos. 7,161,506, 7,378,992, 7,415,530, 8,643,513, 9,054,728, and 9,116,908. The lawsuit has been transferred to the U.S. District Court for the Northern District of California for further proceedings. Realtime Data asserts that the Company has incorporated Realtime Data’s patented technology into its compression products and services. Realtime Data seeks unspecified monetary damages and other relief that the Court deems appropriate. On July 31, 2017, the District Court stayed proceedings in this litigation pending the outcome of Inter Partes Review proceedings before the Patent Trial and Appeal Board relating to the Realtime patents. In those proceedings the asserted claims of the ’506 patent, the ’992 patent, and the ’513 patent were found unpatentable. In addition, on July 19, 2019, the United States District Court for the District of Delaware issued a decision finding that all claims of the ’728 patent, the ’530 patent, and the ’908 patent are not eligible for patent protection under 35 U.S.C. § 101 (the “Delaware Action”). On appeal, the Federal Circuit vacated the decision in the Delaware Action and remanded for the Court to “elaborate on its ruling.” The case pending against Quantum in the Northern District of California remains stayed pending the final outcome in the Delaware Action. On May 4, 2021, the Court in the Delaware Action reaffirmed its earlier ruling and granted defendants’ motions to dismiss under Section 101. The Court also granted Realtime Data fourteen days to file amended complaints in the Delaware Action where they sought leave to do so. On May 19, 2021, Realtime Data filed amended complaints including revised bases for claims of infringement of the same patents. On June 29, 2021, defendants in the Delaware Action filed a renewed motion to dismiss under Section 101. Realtime Data filed its opposition to the motion to dismiss on July 13, 2021. On August 23, 2021, the Court again reaffirmed its earlier ruling and granted defendants’ motions to dismiss under Section 101. Realtime Data has appealed that decision to the Federal Circuit. On September 7, 2021, the case against Quantum in the Northern District of California was stayed pending the outcome of Realtime Data’s 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 alleging that between 2012 and 2014, Starboard purchased 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 lawsuit further alleges that Quantum hid its failure to meet those performance objectives by improperly recognizing revenue in fiscal 2015. The California action was stayed and then dismissed. 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. As of January 12, 2023, all parties signed a settlement agreement amicably resolving both actions. The litigation will have no material effect on the Company’s financial statements or business operations. Other Commitments 14 Table of Contents 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 nine months ended December 31, 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 Company’s financial liabilities were comprised primarily of long-term debt at December 31, 2022. The Company uses significant other observable market data or assumptions (Level 2 inputs as defined in the accounting guidance) that it believes market participants would use in pricing debt. The carrying value and fair value of the Company’s financial liabilities were primarily comprised of the following as of December 31, 2022 (in thousands): December 31, 2022 2021 Carrying Value Fair Value Carrying Value Fair Value Term Loan $ 75,917 $ 75,917 $ 98,750 $ 98,750 PNC Credit Facility 27,736 27,736 7,556 7,556 NOTE 12: SUBSEQUENT EVENTS As of January 12, 2023, all parties in the Starboard legal matter signed a settlement agreement amicably resolving both actions (see Note 9, Commitments and Contingencies ), The litigation will have no material effect on the Company’s financial statements or business operations.