What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-06-06 compared with 2022-06-08 · 198 added, 236 removed, 821 unchanged (35% of the section changed)

12 unchanged sentences

Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Quantum Corporation and its subsidiaries (the Company) as of March 31, 2022 and 2021 and the related consolidated statements of operations and comprehensive loss, stockholders' deficit, and cash flows for each of the years in the three year period ended March 31, 2022, and the related notes (collectively referred to as the consolidated financial statements).

We have audited the accompanying consolidated balance sheets of Quantum Corporation and its subsidiaries (the Company) as of March 31, 2023 and 2022 and the related consolidated statements of operations, comprehensive loss, stockholders' deficit, and cash flows for each of the years in the three-year period ended March 31, 2023, and the related notes (collectively referred to as the consolidated financial statements).

We also have audited the Company's internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2022 in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Also in our opinion, the Company maintained, in all material respects, effective internal controls over financial reporting as of March 31, 2023, based on the criteria established in Internal Controls - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting appearing under Item 9A.

Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

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Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

17 unchanged sentences

Revenue from distributors is recognized when the customer obtains control of the product, which generally occurs at the point of shipment or upon delivery, unless customer acceptance is uncertain.

Net sales for the fiscal year ended March 31, 2022 was $372.8 million, which principally consist of product sales.

We identified the timing of revenue recognition for product sales (i.e., whether the Company recorded product sales in the appropriate fiscal year) as a critical audit matter because of the significant judgment used when applying Accounting Standards Codification Topic 606 – Revenue from Contracts with Customers – to contracts with customers.

The Company utilizes a broad network of distributors, value-added resellers ("VARs"), direct marketing resellers ("DMRs"), original equipment manufacturers ("OEMs") and other suppliers ship products and fulfill performance obligations.

We identified the timing of revenue recognition for product sales (i.e., whether the Company recorded product sales in the appropriate fiscal year) as a critical audit matter because of the significant judgments used when applying Accounting Standards Codification Topic 606 – Revenue from Contracts with Customers – to contracts with customers.

The Company ships products to a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to fulfill performance obligations.

This made auditing the timing of revenue recognition for product sales challenging and required significant audit effort to validate the timing of revenue recognition.

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• We tested the effectiveness of internal controls over the timing of revenue recognition.

• We selected a sample of product sales obtained the invoice, purchase order, customer contract or agreement, packing list, bill of lading, proof of delivery, and evidence of cash collection, to validate revenue was recognized in the appropriate fiscal year.

• We selected a sample of product sales for the year and examined the related contract to validate no customer acceptance clauses existed that would preclude revenue recognition.

• We selected a sample of credit memos from the period immediately subsequent to the Company’s fiscal year end and the related invoice, return merchandise authorization form, and shipping documents, to and validated revenue was recognized in the fiscal year ended March 31, 2022 only when control was transferred to the customer and if applicable, customer acceptance had occurred.

• We selected a sample of product sales, obtained the invoice, purchase order, customer contract or agreement, packing list, bill of lading, proof of delivery, and evidence of cash collection, to validate no customer acceptance clauses existed that would preclude revenue recognition, and revenue was recognized in the appropriate fiscal year.

• We selected a sample of credit memos from the period immediately subsequent to the Company’s fiscal year end and the related invoice, return merchandise authorization form, and shipping documents, and validated revenue was recognized in the fiscal year ended March 31, 2023 only when control was transferred to the customer and if applicable, customer acceptance had occurred.

• We obtained and evaluated internal certifications provided by the Company’s sales employees to validate no side agreements existed that could impact the timing of revenue recognition.

Inventories – Excess and Obsolescence Reserve — Refer to Note 1 to the Consolidated Financial Statements

Inventories – Excess and Obsolescence write down — Refer to Note 1 to the Consolidated Financial Statements

Critical Audit Matter Description

The Company's manufacturing and service parts inventories are recorded on a first-in, first-out ("FIFO") basis, subject to the lower of cost or net realizable value, and as necessary, the Company writes down the valuation of inventories for excess and obsolescence.

Provision for manufacturing and service inventories for the fiscal year ended March 31, 2022 was $20.8 million.

We identified the excess and obsolescence write-down as a critical audit matter because of the judgment's management makes to estimate the excess and obsolescence write-downs.

This required a high degree of auditor judgment and significant effort to validate the methodology and the reasonableness of the excess and obsolescence write-downs.

The Company’s manufacturing and service parts inventories are recorded on a first-in, first-out basis, subject to the lower of cost or net realizable value, and as necessary, the Company writes down the valuation of inventories for excess and obsolescence (“E&O”).

We identified the E&O write-down as a critical audit matter because of the judgments management makes to estimate future parts demand.

This required a high degree of auditor judgment and significant effort to validate.

How the Critical Audit Matter Was Addressed in the Audit

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• We gained an understanding and evaluated the Company’s methodology for determining inventory that is excess or obsolete and the key assumptions and judgments made as part of the process.

• We evaluated the assumptions used by the Company to define what is considered aged inventory by assessing historical trends in the Company’s product life cycle as well as evaluating the underlying calculations applied to the aged inventory.

• We evaluated the inventory valuation utilizing the methodology above to assess the inventory write-down rate applied to different products.

• We evaluated the reasonableness of sales demand, tested the completeness and accuracy of prior usage data, and specific product considerations used to estimate parts demand.

• We verified that estimated parts demand was properly compared to inventories on hand to determine excess inventory, and that such excess was properly written down to net realizable value.

/s/ Armanino LLP

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Goodwill 12,969 12,969

Restricted cash — 5,000

Right-of-use assets, net 10,291 11,107

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Accounts payable $ 35,716 $ 34,220

Deferred revenue 86,517 84,027

Deferred revenue, current portion 82,504 86,517

Long-term debt, current portion 5,000 4,375

2 unchanged sentences

Total current liabilities 152,596 157,815

Deferred revenue 41,580 36,126

Deferred revenue, net of current portion 43,306 41,580

Revolving credit facility 16,750 17,735

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( 26,007 ) ( 13,840 ) 8,403

Other expense, net ( 251 ) ( 1,312 ) ( 261 )

Other income (expense), net 1,956 ( 251 ) ( 1,312 )

Interest expense ( 10,560 ) ( 11,888 ) ( 27,522 )

4 unchanged sentences

Net loss $ ( 37,943 ) $ ( 32,280 ) $ ( 35,459 )

Net loss per share - basic and diluted $ ( 0.55 ) $ ( 0.83 ) $ ( 0.14 )

Deemed dividend on warrants ( 389 ) — —

Net loss attributable to common stockholders $ ( 38,332 ) $ ( 32,280 ) $ ( 35,459 )

Net loss per share attributable to common stockholders - basic and diluted $ ( 0.42 ) $ ( 0.55 ) $ ( 0.83 )

Weighted average shares - basic and diluted 90,348 58,871 42,852

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Long-term debt related costs 992 8,471 167

Paid-in-kind interest — — 1,858

Provision for manufacturing and service inventories 18,052 5,740 6,334

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Accounts payable 1,158 ( 1,939 ) ( 1,994 )

Prepaid expenses 3,695 ( 3,959 ) ( 594 )

Deferred revenue ( 2,286 ) ( 2,514 ) 418

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Accrued compensation ( 431 ) ( 3,073 ) 4,257

Prepaid expenses and other assets ( 6,561 ) 2,215 979

Other assets ( 1,270 ) ( 2,602 ) 2,809

Other liabilities 1,022 ( 3,003 ) ( 2,541 )

4 unchanged sentences

Business acquisitions ( 3,020 ) ( 7,808 ) ( 2,655 )

Net cash provided by (used in) investing activities

Net cash used in investing activities

( 15,601 ) ( 14,124 ) ( 9,586 )

Financing activities

Borrowings of long-term debt 94,961 19,400 —

Borrowings of long-term debt, net of debt issuance costs — 94,961 19,400

Repayments of long-term debt ( 24,596 ) ( 94,301 ) ( 92,782 )

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Purchases of property and equipment included in accounts payable $ 1,049 $ 147 $ 258

Purchases of property and equipment included in accrued liabilities $ — $ 1,212 $ —

Transfer of property and equipment to manufacturing inventory $ 818 $ 429 $ 400

Payment of litigation settlements with insurance proceeds $ — $ — $ 8,950

Transfer of manufacturing inventory to services inventory $ 4,045 $ 211 $ 918

Transfer of manufacturing inventory to property and equipment $ 343 $ 818 $ 429

Paid-in-kind interest $ 319 $ — $ —

Deemed dividend $ 389 $ — $ —

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows:

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Net loss — — — ( 35,459 ) — ( 35,459 )

Foreign currency translation adjustments, net — — — — ( 112 ) ( 112 )

Foreign currency translation adjustments, net of income taxes — — — — 666 666

Shares issued under employee stock purchase plan 320 4 1,331 — — 1,335

Shares issued under employee incentive plans, net 1,264 13 ( 13 ) — — —

Shares issued from warrants exercised, net 2,783 28 ( 28 ) — — —

Shares surrendered for employees' tax liability upon settlement of restricted stock units ( 44 ) — ( 236 ) — — ( 236 )

Shares issued in connection with business acquisition 361 3 2,077 — — 2,080

Shares issued in connection with secondary equity offering, net 15,109 151 96,604 — — 96,755

Warrants issued related to long-term debt — — 11,515 — — 11,515

Stock-based compensation — — 9,624 — — 9,624

4 unchanged sentences

Shares issued under employee incentive plans, net 2,308 23 ( 23 ) — — —

Shares surrendered for employees' tax liability upon settlement of restricted stock units ( 44 ) — ( 236 ) — — ( 236 )

Shares issued in connection with business acquisition 821 8 2,810 — — 2,818

Shares issued in connection with secondary equity offering, net 15,109 151 96,604 — — 96,755

Warrants issued related to long-term debt — — 11,515 — — 11,515

Stock-based compensation — — 13,829 — — 13,829

4 unchanged sentences

Shares issued under employee incentive plans, net 2,180 21 ( 21 ) — — —

Shares issued in connection with rights offering, net 30,000 300 65,949 — — 66,249

Shares issued in connection with business acquisition 361 4 ( 4 ) — — —

Settlement of warrant down round provision — — 389 — — 389

Deemed dividend on warrants — — ( 389 ) — — ( 389 )

Stock-based compensation — — 10,750 — — 10,750

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Balance Sheet Information

Restructuring Charges

Net Loss Per Share

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The Company generated negative cash flows from operations of approximately $ 4.9 million, $ 33.7 million and $ 0.8 million for the fiscal years ended March 31, 2023, 2022 and 2021, respectively, and generated net losses of approximately $ 37.9 million, $ 32.3 million, and $ 35.5 million for the fiscal years ended March 31, 2023, 2022 and 2021, respectively.

The Company has funded operations through the sale of common stock, term debt borrowings, revolving credit facility borrowings and proceeds from the Paycheck Protection Program Loan described in Note 5:

Management believes that it has

the ability to obtain additional debt or equity financing, if required, and has historically been able to do so.

Management also believes that current working capital, borrowings available under the revolving credit facility and future equity financing (including the April 22, 2022 sale of 30 million shares of our common stock for gross proceeds of $ 67.5 million) or debt financing will provide the Company with sufficient capital to fund operations for at least one year from the consolidated financial statement issuance date.

There is no assurance that we would be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company.

The Company has funded

operations through the sale of common stock, term debt borrowings and revolving credit facility borrowings described in Note 5:

Management believes that it has the ability to obtain additional debt or equity financing, if required, and has historically been able to do so.

Management also believes that current working capital, borrowings available under the revolving credit facility and future equity financing or debt financing (including additional Term Debt borrowings described in Note 13:

Subsequent Events) will provide the Company with sufficient capital to fund operations for at least one year from the consolidated financial statement issuance date.

There is no assurance that the Company would be able to obtain sufficient additional funds when needed or that such funds, if available, would be obtainable on terms satisfactory to the Company.

Principles of Consolidation

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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.

The preparation of financial statements in conformity with 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.

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.

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The Company has not experienced any losses with these financial institutions and does not believe such balances are exposed to significant credit risk.

Restricted Cash

Restricted cash is comprised of required minimum balances that serve as cash collateral in connection with various items including insurance requirements, value added taxes, ongoing tax audits and leases in certain countries.

Allowance for Doubtful Accounts

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These allowances are accounted for as lease incentives and reduce its ROU asset and lease cost over the lease term.

consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term and record variable lease payments as incurred.

Deferred Revenue

Deferred revenue primarily consists of amounts that have been invoiced but have not yet been recognized as revenue and performance obligations pertaining to subscription services.

The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet dates.

For short-term leases which have a lease term less than twelve months and do not include an option to purchase the underlying asset that is reasonably certain to be exercised, the Company recognizes rent expense in the consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term and record variable lease payments as incurred.

Revenue Recognition

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Support plans provide additional services and assurance outside the scope of the Company's primary product warranties.

Revenue from support plans are recognized ratably over the contractual term of the service contract.

Revenue from support plans is recognized ratably over the contractual term of the service contract.

The Company also sells software subscriptions that include term licenses which are recognized as revenue when the license is delivered to the customer and related customer support which is recognized ratably over the service period.

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The reports substantiate that the performance obligation has been satisfied therefore revenue is recognized based on the reports or when amounts can be reasonably estimated.

Deferred Revenue

Deferred revenue primarily consists of amounts that have been invoiced but have not yet been recognized as revenue and performance obligations pertaining to subscription services.

The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet dates.

Significant Judgements

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Software implementation costs are capitalized to either other current assets or other long-term assets on the Company's consolidated balance sheet and amortized over 10 years.

Software implementation costs capitalized

were $ 3.1 million and $ 3.1 million for fiscal 2022 and 2021.

Related amortization expense for software implementation costs was $ 0.1 million and $ 0 during fiscal 2022 and 2021, respectively.

Software implementation costs capitalized were $ 5.6 million, $ 3.1 million and $ 3.1 million for fiscal 2023, 2022 and 2021, respectively.

Related amortization expense for software implementation costs was $ 0.1 million, $ 0.1 million and $ 0 during fiscal 2023, 2022 and 2021, respectively.

Advertising Expense

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In periods subsequent to initial measurement, the Company recognizes changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate.

Over time, the liability is accreted to its present value and the capitalized cost is

depreciated over the estimated useful life of the asset.

Over time, the liability is accreted to its present value and the capitalized cost is depreciated over the estimated useful life of the asset.

The Company’s obligations relate primarily to certain legal obligations to remediate leased property on which certain assets are located.

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The Company does not believe it has significant credit risk beyond that provided for in the consolidated financial statements in the ordinary course of business.

During the fiscal years ended March 31, 2022, 2021 and 2020 no customers represented 10% or more of the Company’s total revenue.

During the fiscal year ended March 31, 2023, one customer represented more than 10% of the Company's total revenue.

In fiscal 2022 and 2021, no customers represented 10% or more of the Company’s total revenue.

One customer comprised approximately 22 % of accounts receivable as of March 31, 2023.

Two customers comprised approximately 22 % of accounts receivable as of March 31, 2021.

One customer comprised approximately 21 % of accounts receivable as of March 31, 2022.

If the Company is unable to obtain adequate quantities of the inventory needed to sell its products, the Company could face costs increases or delays or discontinuations in product shipments, which could have a material adverse effect on the Company’s results of operations.

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Segment Reporting

Business segments are defined as components of an enterprise about which discrete financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance.

Based on the way the Company manages its business, the Company has determined that it currently operates with one reportable segment.

The chief operating decision maker focuses on

consolidated results in assessing operating performance and allocating resources.

Furthermore, the Company offers similar products and services and uses similar processes to sell those products and services to similar classes of customers.

The Company’s chief operating decision-maker is its Chief Executive Officer who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis.

There are no segment managers who are held accountable by the chief operating decision-maker, or anyone else, for operations, operating results, and planning for levels or components below the consolidated unit level.

Accordingly, the Company has determined that it has a single reportable segment and operating segment structure.

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:

Accordingly, the Company has a one reportable segment and operates in three geographic regions:

(a) Americas;

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Participants may voluntarily contribute to the plan up to the maximum limits established by Internal Revenue Service regulations.

For the years ended March 31, 2022 and 2021, the Company incurred $ 1.7 million and $ 1.2 million in matching contributions, respectively.

No matching contributions were made in the fiscal year ended March 31, 2020.

For the years ended March 31, 2023, 2022 and 2021, the Company incurred $ 1.7 million, $ 1.7 million, and $ 1.2 million in matching contributions, respectively.

Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board issued ASU 2021-08— Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which amends ASC 805 to “require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.” Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date.

As a result of the amendments made by ASU 2021-08, it is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements.

The Company elected to early adopt this standard in the fourth quarter of fiscal 2022 using a retrospective approach that applies the new standard to all business acquisitions that occurred within the current fiscal year.

The impact of adoption was in increase of $ 2.7 million to deferred revenue and goodwill associated with the Pivot 3 acquisition described in Note 3:

Business Acquisitions .

There are no recently issued accounting pronouncements that are expected to have a material impact on our consolidated financial statements and accompanying disclosures.

In the following table, revenue is disaggregated by major product offering and geographies (in thousands):

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2023 % 2022 % 2021 %

Primary storage systems $ 36,575 $ 52,295 $ 54,211

Secondary storage systems 63,528 41,948 57,192

Device and media 24,849 24,410 31,228

Product revenue 172,332 124,952 118,653

Service and subscription 77,863 81,608 76,039

Total revenue 250,195 61 % 206,560 55 % 194,692 56 %

Primary storage systems 13,620 12,940 16,078

Secondary storage systems 37,643 33,688 40,008

Device and media 19,467 20,881 25,484

Product revenue 67,485 70,730 67,509

Service and subscription 44,675 44,187 41,261

Total revenue 112,160 27 % 114,917 31 % 108,770 31 %

Primary storage systems 5,848 4,409 6,863

Secondary storage systems 16,517 13,364 14,472

Device and media 5,714 5,873 5,632

Product revenue 26,720 28,079 23,646

Service and subscription 9,972 7,894 7,604

Total revenue 36,692 9 % 35,973 10 % 31,250 9 %

Primary storage systems 56,043 69,644 77,152

Secondary storage systems 117,688 89,000 111,672

Device and media 50,030 51,164 62,344

Product revenue 266,537 223,761 209,808

Service and subscription 132,510 133,689 124,904

3 unchanged sentences

2 Royalty revenue is not allocable to geographic regions.

Revenue by Solution

Year Ended March 31,

2023 % 2022 % 2021 %

Primary storage systems 57,578 14 % 60,697 16 % 70,286 20 %

Secondary storage systems 175,508 43 % 118,310 32 % 89,000 25 %

Device and media 42,371 10 % 50,030 13 % 51,164 15 %

Service 123,590 30 % 128,413 35 % 124,262 36 %

Royalty 13,705 3 % 15,377 4 % 14,864 4 %

Total revenue 1

412,752 100 % 372,827 100 % 349,576 100 %

1 Subscription revenue of $ 8.9 million, $ 5.3 million and $ 0.6 million allocated to Primary and Secondary storage systems for the fiscal years ended 2023, 2022 and 2021, respectively.

Contract Balances

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As of March 31, 2023 $ 95,584 $ 44,579 $ 140,163

The table below reflects our deferred revenue as of March 31, 2023 (in thousands):

Deferred revenue by period

(in thousands) Total 1 year or less 1 – 3 Years 3 year or greater

Service revenue $ 111,041 $ 75,211 $ 33,750 $ 2,080

Subscription revenue 14,769 7,293 6,648 828

Total $ 125,810 $ 82,504 $ 40,398 $ 2,908

The Company expects to recognize approximately 68.2 % of the remaining performance obligations within the next 12 months.

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BUSINESS ACQUISITIONS

On December 12, 2020, the Company entered into a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Square Box Systems Limited (“SBS”).

The purchase price of approximately $ 7.7 million was comprised of (a) $ 2.6 million cash (net of cash acquired);

(b) approximately 0.4 million shares of the Company’s common stock, with a fair value of $ 2.1 million;

and (d) $ 1.0 million cash payable at the second anniversary of the closing date.

Contingently issuable restricted stock units in the amount of $ 5.3 million, which are subject to continuous employment, are being recognized as stock-based compensation over the related two years vesting period.

The purchase price was allocated to tangible assets of approximately $ 0.8 million, intangible assets of approximately $ 5.6 million based on their fair values on the acquisition date, liabilities of approximately $ 1.0 million, and a net deferred tax liability of $ 1.1 million.

The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed was approximately $ 3.4 million, which has been recorded as goodwill.

The historical results of operations for SBS were not significant to the Company's consolidated results of operations for the periods presented.

In July 2021, the Company purchased specified assets related to the video surveillance business of PV3 (an ABC) LLC, a Delaware limited liability company as assignee for the benefit of Pivot3, Inc., a Delaware corporation (“Pivot 3”).

The transaction costs associated with the acquisition were not material and were expensed as incurred.

Goodwill generated from this acquisition is primarily attributable to the expected post-acquisition synergies from integrating Pivot3's video surveillance portfolio and assets with its platform to expand the video surveillance portfolio with hardware and software offerings that will be offered under the Quantum VS-Series portfolio.

Goodwill generated from this acquisition is primarily attributable to the expected post-acquisition synergies from integrating Pivot3's video surveillance portfolio and assets.

Goodwill obtained in an asset acquisition is deductible for tax purposes.

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The total purchase consideration for the acquisition was $ 2.8 million with $ 2.6 million paid at closing and an additional $ 0.2 million paid in three equal quarterly installments after closing.

The fair value of the assets acquired was allocated to developed technology with an estimate useful life of three years .

The fair value of the assets acquired was allocated to developed technology with an estimated useful life of three years .

BALANCE SHEET INFORMATION

1 unchanged sentence

Manufacturing inventories March 31,

Finished goods

Manufactured finished goods $ 6,958 $ 14,607

Distributor inventory 212 238

Total finished goods 14,607 12,690

Work in progress 1,304 2,546

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Intangible assets, net $ 13,411 $ ( 8,470 ) $ 4,941 $ 13,808 $ ( 4,224 ) $ 9,584

Intangible assets amortization expense was $ 3.7 million, $ 0.1 million for the years ended March 31, 2022 and 2021, respectively.

There was no amortization expense for the year ended March 31, 2020.

Intangible assets amortization expense was $ 4.6 million, $ 3.7 million, and $ 0.1 million for the years ended March 31, 2023, 2022, and 2021, respectively.

As of March 31, 2023, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 1.6 years.

11 unchanged sentences

Asset retirement obligation

Accrued income taxes

Accrued warranty

Accrued interest

Accrued restructuring — 580

Lease liability 1,364 1,727

Total other accrued liabilities $ 13,666 $ 16,562

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Year Ended March 31,

Senior Secured Term Loan $ — $ 92,426

Term Loan 74,667 98,723

Amended PNC Credit Facility 17,735 —

Paycheck Protection Program — 10,000

PNC Credit Facility 16,750 17,735

current portion ( 5,000 ) ( 4,375 )

2 unchanged sentences

Long-term debt, net $ 83,104 $ 107,184

(1) The unamortized debt issuance costs related to the Term Loan and the Senior Secured Term Loan are presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying consolidated balance sheets.

(1) The unamortized debt issuance costs related to the Term Loan are presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying consolidated balance sheets.

Unamortized debt issuance costs related to the PNC Credit Facility are presented within other assets on the accompanying consolidated balance sheets.

On December 27, 2018, the Company entered into a senior secured term loan (the "Senior Secured Term Loan”) 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 utilizing the proceeds of the secondary public offering discussed in Note 7:

Common Stock .

The Company recognized a loss on debt extinguishment of $ 14.8 million which included the write-off of debt issuance costs of $ 10.1 million, a prepayment penalty of $ 4.6 million and other costs of $ 0.1 million.

On December 27, 2018, the Company entered into a senior secured term loan (the "Senior Secured Term Loan”) and amended its Revolving Credit and Security Agreement with PNC Bank, National Association (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”).

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Principal and interest payments are payable on a quarterly basis.

The Company incurred $ 5.1 million in costs related to the Term Loan.

These debt issuance costs are reflected as a reduction of the carrying amount of the Term Loan and are being recognized as interest expense over the term of the Term Loan.

The Company recorded a loss on debt extinguishment of $ 15.0 million related to the repayment of the Senior Secured Term Loan which was comprised of $ 6.4 million in prepayment penalties, $ 0.1 million in legal fees, and the write-off of unamortized debt issuance costs of $ 8.4 million.

On March 15, 2022, the Company entered into an amendment to the Term Loan, which, among other things (a) waived compliance with the total leverage ratio financial covenant for the four fiscal quarter period ended March 31, 2022;

(b) waived compliance with the minimum liquidity financial covenant as of March 31, 2022;

and (c) permitted the Company to retain a portion of the cash proceeds of a public offering of the Company's common stock.

Loans under the Term Loan designated as Prime Rate 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 LIBOR Rate based upon an interest period of one month plus 1.0 %;

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;

(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 LIBOR Rate Loans bear interest at a rate per annum equal to the LIBOR Rate plus an applicable margin of 6.00 %.

The LIBOR Rate is subject to a floor of 0.75%.

The Company can designate a loan as a Prime Rate Loan or LIBOR Rate Loan in its discretion.

The Term Loan and the PNC Credit Agreement contain certain covenants, including requirements to prepay the Term Loan in an amount equal to (i) 100 % of the net cash proceeds from certain asset dispositions, extraordinary receipts, debt issuances and equity issuances, subject to certain reinvestment rights and other exceptions and (ii) 75 % of certain excess cash flow of the Company and its subsidiaries beginning in the fiscal year ended March 31, 2023, subject to certain exceptions, including reductions to the percentage of such excess cash flow that is required to prepay the loans to 50 % and 0 %, based on the Company’s applicable total net leverage ratio.

Amounts outstanding under the Term Loan may become due and payable upon the occurrence of specified events, which among other things include (subject to certain exceptions and cure periods):

(i) failure to pay principal, interest, or any fees when due;

(ii) breach of any representation or warranty, covenant, or other agreement in the Term Loan and other related loan documents;

(iii) the occurrence of a bankruptcy or insolvency proceeding with respect to the Company or certain of its subsidiaries;

(iv) any “Event of Default” with respect to other indebtedness involving an aggregate amount of $ 3,000,000 or more;

(v) any lien created by the Term Loan or any related security documents ceasing to be valid and perfected;

(vi) the Term Loan Credit Agreement or any related security documents or guarantees ceasing to be legal, valid, and binding upon the parties thereto;

or (vii) a change of control shall occur.

Additionally, the Term Loan contains financial covenants relating to minimum liquidity and total net leverage.

Revolving Credit Facility

On September 30, 2021, the Company amended the PNC Credit Facility.

The amendment, among other things (a) extended the maturity date to August 5, 2026;

(b) reduced the principal amount of the revolving commitments to a maximum amount equal to the lesser of:

(i) $ 30.0 million or (ii) the amount of the borrowing base, as defined in the PNC Credit agreement;

(c) replaced existing debt covenants with net leverage ratio, minimum liquidity and fixed charges coverage ratio covenants, and (d) removed the requirement to maintain a $ 5.0 million restricted cash reserve with PNC.

On March 15, 2022, the Company entered into an amendment to the PNC Credit Facility, which, among other things (a) waived compliance with the total leverage ratio financial covenant for the four fiscal quarter period ended March 31, 2022;

(b) waived compliance with the fixed charge coverage ratio;

and (c) waived compliance with the minimum liquidity financial covenant as of March 31, 2022.

Loans designated as PNC LIBOR Rate Loans bear interest at a rate per annum equal to the LIBOR Rate plus 2.25 % until December 31, 2021 and thereafter between 1.75 % and 2.25 % based on the percentage of Average Undrawn Availability (as defined in the PNC Credit Agreement) for the most recently completed fiscal quarter (the "PNC LIBOR Loan Interest Rate").

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.

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 Bank 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 LIBOR Rate plus 1.0 %, plus 1.25 % until December 31, 2021 and thereafter between 0.75 % and 1.25 % based on the percentage of Average Undrawn Availability (as defined in the PNC Credit Agreement) for the most recently completed fiscal quarter (the "PNC Domestic Loan Interest Rate").

If on the last day of any calendar quarter, the average “Usage Amount” during such calendar quarter does not equal the “Maximum Revolving Advance Amount” (as such terms are defined in the PNC Credit Facility), then the Company will pay an undrawn commitment fee of between 0.25 % and 0.375 % (based on the percentage usage of the Maximum Revolving Advance Amount during that calendar quarter) on the amount by which the Maximum Revolving Advance Amount exceeds such average Usage Amount.

With respect to any PNC LIBOR Rate Loan, the Company has agreed to pay affiliates of certain Term Loan lenders a fee equal to a percentage per annum equal to the sum of (x) 6.00 %, minus (y) the PNC LIBOR Loan Interest Rate, plus (z) if the LIBOR Rate applicable to such interest payment is less than 0.75 %, (i) 0.75 % minus (ii) such LIBOR Rate.

With respect to any Domestic Rate Loan or Swing Loan, the Company has agreed to pay an affiliate of Blue Torch a fee equal to a percentage per annum equal to the sum of (x) 5.00 %, minus (y) the 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.

If on the last day of any calendar quarter, the average “Usage Amount” during such calendar quarter does not equal the “Maximum Revolving Advance Amount” (as such terms are defined in the PNC Credit Facility), then the Company has agreed to pay affiliates of certain Term Loan lenders a fee at a rate per annum equal to 1.00 % minus a fee percentage between 0.25 % to 0.375 % on the amount by which the Maximum Revolving Advance Amount exceeds such average Usage Amount.

As of March 31, 2022, the interest rate on the Term Loan was 6.75 % and the interest rate on the PNC Credit Facility for Domestic Rate Loans and Swing Loans was 4.75 % and for LIBOR Loans was 2.61 %.

As of March 31, 2022, the

PNC Credit Facility had a borrowing base of $ 24.1 million, of which $ 5.0 million was available at that date.

The Company was required to maintain a $ 5.0 million restricted cash reserve as part of the PNC Credit Facility, which was presented as long-term restricted cash within the accompanying consolidated balance sheet as of March 31, 2021.

The September 30, 2021 amendment to the PNC Credit Facility removed the restricted cash reserve requirement.

Paycheck Protection Program Loan

On April 13, 2020, the Company entered into a Paycheck Protection Program (“PPP”) Term Loan (“PPP Loan”) effective April 11, 2020 with PNC in an aggregate principal amount of $ 10.0 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

In July 2021, the Company received notice from PNC that the PPP Loan and related accrued interest was approved for forgiveness in full by the U.S.

Small Business Administration (the “SBA”).

The Company recorded the amount forgiven as gain on debt extinguishment of $ 10.0 million in fiscal year ended March 31, 2022.

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 quarter 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 March 31, 2023, the interest rate on the Term Loan was 10.8 % and the interest rate on the PNC Credit Facility for Domestic Rate Loans and Swing Loans was 9.75 % and the PNC SOFR Rate Loan was 7.5 %.

As of March 31, 2023, the PNC Credit Facility had an available borrowing base of $ 36.8 million, of which $ 20.0 million was available to borrow at that date.

Subsequent to year end these terms were renegotiated, please See Note 13:

Subsequent Event for more information.

Supplemental balance sheet information related to leases is as follows (in thousands):

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Operating cash outflows related to operating leases totaled $ 3.5 million and $ 3.7 million for the fiscal years ended March 31, 2023 and March 31, 2022, respectively.

RESTRUCTURING CHARGES

During fiscal years 2023, 2022 and 2021, the Company approved certain restructuring plans to improve operational efficiencies and rationalize its cost structure.

The following tables show the activity and the estimated timing of future payouts for accrued restructuring (in thousands):

Severance and

benefits Facilities Total

Balance as of March 31, 2020 $ — $ — $ —

Restructuring costs 3,701 — 3,701

Cash payments ( 3,121 ) — ( 3,121 )

Balance as of March 31, 2021 580 — 580

Adjustments of prior estimates — — —

Cash payments 850 — 850

Other non-cash ( 1,430 ) — ( 1,430 )

Balance as of March 31, 2022 — — —

Restructuring costs 1,605 — 1,605

Cash payments ( 1,605 ) — ( 1,605 )

Balance as of March 31, 2023 $ — $ — $ —

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 $ 66.2 million.

A portion of the proceeds from the Rights Offering was used to prepay $ 20.0 million of the Company’s Term Loan.

Secondary Public Offering

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Amended and Restated 2012 Long-Term Incentive Plan

The Company has a stockholder-approved 2012 Long-Term Incentive Plan (the “Plan”) that was amended and restated in fiscal year 2022 which added an additional 5.9 million shares.

The Plan has 9.0 million shares authorized for issuance of new shares, with 4.8 million performance shares and restricted shares outstanding, and 4.2 million shares available for future issuance under the Plan as of March 31, 2022.

Stock options under the Plan are granted at prices determined by the Board of Directors, but at not less than the fair market value of the Company's common stock on the date of grant.

The majority of performance share units, restricted stock units and stock options granted to employees vest over three years .

The Company has a stockholder-approved 2012 Long-Term Incentive Plan (the “Plan”) that has 7.0 million shares authorized for issuance of new shares, with 5.6 million performance shares and restricted shares outstanding, and 1.4 million shares available for future issuance under the Plan as of March 31, 2023.

The majority of performance share units, restricted stock units and stock options granted to employees typically vest between one and three years .

Stock options, performance shares and restricted stock grants to non-employee directors typically vest over one year .

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The Company's 2021 Inducement Plan became effective on February 1, 2021 and provides for issuance of inducement equity awards to individuals who were not previously an employee or non-employee director of the Company as an inducement material to such individual's entering into employment with the Company.

The term of each stock option and restricted stock unit under the plan will not exceed seven years , and each award generally vests between two and four years .

There were no shares available for future issuance as of March 31, 2022.

The term of each stock option and restricted stock unit under the plan will not exceed seven years , and each award generally vests between two and three years .

On December 30, 2022 the Leadership and Compensation Committee of the Board of Directors 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.

There were 0.6 million shares available for future issuance as of March 31, 2023.

The Company accounts for all forfeitures of stock-based awards when they occur.

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Shares available for issuance at beginning of period 688 1,077

Additional shares authorized during the period — —

Shares issued during the period ( 600 ) ( 389 )

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Treasury securities with maturities similar to the expected term of the options for each option group.

Dividend Yield —The Company has never declared or paid any cash dividends and do not currently plan to pay cash dividends in the foreseeable future.

Dividend Yield —The Company has never declared or paid any cash dividends and does not currently plan to pay cash dividends in the foreseeable future.

Consequently, an expected dividend yield of zero was used.

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0.06 % - 0.23 %

0.05 % - 0.11 %

Dividend yield — % — % — %

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$ 4.60 - $ 6.40

$ 4.99 - $ 8.05

Performance Stock Units

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The Company granted 0.9 million, 0.0 million and 0.5 million of performance share units with financial performance conditions (“Performance PSUs”) in the fiscal years ended March 31, 2023, 2022 and 2021, respectively.

Performance PSUs become eligible for vesting based on the Company achieving certain financial performance targets through the end of the fiscal year when the performance PSUs were granted, and are contingent upon continued service of the holder of the award during the vesting period.

Performance PSUs become eligible for vesting based on the Company achieving certain financial performance targets, and are contingent upon continued service of the holder of the award during the vesting period.

Performance PSUs are valued at the market closing share price on the date of grant and compensation expense for Performance PSUs is recognized when it is probable that the performance conditions will be achieved.

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General and administrative 4,427 4,358 4,314

Total share-based compensation $ 13,829 $ 9,624 $ 6,748

Total stock-based compensation $ 10,750 $ 13,829 $ 9,624

Year Ended March 31,

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Total stock-based compensation $ 10,750 $ 13,829 $ 9,624

As of March 31, 2022 and 2021, the Company had outstanding warrants to purchase 7,110,616 shares of the Company’s common stock exercisable until December 27, 2028 at an exercise price of $ 1.33 per share and outstanding warrants to purchase 3,450,000 shares of the Company's common stock exercisable until June 16, 2030 at an exercise price of $ 3.00 per share (collectively, the "Warrants").

The exercise price and the number of shares underlying the 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.

As of March 31, 2023 and 2022, the Company had outstanding warrants to purchase 7,110,616 shares of the Company’s common stock exercisable until December 27, 2028 at an exercise price of $ 1.33 per share (the "$ 1.33 Warrants").

As of March 31, 2022 and the date of the Rights Offering, the Company had outstanding warrants to purchase 3,400,000 shares of the Company's common stock exercisable until June 16, 2030 at an exercise price of $ 3.00 per share (the “$ 3.00 Warrants").

The exercise price and the number of shares underlying the $ 1.33 Warrants and the $ 3.00 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”).

The Rights Offering triggered the Down Round Feature on April 22, 2022, the for the $ 3.00 Warrants due to the price per share received in the Rights Offering being lower than the exercise price.

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 and diluted earnings per share calculations.

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 March 31, 2023 and 2022, the Company had outstanding warrants to purchase 50,000 shares of the Company's common stock exercisable until June 16, 2030 at an exercise price of $ 3.00 per share.

Upon exercise, the aggregate exercise price may be paid, at each warrant holder’s election, in cash or on a net issuance basis, based upon the fair market value of the Company’s common stock at the time of exercise.

The Warrants grant the holders certain registration rights for the shares of common stock issuable upon the exercise of the applicable warrants, including (a) the ability of a holder to request that the Company file a Form S-1 registration statement with respect to at least 40 % of the registrable securities held by such holder as of the issuance date of the applicable warrants;

The $ 1.33 Warrants and $ 3.00 Warrants grant the holders certain registration rights for the shares of common stock issuable upon the exercise of the applicable warrants, including (a) the ability of a holder to request that the Company file a Form S-1 registration statement with respect to at least 40 % of the registrable securities held by such holder as of the issuance date of the applicable warrants;

(b) the ability of a holder to request that the Company file a Form S-3 registration statement with respect to outstanding registrable securities if at any time the Company is eligible to use a Form S-3 registration statement;

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The Company had outstanding market based restricted stock units as of March 31, 2023 that were eligible to vest into shares of common stock subject to the achievement of certain stock price targets in addition to a time-based vesting period.

These contingently issuable shares are excluded from the computation of diluted earnings per share

if, based on current period results, the shares would not be issuable if the end of the reporting period were the end of the contingency period.

These contingently issuable shares are excluded from the computation of diluted earnings per share if, based on current period results, the shares would not be issuable if the end of the reporting period were the end of the contingency period.

There were 0.4 million shares of contingently issuable market-based restricted stock units that were excluded from the table above as the market conditions were not satisfied as of March 31, 2023.

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2023 2022 2021

Expense at the federal statutory rate $ ( 6,493 ) $ ( 7,396 ) $ ( 925 )

Expiration of attributes 18,345 9,862 11,679

Valuation allowance ( 4,899 ) 5,444 ( 2,639 )

Permanent items 1,941 1,295 914

Expense (benefit) at the federal statutory rate $ ( 7,560 ) $ ( 6,493 ) $ ( 7,396 )

Equity compensation 1,945 195 345

Debt forgiveness ( 2,100 ) — —

Permanent items 1,498 1,941 1,295

Foreign taxes 586 1,761 ( 129 )

State income taxes ( 373 ) ( 402 ) ( 969 )

Research and development credits ( 2,094 ) ( 1,829 ) ( 1,566 )

Valuation allowance 5,096 ( 4,899 ) 5,444

Uncertain tax positions ( 3,791 ) ( 6,349 ) ( 6,695 )

Tax reform — — —

Credit monetization — ( 2,100 ) —

Expiration of attributes 5,734 18,345 9,862

Research and development credits ( 1,582 ) ( 2,094 ) ( 1,829 )

Other 387 1,436 311

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Deferred revenue 28,389 29,485

Capitalized research and development 23,949 16,289

Tax credits 15,894 16,085

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Other accruals and reserves not currently deductible for tax purposes 4,494 4,450

Capitalized research and development 16,289 7,811

Lease obligations 2,384 2,514

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Net deferred tax assets (liabilities) $ 729 $ ( 17 )

The valuation allowance decreased by $ 4.9 million during the year ended March 31, 2022, increased by $ 5.4 million during the year ended March 31, 2021, and decreased by $ 2.5 million during the year ended March 31, 2020.

The valuation allowance increased by $ 5.3 million during the year ended March 31, 2023, increased by $ 4.9 million during the year ended March 31, 2022, and decreased by $ 5.4 million during the year ended March 31, 2021, respectively.

A reconciliation of the gross unrecognized tax benefits is as follows (in thousands):

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The Company's practice is to recognize interest and penalties related to income tax matters in the income tax provision in the consolidated statements of operations.

As of March 31, 2022, $ 93.5 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the consolidated balance sheets and $ 7.3 million (including interest and penalties) were included in other long-term liabilities in the consolidated balance sheets.

As of March 31, 2023, $ 90.3 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the consolidated balance sheets and $ 7.2 million (including interest and penalties) were included in other long-term liabilities in the consolidated balances sheets.

The Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates.

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During the next 12 months, it is reasonably possible that approximately $ 3.5 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 $ 2.9 million will be offset by the establishment of a related valuation allowance.

The net tax benefit recognized in the income statement is estimated to be $ 0.6 million.

As of March 31, 2023, the Company had federal net operating loss and tax credit carryforwards of approximately $ 246.5 million and $ 48.2 million, respectively.

The net operating loss and tax credit carryforwards expire in varying amounts beginning in fiscal year 2022 if not previously utilized, and $ 12.8 million are indefinite-lived net operating loss carryforwards.

The net operating loss and tax credit carryforwards expire in varying amounts in fiscal year 2024 if not previously utilized, and $ 12.8 million are indefinite-lived net operating loss carryforwards.

These carryforwards include $ 11.1 million of acquired net operating losses and $ 4.4 million of acquired credits, the utilization of which is subject to various limitations due to prior changes in ownership.

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As of March 31, 2023, the Company had issued non-cancelable commitments for $ 28.7 million to purchase inventory from its contract manufacturers and suppliers.

At the end of fiscal year 2022, the Company had various non-cancelable operating for office facilities.

At the end of fiscal 2023, the Company had various non-cancelable operating for office facilities.

Refer to Note 6:

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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.

The lawsuit was thereafter 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.

On July 31, 2017, the Court in the Northern District of California stayed proceedings in this litigation pending the outcome of Inter Partes Review proceedings before the Patent Trial and Appeal Board relating to the asserted 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.

On appeal, the Federal Circuit vacated the decision in the Delaware Action and remanded for the Court to “elaborate on its ruling.” In opinions dated May 4, 2021 and August 23, 2021, the Court in the Delaware Action reaffirmed its earlier ruling and granted defendants’ motions to dismiss under Section 101.

Realtime Data has appealed those decisions to the Federal Circuit.

The Federal Circuit argument occurred on February 10, 2023 and a decision is expected sometime in the latter half of the year.

The case pending against Quantum in the Northern District of California remains stayed pending the final outcome of the appeal in the Delaware Action.

Quantum believes the probability that this lawsuit will have a material adverse effect on its business, operating results or financial condition is remote.

Starboard Matter

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.

Gacek resigned from the board effective May 1, 2017, and as CEO effective November 7, 2017;

Auvil resigned from the board effective November 8, 2017.

The complaint’s accounting allegations largely repeat allegations made in now-concluded shareholder class actions, shareholder derivative actions and an SEC investigation, the settlement of which Quantum previously reported in the Company’s Form 10-Q filed with the SEC on January 29, 2020 and Form 10-K filed with the SEC on August 6, 2019 (among other SEC filings).

On September 14, 2020, defendants filed a motion to dismiss the California action on grounds of forum non conveniens and the mandatory Delaware forum selection clauses set forth in the contracts between Starboard and Quantum.

On November 19, 2020, Starboard filed a first amended complaint in which Quantum was not named as a defendant, in effect dismissing Quantum from the California action.

On January 8, 2021, Messrs.

Gacek and Auvil moved to dismiss the amended complaint in California on grounds of forum non conveniens and the mandatory Delaware forum selection clauses set forth in the contracts between Starboard and Quantum.

On March 11, 2021, the California Superior Court stayed the California action.

On 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 the Board of Directors and then, in July 2014, entered into an agreement with Quantum whereby Starboard would not seek control of the Board of Directors 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.

Also as previously reported, 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.

2 unchanged sentences

Gacek and Auvil.

The complaint prays for unspecified damages in an amount to be determined at trial, costs and attorneys’ fees, and any other relief deemed just or appropriate by the court.

On May 10, 2021, Quantum filed a motion to dismiss this Delaware action, as did Messrs.

Gacek and Auvil.

Briefing on the motions ended July 26, 2021.

The Court held oral argument on the motions on November 1, 2021.

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;

the bench ruling was confirmed in a written order filed February 24, 2022.

On March 28, 2022, Quantum filed an answer and affirmative defenses to the complaint, as did Messrs.

Gacek and Auvil.

Discovery is underway.

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.

At this time, Quantum is unable to estimate the range of possible outcomes with respect to this matter.

On March 4, 2022, Starboard filed a request for dismissal without prejudice of the California action because the matter is proceeding in Delaware.

On March 10, 2022, the California Superior Court entered a minute order dismissing the action without prejudice.

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.

Indemnifications

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These agreements may limit the time within which an indemnification claim can be made and the amount of the claim.

In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contains similar indemnification obligations to its agents.

In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to its agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of the Company’s indemnification claims, and the unique facts and circumstances involved in each particular agreement.

9 unchanged sentences

Carrying Value Fair Value Carrying Value Fair Value

Senior Secured Term Loan $ — $ — $ 92,426 $ 97,047

Term Loan 74,667 66,684 98,723 98,723

1 unchanged sentence

SUBSEQUENT EVENTS

Rights Offering

On April 22, 2022, the Company completed a rights offering of 30 million shares of its common stock for gross proceeds of $ 67.5 million.

The Company repaid $ 20.0 million of its outstanding Term Loan with the offering proceeds.

Debt Restructuring

On April 25, 2022, the Company entered into amendments to the Term Loan and the PNC Credit Facility.

(b) replaced the

benchmark rate for LIBOR Rate Loans with a rate based on the Secured Overnight Financing Rate ("SOFR").

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 the SOFR.

Debt Amendments

On June 1, 2023, the Company entered into amendments to the Term Loan and the PNC Credit Facility.

The amendments, among other things, (a) amended the total net leverage ratio financial covenant commencing with the fiscal quarter ended June 30, 2023;

(b) amended the minimum liquidity financial covenant to decrease the minimum liquidity to $ 15 million;

and (c) amended the “EBITDA” definition to increase the add-back cap on non-recurring items including restructuring charges during the fiscal years ended March 31, 2024 and 2025.

The Term Loan amendment (the “June 2023 Term Loan Amendment”) also provided an advance of $ 15 million in additional Term Loan borrowings.

In connection with the amendments, the Company issued to the lender a warrant to purchase an aggregate of 1.25 million shares of the Company’s common stock, par value $ 0.01 per share, at an exercise price of $ 1.00 per share.

The exercise price and the number of shares underlying the warrant are subject to adjustment in the event of specified events, including dilutive issuances at a price lower than the exercise price of the warrant, a subdivision or combination of the Common Stock, a reclassification of the Common Stock or specified dividend payments.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data