Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 32 )
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Consolidated Balance Sheets
42
Consolidated Statements of Operations and Comprehensive Loss
43
Consolidated Statements of Cash Flows
44
Consolidated Statements of Stockholders’ Deficit
45
Index to Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Quantum Corporation
San Jose, California
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, 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 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. 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. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in 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. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
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assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition — Refer to Note 1 to the Consolidated Financial Statements
Critical Audit Matter Description
The Company recognizes revenue from sales of products as control is transferred to customers, which generally occurs at the point of shipment or upon delivery, unless customer acceptance is uncertain. 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.
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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How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the timing of revenue recognition for product sales included the following, among others:
• 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 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.
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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 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
Our principal audit procedures related to the Company’s excess and obsolescence write-down included the following procedures, among others:
• We tested the effectiveness of internal controls over inventory valuation.
• 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 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
San Ramon, California
June 6, 2023
We have served as the Company's auditor since 2019.
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QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31,
2023 2022
Assets
Current assets:
Cash and cash equivalents $ 25,963 $ 5,210
Restricted cash 212 283
Accounts receivable, net of allowance for doubtful accounts of $ 201 and $ 422 , respectively
72,464 69,354
Manufacturing inventories 19,441 33,546
Service parts inventories 25,304 24,254
Prepaid expenses 4,158 7,853
Other current assets 5,513 4,697
Total current assets 153,055 145,197
Property and equipment, net 16,555 12,853
Intangible assets, net 4,941 9,584
Goodwill 12,969 12,969
Right-of-use assets, net 10,291 11,107
Other long-term assets 15,846 9,925
Total assets $ 213,657 $ 201,635
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable $ 35,716 $ 34,220
Deferred revenue, current portion 82,504 86,517
Long-term debt, current portion 5,000 4,375
Accrued compensation 15,710 16,141
Other accrued liabilities 13,666 16,562
Total current liabilities 152,596 157,815
Deferred revenue, net of current portion 43,306 41,580
Revolving credit facility 16,750 17,735
Long-term debt, net of current portion 66,354 89,448
Operating lease liabilities 10,169 9,891
Other long-term liabilities 11,370 11,849
Total liabilities 300,545 328,318
Commitments and Contingencies (Note 11)
Stockholders’ deficit
Preferred stock:
Preferred stock, 20,000 shares authorized; no shares issued as of March 31, 2023 and 2022
— —
Common stock:
Common stock, $ 0.01 par value; 225,000 shares authorized; 93,574 and 60,433 shares issued and outstanding at March 31, 2023 and 2022, respectively
936 605
Additional paid-in capital 722,603 645,038
Accumulated deficit ( 808,846 ) ( 770,903 )
Accumulated other comprehensive loss ( 1,581 ) ( 1,423 )
Total stockholders' deficit ( 86,888 ) ( 126,683 )
Total liabilities and stockholders' deficit $ 213,657 $ 201,635
The accompanying notes are an integral part of these consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
Year Ended March 31,
2023 2022 2021
Revenue
Product $ 266,537 $ 223,761 $ 209,808
Service and subscription 132,510 133,689 124,904
Royalty 13,705 15,377 14,864
Total revenue 412,752 372,827 349,576
Cost of revenue
Product 220,031 169,780 150,257
Service and subscription 58,782 56,012 48,566
Total cost of revenue 278,813 225,792 198,823
Gross profit 133,939 147,035 150,753
Operating expenses
Research and development 44,555 51,812 41,703
Sales and marketing 66,034 62,957 54,945
General and administrative 47,752 45,256 42,001
Restructuring charges 1,605 850 3,701
Total operating expenses 159,946 160,875 142,350
Income (loss) from operations
( 26,007 ) ( 13,840 ) 8,403
Other income (expense), net 1,956 ( 251 ) ( 1,312 )
Interest expense ( 10,560 ) ( 11,888 ) ( 27,522 )
Loss on debt extinguishment, net ( 1,392 ) ( 4,960 ) ( 14,789 )
Net loss before income taxes
( 36,003 ) ( 30,939 ) ( 35,220 )
Income tax provision 1,940 1,341 239
Net loss $ ( 37,943 ) $ ( 32,280 ) $ ( 35,459 )
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
Net loss $ ( 37,943 ) $ ( 32,280 ) $ ( 35,459 )
Foreign currency translation adjustments, net ( 158 ) ( 567 ) 666
Total comprehensive loss $ ( 38,101 ) $ ( 32,847 ) $ ( 34,793 )
The accompanying notes are an integral part of these consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
2023 2022 2021
Operating activities
Net loss
$ ( 37,943 ) $ ( 32,280 ) $ ( 35,459 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 10,118 9,418 5,697
Amortization of debt issuance costs 1,624 2,414 6,301
Long-term debt related costs 992 8,471 167
Provision for manufacturing and service inventories 18,052 5,740 6,334
Gain on PPP loan extinguishment — ( 10,000 ) —
Stock-based compensation 10,750 13,829 9,624
Non-cash income tax benefit — — ( 577 )
Non-cash loss on debt extinguishment — — 10,087
Other non-cash ( 2,067 ) ( 832 ) 704
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable ( 2,966 ) 3,651 ( 1,625 )
Manufacturing inventories ( 1,839 ) ( 12,069 ) 924
Service parts inventories ( 3,503 ) ( 4,400 ) ( 5,879 )
Accounts payable 1,158 ( 1,939 ) ( 1,994 )
Prepaid expenses 3,695 ( 3,959 ) ( 594 )
Deferred revenue ( 2,286 ) ( 2,514 ) 418
Accrued restructuring charges — ( 580 ) 580
Accrued compensation ( 431 ) ( 3,073 ) 4,257
Other assets ( 1,270 ) ( 2,602 ) 2,809
Other liabilities 1,022 ( 3,003 ) ( 2,541 )
Net cash used in operating activities
( 4,894 ) ( 33,728 ) ( 767 )
Investing activities
Purchases of property and equipment ( 12,581 ) ( 6,316 ) ( 6,931 )
Business acquisitions ( 3,020 ) ( 7,808 ) ( 2,655 )
Net cash used in investing activities
( 15,601 ) ( 14,124 ) ( 9,586 )
Financing activities
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 )
Borrowings of credit facility 497,280 309,000 309,920
Repayments of credit facility ( 498,665 ) ( 291,265 ) ( 313,065 )
Borrowings of paycheck protection program — — 10,000
Proceeds from secondary offering, net — — 96,756
Payment of taxes due upon vesting of restricted stock — — ( 236 )
Proceeds from issuance of common stock 67,146 1,762 1,335
Net cash provided by financing activities 41,165 20,157 31,328
Effect of exchange rate changes on cash and cash equivalents 12 51 ( 108 )
Net change in cash, cash equivalents, and restricted cash 20,682 ( 27,644 ) 20,867
Cash, cash equivalents, and restricted cash at beginning of period 5,493 33,137 12,270
Cash, cash equivalents, and restricted cash at end of period $ 26,175 $ 5,493 $ 33,137
Supplemental disclosure of cash flow information
Cash paid for interest $ 8,701 $ 9,140 $ 24,324
Cash paid for income taxes, net of refunds $ 1,418 $ 944 $ ( 2,283 )
Non-cash transactions
Purchases of property and equipment included in accounts payable $ 1,049 $ 147 $ 258
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:
Cash and cash equivalents $ 25,963 $ 5,210 $ 27,430
Restricted cash, current 212 283 707
Restricted cash, long-term — — 5,000
Total cash, cash equivalents and restricted cash at the end of period $ 26,175 $ 5,493 $ 33,137
The accompanying notes are an integral part of these consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
Common Stock Additional
Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit
Shares Amount
Balance, March 31, 2020 39,905 $ 399 $ 505,762 $ ( 703,164 ) $ ( 1,522 ) $ ( 198,525 )
Net loss — — — ( 35,459 ) — ( 35,459 )
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 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
Balance, March 31, 2021 56,915 $ 570 $ 626,664 $ ( 738,623 ) $ ( 856 ) $ ( 112,245 )
Net loss — — — ( 32,280 ) — ( 32,280 )
Foreign currency translation adjustments, net of income taxes — — — — ( 567 ) ( 567 )
Shares issued under employee stock purchase plan 389 4 1,758 — — 1,762
Shares issued under employee incentive plans, net 2,308 23 ( 23 ) — — —
Shares issued in connection with business acquisition 821 8 2,810 — — 2,818
Stock-based compensation — — 13,829 — — 13,829
Balance, March 31, 2022 60,433 $ 605 $ 645,038 $ ( 770,903 ) $ ( 1,423 ) $ ( 126,683 )
Net loss — — — ( 37,943 ) — ( 37,943 )
Foreign currency translation adjustments, net of income taxes — — — — ( 158 ) ( 158 )
Shares issued under employee stock purchase plan 600 6 891 — — 897
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
Balance, March 31, 2023 93,574 $ 936 $ 722,603 $ ( 808,846 ) $ ( 1,581 ) $ ( 86,888 )
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The accompanying notes are an integral part of these consolidated financial statements.
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INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Note 1: Description of Business and Summary of Significant Accounting Policies
47
Note 2: Revenue Recognition
56
Note 3: Business Acquisitions
57
Note 4: Balance Sheet Information
59
Note 5: Debt
61
Note 6: Leases
62
Note 7: Restructuring Charges
63
Note 8: Common Stock
63
Note 9: Net Loss Per Share
67
Note 10: Income Taxes
68
Note 11: Commitments and Contingencies
70
Note 12: Fair Value of Financial Instruments
72
Note 13: Subsequent Events
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND 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 and the cloud 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 consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated. The Company reviews subsidiaries and affiliates, as well as other entities, to determine if they should be considered variable interest entities (“VIE”), and whether it should change the consolidation determinations based on changes in their characteristics. The Company considers an entity a VIE if its equity investors own an interest therein that lacks the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or if the entity is structured with non-substantive voting interests. To determine whether or not the entity is consolidated with the Company’s results, the Company also evaluates which interests are variable interests in the VIE and which party is the primary beneficiary of the VIE.
Liquidity
The accompanying consolidated financial statements of the Company have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. 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
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operations through the sale of common stock, term debt borrowings and revolving credit facility borrowings described in Note 5: Debt . 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
The consolidated financial statements include the accounts of Quantum and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
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. 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.
Cash and Cash Equivalents
The Company has cash deposits and cash equivalents deposited in or managed by major financial institutions. Cash equivalents include all highly liquid investment instruments with an original maturity of three months or less and consist primarily of money market accounts. At times the related amounts are in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses with these financial institutions and does not believe such balances are exposed to significant credit risk.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses based on historical experience and expected collectability of outstanding accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition, and for the majority of its customers require no collateral. For customers that do not meet the Company’s credit standards, the Company may require a form of collateral, such as cash deposits or letters of credit, prior to the completion of a transaction. These credit evaluations require significant judgment and are based on multiple sources of information. The Company analyzes such factors as its historical bad debt experience, industry and geographic concentrations of credit risk, current economic trends and changes in customer payment terms. The Company will write-off customer balances in full to the reserve when it has determined that the balance is not recoverable. Changes in the allowance for doubtful accounts are recorded in general and administrative expenses.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Inputs are unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
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The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company's financial instruments consist of Level 3 liabilities.
Manufacturing Inventories
Manufacturing inventory is recorded at the lower of cost or net realizable value, with cost being determined on a first-in, first-out (“FIFO”) basis. Costs include material, direct labor, and an allocation of overhead in the case of work in process. Adjustments to reduce the cost of manufacturing inventory to its net realizable value, if required, are made for estimated excess, obsolete or impaired balances. Factors influencing these adjustments include declines in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from the Company’s estimates.
Service Parts Inventories
Service parts inventories are recorded at the lower of cost or net realizable value, with cost being determined on a FIFO basis. The Company carries service parts because it generally provides product warranty for one to three years and earns revenue by providing enhanced and extended warranty and repair services during and beyond this warranty period. Service parts inventories consist of both component parts, which are primarily used to repair defective units, and finished units, which are provided for customer use permanently or on a temporary basis while the defective unit is being repaired. The Company records adjustments to reduce the carrying value of service parts inventory to its net realizable value and disposes of parts with no use and a net realizable value of zero. Factors influencing these adjustments include product life cycles, end of service life plans and volume of enhanced or extended warranty service contracts. Estimates of net realizable value involve significant estimates and judgments about the future, and revisions would be required if these factors differ from the Company’s estimates.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation and amortization, computed on a straight-line basis over the estimated useful lives of the assets as follows:
Machinery and equipment 3 to 5 years
Computer equipment 3 to 5 years
Other software 3 years
Furniture and fixtures 5 years
Other office equipment 5 years
Leasehold improvements Shorter of useful life or life of lease
When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations and comprehensive income (loss) in the period realized.
The Company evaluates the recoverability of the carrying amount of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. A potential impairment charge is evaluated when the undiscounted expected cash flows derived from an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of impairment testing, the undiscounted cash flows used to assess impairments and the fair value of the asset group.
Business Combinations
The Company allocates the purchase price to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the estimated fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill. The results of operations of an acquired business is included in its consolidated financial statements from the date of acquisition. Acquisition-related expenses are expensed as incurred.
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Goodwill
Goodwill represents the excess of the purchase price consideration over the estimated fair value of the tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill is evaluated for impairment annually in the third quarter of the Company's fiscal year as a single reporting unit, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company may elect to qualitatively assess whether it is more likely than not that the fair value of its reporting unit is less than its carrying value. If the Company opts not to qualitatively assess, a quantitative goodwill impairment test is performed. The quantitative test compares its reporting unit's carrying amount, including goodwill, to its fair value calculated based on its enterprise value. If the carrying amount exceeds its fair value, an impairment loss is recognized for the excess. The Company did not recognize any impairment of goodwill in any of the periods presented in the consolidated financial statements.
Purchased Intangible Assets
Purchased intangible assets with finite lives are stated at cost, net of accumulated amortization. The Company amortizes its intangible assets on a straight-line basis over an estimated useful life of two to four years .
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment and finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company measures the recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, the Company records an impairment charge for the amount by which the carrying amount of the asset exceeds its fair market value.
Operating Leases
The Company determines if an arrangement contains a lease at inception. Lease liabilities are recognized at the present value of the future lease payments at commencement date. The interest rate implicit in the Company's operating leases is not readily determinable, and therefore an incremental borrowing rate is estimated to determine the present value of future payments. The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments. The operating lease right-of-use ("ROU") asset is determined based on the lease liability initially established and reduced for any prepaid lease payments and any lease incentives. The Company accounts for the lease and non-lease components of operating lease contract consideration as a single lease component.
Certain of the operating lease agreements contain rent concession, rent escalation, and option to renew provisions. Rent concession and rent escalation provisions are considered in determining the lease cost. Lease cost is recognized on a straight-line basis over the lease term commencing on the date the Company has the right to use the leased property. The Company generally uses the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that an extension or termination option will be exercised.
In addition, certain operating lease agreements contain tenant improvement allowances from the Company's landlords. These allowances are accounted for as lease incentives and reduce its ROU asset and lease cost over the lease term.
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
The Company generates revenue from three main sources: (1) product, (2) professional services, and (3) royalties. Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis. The Company's performance obligations are satisfied at a point in time or over time as stand ready obligations. The majority of revenue is recognized at a point in time when products are accepted, installed or delivered.
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Product Revenue
The Company's product revenue is comprised of multiple storage solution hardware and software offerings targeted towards consumer and enterprise customers. Revenue from product sales is recognized at the point in time when the customer takes control of the product. If there are significant post-delivery obligations, the related revenue is deferred until such obligations are fulfilled. Revenue from contracts with customer acceptance criteria are recognized upon end user acceptance.
Service and Subscription Revenue
Service and subscription revenue consists of four components: (a) post-contract customer support agreements,
(b) software subscriptions, (c) installation, and (d) consulting & training.
Customers have the option to choose between different levels of hardware and software support. The Company's support plans include various stand-ready obligations such as technical assistance hot-lines, replacement parts maintenance, and remote monitoring that are delivered whenever called upon by its customers. Support plans provide additional services and assurance outside the scope of the Company's primary product warranties. 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.
The Company offers installation services on all its products. Customers can opt to either have Quantum or a Quantum-approved third-party service provider install its products. Installation services are typically completed within a short period of time and revenue from these services are recognized at the point when installation is complete.
A majority of the Company's consulting and training revenue does not take significant time to complete therefore these obligations are satisfied upon completion of such services at a point in time.
Royalty Revenue
The Company licenses certain intellectual property to third party manufacturers which gives the manufacturers rights to intellectual property including the right to either manufacture or include the intellectual property in their products for resale. Licensees pay the Company a per-unit royalty for sales of their products that incorporate its intellectual property. On a periodic and timely basis, the licensees provide the Company with reports containing units sold to end users subject to the royalties. 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
The Company generally enters into contracts with customers to provide storage solutions to meet their individual needs. Most of the Company’s contracts contain multiple goods and services designed to meet each customers’ unique storage needs. Contracts with multiple goods and services have multiple distinct performance obligations as the promise to transfer hardware, installation services, and support services are capable of being distinct and provide economic benefit to customers on their own.
Stand-alone selling price
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For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative standalone selling price (“SSP”) of the good or service underlying each performance obligation. The SSP represents the amount for which the Company would sell the good or service to a customer on a standalone basis (i.e., not sold as a bundle with any other products or services). Where SSP may not be directly observable (e.g., the performance obligation is not sold separately), the Company maximized the use of observable inputs by using information including reviewing discounting practices, performance obligations with similar customers and product groupings. The Company evaluated all methods included in ASC 606 to determine SSP and concluded that invoice price is the best representation of what the Company expects to receive from the delivery of each performance obligation.
Variable consideration
Product revenue includes multiple types of variable consideration, such as rebates, returns, or stock rotations. All contracts with variable consideration require payment upon satisfaction of the performance obligation typically with net 45-day payment terms. The Company does not include significant financing components in its contracts. The Company constrains estimates of variable consideration to amounts that are not expected to result in a significant revenue reversal in the future, primarily based on the most likely level of consideration to be returned to the customer under the specific terms of the underlying programs.
The expected value method is used to estimate the consideration expected to be returned to the customer. The Company uses historical data and current trends to drive the estimates. The Company records a reduction to revenue to account for these programs. The Company initially measures this asset at the carrying amount of the inventory, less any expected costs to recover the goods including potential decreases in the value of the returned goods.
Cost of Service and Subscription Revenue
The Company classifies expenses as service cost of revenue by estimating the portion of its total cost of revenue that relates to providing field support to its customers under contract. These estimates are based upon a variety of factors, including the nature of the support activity and the level of infrastructure required to support the activities from which it earns service and subscription revenue. In the event its service business changes, its estimates of cost of service and subscription revenue may be impacted.
Research and Development Costs
Expenditures relating to the development of new products and processes are expensed as incurred. These costs include expenditures for employee compensation, materials used in the development effort, other internal costs, as well as expenditures for third party professional services. The Company has determined that technological feasibility for its software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established have not been material. The Company expenses software-related research and development costs as incurred.
Internal-use Software Costs
The Company capitalizes costs incurred to implement software solely for its internal use, including (i) hosted applications used to deliver the Company's support services, and (ii) certain implementation costs incurred in a hosting arrangement that is a service contract when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable the project will be completed and used to perform the intended function.
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 $ 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.
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Advertising Expense
Advertising expense is recorded as incurred and was $ 3.2 million, $ 3.5 million, and $ 1.5 million in fiscal 2023, 2022 and 2021, respectively.
Shipping and Handling Fees
Shipping and handling fees are included in cost of revenue and were $ 12.1 million, $ 11.5 million, and $ 9.4 million in fiscal 2023, 2022 and 2021, respectively.
Restructuring Reserves
Restructuring reserves include charges related to the realignment and restructuring of the Company’s business operations. These charges represent judgments and estimates of the Company’s costs of severance, closure and consolidation of facilities and settlement of contractual obligations under its operating leases, including sublease rental rates, asset write-offs and other related costs. The Company reassesses the reserve requirements to complete each individual plan under the restructuring programs at the end of each reporting period. If these estimates change in the future or actual results differ from the Company’s estimates, additional charges may be required.
Foreign Currency Translation
The Company's international operations generally use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are reported as a component of other comprehensive loss and recorded in accumulated other comprehensive loss in the accompanying consolidated balance sheets.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes, in which deferred tax asset and liabilities are recognized based on differences between the financial reporting carrying values of assets and liabilities and the tax basis of those assets and liabilities, measured at the enacted tax rates expected to apply to taxable income in the years in which those tax assets or liabilities are expected to be realized or settled.
A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in the Company’s judgment about the realizability of the related deferred tax asset, is included in the tax provision.
The Company assesses whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized in the consolidated financial statements from such a position is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. The Company recognizes penalties and tax-related interest expense as a component of income tax expense in the consolidated statements of operations.
Asset Retirement Obligations
The Company records an asset retirement obligation for the fair value of legal obligations associated with the retirement of tangible long-lived assets and a corresponding increase in the carrying amount of the related asset in the period in which the obligation is incurred. 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. The Company’s obligations relate primarily to certain legal obligations to remediate leased property on which certain assets are located.
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Warranty Expense
The Company warranties its products against certain defects and the terms range from one to three years . The Company provides for the estimated costs of fulfilling its obligations under hardware warranties at the time the related revenue is recognized. The Company estimates the provision based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The Company regularly reassess its estimates to determine the adequacy of the recorded warranty liability and adjusts the provision, as necessary.
Debt Issuance Costs
Debt issuance costs for revolving credit agreements are capitalized and amortized over the term of the underlying agreements on a straight-line basis. Amortization of these debt issuance costs is included in interest expense while the unamortized debt issuance cost balance is included in other current assets or other assets. Debt issuance costs for the Company’s term loans are recorded as a reduction to the carrying amount and are amortized over their terms using the effective interest method. Amortization of these debt issuance costs is included in interest expense.
Stock-Based Compensation
The Company classifies stock-based awards granted in exchange for services as either equity awards or liability awards. The classification of an award as either an equity award or a liability award is generally based upon cash settlement options. Equity awards are measured based on the fair value of the award at the grant date. Liability awards are re-measured to fair value each reporting period. Each reporting period, the Company recognizes the change in fair value of awards issued to non-employees as expense. The Company recognizes stock-based compensation on a straight-line basis over the award’s requisite service period, which is generally the vesting period of the award, less actual forfeitures. No compensation expense is recognized for awards for which participants do not render the requisite services. For equity and liability awards earned based on performance or upon occurrence of a contingent event, when and if the awards will be earned is estimated. If an award is not considered probable of being earned, no amount of stock-based compensation is recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the extent the estimate of awards considered probable of being earned changes, the amount of stock-based compensation recognized will also change.
Concentration of Credit Risk
The Company sells products to customers in a wide variety of industries on a worldwide basis. In countries or industries where the Company is exposed to material credit risk, the Company may require collateral, including cash deposits and letters of credit, prior to the completion of a transaction. 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 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. 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. In many cases, the Company’s chosen vendor may be the sole source of supply for the products or parts they manufacture, or services they provide, for the Company. Some of the products the Company purchases from these sources are proprietary or complex in nature, and therefore cannot be readily or easily replaced by alternative sources.
Segment Reporting
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 a one reportable segment and operates in three geographic regions: (a) Americas; (b) Europe, Middle East, and Africa (“EMEA”); and (c) Asia Pacific (“APAC”).
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The following table summarizes property and equipment, net by geographic region (in thousands):
For the year ended March 31,
2023 2022
United States $ 16,289 $ 12,506
International 266 347
Total $ 16,555 $ 12,853
Defined Contribution Plan
The Company sponsors a qualified 401(k) retirement plan for its U.S. employees. The plan covers substantially all employees who have attained the age of 18. Participants may voluntarily contribute to the plan up to the maximum limits established by Internal Revenue Service regulations. 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
There are no recently issued accounting pronouncements that are expected to have a material impact on our consolidated financial statements and accompanying disclosures.
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NOTE 2: REVENUE
In the following table, revenue is disaggregated by major product offering and geographies (in thousands):
Year Ended March 31,
2023 % 2022 % 2021 %
Americas 1
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 %
EMEA
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 %
APAC
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 %
Consolidated
Product revenue 266,537 223,761 209,808
Service and subscription 132,510 133,689 124,904
Royalty 2
13,705 3 % 15,377 4 % 14,864 4 %
Total revenue 412,752 100 % 372,827 100 % 349,576 100 %
1 Revenue for Americas geographic region outside of the United States is not significant.
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
The following table presents the Company’s contract liabilities and certain information related to this balance as of March 31, 2023 (in thousands):
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March 31, 2023
Deferred revenue $ 125,810
Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period $ 82,609
Remaining Performance Obligations
Remaining performance obligations consisted of the following (in thousands):
Current Non-Current Total
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. The majority of the Company’s noncurrent remaining performance obligations is expected to be recognized in the next 13 to 60 months.
NOTE 3: BUSINESS ACQUISITIONS
Pivot3
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. Goodwill obtained in an asset acquisition is deductible for tax purposes.
The total purchase consideration for the acquisition of Pivot3 was $ 7.8 million, which consisted of the following (in thousands):
Cash $ 5,000
Fair value of stock consideration 2,818
Total $ 7,818
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of the acquisition (in thousands):
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Amount Estimated Useful Life
Goodwill $ 9,503
Identified intangible assets:
Developed technology 1,700 2 years
Customer lists 3,700 4 years
Property, plant and equipment 4,300 3 years
Net liabilities assumed ( 11,385 )
Total $ 7,818
Pivot3 has also agreed to license to the Company certain intellectual property rights related to the business. The historical results of operations for Pivot3 were not significant to the Company's consolidated results of operations for the periods presented.
EnCloudEn
In October 2021, the Company acquired all intellectual property rights and certain other assets of EnCloudEn, an early stage hyperconverged infrastructure software company. The transaction costs associated with the acquisition were not material and were expensed as incurred. 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 estimated useful life of three years .
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NOTE 4: BALANCE SHEET INFORMATION
Certain significant amounts included in the Company's consolidated balance sheets consist of the following (in thousands):
Manufacturing inventories March 31,
2023 2022
Manufactured finished goods $ 6,958 $ 14,607
Work in progress 1,304 2,546
Raw materials 11,179 16,393
Total manufacturing inventories $ 19,441 $ 33,546
Service inventories March 31,
2023 2022
Finished goods $ 19,834 $ 19,234
Component parts 5,470 5,020
Total service inventories $ 25,304 $ 24,254
Property and equipment, net March 31,
2023 2022
Machinery and equipment, and software $ 46,170 $ 46,831
Leasehold improvements 14,405 6,029
Furniture and fixtures 848 838
61,423 53,698
Less: accumulated depreciation ( 44,868 ) ( 40,845 )
Total property, plant and equipment, net $ 16,555 $ 12,853
Depreciation and amortization expense for property and equipment amounted to $ 10.1 million, $ 9.4 million, and $ 5.7 million for the years ended March 31, 2023, 2022, and 2021, respectively.
Intangibles, net March 31, 2023 March 31, 2022
Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Developed technology $ 9,013 $ ( 6,269 ) $ 2,744 $ 9,208 $ ( 3,121 ) $ 6,087
Customer lists 4,398 ( 2,201 ) 2,197 4,600 ( 1,103 ) 3,497
Intangible assets, net $ 13,411 $ ( 8,470 ) $ 4,941 $ 13,808 $ ( 4,224 ) $ 9,584
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. The Company recorded amortization of developed technology in cost of product revenue, and customer lists in sales and marketing expenses in the consolidated statements of operations.
As of March 31, 2023, the future expected amortization expense for intangible assets is as follows (in thousands):
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Fiscal year ending Estimated future amortization expense
2024 $ 3,488
2025 1,453
Thereafter —
Total $ 4,941
Goodwill Amount
Balance at March 31, 2022 $ 12,969
Goodwill acquired —
Balance at March 31, 2023
$ 12,969
Other accrued liabilities March 31,
2023 2022
Accrued expenses
$ 1,988 $ 4,984
Asset retirement obligation
2,513 4,590
Accrued income taxes
1,509 943
Accrued warranty
2,094 1,899
Accrued interest
494 278
Lease liability 1,364 1,727
Other
3,704 2,141
Total other accrued liabilities $ 13,666 $ 16,562
The following table details the change in the accrued warranty balance (in thousands):
Year Ended March 31,
2023 2022 2021
Balance as of April 1 $ 1,899 $ 2,383 2,668
Current period accruals 3,477 3,717 4,699
Adjustments to prior estimates ( 18 ) ( 156 ) ( 472 )
Charges incurred ( 3,264 ) ( 4,045 ) ( 4,512 )
Balance as of March 31 $ 2,094 $ 1,899 $ 2,383
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NOTE 5: DEBT
The following table summarizes the Company's borrowing as of the dates presented (in thousands):
Year Ended March 31,
2023 2022
Term Loan 74,667 98,723
PNC Credit Facility 16,750 17,735
Less: current portion ( 5,000 ) ( 4,375 )
Less unamortized debt issuance costs (1)
( 3,313 ) ( 4,899 )
Long-term debt, net $ 83,104 $ 107,184
(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.
Term Loan
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”). 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.
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.
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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 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.
NOTE 6: LEASES
Supplemental balance sheet information related to leases is as follows (in thousands):
Operating leases March 31, 2023 March 31, 2022
Operating lease right-of-use assets $ 10,291 $ 11,107
Other current liabilities $ 1,364 $ 1,727
Operating lease liability 10,169 9,891
Total operating lease liabilities $ 11,533 $ 11,618
The components of lease expense were as follows (in thousands):
Year Ended March 31,
Lease expense 2023 2022
Operating lease expense $ 4,276 $ 3,727
Variable lease expense 753 643
Short-term lease expense — 15
Total lease expense $ 5,029 $ 4,385
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Maturity of Lease Liabilities Operating Leases
2023 $ 2,700
2024 2,208
2025 1,781
2026 1,606
2027 1,436
Thereafter 13,262
Total lease payments $ 22,993
Less: Imputed interest ( 11,460 )
Present value of lease liabilities $ 11,533
Lease Term and Discount Rate March 31,
2023 2022
Weighted average remaining operating lease term (years) 10.85 10.88
Weighted average discount rate for operating leases 12.66 % 12.9 %
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.
NOTE 7: 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 $ — $ — $ —
NOTE 8: COMMON STOCK
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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
On February 8, 2021, the Company closed a secondary public offering of 15,109,489 shares of its common stock for gross proceeds of $ 103.5 million. The Company received net proceeds of $ 96.8 million after deducting underwriters' discounts and other offering related expenses.
Amended and Restated 2012 Long-Term Incentive Plan
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 . The term of each stock option under the Plan will not exceed seven years . Stock options, performance share units and restricted stock units granted under the Plan are subject to forfeiture if employment terminates.
2021 Inducement Plan
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 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.
Employee Stock Purchase Plan
The Company's has an Employee Stock Purchase Plan (the "ESPP") which enables eligible employees to purchase shares of its common stock at a discount. Purchases will be accomplished through participation in discrete offering periods. On each purchase date, eligible employees will purchase the Company's common stock at a price per share equal to 85 % of the lesser of (i) the fair market value of the Company's common stock on the first trading day of the offering period, and (ii) the fair market value of the Company's common stock on the purchase date.
The Company has reserved shares of common stock for future issuance under its ESPP as follows (in thousands):
March 31,
2023 2022
Shares available for issuance at beginning of period 688 1,077
Shares issued during the period ( 600 ) ( 389 )
Total shares available for future issuance at end of period 88 688
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The Company uses the Black-Scholes-Merton option-pricing model (“Black-Scholes”) to determine the fair value for stock options, shares forecasted to be issued pursuant to its ESPP, and warrants. This requires the use of assumptions about expected life, stock price, volatility, risk-free interest rates and expected dividends.
Expected Life —The expected term was based on historical experience with similar awards, giving consideration to the contractual terms, exercise patterns and post-vesting forfeitures.
Volatility —The expected stock price volatility for the Company's common stock was based on the historical volatility of its common stock over the most recent period corresponding with the estimated expected life of the award.
Risk-Free Rate —The risk-free interest rate is based on the yields of U.S. 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 does not currently plan to pay cash dividends in the foreseeable future. Consequently, an expected dividend yield of zero was used.
The weighted-average grant date fair value and the assumptions used in calculating fair values of shares forecasted to be issued pursuant to the Company's ESPP are as follows:
Year Ended March 31,
2023 2022 2021
Expected life 0.5 years 0.5 years 0.5 years
Volatility 96 %
51 % - 57 %
55 % - 133 %
Risk-free interest rate 3.10 %
0.06 % - 0.23 %
0.05 % - 0.11 %
Dividend yield — % — % — %
Fair value of common stock $ 1.85
$ 4.60 - $ 6.40
$ 4.99 - $ 8.05
Performance Stock Units
The Company granted 0.4 million, 0.6 million, and 0.9 million of performance share units with market conditions (“Market PSUs”) in fiscal 2023, 2022, and 2021, respectively. Market PSUs vest one to three years from the issuance date and become eligible for vesting based on the Company achieving certain stock price targets and are contingent upon continued service of the holder of the award during the vesting period. The estimated fair value of these Market PSUs is determined at the issuance date using a Monte Carlo simulation model.
Assumptions used in the Monte Carlo model to calculate fair values of market PSU’s during each fiscal period are as follows:
Weighted-Average 2023 2022 2021
Discount period (years) 3.00 2.98 2.54
Risk-free interest rate 2.84 % 0.93 % 0.31 %
Stock price volatility 80.00 % 75.00 % 82.00 %
Grant date fair value $ 1.17 $ 5.40 $ 3.77
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, 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. Compensation expense recognized related to Performance PSUs is reversed if the Company determines that it is no longer probable that the performance conditions will be achieved.
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The following table summarizes activity for Market PSUs and Performance PSUs for the year ended March 31, 2023 (shares in thousands) :
Shares Weighted-Average
Grant Date Fair Value per Share
Outstanding as of March 31, 2022 1,579 $ 4.58
Granted 1,357 $ 1.33
Vested ( 555 ) $ 5.07
Forfeited or cancelled ( 768 ) $ 2.41
Outstanding as of March 31, 2023 1,613 $ 2.72
As of March 31, 2023 , there was $ 1.6 million and $ 0.0 million of unrecognized stock-based compensation related to Market PSUs and Performance PSUs, respectively, which is expected to be recognized over a weighted-average period of one year . The total grant date fair value of shares vested during fiscal years ended March 31, 2023 , 2022, and 2021 was $ 1.9 million, $ 3.9 million, and $ 2.9 million, respectively.
Restricted Stock Units
The Company granted 2.9 million, 2.8 million, and 2.4 million of service-based restricted stock units (“RSUs”) in the fiscal years ended March 31, 2023, 2022 and 2021, respectively, which generally vest ratably over a three-year service period. RSUs are valued at the market closing share price on the date of grant and compensation expense for RSUs is recognized ratably over the applicable vesting period.
The following table summarizes activity for restricted stock units for the year ended March 31, 2023 (shares in thousands) :
Shares Weighted-Average
Grant Date Fair Value per Share
Outstanding as of March 31, 2022 3,856 $ 5.46
Granted 2,920 $ 1.43
Vested ( 1,625 ) $ 5.32
Forfeited or cancelled ( 657 ) $ 4.13
Outstanding as of March 31, 2023 4,494 $ 3.09
As of March 31, 2023 , there was $ 9.2 million of total unrecognized stock-based compensation related to RSUs, which is expected to be recognized over a weighted-average period of two years . The total grant date fair value of RSUs vested during fiscal years ended March 31, 2023, 2022, and 2021 was $ 5.2 million, $ 5.0 million, and $ 2.1 million, respectively.
Compensation Expense
The following table details the Company's stock-based compensation expense, net of forfeitures (in thousands):
Year Ended March 31,
2023 2022 2021
Cost of revenue $ 929 $ 1,112 $ 672
Research and development 2,997 5,843 2,881
Sales and marketing 2,397 2,516 1,757
General and administrative 4,427 4,358 4,314
Total stock-based compensation $ 10,750 $ 13,829 $ 9,624
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Year Ended March 31,
2023 2022 2021
Restricted stock units $ 9,299 $ 9,331 $ 4,041
Performance share units 878 3,811 4,904
Employee stock purchase plan 573 687 679
Total stock-based compensation $ 10,750 $ 13,829 $ 9,624
Warrants
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 $ 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; and (c) certain piggyback registration rights related to potential future equity offerings of the Company, subject to certain limitations.
NOTE 9: NET LOSS PER SHARE
Equity Instruments Outstanding
The Company has stock options, performance share units, restricted stock units and options to purchase shares under its ESPP, granted under various stock incentive plans that, upon exercise and vesting, would increase shares outstanding. The Company has also issued warrants to purchase shares of the Company’s stock.
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The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share attributable to common stock for the periods presented because their effect would have been anti-dilutive (in thousands):
Year Ended March 31,
2023 2022 2021
Stock awards 543 1,996 1,818
Warrants 3,538 6,886 6,573
ESPP 8 11 223
Total 4,089 8,893 8,614
The dilutive impact related to common shares from stock incentive plans and outstanding warrants is determined by applying the treasury stock method to the assumed vesting of outstanding performance share units and restricted stock units and the exercise of outstanding options and warrants. The dilutive impact related to common shares 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.
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. 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.
NOTE 10: INCOME TAXES
Pre-tax loss reflected in the consolidated statements of operations for the years ended March 31, 2023, 2022 and 2021 is as follows (in thousands):
Year Ended March 31,
2023 2022 2021
U.S. $ ( 38,004 ) $ ( 31,489 ) $ ( 36,648 )
Foreign 2,001 550 1,428
Total $ ( 36,003 ) $ ( 30,939 ) $ ( 35,220 )
Income tax provision consists of the following (in thousands):
Year Ended March 31,
2023 2022 2021
Current tax expense
Federal $ — $ — $ ( 76 )
State 70 477 339
Foreign 2,045 1,381 747
Total current tax expense 2,115 1,858 1,010
Deferred tax expense
Federal 23 9 ( 577 )
State 108 22 9
Foreign ( 306 ) ( 548 ) ( 203 )
Total deferred tax expense (benefit) ( 175 ) ( 517 ) ( 771 )
Income tax provision $ 1,940 $ 1,341 $ 239
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The income tax provision differs from the amount computed by applying the federal statutory rate of 21 % to loss before income taxes as follows (in thousands):
For the year ended March 31,
2023 2022 2021
Expense (benefit) at the federal statutory rate $ ( 7,560 ) $ ( 6,493 ) $ ( 7,396 )
Equity compensation 1,945 195 345
Permanent items 1,498 1,941 1,295
Foreign taxes 586 1,761 ( 129 )
State income taxes ( 373 ) ( 402 ) ( 969 )
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
Income tax provision $ 1,940 $ 1,341 $ 239
Significant components of deferred tax assets and liabilities are as follows (in thousands):
As of March 31,
2023 2022
Deferred tax assets
Loss carryforwards $ 56,675 $ 59,636
Deferred revenue 28,389 29,485
Capitalized research and development 23,949 16,289
Tax credits 15,894 16,085
Disallowed interest 13,162 12,296
Other accruals and reserves not currently deductible for tax purposes 4,494 4,450
Lease obligations 2,384 2,514
Inventory 2,715 1,701
Accrued warranty expense 495 447
Acquired intangibles 961 853
Gross deferred tax assets 149,118 143,756
Valuation allowance ( 143,704 ) ( 138,365 )
Total deferred tax assets, net of valuation allowance $ 5,414 $ 5,391
Deferred tax liabilities
Depreciation $ ( 2,009 ) $ ( 1,921 )
Lease assets ( 2,128 ) ( 2,439 )
Other ( 548 ) ( 1,048 )
Total deferred tax liabilities $ ( 4,685 ) $ ( 5,408 )
Net deferred tax assets (liabilities) $ 729 $ ( 17 )
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.
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A reconciliation of the gross unrecognized tax benefits is as follows (in thousands):
For the year ended March 31,
2023 2022 2021
Beginning Balance $ 99,603 $ 101,119 $ 107,282
Increase in balances related to tax positions in current period 2,778 2,785 2,560
Increase in balances related to tax positions in prior period — 4,881 —
Increase in balances related to acquisitions — — 511
Decrease in balances related to tax positions in prior period ( 817 ) ( 1,020 ) ( 522 )
Decrease in balances due to lapse in statute of limitations ( 5,221 ) ( 8,162 ) ( 8,712 )
Ending balance $ 96,343 $ 99,603 $ 101,119
During fiscal 2023, excluding interest and penalties, there was a $ 3.3 million change in the Company's unrecognized tax benefits. Including interest and penalties, the total unrecognized tax benefit at March 31, 2023 was $ 97.0 million, of which $ 78.3 million, if recognized, would favorably affect the effective tax rate. At March 31, 2023, accrued interest and penalties totaled $ 1.2 million. 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, 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. The Company's U.S. tax returns have been audited for years through 2002 by the Internal Revenue Service. In other major jurisdictions, the Company is generally open to examination for the most recent three to five fiscal years. 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 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.
Certain changes in stock ownership could result in a limitation on the amount of both acquired and self generated net operating loss and tax credit carryovers that can be utilized each year. If the Company has previously undergone, or should it experience in the future, such a change in stock ownership, it could severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges.
Due to its history of net losses and the difficulty in predicting future results, Quantum believes that it cannot rely on projections of future taxable income to realize the deferred tax assets. Accordingly, it has established a full valuation allowance against its U.S. and certain foreign net deferred tax assets. Significant management judgement is required in determining the Company's deferred tax assets and liabilities and valuation allowances for purposes of assessing its ability to realize any future benefit from its net deferred tax assets. The Company intends to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. The Company's income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, its valuation allowance.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Commitments to Purchase Inventory
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The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon its 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 March 31, 2023, the Company had issued non-cancelable commitments for $ 28.7 million to purchase inventory from its contract manufacturers and suppliers.
Leases
At the end of fiscal 2023, the Company had various non-cancelable operating for office facilities. Refer to Note 6: Leases for additional information regarding lease commitments.
Legal Proceedings
Realtime Data Matter
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 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. 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.” 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
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. 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.
Indemnifications
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The Company has certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. Other than certain product warranty liabilities recorded as of March 31, 2023 and 2022, the Company did not record a liability associated with these guarantees, as the Company has little, or no history of costs associated with such indemnification requirements. Contingent liabilities associated with product liability may be mitigated by insurance coverage that the Company maintains.
In the normal course of business to facilitate transactions of the Company’s services and products, the Company indemnifies certain parties with respect to certain matters. The Company has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. 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 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. Historically, payments made by the Company under these agreements have not had a material impact on its operating results, financial position, or cash flows.
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has certain non-financial assets that are measured at fair value on a non-recurring basis when there is an indicator of impairment, and they are recorded at fair value only when an impairment is recognized. These assets include property and equipment and amortizable intangible assets. The Company did not record impairments to any non-financial assets in the fiscal years ended March 31, 2023, 2022 and 2021. The Company does not have any non-financial liabilities measured and recorded at fair value on a non-recurring basis. The carrying amounts reported in the accompanying consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts.
The table below represents the carrying value and total estimated fair value of long-term debt as of March 31, 2023 and March 31, 2022, respectively. The fair value has been classified as Level 2 within the fair value hierarchy.
March 31,
2023 2022
Carrying Value Fair Value Carrying Value Fair Value
Term Loan 74,667 66,684 98,723 98,723
PNC Credit Facility 16,750 15,918 17,735 17,735
NOTE 13: SUBSEQUENT EVENTS
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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.