QUANTUM CORP /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis compares the change in the consolidated financial statements for quarters ending December 31, 2024 and December 31, 2023 and should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Quarterly Report. In particular, the risk factors contained in Part II, Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources. For comparisons of quarters ended December 31, 2023 and December 31, 2022 , see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2023 , filed with the SEC on September 6, 2024, and incorporated herein by reference. Our fiscal year ends on March 31 of each calendar year. "Fiscal 2024" refers to the fiscal year ended March 31, 2024. The following discussion contains forward-looking statements, such as statements regarding anticipated impacts on our business, our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. OVERVIEW We are a technology company whose mission is to deliver innovative solutions to organizations across the world. We design, manufacture and sell technology and services that help customers capture, create and share digital content, and protect it for decades. We emphasize innovative technology in the design and manufacture of our products to help our customers unlock the value in their video and unstructured data in new ways to solve their most pressing business challenges. We generate revenue by designing, manufacturing, and selling technology and services. Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; data center costs in support of our cloud-based services; and interest associated with our long-term debt and income taxes. Macroeconomic Conditions We continue to actively monitor, evaluate and respond to the current uncertain macro environment, including the impact of higher interest rates, inflation, tariffs, lingering supply chain challenges, and a stronger U.S. dollar. During the quarter we continued to experience longer sales cycle for opportunities with our enterprise as well as commercial customers. The macro environment remains unpredictable and our past results may not be indicative of future performance. 21 Table of Contents RESULTS OF OPERATIONS Three Months Ended December 31, Nine Months Ended December 31, (in thousands) 2024 2023 2024 2023 Total revenue $ 72,551 $ 71,926 $ 214,364 $ 240,099 Total cost of revenue (1) 40,796 42,745 127,205 142,543 Gross profit 31,755 29,181 87,159 97,556 Operating expenses Sales and marketing (1) 12,448 14,244 39,321 45,800 General and administrative (1) 14,142 11,893 49,186 34,833 Research and development (1) 7,683 8,763 24,255 28,828 Restructuring charges (1) 1,342 497 2,916 3,164 Total operating expenses 35,615 35,397 115,678 112,625 Loss from operations (3,860) (6,216) (28,519) (15,069) Other income (expense), net 967 (1,419) (408) (2,049) Interest expense (6,840) (3,937) (16,761) (10,992) Change in fair value of warrant liabilities (61,630) 2,213 (56,414) 7,341 Loss on debt extinguishment — — (3,003) — Net loss before income taxes (71,363) (9,359) (105,105) (20,769) Income tax provision 70 510 675 1,573 Net loss $ (71,433) $ (9,869) $ (105,780) $ (22,342) (1) Includes stock-based compensation as follows: Three Months Ended December 31, Nine Months Ended December 31, (in thousands) 2024 2023 2024 2023 Cost of revenue $ 95 $ 195 $ 361 $ 576 Research and development 105 325 454 989 Sales and marketing 46 (123) 219 516 General and administrative 490 509 1,342 1,657 Total $ 736 $ 906 $ 2,376 $ 3,738 Comparison of the Three Months Ended December 31, 2024 and 2023 Revenue Three Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Product revenue $ 38,610 53 % $ 37,113 51 % $ 1,497 4 % Service and subscription 31,615 44 % 32,771 46 % (1,156) (4) % Royalty 2,326 3 % 2,042 3 % 284 14 % Total revenue $ 72,551 100 % $ 71,926 100 % $ 625 1 % Product Revenue In the three months ended December 31, 2024, product revenue increased $1.5 million, or 4%, as compared to the same period in fiscal 2024. The primary driver of the increase was in Primary storage systems with higher sales of our StorNext based solutions. 22 Table of Contents Service and Subscription Revenue Service and subscription revenue decreased $1.2 million, or 4%, in the three months ended December 31, 2024 compared to the same period in fiscal 2024. This decrease was due to certain long-lived products reaching their end-of-service-life. Royalty Revenue We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium. Royalty revenue saw a small increase of $0.3 million, or 14%, in the three months ended December 31, 2024 compared to the same period in fiscal 2024 due to product mix. Gross Profit and Margin Three Months Ended December 31, (dollars in thousands) 2024 Gross margin % 2023 Gross margin % $ Change Basis point change Product $ 7,688 19.9 % $ 7,069 19.0 % $ 619 90 Service and subscription 21,741 68.8 % 20,070 61.2 % 1,671 760 Royalty 2,326 100.0 % 2,042 100.0 % 284 — Gross profit $ 31,755 43.8 % $ 29,181 40.6 % $ 2,574 320 Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business. Product Gross Margin Product gross margin increased by $0.6 million, or by 90 basis points, for the three months ended December 31, 2024, as compared with the same period in fiscal 2024. This increase was primarily due to a more favorable mix of revenues, weighted towards our higher margin product lines, as well as improvements in our operational efficiency and logistics costs. Service and Subscription Gross Margin Service and subscription gross margins increased 760 basis points for the three months ended December 31, 2024, as compared with the same period in fiscal 2024. This increase was primarily driven by improvements in our operations efficiency. Royalty Gross Margin Royalties do not have significant related cost of sales. Operating Expenses Three Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Sales and marketing $ 12,448 17 % $ 14,244 20 % $ (1,796) (13) % General and administrative 14,142 19 % 11,893 17 % 2,249 19 % Research and development 7,683 11 % 8,763 12 % (1,080) (12) % Restructuring charges 1,342 2 % 497 1 % 845 170 % Total operating expenses $ 35,615 49 % $ 35,397 49 % $ 218 1 % In the three months ended December 31, 2024, sales and marketing expenses decreased $1.8 million, or 13%, as compared with the same period in fiscal 2024. This decrease was primarily driven by improved operational efficiency and increased leverage of our channel. In the three months ended December 31, 2024, general and administrative expenses increased $2.2 million, or 19%, as compared with the same period in fiscal 2024 This increase was primarily driven by higher expense in compliance focused outside services related to ongoing projects. 23 Table of Contents In the three months ended December 31, 2024, research and development expenses decreased $1.1 million, or 12%, as compared with the same period in fiscal 2024 This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design. In the three months ended December 31, 2024, restructuring expenses increased $0.8 million, or 170% as compared with the same period in fiscal 2024 The increase was the result of cost reduction initiatives in the current year. Other Income (Expense) Three Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Other income (expense) $ 967 1 % $ (1,419) (2) % $ 2,386 168 % The change in other income (expense), net during the three months ended December 31, 2024 compared with the same period in fiscal 2024 was related primarily to fluctuations in foreign currency exchange rates during the three months ended December 31, 2024. Interest Expense Three Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Interest expense $ (6,840) (9) % $ (3,937) (5) % $ (2,903) 74 % In the three months ended December 31, 2024, interest expense increased $2.9 million, or 74%, as compared with the same period in fiscal 2024 due to a higher effective interest rate on our Term Loan. Warrant liabilities Three Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Change in fair value of warrant liabilities $ (61,630) (85) % $ 4,402 6 % $ (66,032) (1,500) % In December 31, 2024, the change in fair value of warrant liabilities increased $66.0 million, or (1,500)%, as compared with the same period in fiscal 2024, due to a lower average stock price in the second fiscal quarter of 2024. Income Taxes Three Months Ended December 31, (dollars in thousands) 2024 % of pretax income 2023 % of pretax income $ Change % Change Income tax provision $ 70 — % $ 510 (5) % $ (440) (86) % The income tax provision for the three months ended December 31, 2024 and 2023 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance. 24 Table of Contents Comparison of the Nine Months Ended December 31, 2024 and 2023 Revenue Nine Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Product revenue $ 116,389 54 % $ 138,635 58 % $ (22,246) (16) % Service and subscription 90,383 42 % 94,229 39 % (3,846) (4) % Royalty 7,592 4 % 7,235 3 % 357 5 % Total revenue $ 214,364 100 % $ 240,099 100 % $ (25,735) (11) % Product Revenue In the nine months ended December 31, 2024, product revenue decreased $22.2 million, or 16%, as compared to the same period in fiscal 2024. The primary driver of the decrease was a $20 million decrease in demand from our large hyperscale customers, as well as more general decreases in the overall tape market with declines in media and devices revenue. Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offered as a subscription. We expect the product revenue portion of our Primary and Secondary storage systems to decrease as we continue to transition to subscription-based offerings. Service and Subscription Revenue We offer a broad range of services including product maintenance, implementation, and training as well as software subscriptions. Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware. Standard service contracts may be extended or include enhanced service, such as faster service response times. Service and subscription revenue decreased $3.8 million, or 4%, in the nine months ended December 31, 2024 compared to the same period in fiscal 2024. This decrease was primarily driven by certain long-lived products reaching their end-of-service-life, partially offset by increases in subscription-based revenue. Royalty Revenue We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium. Royalty revenue saw a small increase of $0.4 million, or 5%, in the three months ended December 31, 2024 compared to the same period in fiscal 2024 due to product mix. Gross Profit and Margin Nine Months Ended December 31, (dollars in thousands) 2024 Gross margin % 2023 Gross margin % $ Change Basis point change Product $ 23,137 19.9 % $ 33,421 24.1 % $ (10,284) (420) Service and subscription 56,428 62.4 % 56,900 60.4 % (472) 200 Royalty 7,592 100.0 % 7,235 100.0 % 357 — Gross profit $ 87,157 40.7 % $ 97,556 40.6 % $ (10,399) 10 Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business. Product Gross Margin Product gross margin decreased 420 basis points, for the nine months ended December 31, 2024, as compared with the same period in fiscal 2024. This decrease was primarily due to a less favorable mix of revenues, weighted towards our lower margin product lines, which were partially offset from improvements in our operational efficiency and logistics costs. Service and Subscription Gross Margin 25 Table of Contents Service and subscription gross margin increased 200 basis points for the nine months ended December 31, 2024, as compared with the same period in fiscal 2024. This increase was primarily driven by lowered operation costs as we continue to drive efficiencies. Royalty Gross Margin Royalties do not have significant related cost of sales. Operating Expenses Nine Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Sales and marketing $ 39,321 18 % $ 45,800 19 % $ (6,479) (14) % General and administrative 49,186 23 % 34,833 15 % 14,353 41 % Research and development 24,255 11 % 28,828 12 % (4,573) (16) % Restructuring charges 2,916 1 % 3,164 1 % (248) (8) % Total operating expenses $ 115,678 54 % $ 112,625 47 % $ 3,053 3 % In the nine months ended December 31, 2024, sales and marketing expense decreased $6.5 million, or 14% , compared with the same period in fiscal 2024. This decrease was primarily driven by improved operational efficiency and increased leverage of our channel. In the nine months ended December 31, 2024, general and administrative expense increased $14.4 million, or 41%, compared with the same period in fiscal 2024. This increase was primarily driven by non-recurring costs related to our previously announced restatement of our historical financial statements, and other related projects. In the nine months ended December 31, 2024, research and development expenses decreased $4.6 million, or 16%, as compared with the same period in fiscal 2024. This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design. In the nine months ended December 31, 2024, restructuring expenses decreased $0.2 million, or 8% , as compared with the same period in fiscal 2024. The decrease was the result of cost reduction initiatives in the prior year. Other Income (Expense) Nine Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Other income (expense) $ (408) 0 % $ (2,049) (1) % $ 1,641 80 % The change in other income (expense), net during the nine months ended December 31, 2024 compared with the same period in fiscal 2024 was related primarily to fluctuations in foreign currency exchange rates during the three months ended December 31, 2024. Interest Expense Nine Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Interest expense $ (16,761) (8) % $ (10,992) (5) % $ (5,769) 52 % In the nine months ended December 31, 2024, interest expense increased $5.8 million, or 52%, as compared with the same period in fiscal 2024 due to a higher effective interest rate on our Term Loan. 26 Table of Contents Warrant liabilities Nine Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Change in fair value of warrant liabilities $ (56,414) (26) % $ 7,341 3 % $ (63,755) (868) % In December 31, 2024, the change in fair value of warrant liabilities increased $63.8 million, or 868%, as compared with the same period in fiscal 2024 due to a lower average stock price in the second fiscal quarter of 2024. Loss on Debt Extinguishment Nine Months Ended December 31, (dollars in thousands) 2024 % of revenue 2023 % of revenue $ Change % Change Loss on debt extinguishment $ (3,003) 1 % $ — — % $ (3,003) 100 % In the nine months ended December 31, 2024, loss on debt extinguishment was related to a prepayment of our Term Loan. Income Taxes Nine Months Ended December 31, (dollars in thousands) 2024 % of pretax income 2023 % of pretax income $ Change % Change Income tax provision $ 675 (1) % $ 1,573 (8) % $ (898) (57) % The income tax provision for the nine months ended December 31, 2024 and 2023 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance. 27 Table of Contents LIQUIDITY AND CAPITAL RESOURCES We consider liquidity in terms of the sufficiency of internal and external cash resources to fund our operating, investing and financing activities. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our balance sheet and amounts available under our revolving credit facility agreement with PNC Bank, National Association, as amended from time to time (the “PNC Credit Facility”). We require significant cash resources to meet obligations to pay principal and interest on our outstanding debt, provide for our research and development activities, fund our working capital needs, and make capital expenditures. Our future liquidity requirements will depend on multiple factors, including our research and development plans and capital asset needs. We had cash and cash equivalents of $20.4 million as of December 31, 2024, which consisted primarily of bank deposits and money market accounts. As of December 31, 2024, our total outstanding Term Loan debt was $105.9 million and PNC Credit Facility borrowings were $37.5 million. As of December 31, 2024, we had $1.6 million available to borrow under the PNC Credit Facility. We are subject to various debt covenants under our debt agreements. Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations. As discussed in Note 1: Description of Business and Significant Accounting Policies—Going Concern , we expect to be in violation of our net leverage covenant as of the June 30, 2025 testing date and the violation will cause the outstanding Term Loan and PNC Credit Facility outstanding balances to become due as an event of default. As a result, we have classified the Term Loan and PNC Credit Facility as current liabilities in the accompanying consolidated balance sheet. We entered into a Standby Equity Purchase Agreement (the “SEPA”) on January 25, 2025, pursuant to which we have a right, but not the obligation, to sell up to $200 million of Common Stock at any time during the three-year period following the date of the SEPA. See Note 12: Subsequent Events for additional information related to the SEPA. Additionally, the Company is evaluating strategies to obtain the additional funding, including potential covenant waivers. We may be unable to obtain additional funding. As such, there can be no assurance that we will be able to obtain additional liquidity when needed or under acceptable terms, if at all. For additional information about our debt, see the sections entitled “Risk Factors—Risks Related to Our Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the Annual Report. Cash Flows The following table summarizes our consolidated cash flows for the periods indicated. Nine Months Ended December 31, (in thousands) 2024 2023 Cash provided by (used in): Operating activities $ (20,345) $ (20,727) Investing activities (4,324) (5,025) Financing activities 19,415 24,138 Effect of exchange rate changes (3) (12) Net decrease in cash, cash equivalents and restricted cash $ (5,257) $ (1,626) Cash Used In Operating Activities Net cash used in operating activities was $20.3 million for the nine months ended December 31, 2024. This use of cash was primarily attributed to lower earnings. Net cash used in operating activities was $20.7 million for the nine months ended December 31, 2023. This use of cash was primarily attributed to cash used in operations excluding changes in assets and liabilities of $8.0 million in addition to cash used from working capital changes. Cash Used in Investing Activities 28 Table of Contents Net cash used in investing activities was $4.3 million in the nine months ended December 31, 2024, which was attributable to capital expenditures. Net cash used in investing activities was $5.0 million in the nine months ended December 31, 2023, which was attributable to capital expenditures. Cash Provided by Financing Activities Net cash provided by financing activities was $19.4 million for the nine months ended December 31, 2024, which was related primarily to borrowings on our Term Loan. Net cash provided by financing activities was $24.1 million for the nine months ended December 31, 2023, which was related primarily to borrowings on the PNC Credit Facility of $14.6 million and borrowing on our Term Loan of $9.6 million net of issuance costs. Commitments and Contingencies Our contingent liabilities consist primarily of certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. We have little history of costs associated with such indemnification requirements and contingent liabilities associated with product liability may be mitigated by our insurance coverage. In the normal course of business to facilitate transactions of our services and products, we indemnify certain parties with respect to certain matters, such as intellectual property infringement or other claims. We also have indemnification agreements with our current and former officers and directors. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of our indemnification claims, and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our operating results, financial position or cash flows. We are also subject to ordinary course litigation. Off Balance Sheet Arrangements Except for the indemnification commitments described under “Commitments and Contingencies” above, we do not currently have any other off-balance sheet arrangements and do not have any holdings in variable interest entities. Contractual Obligations We have contractual obligations and commercial commitments, some of which, such as purchase obligations, are not recognized as liabilities in our financial statements. There have not been any material changes to the contractual obligations disclosed in the Annual Report. Critical Accounting Estimates and Policies The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report. On an ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider certain accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change. Our accounting policies that include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain are summarized in the Annual Report under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies.” For additional information on our significant accounting policies, see Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. Recently Issued and Adopted Accounting Pronouncements 29 Table of Contents See Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to our quantitative and qualitative disclosures about market risk from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Form 10-K, which such section is incorporated herein by reference.