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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2022
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission File Number 001-13449
| | |
Quantum Corporation |
(Exact name of registrant as specified in its charter) |
| | | | | | | | | | | | | | |
Delaware | | 94-2665054 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
224 Airport Parkway | Suite 550 | | |
San Jose | CA | | 95110 |
(Address of Principal Executive Offices) | | (Zip Code) |
| | | | | |
(408) | | 944-4000 |
Registrant's telephone number, including area code |
| | |
|
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | | QMCO | | Nasdaq Global Market |
| | | | | | | | | | | | | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | x | Yes | ¨ | No |
|
| | | | | | | | | | | | | | |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| x | Yes | ¨ | No |
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | x |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
| | | | | | | | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised | | |
☐ | |
| | | | | | | | | | | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | | | | |
☐ | Yes | x | No |
As of the close of business on January 30, 2023, there were 105,214,639 shares of Quantum Corporation’s common stock issued and outstanding.
QUANTUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended December 31, 2022
Table of Contents
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 6. | | |
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| |
As used in this Quarterly Report on Form 10-Q, the terms "Quantum," "we," "us," and "our" refer to Quantum Corporation and its subsidiaries taken as a whole, unless otherwise noted or unless the context indicates otherwise.
Note Regarding Forward-Looking Statements
This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding COVID-19's 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, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Part II, Item 1A. Moreover, we operate in a competitive and changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, you should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We do not intend to update any of these forward-looking statements for any reason after the date of this report or to conform these statements to actual results or revised expectations, except as required by law.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts, unaudited)
| | | | | | | | | | | | |
| December 31, 2022 | | March 31, 2022 | |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | $ | 26,028 | | | $ | 5,210 | | |
Restricted cash | 219 | | | 283 | | |
| | | | |
Accounts receivable, net of allowance for doubtful accounts of $219 and $422 | 72,911 | | | 69,354 | | |
Manufacturing inventories | 32,402 | | | 33,546 | | |
Service parts inventories | 25,822 | | | 24,254 | | |
Prepaid expenses | 7,198 | | | 7,853 | | |
Other current assets | 7,489 | | | 4,697 | | |
Total current assets | 172,069 | | | 145,197 | | |
Property and equipment, net | 16,794 | | | 12,853 | | |
Intangible assets, net | 6,497 | | | 9,584 | | |
Goodwill | 12,969 | | | 12,969 | | |
| | | | |
Right-of-use assets, net | 10,468 | | | 11,107 | | |
Other long-term assets | 13,600 | | | 9,925 | | |
Total assets | $ | 232,397 | | | $ | 201,635 | | |
Liabilities and Stockholders’ Deficit | | | | |
Current liabilities: | | | | |
Accounts payable | $ | 41,788 | | | $ | 34,220 | | |
| | | | |
Deferred revenue | 72,669 | | | 86,517 | | |
| | | | |
Long-term debt, current portion | 5,000 | | | 4,375 | | |
| | | | |
| | | | |
Accrued compensation | 15,527 | | | 16,141 | | |
Other accrued liabilities | 15,852 | | | 16,562 | | |
Total current liabilities | 150,836 | | | 157,815 | | |
Deferred revenue | 41,076 | | | 41,580 | | |
| | | | |
Revolving credit facility | 27,736 | | | 17,735 | | |
Long-term debt, net of current portion | 67,306 | | | 89,448 | | |
| | | | |
Operating lease liabilities | 10,346 | | | 9,891 | | |
Other long-term liabilities | 12,150 | | | 11,849 | | |
Total liabilities | 309,450 | | | 328,318 | | |
Commitments and contingencies (Note 9) | | | | |
Stockholders' deficit | | | | |
Preferred stock, 20,000 shares authorized; no shares issued and outstanding | — | | | — | | |
Common stock, $0.01 par value; 225,000 shares authorized; 93,144 and 60,433 shares issued and outstanding | 932 | | | 605 | | |
Additional paid-in capital | 719,769 | | | 645,038 | | |
Accumulated deficit | (795,237) | | | (770,903) | | |
Accumulated other comprehensive loss | (2,517) | | | (1,423) | | |
Total stockholders’ deficit | (77,053) | | | (126,683) | | |
Total liabilities and stockholders’ deficit | $ | 232,397 | | | $ | 201,635 | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue: | | | | | | | |
Product | $ | 75,420 | | | $ | 58,522 | | | $ | 198,597 | | | $ | 165,308 | |
Service and subscription | 32,950 | | | 33,162 | | | 99,066 | | | 100,352 | |
Royalty | 2,826 | | | 3,660 | | | 9,744 | | | 11,963 | |
Total revenue | 111,196 | | | 95,344 | | | 307,407 | | | 277,623 | |
Cost of revenue: | | | | | | | |
Product | 58,528 | | | 45,118 | | | 163,010 | | | 124,982 | |
Service and subscription | 12,379 | | | 15,016 | | | 42,229 | | | 41,764 | |
Total cost of revenue | 70,907 | | | 60,134 | | | 205,239 | | | 166,746 | |
Gross profit | 40,289 | | | 35,210 | | | 102,168 | | | 110,877 | |
Operating expenses: | | | | | | | |
Research and development | 11,254 | | | 14,607 | | | 33,925 | | | 38,287 | |
Sales and marketing | 16,339 | | | 16,714 | | | 47,894 | | | 46,128 | |
General and administrative | 10,969 | | | 10,538 | | | 35,223 | | | 33,830 | |
Restructuring charges | (41) | | | 576 | | | 1,605 | | | 850 | |
Total operating expenses | 38,521 | | | 42,435 | | | 118,647 | | | 119,095 | |
Income (loss) from operations | 1,768 | | | (7,225) | | | (16,479) | | | (8,218) | |
Other income (expense), net | (544) | | | (150) | | | 2,638 | | | (223) | |
Interest expense | (2,701) | | | (2,431) | | | (7,537) | | | (9,387) | |
Loss on debt extinguishment | — | | | — | | | (1,392) | | | (4,960) | |
Net loss before income taxes | (1,477) | | | (9,806) | | | (22,770) | | | (22,788) | |
Income tax provision | 693 | | | 1,254 | | | 1,564 | | | 1,678 | |
Net loss | $ | (2,170) | | | $ | (11,060) | | | $ | (24,334) | | | $ | (24,466) | |
Deemed dividend on warrants | — | | | — | | | (389) | | | — | |
Net loss attributable to common stockholders | $ | (2,170) | | | $ | (11,060) | | | $ | (24,723) | | | $ | (24,466) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net loss per share attributable to common stockholders | $ | (0.02) | | | $ | (0.19) | | | $ | (0.28) | | | $ | (0.42) | |
Weighted average shares - basic and diluted | 92,752 | | | 59,486 | | | 89,335 | | | 58,399 | |
| | | | | | | |
| | | | | | | |
Net loss | $ | (2,170) | | | $ | (11,060) | | | $ | (24,334) | | | $ | (24,466) | |
Foreign currency translation adjustments, net | 1,480 | | | (37) | | | (1,094) | | | (276) | |
Total comprehensive loss | $ | (690) | | | $ | (11,097) | | | $ | (25,428) | | | $ | (24,742) | |
See accompanying Notes to Condensed Consolidated Financial Statements.
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
| | | | | | | | | | | | | |
| Nine Months Ended December 31, | | |
| 2022 | | 2021 | | |
Operating activities | | | | | |
Net loss | $ | (24,334) | | | $ | (24,466) | | | |
Adjustments to reconcile net loss to net cash used in operating activities | | | | | |
Depreciation and amortization | 7,235 | | | 6,795 | | | |
Amortization of debt issuance costs | 1,201 | | | 1,981 | | | |
Loss on debt extinguishment | 992 | | | — | | | |
Provision for product and service inventories | 11,334 | | | 4,016 | | | |
Stock-based compensation | 8,340 | | | 10,580 | | | |
Paycheck Protection Program loan forgiveness | — | | | (10,000) | | | |
| | | | | |
Non-cash loss on debt extinguishment | — | | | 8,471 | | | |
Other | (2,059) | | | 282 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Unrealized foreign exchange loss | (1,134) | | | — | | | |
| | | | | |
| | | | | |
Changes in assets and liabilities: | | | | | |
Accounts receivable, net | (3,367) | | | 7,008 | | | |
Manufacturing inventories | (9,352) | | | (10,672) | | | |
Service parts inventories | (2,671) | | | (2,281) | | | |
Prepaid expenses | 654 | | | (5,653) | | | |
Accounts payable | 7,015 | | | 5,369 | | | |
| | | | | |
Accrued restructuring charges | 130 | | | 17 | | | |
Accrued compensation | (614) | | | (3,021) | | | |
Deferred revenue | (14,351) | | | (8,598) | | | |
Other current assets | (2,812) | | | (1,394) | | | |
Other non-current assets | 1,357 | | | (1,148) | | | |
Other current liabilities | 2,540 | | | (3,350) | | | |
Other non-current liabilities | 300 | | | (617) | | | |
Net cash used in operating activities | (19,596) | | | (26,681) | | | |
Investing activities | | | | | |
| | | | | |
| | | | | |
Purchases of property and equipment | (10,644) | | | (3,971) | | | |
Business acquisition payments | (2,000) | | | (7,808) | | | |
| | | | | |
| | | | | |
Net cash used in investing activities | (12,644) | | | (11,779) | | | |
Financing activities | | | | | |
Borrowings of long-term debt, net of debt issuance costs | — | | | 94,961 | | | |
Repayments of long-term debt and payment of amendment fees | (23,346) | | | (93,677) | | | |
Borrowings of credit facility | 363,103 | | | 207,563 | | | |
Repayments of credit facility and payment of amendment fees | (353,502) | | | (200,007) | | | |
| | | | | |
| | | | | |
Proceeds from issuance of common stock, net | 66,718 | | | 806 | | | |
| | | | | |
Net cash provided by financing activities | 52,973 | | | 9,646 | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 21 | | | 12 | | | |
Net change in cash, cash equivalents and restricted cash | 20,754 | | | (28,802) | | | |
Cash, cash equivalents, and restricted cash at beginning of period | 5,493 | | | 33,137 | | | |
Cash, cash equivalents, and restricted cash at end of period | $ | 26,247 | | | $ | 4,335 | | | |
Cash, Cash Equivalents and Restricted Cash at end of period | | |
Cash and cash equivalents | $ | 26,028 | | | $ | 4,004 | | | |
Restricted cash, current | 219 | | | 331 | | | |
| | | | | |
Cash and cash equivalents at the end of period | $ | 26,247 | | | $ | 4,335 | | | |
Supplemental disclosure of cash flow information | | | | | |
Cash paid for interest | $ | 6,270 | | | $ | 7,180 | | | |
Cash paid for income taxes, net | $ | 837 | | | $ | 541 | | | |
Non-cash transactions | | | | | |
Purchases of property and equipment included in accounts payable | $ | 1,198 | | | $ | 1,148 | | | |
| | | | | |
Transfer of manufacturing inventory to services inventory | $ | 2,308 | | | $ | 1,212 | | | |
Transfer of manufacturing inventory to property and equipment | $ | 264 | | | $ | 382 | | | |
Paid-in-kind interest | $ | 319 | | | $ | — | | | |
Deemed dividend on warrants | $ | 389 | | | $ | — | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income Loss | | Total Stockholders' Deficit |
| | Shares | | Amount | | | | |
Balance, September 30, 2021 | | 59,272 | | | $ | 593 | | | $ | 636,538 | | | $ | (752,029) | | | $ | (1,095) | | | $ | (115,993) | |
Net loss | | — | | | — | | | — | | | (11,060) | | | — | | | (11,060) | |
Foreign currency translation adjustments, net | | — | | | — | | | — | | | — | | | (37) | | | (37) | |
Shares issued under employee stock purchase plan | | — | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee incentive plans, net | | 183 | | | 2 | | | (2) | | | — | | | — | | | — | |
Shares issued in connection with business acquisition | | 361 | | | 4 | | | (4) | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 4,307 | | | — | | | — | | | 4,307 | |
Balance, December 31, 2021 | | 59,816 | | | $ | 599 | | | $ | 640,839 | | | $ | (763,089) | | | $ | (1,132) | | | $ | (122,783) | |
| | | | | | | | | | | | |
Balance, September 30, 2022 | | 92,158 | | | $ | 922 | | | $ | 716,800 | | | (793,067) | | | $ | (3,997) | | | $ | (79,342) | |
Net loss | | — | | | — | | | — | | | (2,170) | | | — | | | (2,170) | |
Foreign currency translation adjustments, net | | — | | | — | | | — | | | — | | | 1,480 | | | 1,480 | |
Shares issued under employee stock purchase plan | | — | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee incentive plans, net | | 625 | | | 6 | | | (6) | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Shares issued in connection with business acquisition | | 361 | | | 4 | | | (4) | | | — | | | — | | | — | |
Rights offering expenses | | — | | | — | | | (2) | | | — | | | — | | | (2) | |
Stock-based compensation | | — | | | — | | | 2,981 | | | — | | | — | | | 2,981 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance, December 31, 2022 | | 93,144 | | | $ | 932 | | | $ | 719,769 | | | $ | (795,237) | | | $ | (2,517) | | | $ | (77,053) | |
See accompanying Notes to Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders' Deficit |
| | Shares | | Amount | | | | |
Balance, March 31, 2021 | | 56,915 | | | $ | 570 | | | $ | 626,664 | | | $ | (738,623) | | | $ | (856) | | | $ | (112,245) | |
Net loss | | — | | | — | | | — | | | (24,466) | | | — | | | (24,466) | |
Foreign currency translation adjustments, net | | — | | | — | | | — | | | — | | | (276) | | | (276) | |
Shares issued under employee stock purchase plan | | 145 | | | 1 | | | 805 | | | — | | | — | | | 806 | |
Shares issued under employee incentive plans, net | | 1,935 | | | 19 | | | (19) | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Shares issued in connection with business acquisition | | 821 | | | 9 | | | 2,809 | | | — | | | — | | | 2,818 | |
Stock-based compensation | | — | | | — | | | 10,580 | | | — | | | — | | | 10,580 | |
Balance, December 31, 2021 | | 59,816 | | | $ | 599 | | | $ | 640,839 | | | $ | (763,089) | | | $ | (1,132) | | | $ | (122,783) | |
| | | | | | | | | | | | |
Balance, March 31, 2022 | | 60,433 | | | $ | 605 | | | $ | 645,038 | | | $ | (770,903) | | | $ | (1,423) | | | $ | (126,683) | |
Net loss | | — | | | — | | | — | | | (24,334) | | | — | | | (24,334) | |
Foreign currency translation adjustments, net | | — | | | — | | | — | | | — | | | (1,094) | | | (1,094) | |
Shares issued under employee stock purchase plan | | 300 | | | 3 | | | 469 | | | — | | | — | | | 472 | |
Shares issued under employee incentive plans, net | | 2,050 | | | 20 | | | (20) | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Shares issued in connection with business acquisition | | 361 | | | 4 | | | (4) | | | — | | | — | | | — | |
Shares issued in connection with rights offering, net | | 30,000 | | | 300 | | | 65,946 | | | — | | | — | | | 66,246 | |
Settlement of warrant down round provision | | — | | | — | | | 389 | | | — | | | — | | | 389 | |
Deemed dividend on warrants | | — | | | — | | | (389) | | | — | | | — | | | (389) | |
Stock-based compensation | | — | | | — | | | 8,340 | | | — | | | — | | | 8,340 | |
Balance, December 31, 2022 | | 93,144 | | | $ | 932 | | | $ | 719,769 | | | $ | (795,237) | | | $ | (2,517) | | | $ | (77,053) | |
See accompanying Notes to Condensed Consolidated Financial Statements.
INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
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Note 11: | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), is a leader in storing and managing digital video and other forms of unstructured data, delivering top streaming performance for video and rich media applications, along with low-cost, long-term storage systems for data protection and archiving. The Company helps customers around the world capture, create and share digital data and preserve and protect it for decades. The Company’s software-defined, hyperconverged storage solutions span from non-violate memory express (“NVMe”), to solid state drives (“SSD”) hard disk drives (“HDD”) tape, the cloud, and video surveillance and are tied together leveraging a single namespace view of the entire data environment. The Company works closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving needs.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. All intercompany balances and transactions have been eliminated. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included within the Company's most recent Annual Report on Form 10-K.
The unaudited consolidated interim financial statements reflect all adjustments, consisting only of normal and recurring items, necessary to present fairly our financial position as of December 31, 2022, the results of operations and comprehensive loss, statements of cash flows, and changes in stockholder's deficit for the three and nine months ended December 31, 2022 and 2021. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment from the ongoing COVID-19 pandemic. Such estimates include, but are not limited to, the determination of standalone selling price for revenue arrangements with multiple performance obligations, useful lives of intangible assets and property and equipment, stock-based compensation and provision for income taxes including related reserves. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recently Issued but not Adopted Accounting Pronouncements
None.
NOTE 2: REVENUE
Based on how the Company manages its business, the Company has determined that it currently operates in one reportable segment. The Company operates in three geographic regions: (a) Americas; (b) Europe, Middle East and Africa (“EMEA”); and (c) Asia Pacific (“APAC”). Revenue by geography is based on the location of the customer from which the revenue is earned.
In the following table, revenue is disaggregated by major product offerings and geographies (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Americas1 | | | | | | | |
Primary storage systems | $ | 10,668 | | | $ | 8,768 | | | $ | 28,921 | | | $ | 27,228 | |
Secondary storage systems | 35,085 | | | 15,060 | | | 88,821 | | | 43,946 | |
Device and media | 4,107 | | | 7,737 | | | 13,773 | | | 19,527 | |
Service and subscription | 19,756 | | | 19,470 | | | 59,319 | | | 61,003 | |
Total revenue | 69,616 | | | 51,035 | | | 190,834 | | | 151,704 | |
| | | | | | | |
EMEA | | | | | | | |
Primary storage systems | 2,332 | | | 3,305 | | | 7,078 | | | 10,325 | |
Secondary storage systems | 10,096 | | | 10,377 | | | 25,380 | | | 27,856 | |
Device and media | 6,029 | | | 5,125 | | | 14,794 | | | 15,018 | |
Service and subscription | 10,989 | | | 11,606 | | | 32,748 | | | 33,454 | |
Total revenue | 29,446 | | | 30,413 | | | 80,000 | | | 86,653 | |
| | | | | | | |
APAC | | | | | | | |
Primary storage systems | 974 | | | 1,718 | | | 3,376 | | | 4,234 | |
Secondary storage systems | 5,541 | | | 5,193 | | | 13,651 | | | 13,291 | |
Device and media | 588 | | | 1,239 | | | 2,803 | | | 3,883 | |
Service and subscription | 2,205 | | | 2,086 | | | 6,999 | | | 5,895 | |
Total revenue | 9,308 | | | 10,236 | | | 26,829 | | | 27,303 | |
| | | | | | | |
Consolidated | | | | | | | |
Primary storage systems | 13,974 | | | 13,791 | | | 39,375 | | | 41,787 | |
Secondary storage systems | 50,722 | | | 30,630 | | | 127,852 | | | 85,093 | |
Device and media | 10,724 | | | 14,101 | | | 31,370 | | | 38,428 | |
Service and subscription | 32,950 | | | 33,162 | | | 99,066 | | | 100,352 | |
Royalty2 | 2,826 | | | 3,660 | | | 9,744 | | | 11,963 | |
Total revenue | $ | 111,196 | | | $ | 95,344 | | | $ | 307,407 | | | $ | 277,623 | |
1 Revenue for Americas geographic region outside of the United States is not significant.
2 Royalty revenue is not allocatable to geographic regions.
Contract Balances
The following table presents the Company’s contract liabilities and certain information related to this balance as of and for the nine months ended December 31, 2022 (in thousands):
| | | | | | | | |
| | December 31, 2022 |
Contract liabilities (deferred revenue) | | $ | 113,745 | |
Revenue recognized in the period from amounts included in contract liabilities at the beginning of the period | | 71,669 | |
Remaining Performance Obligations
Remaining performance obligations consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Current | | Non-Current | | Total |
As of December 31, 2022 | | $ | 105,981 | | | $ | 42,645 | | | $ | 148,626 | |
The Company's non-current remaining performance obligations are expected to be recognized in the next 13 to 60 months.
NOTE 3: BALANCE SHEET INFORMATION
Certain significant amounts included in the Company's condensed consolidated balance sheets consist of the following (in thousands):
Manufacturing inventories
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2022 |
| | | |
| | | |
| | | |
Finished goods | $ | 13,639 | | | $ | 14,607 | |
Work in progress | 2,268 | | | 2,546 | |
Raw materials | 16,495 | | | 16,393 | |
Total manufacturing inventories | $ | 32,402 | | | $ | 33,546 | |
Service parts inventories
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2022 |
Finished goods | $ | 21,215 | | | $ | 19,234 | |
Component parts | 4,607 | | | 5,020 | |
Total service parts inventories | $ | 25,822 | | | $ | 24,254 | |
Intangibles, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | March 31, 2022 |
| | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| | | | | | | | | | | | |
Developed technology | | $ | 9,013 | | | $ | (5,442) | | | $ | 3,571 | | | $ | 9,013 | | | $ | (2,926) | | | $ | 6,087 | |
Customer lists | | 4,398 | | | (1,472) | | | 2,926 | | | 4,398 | | | (901) | | | 3,497 | |
| | | | | | | | | | | | |
Intangible assets, net | | $ | 13,411 | | | $ | (6,914) | | | $ | 6,497 | | | $ | 13,411 | | | $ | (3,827) | | | $ | 9,584 | |
Intangible assets amortization expense was $0.7 million and $1.2 million for the three months ended December 31, 2022 and 2021, respectively and $3.1 million and $2.5 million for the nine months ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 1.8 years.
As of December 31, 2022, the future expected amortization expense for intangible assets is as follows (in thousands):
| | | | | | | | |
Fiscal year ending | | Estimated future amortization expense |
Remainder of 2023 | | $ | 1,147 | |
2024 | | 3,523 | |
2025 | | 1,827 | |
| | |
| | |
Thereafter | | — | |
Total | | $ | 6,497 | |
Goodwill
As of December 31, 2022 and March 31, 2022, goodwill was $13.0 million. There were no impairments to goodwill during the nine months ended December 31, 2022 and 2021.
NOTE 4: LONG-TERM DEBT
The Company’s long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2022 |
Term Loan | $ | 75,917 | | | $ | 98,722 | |
| | | |
PNC Credit Facility | 27,736 | | | 17,735 | |
Less: current portion | (5,000) | | | (4,375) | |
Less: unamortized debt issuance costs (1) | (3,611) | | | (4,899) | |
Long-term debt, net | $ | 95,042 | | | $ | 107,183 | |
(1) The unamortized debt issuance costs related to the Term Loan is presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying condensed consolidated balance sheets. Unamortized debt issuance costs related to the PNC Credit Facility are presented within other assets on the accompanying condensed consolidated balance sheets.
On December 27, 2018, the Company entered into a senior secured term loan (the "Senior Secured Term Loan”) and amended its existing PNC Bank Credit Facility Agreement (the "PNC Credit Facility"). On February 11, 2021, the Company prepaid $92.3 million of its outstanding Senior Secured Term Loan.
On August 5, 2021, the Company entered into a new senior secured term loan to borrow an aggregate of $100.0 million (the “Term Loan”). A portion of the proceeds were used to repay in full all outstanding borrowings under the Senior Secured Term Loan. Borrowings under the Term Loan mature on August 5, 2026. Principal is payable at a rate per annum equal to (a) 2.5% of the original principal balance thereof during the first year following the closing date of the Term Loan and (b) 5% of the original principal balance thereof thereafter. Principal and interest payments are payable on a quarterly basis.
On April 25, 2022, the Company entered into amendments to the Term Loan and the PNC Credit Facility. The Term Loan amendment, among other things, (a) amended the total net leverage ratio financial covenant and the minimum liquidity financial covenant commencing with the fiscal quarter ended June 30, 2022; and; (b) replaced the benchmark rate for LIBOR Rate Loans with a rate based on the Secured Overnight Financing Rate ("SOFR"). The amendment to the Term Loan was accounted for as a modification. The Company incurred $0.4 million in costs related to the modification which are reflected as a reduction to the carrying amount of the Term Loan and amortized to interest expense over the remaining loan term.
Loans under the Term Loan designated as ABR Loans bear interest at a rate per annum equal to the greatest of (i) 1.75%; (ii) the Federal funds rate plus 0.50%; (iii) the SOFR Rate based upon an interest period of one month plus 1.0%; and (iv) the “Prime Rate” last quoted by the Wall Street Journal, plus an applicable margin of 5.00%. Loans designated as SOFR Rate Loans bear interest at a rate per annum equal to the SOFR Rate plus an applicable margin of 6.00%. The SOFR Rate is subject to a floor of 0.75%. The Company can designate a loan as an ABR Rate Loan or SOFR Rate Loan in its discretion.
The PNC Credit Facility amendment, among other things, (a) increased the principal amount of revolving commitments from $30.0 million to $40.0 million; (b) waived compliance with the fixed charge coverage ratio financial covenant until the fiscal quarter ended March 31, 2025; (c) amended the total net leverage ratio financial covenant and the minimum liquidity financial covenant commencing with the fiscal quarter ended June 30, 2022; and (d) replaced the benchmark rate for PNC LIBOR Rate Loans with a rate based on SOFR. The amendment to the PNC Credit Facility was accounted for as a modification. The Company incurred $0.4 million in costs which were recorded to other assets and amortized to interest expense over the remaining term of the agreement.
Loans designated as PNC SOFR Loans bear interest at a rate per annum equal to the SOFR Rate plus 2.75% until December 31, 2023 and thereafter between 2.25% and 2.75% determined based on the Company’s Total Net Leverage Ratio, (as defined in the PNC Credit Facility Agreement) for the most recently completed fiscal quarter (the "PNC SOFR Loan Interest Rate"). Loans under the PNC Credit Facility designated as PNC Domestic Rate Loans and Swing Loans bear interest at a rate per annum equal to the greatest of (i) the base commercial lending rate of PNC Bank; (ii) the Overnight Bank Funding Rate plus 0.5%; and (iii) the daily SOFR Rate plus 1.0%, plus 1.75% until December 31, 2023 and thereafter between 1.25% and 1.75% determined based on the Company’s Total Net Leverage Ratio (the “PNC Domestic Loan Interest Rate”).
With respect to any PNC SOFR Rate Loan, the Company has agreed to pay affiliates of certain Term Loan lenders a fee equal to a percentage per annum equal to the sum of (x) 6.50%, minus (y) the PNC SOFR Loan Interest Rate, plus (z) if the SOFR Rate applicable to such interest payment is less than 0.75%, (i) 0.75% minus (ii) such SOFR Rate. With respect to any Domestic Rate Loan or Swing Loan, the Company has agreed to pay an affiliate of certain Term Loan lenders a fee equal to a percentage per annum equal to the sum of (x) 5.50%, minus (y) the PNC Domestic Loan Interest Rate, plus (z) if the Alternative Base Rate applicable to such interest payment is less than 1.00%, (i) 1.00% minus (ii) such Alternative Base Rate.
During the nine months ended December 31, 2022, the Company recorded a loss on debt extinguishment of $1.4 million related to a $20.0 million prepayment of the Term Loan which was comprised of a $0.4 million prepayment penalty and the write-off of unamortized debt issuance costs of $1.0 million.
As of December 31, 2022, the interest rate on the Term Loan was 9.81% and the interest rate on the PNC Credit Facility for Domestic Rate Loans and Swing Loans was 9.25%. As of December 31, 2022, the PNC Credit Facility had an available borrowing base of $33.4 million, of which $5.7 million was available to borrow at that date.
NOTE 5: LEASES
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | |
Operating leases | | December 31, 2022 | | March 31, 2022 | | |
Operating lease right-of-use asset | | $ | 10,468 | | | $ | 11,107 | | | |
| | | | | | |
Other accrued liabilities | | 1,202 | | | 1,727 | | | |
Operating lease liability | | 10,346 | | | 9,891 | | | |
Total operating lease liabilities | | $ | 11,548 | | | $ | 11,618 | | | |
Components of lease cost were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
Lease Cost | | 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | | $ | 994 | | | $ | 887 | | | $ | 3,023 | | | $ | 3,016 | |
Variable lease cost | | 176 | | | 176 | | | 513 | | | 527 | |
Short-term lease cost | | — | | | 13 | | | — | | | 17 | |
Total lease cost | | $ | 1,170 | | | $ | 1,076 | | | $ | 3,536 | | | $ | 3,560 | |
| | | | | | | | |
Maturity of Lease Liabilities | | Operating Leases |
Remainder of 2023 | | $ | 657 | |
2024 | | 2,495 | |
2025 | | 2,185 | |
2026 | | 1,717 | |
2027 | | 1,586 | |
Thereafter | | 14,696 | |
Total lease payments | | $ | 23,336 | |
Less: imputed interest | | (11,788) | |
Present value of lease liabilities | | $ | 11,548 | |
| | | | | | | | | | | | | | |
Lease Term and Discount Rate | | December 31, 2022 | | March 31, 2022 |
Weighted average remaining operating lease term (years) | | 11.11 | | 10.88 |
Weighted average discount rate for operating leases | | 12.6 | % | | 12.9 | % |
Operating cash outflows related to operating leases totaled $2.4 million and $3.1 million for the nine months ended December 31, 2022 and 2021, respectively.
NOTE 6: COMMON STOCK
In the quarter ended September 30, 2022, the Company’s shareholders approved an increase in its authorized shares of common stock from 125 million to 225 million.
On December 30, 2022 the Leadership and Compensation Committee of the Board approved an amendment to the 2021 Inducement Plan to increase the number of shares of common stock of the Company authorized for issuance thereunder from 770,000 to 1.5 million.
Common Stock Rights Offering
On April 22, 2022, the Company completed a rights offering of 30 million shares of its common stock for $2.25 per share (the “Rights Offering”). The proceeds net of offering expenses was $66.0 million. A portion of the proceeds from the Rights Offering was used to prepay $20.0 million of the Company’s Term Loan.
Warrants
As of the date of the Rights Offering, the Company had outstanding warrants to purchase 7,110,616 shares of the Company’s common stock at an exercise price of $1.33 per share and outstanding warrants to purchase 3,400,000 shares of the Company's common stock at an exercise price of $3.00 per share (the “$3.00 Warrants"). The exercise price and the number of shares underlying these warrants are subject to adjustment in the event of specified events, including dilutive issuances of common stock linked equity instruments at a price lower than the exercise price of the warrants, a subdivision or combination of the Company’s common stock, a reclassification of the Company’s common stock or specified dividend payments (the “Down Round Feature”).
On April 22, 2022, the Down Round Feature was triggered for the $3.00 Warrants due to the price per share received in the Rights Offering. The exercise price for the $3.00 Warrants was adjusted to $2.79 per share and an additional 256,113 warrants were subsequently issued with an exercise price of $2.79. The Company calculated the difference between the $3.00 Warrants’ fair value before and after the Down Round Feature was triggered using the original exercise price and the new exercise price in addition to the value of the newly issued warrants. The
difference in fair value of the effect of the Down Round Feature of $0.4 million was reflected as a deemed dividend and a reduction to income available to common stockholders in the basic earnings per share calculation. The Company used the Black-Scholes-Merton option-pricing model to determine the fair value of the deemed dividend. The assumptions used in the model are as follows: dividend rate of 0%; expected term of 8 years; volatility of 56%; and a risk-free rate 2.85%.
As of December 31, 2022, there were approximately 10.8 million warrants outstanding.
NOTE 7: NET LOSS PER SHARE
The following outstanding stock-based instruments which are comprised of performance share units, restricted stock units, and warrants were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended December 31, | | Nine Months Ended December 31, |
2022 | | 2021 | | 2022 | | 2021 |
5,450 | | | 8,802 | | | 3,763 | | | 9,811 | |
The dilutive impact related to common stock from restricted stock units and warrants is determined by applying the treasury stock method to the assumed vesting of outstanding restricted stock units and the exercise of outstanding warrants. The dilutive impact related to common stock from contingently issuable performance share units is determined by applying a two-step approach using both the contingently issuable share guidance and the treasury stock method.
NOTE 8: INCOME TAXES
The effective tax rate for the three and nine months ended December 31, 2022 was (7.1)% and (6.7)%, respectively, as compared to (12.6)% and (7.3)%, respectively, for the three and nine months ended December 31, 2021. The effective tax rates differed from the federal statutory tax rate of 21% during each of these periods due primarily to unbenefited losses experienced in jurisdictions with valuation allowances on deferred tax assets as well as the forecasted mix of earnings in domestic and international jurisdictions.
As of December 31, 2022, including interest and penalties, the Company had $103.0 million of unrecognized tax benefits, $84.3 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of December 31, 2022, the Company had accrued interest and penalties related to these unrecognized tax benefits of $1.4 million. The Company recognizes interest and penalties related to income tax matters in the income tax provision in the condensed consolidated statements of operations. As of December 31, 2022, $95.0 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the condensed consolidated balance sheets and $8.0 million (including interest and penalties) were recorded in other long-term liabilities in the condensed consolidated balance sheets. During the next 12 months, it is reasonably possible that approximately $10.8 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations. Upon recognition of the tax benefit related to the expiring statutes of limitation, $