Quantum Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

COMMON STOCK

COMMON STOCK

12 Months Ended

Mar. 31, 2023

Share-Based Payment Arrangement [Abstract]

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

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.

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


	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.