Upon exercise, the aggregate exercise price of the Lender Warrants 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 Common Stock at the time of exercise. The exercise price and the number of shares underlying the Lender Warrants are subject to adjustment in the event of specified events, including dilutive issuances of equity instruments at a price lower than the exercise price of the respective warrants (the "Down Round Feature"), repricing of existing equity-linked instruments at a price lower than the exercise price of the respective warrants (the "Warrant Repricing Feature"), a subdivision or combination of the Common Stock, a reclassification of the Common Stock or specified dividend payments. The Company's warrants also have a provision that determines the potential stock price used when applying the Black-Scholes valuation model to determine the settlement price of the warrants in Successor Major Transactions ("SMT"), as defined in the respective warrant agreements, which include a change in control or liquidation (the "Warrant Settlement Price Provision"). The Warrant Settlement Price Provision requires the use of the greater of the closing price of the Common Stock on the trading day immediately preceding the date on which an SMT is consummated, the closing market price of the Common Stock following the first public announcement of an SMT or the closing market of the Common Stock immediately preceding the announcement of an SMT. Due to these terms, equity classification was precluded, and these warrants are carried as liabilities at fair value.
The Company also issued 2,500 warrants to purchase the Common Stock in June 2020 and June 2023 to advisors of the Company at an exercise price of $60.00 and $20.00, respectively (collectively the "Other Warrants"). The Company has concluded that the Other Warrants do not contain provisions that would require liability classification under Topic 480 or Topic 718 and have been equity classified.
Registration Rights Agreements
The Lender 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
The Company has performance share units, restricted stock units and options to purchase shares under its Employee Stock Purchase Plan, as amended and restated on July 25, 2023 (“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 Common Stock.
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.
The following weighted-average outstanding shares of Common Stock equivalents were excluded from the computation of diluted net income (loss) per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (in thousands):
The Company had outstanding market based restricted stock units as of December 31, 2024 that were eligible to vest into shares of the 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 170,750 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 December 31, 2024.
NOTE 10: INCOME TAXES
The effective tax rate for the three and nine months ended December 31, 2024 was (0.1)% and (0.6)%, respectively, as compared to (5.5)% and (7.6)%, for the three and nine months ended December 31, 2023, respectively. 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, 2024, including interest and penalties, the Company had $90.9 million of unrecognized tax benefits, $78.5 million of which, if recognized, would favorably affect the effective tax rate without consideration of the valuation allowance. As of December 31, 2024, 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, 2024, $83.2 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the condensed consolidated balance sheet and $7.8 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 $12.8 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, $11.8 million will be offset by the establishment of a related valuation allowance. The net tax benefit recognized in the statements of operation is estimated to be $1.0 million.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Commitments to Purchase Inventory
The Company uses contract manufacturers for its manufacturing operations. Under these arrangements, the contract manufacturer procures inventory to manufacture products based upon the Company’s 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 December 31, 2024, the Company had issued non-cancelable commitments for $29.5 million to purchase inventory from its contract manufacturers and suppliers.
Legal Proceedings
Arrow Electronics Matter
On July 27, 2023, an electronics component distributor filed a lawsuit in a federal court in the Northern District of California against Quantum, alleging breach of contract and breach of the covenant of good faith and fair dealing, seeking, among other things just over $4.0 million in damages. Quantum has filed a responsive pleading disputing Arrow Electronics’ claims and plans to aggressively defend itself against them. Written and oral discovery is complete and both parties have filed motions for summary judgment. As of date, Arrow Electronics’ motion for summary judgment has been denied, and Quantum’s motion for summary judgment has been granted in part and denied in part. Quantum also filed a motion to exclude Arrow Electronics’ expert witness report, which was granted. Trial is currently set to commence in February 2025. At this time, Quantum believes the probability that this lawsuit will have a material adverse effect on our business, operating results, or financial condition is remote.
Additionally, from time to time, the Company is party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, the Company does not expect that the ultimate outcome of any currently pending matters, individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, cash flows or financial position.
NOTE 12: SUBSEQUENT EVENTS
Warrants
On January 3, 2025, 677,905 warrants were exercised in a cashless exercise whereby 228,195 shares with a weighted average value of $35.42 per share were used to settle the exercise price and the remaining 449,710 shares were issued to the warrant holders.
Standby Equity Purchase Agreement
On January 25, 2025, the Company entered into a Standby Equity Purchase Agreement (the “SEPA”), with YA II PN, Ltd., a Cayman Islands exempt limited partnership (“YA”) managed by Yorkville Advisors Global, LP. Pursuant to and subject to the terms of the SEPA, YA has committed to purchase up to $200 million of Common Stock at any time during the three-year period following the date of the SEPA.
Any sale of Common Stock pursuant to the SEPA is subject to certain limitations, including that we may not issue to YA more than 19.99% of the Common Stock outstanding immediately prior to the execution of the SEPA. In connection with the execution of the SEPA, the Company has issued to YA 42,158 shares of Common Stock as consideration for YA’s commitment to purchase shares of Common Stock under the SEPA.
Term Loan Amendments
On January 27, 2025, the Company entered into an amendment (the “January 2025 Term Loan Amendment”) to the Term Loan. The January 2025 Term Loan Amendment, among other things, (i) amends the minimum EBITDA covenant so that such covenant is not tested on December 31, 2024 or March 31, 2025, (ii) amends certain mandatory prepayment events, and (iii) waives certain events of default, in each case, as set forth in the January 2025 Term Loan Amendment.
On January 27, 2025, the Company entered into an amendment (the “January 2025 Revolver Amendment”) to the PNC Credit Facility. The January 2025 Revolver Amendment, among other things, (i) amends the minimum EBITDA covenant so that such covenant is not tested on December 31, 2024 or March 31, 2025, (ii) amends certain mandatory prepayment events, and (iii) waives certain events of default, in each case, as set forth in the January 2025 Revolver Amendment.
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.
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.
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.
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.
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 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.
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.
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.
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
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report. Based on such evaluation, our principal executive and principal financial officers have concluded that as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
Notwithstanding the identified material weaknesses, management, including our chief executive officer and chief financial officer have determined, that the condensed consolidated financial statements included in this Form 10-Q fairly represent in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, for the periods presented in accordance with U.S. generally accepted accounting principles.
Material Weaknesses in Internal Control Over Financial Reporting
The following material weaknesses in our internal control over financial reporting, as initially disclosed in Part II, Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended March 31, 2024 had not been remediated as of December 31, 2024. Specifically:
•The Company’s accounting practices and procedures for applying standalone selling price under Accounting Standards Codification Topic 606 Revenue from Contracts with Customers (“Topic 606”) were not adequate to conclude on the application of standalone selling price consistent with the generally accepted application of the guidance in Topic 606.
•The Company did not maintain effective controls over the accuracy of the inputs in the sales order entry process to ensure accuracy of the price, quantity, and related customer data.
Remediation Plan
The Company is implementing enhancements to its internal controls to remediate these material weaknesses in its internal control over financial reporting, including:
•Review and update significant relevant accounting policies, procedures and controls.
•Provide additional training to individuals involved in the assessments for these topics.
•Engage with external third parties to assist with assessments for these topics, where necessary.
The Company is committed to maintaining a strong internal control environment and believes the remediation efforts, will represent significant improvements in its controls over the control environment. These steps will take time to be fully implemented and confirmed to be effective and sustainable. Additional controls may also be required over time. While the Company believes that these efforts will improve its internal control over financial reporting, the Company will not be able to conclude whether the steps the Company is taking will remediate the material weakness in internal control over financial reporting until a sufficient period has passed to allow management to test the design and operational effectiveness of the new and enhanced controls. Until the remediation steps set forth above are fully implemented and tested, the material weaknesses will continue to exist.
Changes in Internal Control
Except for the ongoing remediation measures to address the remaining material weaknesses, in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act, there were no changes in our internal control over
financial reporting that occurred during the quarter ended December 31, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Except as set forth below, there have been no material changes to the previously disclosed risk factors discussed in “Part I, Item 1A, Risk Factors” in the Annual Report. You should consider carefully these factors, together with all of the other information in this Quarterly Report, including our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, before making an investment decision.
It is not possible to predict the actual number of shares we will sell under the SEPA, or the actual gross proceeds resulting from those sales.
On January 25, 2025, we entered into the SEPA with YA, pursuant to which YA committed to purchase up to $200.0 million in shares of our Common Stock, subject to certain limitations and conditions.
We generally have the right to control the timing and amount of any sales of our shares of Common Stock to YA under the SEPA. Because the purchase price per share to be paid by YA for the shares of Common Stock that we may elect to sell to YA under the SEPA will fluctuate based on the market prices of our Common Stock during the applicable purchase valuation period for each purchase made pursuant to the SEPA, it is not possible for us to predict the total number of shares of Common Stock that we will sell to YA under the SEPA, the purchase price per share that YA will pay for shares purchased from us in the future under the SEPA, or the aggregate gross proceeds that we will receive from those purchases by YA under the SEPA. Sales of shares of our Common Stock pursuant to the SEPA will be dilutive to stockholders.
Moreover, although the SEPA provides that we may sell up to an aggregate of $200.0 million of our Common Stock to YA, only 2,302,733 shares of our Common Stock under the SEPA are being registered for resale by YA, which registration statement on Form S-1 filed with the SEC on January 27, 2025, as amended (as amended, the “Registration Statement”), has not yet been declared effective. If it becomes necessary for us to issue and sell to YA under the SEPA more than the shares that are being registered for resale under the Registration Statement in order to receive aggregate gross proceeds equal to the total commitment of aggregate of $200.0 million under the SEPA, we must file with the SEC one or more additional registration statements to register under the Securities Act of 1933 the resale by YA of any such additional shares of our Common Stock we wish to sell from time to time under the SEPA, which the SEC must declare effective and we may need to obtain stockholder approval to issue shares of Common Stock in excess of the exchange cap under the SEPA in accordance with applicable listing rules of The Nasdaq Stock Market.
During the period covered by this Quarterly Report, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
The exhibits required to be filed or furnished as part of this Quarterly Report are listed below. Notwithstanding any language to the contrary, exhibits 32.1 and 32.2 shall not be deemed to be filed as part of this Quarterly Report for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933, except to the extent that the Company specifically incorporates it by reference.
Cover page interactive data file, submitted using inline XBRL (contained in Exhibit 101)
X
* Schedules and attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and attachments upon request by the Securities and Exchange Commission.
# Indicates management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Quantum Corporation
(Registrant)
February 12, 2025
/s/ James J. Lerner
(Date)
James J. Lerner
President, Chief Executive Officer and Chairman of the Board
