ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report. In particular, the risk factors contained in Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources.
The following discussion contains forward-looking statements, such as 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. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements.
Overview and Fiscal Year 2022 Highlights
We are a technology company whose mission is to deliver innovative solutions to forward-thinking 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 income taxes.
Highlights from fiscal year 2022 included:
•We announced a new partnership with Supermicro and our ActiveScale 6.0 software and storage platform, as we expand our Object Storage line of business.
•We completed the Pivot3 business acquisition, which adds a portfolio of industry leading hyperconverged infrastructure (HCI) and intelligent software solutions for the security and surveillance markets.
•We completed the EnClouden assets acquisition which will enable us to expand the addressable market for our video surveillance portfolio, offering customers a solution using their server hardware of choice with a flexible subscription-based software model.
•We completed the refinancing of our term loan, significantly reducing our annual debt service and greatly increasing our financial flexibility related to covenants and restrictions.
•We brought on industry veteran John Hurley as Chief Revenue Officer. John brings extensive experience working with the largest global enterprise, commercial, and service provider customers.
•We announced a new collaboration and Remote Editing Solution for Adobe Premiere Pro Users.
•We announced a partnership with IBM on the next generation of LTO technology in which we will collaborate with IBM in its development of LTO-10 tape drives and media in order to accelerate time-to-market, capacity, and performance.
•We were awarded one Platinum and one Gold 'ASTORS' Homeland Security Award from American Security Today. The Annual 'ASTORS' Awards Program, is specifically designed to honor distinguished government and vendor solutions that deliver enhanced value, benefit, and intelligence to end-users in a variety of government, homeland security, enterprise, and public safety vertical markets.
COVID-19 IMPACT AND ASSOCIATED ACTIONS
Since the beginning of March 2020, COVID-19 has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread,
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including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders. These measures may remain in place for a significant period of time.
In light of these events, we have taken actions to protect the health and safety of our employees while continuing to serve our global customers as an essential business. We have implemented more thorough sanitation practices as outlined by health organizations and instituted mitigation practices at our locations around the world, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and decreasing employee travel.
We have seen a gradual stabilization in our business during the second half of fiscal 2021 and into fiscal 2022 as customers increasingly adapted to the COVID-19 environment. However, COVID-19 has caused a significant disruption to the global supply chain, which continues to have a negative impact on our business. Before the current disruptions in the global supply chain our historical backlog was very limited and typically represented less than 5% of quarterly revenues. During our fourth fiscal quarter our backlog remained above $60 million for the second consecutive quarter, up from $50 million as of September 30, 2021, and $30 million as of June 30, 2021. Approximately 80% of the ending backlog represented tape products a majority of which is for orders from our hyperscale customers. We anticipate that supply chain constraints will remain challenging, limiting our ability to ship against all customer demand and recognize a meaningful portion of the current backlog.
We will continue to actively monitor the impact of COVID-19 and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See “The recent COVID-19 pandemic could adversely affect our business, results of operations and financial condition” in Item 1A for more information regarding the risks we face as a result of the COVID-19 pandemic.
RESULTS OF OPERATIONS
Year Ended March 31,
Operating expenses
Loss on debt extinguishment, net (4,960) (14,789) —
(1) Includes stock-based compensation as follows:
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Year Ended March 31,
Comparison of the Years Ended March 31, 2022 and 2021
Revenue
Year Ended March 31,
(in thousands) 2022 % ofrevenue 2021 % ofrevenue $ Change % Change
Product revenue
Product Revenue
In fiscal 2022, product revenue increased $14.0 million, or 7%, as compared to fiscal 2021. Secondary storage systems increased by 32%, driven by increased demand from our large hyperscale customers, as well as continued strong demand globally for data protection and archive solutions. Primary storage systems decreased 20%, driven by large end-of-life purchases in the prior year. Devices and media decreased $1.1 million driven partially by decreased supply of LTO tape drives.
Service and Subscription Revenue
Service and subscription revenue increased $8.8 million, or 7%, in fiscal 2022 compared to fiscal 2021. This increase was due in part to acquisitions made during fiscal 2022. The increase also reflects a shift to subscription-based software licensing.
Royalty Revenue
We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue increased $0.5 million, or 3%, in fiscal 2022, as compared to fiscal 2021, related to shifts in market unit volumes towards more recent technologies such as LTO9 and LTO8.
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Gross Profit and Margin
Year Ended March 31,
(in thousands) 2022 Grossmargin % 2021 Grossmargin % $ Change Basis point change
Product Gross Margin
Product gross margin decreased 430 basis points for fiscal 2022, as compared with the same period in 2021. This decrease was due primarily to an increase in materials cost and freight, as global supply chain constraints disrupted normal procurement channels. Our product mix was also more heavily weighted to lower margin solutions.
Service and subscription gross margin decreased 300 basis points for fiscal 2022, as compared with the same period in 2021. This decrease was due primarily to increased costs for freight and repair on replacement parts.
Royalty Gross Margin
Royalties do not have significant related cost of sales.
Operating expenses
Year Ended March 31,
(in thousands) 2022 % ofrevenue 2021 % ofrevenue $ Change % Change
In fiscal 2022, research and development expense increased $10.1 million, or 24%, as compared with fiscal 2021. This increase was partially attributable to acquisitions made during fiscal 2022 which broaden our portfolio in the video surveillance and media and entertainment markets. We have also invested in a partnership with IBM to develop the next generation LTO technology.
In fiscal 2022, sales and marketing expenses increased $8.0 million, or 15%, as compared with fiscal 2021. This increase was partially driven by acquisitions made during fiscal 2022, expanding us into new markets. Marketing program spend also increased as in-person events started to occur again after a halt in the previous year.
In fiscal 2022, general and administrative expenses increased $3.3 million, or 8%, as compared with fiscal 2021. This increase was driven primarily by one-time legal and financial expenses related to acquisitions.
In fiscal 2022, restructuring expenses decreased $2.9 million, or 77%, as compared with fiscal 2021. This decrease is driven by corporate restructuring activities in the prior year as we consolidated our physical footprint and operations in certain markets.
Other expense, net
Year Ended March 31,
(in thousands) 2022 % ofrevenue 2021 % ofrevenue $ Change % Change
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In fiscal 2022, other expense, net decreased $1.1 million or 81%, compared to fiscal 2021. The decrease was primarily related to differences in foreign currency gains and losses during each period.
Interest expense
Year Ended March 31,
(in thousands) 2022 % ofrevenue 2021 % ofrevenue $ Change % Change
In fiscal 2022, interest expense decreased $15.6 million, or 57%, as compared to fiscal 2021. This decrease was primarily due to a lower principal balance and a lower effective interest rate on our Term Loan.
Loss on debt extinguishment, net
Year Ended March 31,
(in thousands) 2022 % ofrevenue 2021 % ofrevenue $ Change % Change
In fiscal 2022, loss on debt extinguishment, net was related to prepayment of our Senior Secured Term Loan that occurred during the period offset by the $10.0 million gain on the forgiveness of the Paycheck Protection Program loan. In fiscal 2021, we incurred a loss on debt extinguishment related to our Senior Secured Term Loan.
Income tax provision
Year Ended March 31,
(in thousands) 2022 % ofrevenue 2021 % ofrevenue $ Change % Change
Our income tax provision is primarily influenced by foreign and state income taxes. In fiscal 2022, the income tax provision increased $1.1 million or 461%, compared to fiscal 2021, related primarily to higher current foreign taxes as a result of an increase in foreign taxable income.
Due to our history of net losses in the U.S., 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 judgement 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.
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Comparison of the Years Ended March 31, 2021 and 2020
Revenue
Year Ended March 31,
(in thousands) 2021 % ofrevenue 2020 % ofrevenue $ Change % Change
Product revenue
Product Revenue
In fiscal 2021, product revenue decreased $41.4 million, or 16%, as compared to fiscal 2020. Secondary storage systems decreased by 20%, driven by fluctuating purchase cycles with our hyperscale customers. Primary storage systems decreased 10%, driven by early disruption in the media and entertainment market as COVID-19 significantly decreased major television and film production. Devices and media decreased $11.2 million driven partially by unusually high demand in fiscal 2020 following the resolution of a legal dispute, which had caused a constraint on LTO tape supply between the two principal suppliers in the market.
Service and Subscription Revenue
Service revenue decreased $6.1 million, or 5%, in fiscal 2021 compared to fiscal 2020. This decrease was due to reduced support renewals from our legacy backup customers, partially offset by new customer support agreements and installations.
Royalty Revenue
We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium. Royalty revenue decreased $5.9 million, or 28%, in fiscal 2021, as compared to fiscal 2020, related to overall declines in market unit volumes as the primary use of tape transitions from backup to archive workflows.
Gross Profit and Margin
Year Ended March 31,
(in thousands) 2021 Grossmargin % 2020 Grossmargin % $ Change Basis point change
Product Gross Margin
Product gross margin was flat comparing fiscal 2021 to fiscal 2020.
Service and Subscription Gross Margin
Service and subscription gross margin decreased 20 basis points for fiscal 2021, as compared with the same period in 2020. This decrease was due primarily to reduced service and subscription revenues from some of our legacy backup customers, partially offset by a reduction in service and subscription costs.
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Royalty Gross Margin
Royalties do not have significant related cost of sales.
Operating expenses
Year Ended March 31,
(in thousands) 2021 % ofrevenue 2020 % ofrevenue $ Change % Change
In fiscal 2021, research and development expense increased $5.4 million, or 15%, as compared with fiscal 2020. This increase was partially attributable to an increase in research and development headcount and professional services cost related to new product development. Most notably this includes headcount related to business acquisitions and integration of the associated development teams.
In fiscal 2021, sales and marketing expenses decreased $4.6 million, or 8%, as compared with fiscal 2020. This decrease was driven by a decrease in compensation as the result of lower sales performance and a decrease in marketing programs and professional services costs. Travel expenses were also significantly reduced during the fiscal year due to restrictions from the COVID-19 pandemic.
In fiscal 2021, general and administrative expenses decreased $12.5 million, or 23%, as compared with fiscal 2020. This decrease was driven primarily by lower costs related to our prior financial restatement and related activities, which we primarily incurred during fiscal 2019 and fiscal 2020 and decreased facilities expenses as we consolidate our physical footprint. These decreases were partially offset by increases to software expense as we modernize our existing IT infrastructure.
In fiscal 2021, restructuring expenses increased $2.7 million, or 262%, as compared with fiscal 2020. This increase was primarily due to footprint and associated headcount reductions that occurred in fiscal 2021, as well as changes in key leadership positions.
Other expense, net
Year Ended March 31,
(in thousands) 2021 % ofrevenue 2020 % ofrevenue $ Change % Change
In fiscal 2021, other expense, net increased $1.1 million or 403%, compared to fiscal 2020. The increase was primarily related to differences in foreign currency gains and losses during each period.
Interest expense
Year Ended March 31,
(in thousands) 2021 % ofrevenue 2020 % ofrevenue $ Change % Change
In fiscal 2021, interest expense increased $2.2 million, or 9%, as compared to fiscal 2020. This increase was primarily due to a higher average principal balance of our outstanding debt.
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Loss on debt extinguishment, net
Year Ended March 31,
(in thousands) 2021 % ofrevenue 2020 % ofrevenue $ Change % Change
In fiscal 2021, we incurred a loss on debt extinguishment related to our Senior Secured Term Loan.
Income tax provision
Year Ended March 31,
(in thousands) 2021 % ofrevenue 2020 % ofrevenue $ Change % Change
Our income tax provision is primarily influenced by foreign and state income taxes. In fiscal 2021, the income tax provision decreased $0.6 million or 70%, compared to fiscal 2020, related primarily to a valuation allowance recorded in fiscal 2020 for certain foreign deferred tax assets.
Due to our history of net losses in the U.S., 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 judgement 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.
Liquidity and Capital Resources
We consider liquidity in terms of the sufficiency of internal and external cash resources to fund our operating, investing and financing activities. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our balance sheet and amounts available under our Amended PNC Credit Facility (as defined below). 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 are subject to the risks arising from COVID-19 which have caused substantial financial market volatility and have adversely affected both the U.S. and the global economy. We believe that these social and economic impacts have had a negative effect on sales due to the decline in certain of our customers' ability or willingness to purchase our products and services. We have also experienced negative impacts on sales due to global supply chain constraints which has resulted in a significant increase in our sales backlog compared to our historical levels. The extent of the impacts will depend, in part, on how long the negative trends in customer demand and supply chain levels will continue. We expect the impact of COVID-19 to continue to have a significant impact on our liquidity and capital resources.
We had cash and cash equivalents of $5.2 million as of March 31, 2022, compared to $27.4 million as of March 31, 2021. These amounts exclude $0.0 and $5.0 million in long-term restricted cash that we were required to maintain under our PNC Credit Facility, and $0.3 million and $0.7 million of short-term restricted cash as of March 31, 2022 and March 31, 2021, respectively. As of March 31, 2022 we had $5.0 million available to borrow under the PNC Credit Agreement.
We generated negative cash flows from operations of approximately $33.7 million, $0.8 million and $1.2 million for the fiscal years ended March 31, 2022, 2021 and 2020, respectively, and generated net losses of approximately
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$32.3 million, $35.5 million, and $5.2 million for the fiscal years ended March 31, 2022, 2021 and 2020, respectively. We have funded operations through the sale of common stock, term debt borrowings, revolving credit facility borrowings and proceeds from the Paycheck Protection Program Loan described in Note 5: Debt. Management believes that it has the ability to obtain additional debt or equity financing, if required, and has historically been able to do so. Management also believes that current working capital, borrowings available under the revolving credit facility and future equity financing (including the April 22, 2022 sale of 30 million shares of our common stock for gross proceeds of $67.5 million) or debt financing will provide the Company with sufficient capital to fund operations for at least one year from the financial statement issuance date. There is no assurance that we would be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us.
Our outstanding long-term debt amounted to $107.2 million as of March 31, 2022, net of $4.9 million in unamortized debt issuance costs and $4.4 million in current portion of long-term debt, and $90.9 million as of March 31, 2021 net of $9.7 million in unamortized debt issuance costs and $1.9 million in current portion of long-term debt.
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. On March 15, 2022, we received waivers of our financial covenants under our term debt and PNC Credit Facility. We believe we were in compliance with all covenants under our debt agreements as of the date of filing of this Annual Report on Form 10-K. See "Risks Related to our Indebtedness" section of Item 1A. Risk Factors.
Cash Flows
The following table summarizes our consolidated cash flows for the periods indicated.
Year Ended March 31,
Cash provided by (used in):
Effect of exchange rate changes (108) (108) (16)
Net Cash Used in Operating Activities
Net cash used in operating activities was $33.7 million for the year ended March 31, 2022, primarily attributable to $30.5 million of changes in assets and liabilities due primarily to working capital requirements due to higher inventories and prepaid expenses.
Net cash used in operating activities was $0.8 million for the year ended March 31, 2021, primarily attributable to cash provided by operating activities excluding changes in assets and liabilities of $3.6 million offset by working capital changes.
Net cash used in operating activities was $1.2 million for the year ended March 31, 2020, primarily attributable $20.9 million of changes in assets and liabilities due primarily to lower deferred revenue and an increase in manufacturing inventories offset by cash provided by operating activities excluding changes in assets and liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities was $14.1 million for the year ended March 31, 2022, primarily attributable to $7.8 million of business acquisitions and $6.3 million of capital expenditures.
Net cash used in investing activities was $9.6 million for the year ended March 31, 2021, primarily attributable to $6.9 million of capital expenditures and $2.7 million for a business acquisition.
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Net cash used in investing activities was $4.6 million for the year ended March 31, 2020, primarily attributable to $2.6 million of capital expenditures and $2.0 million for a business acquisition.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $20.2 million for the year ended March 31, 2022 due primarily to $17.7 million of borrowings under PNC Credit Facility.
Net cash provided by financing activities was $31.3 million for the year ended March 31, 2021 due primarily to a secondary equity offering which generated net proceeds of $96.8 million, term loan borrowings of $19.4 million (net of lender fees of $0.6 million), $10.0 million in borrowings under the Paycheck Protection Program, offset in part by the prepayment of $92.3 million of our term debt.
Net cash provided by financing activities was $1.2 million for the year ended March 31, 2020 related primarily to net borrowings under the Amended PNC Credit Facility offset by principal repayments on our term debt.
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 of business litigation, See Note 10: Commitments and Contingencies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Contractual Obligations
Contractual obligations are cash amounts that we are obligated to pay as part of certain contracts that we have entered into during the normal course of business. Below is a table that shows our contractual obligations as of March 31, 2022 (in thousands):
Payments Due by Period
(in thousands) Total 1 year or less 1 – 3 Years 3 –5 Years More than5 years
(1)Consists of (i) principal and interest payments on our term loan based on the amount outstanding and interest rates in effect at March 31, 2022, and (ii) principal, interest, and unused commitment fees on our PNC Credit Facility based on the amount outstanding and rates in effect at March 31, 2022.
(2)Represents aggregate future minimum lease payments under non-cancelable operating leases.
(3)Includes primarily non-cancelable inventory purchase commitments.
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Off-Balance Sheet Arrangements
We do not currently have any other off-balance sheet arrangements and do not have any holdings in variable interest entities.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our consolidated financial statements in accordance with U.S. GAAP 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 Annual Report on Form 10-K. 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 the following 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. The following accounting policies include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain. For information on our significant accounting policies, including the policies discussed below, see Note 1: Description of Business and Significant Accounting Policies, to our consolidated financial statements.
Revenue Recognition
Our revenue is derived from three main sources: (a) products, (b) service and subscription, and (c) royalties. Our performance obligations are satisfied at a point in time or over time as stand ready obligations. Product revenue is recognized at the point in time when the customer takes control of the product, which typically occurs at the point of shipment. Service and subscription revenue consists of customer support agreements, software subscriptions, installation, and consulting & training. Our software subscriptions include term licenses which are recognized as revenue when the license has been delivered to the customer and related customer support which is recognized ratably over the service period. Revenue from customer support agreements is recognized ratably over the contractual term of the agreement. Installation services are typically completed within a short period of time and revenue from these services are recognized at the point when installation is complete. A majority of the Company's consulting and training revenue does not take significant time to complete therefore these obligations are satisfied upon completion of such services at a point in time. We license certain products under royalty arrangements, pursuant to which our licensees periodically provide us with reports containing units sold to end users subject to the royalties. The reports substantiate that our performance obligation has been satisfied and we recognize royalty revenue based on the reports or when amounts can be reasonably estimated.
There are significant judgements used when applying ASC Topic 606 to contracts with customers. Most of our contracts contain multiple goods and services designed to meet each customers’ unique storage needs. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price of the good or service underlying each performance obligation. Where standalone selling price may not be directly observable (e.g., the performance obligation is not sold separately), we maximize the use of observable inputs by using information including reviewing discounting practices, performance obligations with similar customers and product groupings. We determined that invoice price is the best representation of what we expect to receive from the delivery of each performance obligation. This judgment is based on the fact that each storage solution is customizable to meet an individual customer’s needs and every product’s transaction price can vary depending on the mix of other products included in the same purchase order and there are no identifiable trends that provide a good representation of expected margin for each product.
Product revenue may be impacted by a variety of price adjustments or other factors, including rebates, returns and stock rotation. We use the expected value method to estimate the net consideration expected to be returned by the customer. We use historical data and current trends to drive our estimates. We record a reduction to revenue to account for these items that may result in variable consideration. We initially measure a returned asset at the carrying amount of the inventory, less any expected costs to recover the goods including potential decreases in value of the returned goods.
Income Taxes
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Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and tax bases of assets and liabilities, measured at the enacted tax rates expected to apply to taxable income in the years in which those tax assets or liabilities are expected to be realized or settled. Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.
A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the tax provision.
We recognize the financial statement effects of an uncertain income tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. We recognize penalties and tax-related interest expense as a component of income tax expense in our consolidated statements of operations. See Note 9: Income Taxes, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Inventories
Manufacturing Inventories
Our manufacturing inventory is recorded at the lower of cost or net realizable value, with cost being determined on a first-in, first-out (“FIFO”) basis. Costs include material, direct labor, and an allocation of overhead. Adjustments to reduce the cost of manufacturing inventory to its net realizable value, if required, are made for estimated excess, obsolete or impaired balances. Factors influencing these adjustments include declines in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates.
Service Parts Inventories
Our service parts inventories are recorded at the lower of cost or net realizable value, with cost being determined on a FIFO basis. Service parts inventories consist of both component parts, which are primarily used to repair defective units, and finished units, which are provided for customer use permanently or on a temporary basis while the defective unit is being repaired. We record adjustments to reduce the carrying value of service parts inventory to its net realizable value and dispose of parts with no use and a net realizable value of zero. Factors influencing these adjustments include product life cycles, end of service life plans and the volume of enhanced or extended warranty service contracts. Estimates of net realizable value involve significant estimates and judgments about the future, and revisions would be required if these factors differ from our estimates.
Business Acquisitions, Goodwill and Acquisition-Related Intangible Assets
We allocate the purchase price to the intangible and tangible assets acquired and liabilities assumed in a business combination at their estimated fair values on the date of acquisition, with the excess recorded to goodwill. We use our best estimates and assumptions to assign fair value to the assets acquired and liabilities assumed as well as the useful lives of the acquired intangible assets. Examples of critical estimates in valuing certain intangible assets we have acquired include, but are not limited to, future expected cash flows, expected technology life cycle, attrition rates of customers, and discount rates. We estimate the useful lives of each intangible asset based on the expected period over which we anticipate generating economic benefit from the asset. The amounts and useful lives assigned to acquired intangible assets impact the amount and timing of future amortization expense.
While we use our best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the estimated fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to the consolidated statements of operations.
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Recently Issued and Adopted Accounting Pronouncements
For recently issued and adopted accounting pronouncements, see Note 1: Description of Business and Significant Accounting Policies, to our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.
Interest Rate Risk
We are subject to interest rate risk on borrowings under our variable interest rate term debt and PNC Credit Facility. See Note 5: Debt to our consolidated financial statements for a description of our long term debt. Changes in the market interest rate will increase or decrease our interest expense. Assuming no change in the outstanding borrowings under the term debt and the PNC Credit Facility during fiscal 2023, a hypothetical 100-basis point increase or decrease in market interest rates sustained throughout the year would not result in a material change to our annual interest expense. Our other long-term debt related to lease obligations have fixed interest rates and terms, and as such, we consider the associated risk to our results of operations from changes in market rates of interest applied to our lease obligations to be minimal.
Foreign Exchange Risk
We conduct business in certain international markets. Because we operate in international markets, we have exposure to different economic climates, political arenas, tax systems and regulations that could affect foreign exchange rates. Our primary exposure to foreign currency risk relates to transacting in foreign currency and recording the activity in U.S. dollars. Changes in exchange rates between the U.S. dollar and these other currencies will result in transaction gains or losses, which we recognize in our consolidated statements of operations.
To the extent practicable, we minimize our foreign currency exposures by maintaining natural hedges between our assets and liabilities and revenues and expenses denominated in foreign currencies. We may enter into foreign exchange derivative contracts or other economic hedges in the future. Our goal in managing our foreign exchange risk is to reduce to the extent practicable our potential exposure to the changes that exchange rates might have on our earnings.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 32) 43
Consolidated Balance Sheets 47
Consolidated Statements of Operations and Comprehensive Loss 48
Consolidated Statements of Cash Flows 49
Consolidated Statements of Stockholders’ Deficit 50
Index to Notes to Consolidated Financial Statements 51
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Quantum Corporation
San Jose, California
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Quantum Corporation and its subsidiaries (the Company) as of March 31, 2022 and 2021 and the related consolidated statements of operations and comprehensive loss, stockholders' deficit, and cash flows for each of the years in the three year period ended March 31, 2022, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
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assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition — Refer to Note 1 to the Consolidated Financial Statements
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/s/ ArmaninoLLP
San Ramon, California
June 8, 2022
We have served as the Company's auditor since 2019.
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QUANTUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Assets
Current assets:
Restricted cash — 5,000
Liabilities and Stockholders’ Deficit
Current liabilities:
Long-term debt, current portion 4,375 1,850
Revolving credit facility 17,735 —
Long-term debt, net of current portion 89,448 90,890
Commitments and Contingencies (Note 10)
Stockholders’ deficit
Preferred stock:
Common stock:
Accumulated other comprehensive loss (1,423) (856)
Total liabilities and stockholders' deficit $ 201,635 $ 194,924
The accompanying notes are an integral part of these consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
Year Ended March 31,
Revenue
Cost of revenue
Operating expenses
Loss on debt extinguishment, net (4,960) (14,789) —
Net loss per share - basic and diluted $ (0.55) $ (0.83) $ (0.14)
Foreign currency translation adjustments, net (567) 666 (112)
The accompanying notes are an integral part of these consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
Operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Long-term debt related costs 8,471 167 —
Paid-in-kind interest — — 1,858
Provision for manufacturing and service inventories 5,740 6,334 6,255
Gain on PPP loan extinguishment (10,000) — —
Non-cash income tax benefit — (577) —
Non-cash loss on debt extinguishment — 10,087 —
Changes in assets and liabilities, net of effect of acquisitions:
Investing activities
Net cash provided by (used in) investing activities (14,124) (9,586) (4,599)
Financing activities
Borrowings of paycheck protection program — 10,000 —
Proceeds from secondary offering, net — 96,756 —
Payment of taxes due upon vesting of restricted stock — (236) (171)
Proceeds from issuance of common stock 1,762 1,335 —
Effect of exchange rate changes on cash and cash equivalents 51 (108) (16)
Supplemental disclosure of cash flow information
Cash paid for income taxes, net of refunds $ 944 $ (2,283) $ (490)
Non-cash transactions
Transfer of property and equipment to manufacturing inventory $ 818 $ 429 $ 400
Payment of litigation settlements with insurance proceeds $ — $ — $ 8,950
The accompanying notes are an integral part of these consolidated financial statements.
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QUANTUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
Shares Amount
Foreign currency translation adjustments, net — — — — (112) (112)
Shares issued under employee incentive plans, net 1,082 11 (182) — — (171)
Shares issued from warrants exercised, net 2,783 28 (28) — — —
Stock-based compensation — — 6,748 — — 6,748
Foreign currency translation adjustments, net of income taxes — — — — 666 666
Shares issued under employee stock purchase plan 320 4 1,331 — — 1,335
Shares issued under employee incentive plans, net 1,264 13 (13) — — —
Shares issued in connection with business acquisition 361 3 2,077 — — 2,080
Warrants issued related to long-term debt — — 11,515 — — 11,515
Stock-based compensation — — 9,624 — — 9,624
Shares issued under employee stock purchase plan 389 4 1,758 — — 1,762
Shares issued under employee incentive plans, net 2,308 23 (23) — — —
Shares issued in connection with business acquisition 821 8 2,810 — — 2,818
The accompanying notes are an integral part of these consolidated financial statements.
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INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Note 2: Revenue Recognition 60
Note 3: Business Acquisitions 61
Note 4: Balance Sheet Information 63
Note 6: Leases 67
Note 7: Common Stock 68
Note 8: Net Loss Per Share 71
Note 9: Income Taxes 72
Note 10: Commitments and Contingencies 74
Note 11: Fair Value of Financial Instruments 76
Note 12: Subsequent Events 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Quantum Corporation, together with its consolidated subsidiaries (“Quantum” or the “Company”), is a leader in storing and managing digital video and other forms of unstructured data, delivering top streaming performance for video and rich media applications, along with low-cost, long-term storage systems for data protection and archiving. The Company helps customers around the world capture, create and share digital data and preserve and protect it for decades. The Company’s software-defined, hyperconverged storage solutions span from non-violate memory express (“NVMe”), to solid state drives, (“SSD”), hard disk drives, (“HDD”), tape and the cloud and are tied together leveraging a single namespace view of the entire data environment. The Company works closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving needs.
Basis of Presentation
The consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated. The Company reviews subsidiaries and affiliates, as well as other entities, to determine if they should be considered variable interest entities (“VIE”), and whether it should change the consolidation determinations based on changes in their characteristics. The Company considers an entity a VIE if its equity investors own an interest therein that lacks the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or if the entity is structured with non-substantive voting interests. To determine whether or not the entity is consolidated with the Company’s results, the Company also evaluates which interests are variable interests in the VIE and which party is the primary beneficiary of the VIE.
Liquidity
The accompanying consolidated financial statements of the Company have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. The Company generated negative cash flows from operations of approximately $33.7 million, $0.8 million and $1.2 million for the fiscal years ended March 31, 2022, 2021 and 2020, respectively, and generated net losses of approximately $32.3 million, $35.5 million, and $5.2 million for the fiscal years ended March 31, 2022, 2021 and 2020, respectively. The Company has funded operations through the sale of common stock, term debt borrowings, revolving credit facility borrowings and proceeds from the Paycheck Protection Program Loan described in Note 5: Debt. Management believes that it has
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the ability to obtain additional debt or equity financing, if required, and has historically been able to do so. Management also believes that current working capital, borrowings available under the revolving credit facility and future equity financing (including the April 22, 2022 sale of 30 million shares of our common stock for gross proceeds of $67.5 million) or debt financing will provide the Company with sufficient capital to fund operations for at least one year from the consolidated financial statement issuance date. There is no assurance that we would be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of Quantum and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with 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.
Cash and Cash Equivalents
The Company has cash deposits and cash equivalents deposited in or managed by major financial institutions. Cash equivalents include all highly liquid investment instruments with an original maturity of three months or less and consist primarily of money market accounts. At times the related amounts are in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses with these financial institutions and does not believe such balances are exposed to significant credit risk.
Restricted Cash
Restricted cash is comprised of required minimum balances that serve as cash collateral in connection with various items including insurance requirements, value added taxes, ongoing tax audits and leases in certain countries.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses based on historical experience and expected collectability of outstanding accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition, and for the majority of its customers require no collateral. For customers that do not meet the Company’s credit standards, the Company may require a form of collateral, such as cash deposits or letters of credit, prior to the completion of a transaction. These credit evaluations require significant judgment and are based on multiple sources of information. The Company analyzes such factors as its historical bad debt experience, industry and geographic concentrations of credit risk, current economic trends and changes in customer payment terms. The Company will write-off customer balances in full to the reserve when it has determined that the balance is not recoverable. Changes in the allowance for doubtful accounts are recorded in general and administrative expenses.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
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Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Inputs are unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company's financial instruments consist of Level 3 liabilities.
Manufacturing Inventories
Manufacturing inventory is recorded at the lower of cost or net realizable value, with cost being determined on a first-in, first-out (“FIFO”) basis. Costs include material, direct labor, and an allocation of overhead in the case of work in process. Adjustments to reduce the cost of manufacturing inventory to its net realizable value, if required, are made for estimated excess, obsolete or impaired balances. Factors influencing these adjustments include declines in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from the Company’s estimates.
Service Parts Inventories
Service parts inventories are recorded at the lower of cost or net realizable value, with cost being determined on a FIFO basis. The Company carries service parts because it generally provides product warranty for one to three years and earns revenue by providing enhanced and extended warranty and repair services during and beyond this warranty period. Service parts inventories consist of both component parts, which are primarily used to repair defective units, and finished units, which are provided for customer use permanently or on a temporary basis while the defective unit is being repaired. The Company records adjustments to reduce the carrying value of service parts inventory to its net realizable value and disposes of parts with no use and a net realizable value of zero. Factors influencing these adjustments include product life cycles, end of service life plans and volume of enhanced or extended warranty service contracts. Estimates of net realizable value involve significant estimates and judgments about the future, and revisions would be required if these factors differ from the Company’s estimates.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation and amortization, computed on a straight-line basis over the estimated useful lives of the assets as follows:
Machinery and equipment 3 to 5 years
Computer equipment 3 to 5 years
Other software 3 years
Furniture and fixtures 5 years
Other office equipment 5 years
Leasehold improvements Shorter of useful life or life of lease
When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations and comprehensive income (loss) in the period realized.
The Company evaluates the recoverability of the carrying amount of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. A potential impairment charge is evaluated when the undiscounted expected cash flows derived from an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of impairment testing, the undiscounted cash flows used to assess impairments and the fair value of the asset group.
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Business Combinations
The Company allocates the purchase price to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the estimated fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill. The results of operations of an acquired business is included in its consolidated financial statements from the date of acquisition. Acquisition-related expenses are expensed as incurred.
Goodwill
Goodwill represents the excess of the purchase price consideration over the estimated fair value of the tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill is evaluated for impairment annually in the third quarter of the Company's fiscal year as a single reporting unit, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company may elect to qualitatively assess whether it is more likely than not that the fair value of its reporting unit is less than its carrying value. If the Company opts not to qualitatively assess, a quantitative goodwill impairment test is performed. The quantitative test compares its reporting unit's carrying amount, including goodwill, to its fair value calculated based on its enterprise value. If the carrying amount exceeds its fair value, an impairment loss is recognized for the excess. The Company did not recognize any impairment of goodwill in any of the periods presented in the consolidated financial statements.
Purchased Intangible Assets
Purchased intangible assets with finite lives are stated at cost, net of accumulated amortization. The Company amortizes its intangible assets on a straight-line basis over an estimated useful life of two to four years.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment and finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company measures the recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, the Company records an impairment charge for the amount by which the carrying amount of the asset exceeds its fair market value.
Operating Leases
The Company determines if an arrangement contains a lease at inception. Lease liabilities are recognized at the present value of the future lease payments at commencement date. The interest rate implicit in the Company's operating leases is not readily determinable, and therefore an incremental borrowing rate is estimated to determine the present value of future payments. The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments. The operating lease right-of-use ("ROU") asset is determined based on the lease liability initially established and reduced for any prepaid lease payments and any lease incentives. The Company accounts for the lease and non-lease components of operating lease contract consideration as a single lease component.
Certain of the operating lease agreements contain rent concession, rent escalation, and option to renew provisions. Rent concession and rent escalation provisions are considered in determining the lease cost. Lease cost is recognized on a straight-line basis over the lease term commencing on the date the Company has the right to use the leased property. The Company generally uses the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that an extension or termination option will be exercised.
In addition, certain operating lease agreements contain tenant improvement allowances from the Company's landlords. These allowances are accounted for as lease incentives and reduce its ROU asset and lease cost over the lease term.
For short-term leases which have a lease term less than twelve months and do not include an option to purchase the underlying asset that is reasonably certain to be exercised, the Company recognizes rent expense in the
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consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term and record variable lease payments as incurred.
Deferred Revenue
Deferred revenue primarily consists of amounts that have been invoiced but have not yet been recognized as revenue and performance obligations pertaining to subscription services. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet dates.
Revenue Recognition
The Company generates revenue from three main sources: (1) product, (2) professional services, and (3) royalties. Sales tax collected on sales is netted against government remittances and thus, recorded on a net basis. The Company's performance obligations are satisfied at a point in time or over time as stand ready obligations. The majority of revenue is recognized at a point in time when products are accepted, installed or delivered.
Product Revenue
The Company's product revenue is comprised of multiple storage solution hardware and software offerings targeted towards consumer and enterprise customers. Revenue from product sales is recognized at the point in time when the customer takes control of the product. If there are significant post-delivery obligations, the related revenue is deferred until such obligations are fulfilled. Revenue from contracts with customer acceptance criteria are recognized upon end user acceptance.
Service and Subscription Revenue
Service and subscription revenue consists of four components: (a) post-contract customer support agreements,
(b) software subscriptions, (c) installation, and (d) consulting & training.
Customers have the option to choose between different levels of hardware and software support. The Company's support plans include various stand-ready obligations such as technical assistance hot-lines, replacement parts maintenance, and remote monitoring that are delivered whenever called upon by its customers. Support plans provide additional services and assurance outside the scope of the Company's primary product warranties. Revenue from support plans are recognized ratably over the contractual term of the service contract.
The Company also sells software subscriptions that include term licenses which are recognized as revenue when the license is delivered to the customer and related customer support which is recognized ratably over the service period.
The Company offers installation services on all its products. Customers can opt to either have Quantum or a Quantum-approved third-party service provider install its products. Installation services are typically completed within a short period of time and revenue from these services are recognized at the point when installation is complete.
A majority of the Company's consulting and training revenue does not take significant time to complete therefore these obligations are satisfied upon completion of such services at a point in time.
Royalty Revenue
The Company licenses certain intellectual property to third party manufacturers which gives the manufacturers rights to intellectual property including the right to either manufacture or include the intellectual property in their products for resale. Licensees pay the Company a per-unit royalty for sales of their products that incorporate its intellectual property. On a periodic and timely basis, the licensees provide the Company with reports containing units sold to end users subject to the royalties. The reports substantiate that the performance obligation has been satisfied therefore revenue is recognized based on the reports or when amounts can be reasonably estimated.
Significant Judgements
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The Company generally enters into contracts with customers to provide storage solutions to meet their individual needs. Most of the Company’s contracts contain multiple goods and services designed to meet each customers’ unique storage needs. Contracts with multiple goods and services have multiple distinct performance obligations as the promise to transfer hardware, installation services, and support services are capable of being distinct and provide economic benefit to customers on their own.
Stand-alone selling price
For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative standalone selling price (“SSP”) of the good or service underlying each performance obligation. The SSP represents the amount for which the Company would sell the good or service to a customer on a standalone basis (i.e., not sold as a bundle with any other products or services). Where SSP may not be directly observable (e.g., the performance obligation is not sold separately), the Company maximized the use of observable inputs by using information including reviewing discounting practices, performance obligations with similar customers and product groupings. The Company evaluated all methods included in ASC 606 to determine SSP and concluded that invoice price is the best representation of what the Company expects to receive from the delivery of each performance obligation.
Variable consideration
Product revenue includes multiple types of variable consideration, such as rebates, returns, or stock rotations. All contracts with variable consideration require payment upon satisfaction of the performance obligation typically with net 45-day payment terms. The Company does not include significant financing components in its contracts. The Company constrains estimates of variable consideration to amounts that are not expected to result in a significant revenue reversal in the future, primarily based on the most likely level of consideration to be returned to the customer under the specific terms of the underlying programs.
The expected value method is used to estimate the consideration expected to be returned to the customer. The Company uses historical data and current trends to drive the estimates. The Company records a reduction to revenue to account for these programs. The Company initially measures this asset at the carrying amount of the inventory, less any expected costs to recover the goods including potential decreases in the value of the returned goods.
Cost of Service and Subscription Revenue
The Company classifies expenses as service cost of revenue by estimating the portion of its total cost of revenue that relates to providing field support to its customers under contract. These estimates are based upon a variety of factors, including the nature of the support activity and the level of infrastructure required to support the activities from which it earns service and subscription revenue. In the event its service business changes, its estimates of cost of service and subscription revenue may be impacted.
Research and Development Costs
Expenditures relating to the development of new products and processes are expensed as incurred. These costs include expenditures for employee compensation, materials used in the development effort, other internal costs, as well as expenditures for third party professional services. The Company has determined that technological feasibility for its software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established have not been material. The Company expenses software-related research and development costs as incurred.
Internal-use Software Costs
The Company capitalizes costs incurred to implement software solely for its internal use, including (i) hosted applications used to deliver the Company's support services, and (ii) certain implementation costs incurred in a hosting arrangement that is a service contract when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable the project will be completed and used to perform the intended function.
Software implementation costs are capitalized to either other current assets or other long-term assets on the Company's consolidated balance sheet and amortized over 10 years. Software implementation costs capitalized
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were $3.1 million and $3.1 million for fiscal 2022 and 2021. Related amortization expense for software implementation costs was $0.1 million and $0 during fiscal 2022 and 2021, respectively.
Advertising Expense
Advertising expense is recorded as incurred and was $3.5 million, $1.5 million, and $3.4 million in fiscal 2022, 2021 and 2020, respectively.
Shipping and Handling Fees
Shipping and handling fees are included in cost of revenue and were $7.3 million, $9.4 million, and $9.4 million in fiscal 2022, 2021 and 2020, respectively.
Restructuring Reserves
Restructuring reserves include charges related to the realignment and restructuring of the Company’s business operations. These charges represent judgments and estimates of the Company’s costs of severance, closure and consolidation of facilities and settlement of contractual obligations under its operating leases, including sublease rental rates, asset write-offs and other related costs. The Company reassesses the reserve requirements to complete each individual plan under the restructuring programs at the end of each reporting period. If these estimates change in the future or actual results differ from the Company’s estimates, additional charges may be required.
Foreign Currency Translation
The Company's international operations generally use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are reported as a component of other comprehensive loss and recorded in accumulated other comprehensive loss in the accompanying consolidated balance sheets.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes, in which deferred tax asset and liabilities are recognized based on differences between the financial reporting carrying values of assets and liabilities and the tax basis of those assets and liabilities, measured at the enacted tax rates expected to apply to taxable income in the years in which those tax assets or liabilities are expected to be realized or settled.
A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in the Company’s judgment about the realizability of the related deferred tax asset, is included in the tax provision.
The Company assesses whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized in the consolidated financial statements from such a position is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. The Company recognizes penalties and tax-related interest expense as a component of income tax expense in the consolidated statements of operations.
Asset Retirement Obligations
The Company records an asset retirement obligation for the fair value of legal obligations associated with the retirement of tangible long-lived assets and a corresponding increase in the carrying amount of the related asset in the period in which the obligation is incurred. In periods subsequent to initial measurement, the Company recognizes changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate. Over time, the liability is accreted to its present value and the capitalized cost is
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depreciated over the estimated useful life of the asset. The Company’s obligations relate primarily to certain legal obligations to remediate leased property on which certain assets are located.
Warranty Expense
The Company warranties its products against certain defects and the terms range from one to three years. The Company provides for the estimated costs of fulfilling its obligations under hardware warranties at the time the related revenue is recognized. The Company estimates the provision based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The Company regularly reassess its estimates to determine the adequacy of the recorded warranty liability and adjusts the provision, as necessary.
Debt Issuance Costs
Debt issuance costs for revolving credit agreements are capitalized and amortized over the term of the underlying agreements on a straight-line basis. Amortization of these debt issuance costs is included in interest expense while the unamortized debt issuance cost balance is included in other current assets or other assets. Debt issuance costs for the Company’s term loans are recorded as a reduction to the carrying amount and are amortized over their terms using the effective interest method. Amortization of these debt issuance costs is included in interest expense.
Stock-Based Compensation
The Company classifies stock-based awards granted in exchange for services as either equity awards or liability awards. The classification of an award as either an equity award or a liability award is generally based upon cash settlement options. Equity awards are measured based on the fair value of the award at the grant date. Liability awards are re-measured to fair value each reporting period. Each reporting period, the Company recognizes the change in fair value of awards issued to non-employees as expense. The Company recognizes stock-based compensation on a straight-line basis over the award’s requisite service period, which is generally the vesting period of the award, less actual forfeitures. No compensation expense is recognized for awards for which participants do not render the requisite services. For equity and liability awards earned based on performance or upon occurrence of a contingent event, when and if the awards will be earned is estimated. If an award is not considered probable of being earned, no amount of stock-based compensation is recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the extent the estimate of awards considered probable of being earned changes, the amount of stock-based compensation recognized will also change.
Concentration of Credit Risk
The Company sells products to customers in a wide variety of industries on a worldwide basis. In countries or industries where the Company is exposed to material credit risk, the Company may require collateral, including cash deposits and letters of credit, prior to the completion of a transaction. The Company does not believe it has significant credit risk beyond that provided for in the consolidated financial statements in the ordinary course of business. During the fiscal years ended March 31, 2022, 2021 and 2020 no customers represented 10% or more of the Company’s total revenue. One customer comprised approximately 21% of accounts receivable as of March 31, 2022. Two customers comprised approximately 22% of accounts receivable as of March 31, 2021.
If the Company is unable to obtain adequate quantities of the inventory needed to sell its products, the Company could face costs increases or delays or discontinuations in product shipments, which could have a material adverse effect on the Company’s results of operations. In many cases, the Company’s chosen vendor may be the sole source of supply for the products or parts they manufacture, or services they provide, for the Company. Some of the products the Company purchases from these sources are proprietary or complex in nature, and therefore cannot be readily or easily replaced by alternative sources.
Segment Reporting
Business segments are defined as components of an enterprise about which discrete financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. Based on the way the Company manages its business, the Company has determined that it currently operates with one reportable segment. The chief operating decision maker focuses on
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consolidated results in assessing operating performance and allocating resources. Furthermore, the Company offers similar products and services and uses similar processes to sell those products and services to similar classes of customers.
The Company’s chief operating decision-maker is its Chief Executive Officer who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis. There are no segment managers who are held accountable by the chief operating decision-maker, or anyone else, for operations, operating results, and planning for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable segment and operating segment structure.
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”).
The following table summarizes property and equipment, net by geographic region (in thousands):
For the year ended March 31,
Defined Contribution Plan
The Company sponsors a qualified 401(k) retirement plan for its U.S. employees. The plan covers substantially all employees who have attained the age of 18. Participants may voluntarily contribute to the plan up to the maximum limits established by Internal Revenue Service regulations. For the years ended March 31, 2022 and 2021, the Company incurred $1.7 million and $1.2 million in matching contributions, respectively. No matching contributions were made in the fiscal year ended March 31, 2020.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board issued ASU 2021-08—Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to “require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.” Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. As a result of the amendments made by ASU 2021-08, it is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements. The Company elected to early adopt this standard in the fourth quarter of fiscal 2022 using a retrospective approach that applies the new standard to all business acquisitions that occurred within the current fiscal year. The impact of adoption was in increase of $2.7 million to deferred revenue and goodwill associated with the Pivot 3 acquisition described in Note 3: Business Acquisitions.
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NOTE 2: REVENUE
In the following table, revenue is disaggregated by major product offering and geographies (in thousands):
Year Ended March 31,
Americas1
EMEA
APAC
Consolidated
1 Revenue for Americas geographic region outside of the United States is not significant.
2 Royalty revenue is not allocable to geographic regions.
Contract Balances
The following table presents the Company’s contract liabilities and certain information related to this balance as of March 31, 2022 (in thousands):
Remaining Performance Obligations
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Remaining performance obligations consisted of the following (in thousands):
Current Non-Current Total
The Company expects to recognize approximately 71.6% of the remaining performance obligations within the next 12 months. The majority of the Company’s noncurrent remaining performance obligations is expected to be recognized in the next 13 to 60 months.
NOTE 3: BUSINESS ACQUISITIONS
Square Box
On December 12, 2020, the Company entered into a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Square Box Systems Limited (“SBS”).
The purchase price of approximately $7.7 million was comprised of (a) $2.6 million cash (net of cash acquired); (b) approximately 0.4 million shares of the Company’s common stock, with a fair value of $2.1 million; (c) $2.0 million cash payable at the first anniversary of the closing date; and (d) $1.0 million cash payable at the second anniversary of the closing date.
Contingently issuable restricted stock units in the amount of $5.3 million, which are subject to continuous employment, are being recognized as stock-based compensation over the related two years vesting period.
The purchase price was allocated to tangible assets of approximately $0.8 million, intangible assets of approximately $5.6 million based on their fair values on the acquisition date, liabilities of approximately $1.0 million, and a net deferred tax liability of $1.1 million. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed was approximately $3.4 million, which has been recorded as goodwill.
The historical results of operations for SBS were not significant to the Company's consolidated results of operations for the periods presented.
Pivot3
In July 2021, the Company purchased specified assets related to the video surveillance business of PV3 (an ABC) LLC, a Delaware limited liability company as assignee for the benefit of Pivot3, Inc., a Delaware corporation (“Pivot 3”). The transaction costs associated with the acquisition were not material and were expensed as incurred. Goodwill generated from this acquisition is primarily attributable to the expected post-acquisition synergies from integrating Pivot3's video surveillance portfolio and assets with its platform to expand the video surveillance portfolio with hardware and software offerings that will be offered under the Quantum VS-Series portfolio. Goodwill obtained in an asset acquisition is deductible for tax purposes.
The total purchase consideration for the acquisition of Pivot3 was $7.8 million, which consisted of the following (in thousands):
Fair value of stock consideration 2,818
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The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of the acquisition (in thousands):
Amount Estimated Useful Life
Identified intangible assets:
Developed technology 1,700 2 years
Customer lists 3,700 4 years
Property, plant and equipment 4,300 3 years
Net liabilities assumed (11,385)
Pivot 3 has also agreed to license to the Company certain intellectual property rights related to the business. The historical results of operations for Pivot 3 were not significant to the Company's consolidated results of operations for the periods presented.
EnCloudEn
In October 2021, the Company acquired all intellectual property rights and certain other assets of EnCloudEn, an early stage hyperconverged infrastructure software company. The transaction costs associated with the acquisition were not material and were expensed as incurred. The total purchase consideration for the acquisition was $2.8 million with $2.6 million paid at closing and an additional $0.2 million paid in three equal quarterly installments after closing. The fair value of the assets acquired was allocated to developed technology with an estimate useful life of three years.
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NOTE 4: BALANCE SHEET INFORMATION
Certain significant amounts included in the Company's consolidated balance sheets consist of the following (in thousands):
Manufacturing inventories March 31,
Finished goods
Service inventories March 31,
Property and equipment, net March 31,
Machinery and equipment, and software $ 46,831 $ 38,327
Total property, plant and equipment, net $ 12,853 $ 10,051
Depreciation and amortization expense for property and equipment amounted to $9.4 million, $5.7 million, and $4.3 million for the years ended March 31, 2022, 2021, and 2020, respectively.
Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Intangible assets amortization expense was $3.7 million, $0.1 million for the years ended March 31, 2022 and 2021, respectively. There was no amortization expense for the year ended March 31, 2020. As of March 31, 2022, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 2.4 years. The Company recorded amortization of developed technology in cost of product revenue, and customer lists in sales and marketing expenses in the consolidated statements of operations.
As of March 31, 2022, the future expected amortization expense for intangible assets is as follows (in thousands):
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Fiscal year ending Estimated future amortization expense
Thereafter —
Goodwill Amount
Goodwill acquired 9,503
Other accrued liabilities March 31,
Accrued restructuring — 580
The following table details the change in the accrued warranty balance (in thousands):
Year Ended March 31,
Adjustments to prior estimates (156) (472) (114)
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NOTE 5: DEBT
The following table summarizes the Company's borrowing as of the dates presented (in thousands):
Year Ended March 31,
Senior Secured Term Loan $ — $ 92,426
Amended PNC Credit Facility 17,735 —
Paycheck Protection Program — 10,000
Less unamortized debt issuance costs(1) (4,899) (9,686)
(1)The unamortized debt issuance costs related to the Term Loan and the Senior Secured Term Loan are presented as a reduction of the carrying amount of the corresponding debt balance on the accompanying consolidated balance sheets. Unamortized debt issuance costs related to the PNC Credit Facility are presented within other assets on the accompanying consolidated balance sheets.
Term Loan
On December 27, 2018, the Company entered into a senior secured term loan (the "Senior Secured Term Loan”) 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 utilizing the proceeds of the secondary public offering discussed in Note 7: Common Stock. The Company recognized a loss on debt extinguishment of $14.8 million which included the write-off of debt issuance costs of $10.1 million, a prepayment penalty of $4.6 million and other costs of $0.1 million.
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. The Company incurred $5.1 million in costs related to the Term Loan. These debt issuance costs are reflected as a reduction of the carrying amount of the Term Loan and are being recognized as interest expense over the term of the Term Loan. The Company recorded a loss on debt extinguishment of $15.0 million related to the repayment of the Senior Secured Term Loan which was comprised of $6.4 million in prepayment penalties, $0.1 million in legal fees, and the write-off of unamortized debt issuance costs of $8.4 million.
On March 15, 2022, the Company entered into an amendment to the Term Loan, which, among other things (a) waived compliance with the total leverage ratio financial covenant for the four fiscal quarter period ended March 31, 2022; (b) waived compliance with the minimum liquidity financial covenant as of March 31, 2022; and (c) permitted the Company to retain a portion of the cash proceeds of a public offering of the Company's common stock.
Loans under the Term Loan designated as Prime Rate 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 LIBOR 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 LIBOR Rate Loans bear interest at a rate per annum equal to the LIBOR Rate plus an applicable margin of 6.00%. The LIBOR Rate is subject to a floor of 0.75%. The Company can designate a loan as a Prime Rate Loan or LIBOR Rate Loan in its discretion.
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The Term Loan and the PNC Credit Agreement contain certain covenants, including requirements to prepay the Term Loan in an amount equal to (i) 100% of the net cash proceeds from certain asset dispositions, extraordinary receipts, debt issuances and equity issuances, subject to certain reinvestment rights and other exceptions and (ii) 75% of certain excess cash flow of the Company and its subsidiaries beginning in the fiscal year ended March 31, 2023, subject to certain exceptions, including reductions to the percentage of such excess cash flow that is required to prepay the loans to 50% and 0%, based on the Company’s applicable total net leverage ratio. Amounts outstanding under the Term Loan may become due and payable upon the occurrence of specified events, which among other things include (subject to certain exceptions and cure periods): (i) failure to pay principal, interest, or any fees when due; (ii) breach of any representation or warranty, covenant, or other agreement in the Term Loan and other related loan documents; (iii) the occurrence of a bankruptcy or insolvency proceeding with respect to the Company or certain of its subsidiaries; (iv) any “Event of Default” with respect to other indebtedness involving an aggregate amount of $3,000,000 or more; (v) any lien created by the Term Loan or any related security documents ceasing to be valid and perfected; (vi) the Term Loan Credit Agreement or any related security documents or guarantees ceasing to be legal, valid, and binding upon the parties thereto; or (vii) a change of control shall occur. Additionally, the Term Loan contains financial covenants relating to minimum liquidity and total net leverage.
Revolving Credit Facility
On September 30, 2021, the Company amended the PNC Credit Facility. The amendment, among other things (a) extended the maturity date to August 5, 2026; (b) reduced the principal amount of the revolving commitments to a maximum amount equal to the lesser of: (i) $30.0 million or (ii) the amount of the borrowing base, as defined in the PNC Credit agreement; (c) replaced existing debt covenants with net leverage ratio, minimum liquidity and fixed charges coverage ratio covenants, and (d) removed the requirement to maintain a $5.0 million restricted cash reserve with PNC.
On March 15, 2022, the Company entered into an amendment to the PNC Credit Facility, which, among other things (a) waived compliance with the total leverage ratio financial covenant for the four fiscal quarter period ended March 31, 2022; (b) waived compliance with the fixed charge coverage ratio; and (c) waived compliance with the minimum liquidity financial covenant as of March 31, 2022.
Loans designated as PNC LIBOR Rate Loans bear interest at a rate per annum equal to the LIBOR Rate plus 2.25% until December 31, 2021 and thereafter between 1.75% and 2.25% based on the percentage of Average Undrawn Availability (as defined in the PNC Credit Agreement) for the most recently completed fiscal quarter (the "PNC LIBOR 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 LIBOR Rate plus 1.0%, plus 1.25% until December 31, 2021 and thereafter between 0.75% and 1.25% based on the percentage of Average Undrawn Availability (as defined in the PNC Credit Agreement) for the most recently completed fiscal quarter (the "PNC Domestic Loan Interest Rate"). If on the last day of any calendar quarter, the average “Usage Amount” during such calendar quarter does not equal the “Maximum Revolving Advance Amount” (as such terms are defined in the PNC Credit Facility), then the Company will pay an undrawn commitment fee of between 0.25% and 0.375% (based on the percentage usage of the Maximum Revolving Advance Amount during that calendar quarter) on the amount by which the Maximum Revolving Advance Amount exceeds such average Usage Amount.
With respect to any PNC LIBOR 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) 6.00%, minus (y) the PNC LIBOR Loan Interest Rate, plus (z) if the LIBOR Rate applicable to such interest payment is less than 0.75%, (i) 0.75% minus (ii) such LIBOR Rate. With respect to any Domestic Rate Loan or Swing Loan, the Company has agreed to pay an affiliate of Blue Torch a fee equal to a percentage per annum equal to the sum of (x) 5.00%, 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. If on the last day of any calendar quarter, the average “Usage Amount” during such calendar quarter does not equal the “Maximum Revolving Advance Amount” (as such terms are defined in the PNC Credit Facility), then the Company has agreed to pay affiliates of certain Term Loan lenders a fee at a rate per annum equal to 1.00% minus a fee percentage between 0.25% to 0.375% on the amount by which the Maximum Revolving Advance Amount exceeds such average Usage Amount.
As of March 31, 2022, the interest rate on the Term Loan was 6.75% and the interest rate on the PNC Credit Facility for Domestic Rate Loans and Swing Loans was 4.75% and for LIBOR Loans was 2.61%. As of March 31, 2022, the
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PNC Credit Facility had a borrowing base of $24.1 million, of which $5.0 million was available at that date. The Company was required to maintain a $5.0 million restricted cash reserve as part of the PNC Credit Facility, which was presented as long-term restricted cash within the accompanying consolidated balance sheet as of March 31, 2021. The September 30, 2021 amendment to the PNC Credit Facility removed the restricted cash reserve requirement.
Paycheck Protection Program Loan
On April 13, 2020, the Company entered into a Paycheck Protection Program (“PPP”) Term Loan (“PPP Loan”) effective April 11, 2020 with PNC in an aggregate principal amount of $10.0 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. In July 2021, the Company received notice from PNC that the PPP Loan and related accrued interest was approved for forgiveness in full by the U.S. Small Business Administration (the “SBA”). The Company recorded the amount forgiven as gain on debt extinguishment of $10.0 million in fiscal year ended March 31, 2022.
NOTE 6: LEASES
Supplemental balance sheet information related to leases is as follows (in thousands):
Operating lease right-of-use assets $ 11,107 $ 9,383
Other current liabilities $ 1,727 $ 2,581
Total operating lease liabilities $ 11,618 $ 10,586
The components of lease expense were as follows (in thousands):
Year Ended March 31,
Short-term lease expense 26 132
Maturity of Lease Liabilities Operating Leases
Total lease payments $ 24,137
Less: Imputed interest (12,519)
Present value of lease liabilities $ 11,618
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Lease Term and Discount Rate March 31,
Weighted average remaining operating lease term (years) 10.88 4.53
Weighted average discount rate for operating leases 12.9 % 13.96 %
Operating cash outflows related to operating leases totaled $3.9 million and $4.9 million for the fiscal years ended March 31, 2022 and March 31, 2021, respectively.
NOTE 7: COMMON STOCK
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 was amended and restated in fiscal year 2022 which added an additional 5.9 million shares. The Plan has 9.0 million shares authorized for issuance of new shares, with 4.8 million performance shares and restricted shares outstanding, and 4.2 million shares available for future issuance under the Plan as of March 31, 2022.
Stock options under the Plan are granted at prices determined by the Board of Directors, but at not less than the fair market value of the Company's common stock on the date of grant. The majority of performance share units, restricted stock units and stock options granted to employees vest over 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 four years. There were no shares available for future issuance as of March 31, 2022.
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):
Shares available for issuance at beginning of period 1,077 1,397
Additional shares authorized during the period — —