QUANTUM CORP DE

Previous wording

The following discussion and analysis compares the change in the consolidated financial statements for quarters ending September 30, 2024 and September 30, 2023 and should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Quarterly Report. In particular, the risk factors contained in Part II, Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources. For comparisons of quarters ended September 30, 2023 and September 30, 2022, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, filed with the SEC on September 6, 2024, and incorporated herein by reference.

Current wording

The following discussion and analysis compares the change in the consolidated financial statements for quarters ending December 31, 2024 and December 31, 2023 and should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Quarterly Report. In particular, the risk factors contained in Part II, Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources. For comparisons of quarters ended December 31, 2023 and December 31, 2022, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, filed with the SEC on September 6, 2024, and incorporated herein by reference. Our fiscal year ends on March 31 of each calendar year. "Fiscal 2024" refers to the fiscal year ended March 31, 2024.

Previous wording

We continue to actively monitor, evaluate and respond to the current uncertain macro environment, including the impact of higher interest rates, inflation, lingering supply chain challenges, and a stronger U.S. dollar. During the quarter we continued to experience longer sales cycle for opportunities with our enterprise as well as commercial customers.

Current wording

We continue to actively monitor, evaluate and respond to the current uncertain macro environment, including the impact of higher interest rates, inflation, tariffs, lingering supply chain challenges, and a stronger U.S. dollar. During the quarter we continued to experience longer sales cycle for opportunities with our enterprise as well as commercial customers.

Previous wording

In the three months ended September 30, 2024, product revenue decreased $6.2 million, or 14%, as compared to the same period in fiscal 2024.. The primary driver of the decrease was in Primary storage systems as customers transition to subscription-based offerings. We expect the product revenue portion of our Primary and Secondary storage systems to decrease as we continue to transition to subscription-based offerings.

Current wording

In the three months ended December 31, 2024, product revenue increased $1.5 million, or 4%, as compared to the same period in fiscal 2024. The primary driver of the increase was in Primary storage systems with higher sales of our StorNext based solutions.

Previous wording

Service and subscription revenue increased $0.8 million, or 3%, in the three months ended September 30, 2024 compared to the same period in fiscal 2024. This increase was due to new support bookings and the transition towards subscription-based licensing, partially offset by certain long-lived products reaching their end-of-service-life.

Current wording

Service and subscription revenue decreased $1.2 million, or 4%, in the three months ended December 31, 2024 compared to the same period in fiscal 2024. This decrease was due to certain long-lived products reaching their end-of-service-life.

Previous wording

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium. Royalty revenue saw a small increase of $0.1 million, or 6%, in the three months ended September 30, 2024 compared to the same period in fiscal 2024 due to product mix.

Current wording

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium. Royalty revenue saw a small increase of $0.3 million, or 14%, in the three months ended December 31, 2024 compared to the same period in fiscal 2024 due to product mix.

Previous wording

Product gross margin decreased by $5.2 million, or by 940 basis points, for the three months ended September 30, 2024, as compared with the same period in fiscal 2024.. This decrease was primarily due to a less favorable mix of revenues, weighted towards our lower margin product lines, which were partially offset from improvements in our operational efficiency and logistics costs.

Current wording

Product gross margin increased by $0.6 million, or by 90 basis points, for the three months ended December 31, 2024, as compared with the same period in fiscal 2024. This increase was primarily due to a more favorable mix of revenues, weighted towards our higher margin product lines, as well as improvements in our operational efficiency and logistics costs.

Previous wording

Service and subscription gross margins increased 360 basis points for the three months ended September 30, 2024, as compared with the same period in fiscal 2024. This increase was primarily driven by the increase in service revenues as well as improvements in our operations efficiency.

Current wording

Service and subscription gross margins increased 760 basis points for the three months ended December 31, 2024, as compared with the same period in fiscal 2024. This increase was primarily driven by improvements in our operations efficiency.

Previous wording

In the three months ended September 30, 2024, sales and marketing expenses decreased $2.1 million, or 14%, as compared with the same period in fiscal 2024 This decrease was primarily driven by improved operational efficiency and increased leverage of our channel.

Current wording

In the three months ended December 31, 2024, sales and marketing expenses decreased $1.8 million, or 13%, as compared with the same period in fiscal 2024. This decrease was primarily driven by improved operational efficiency and increased leverage of our channel.

Previous wording

In the three months ended September 30, 2024, general and administrative expenses increased $3.7 million, or 36%, as compared with the same period in fiscal 2024 This increase was primarily driven by non-recurring costs related to our previously announced restatement of our historical financial statements, and other related projects.

Current wording

In the three months ended December 31, 2024, general and administrative expenses increased $2.2 million, or 19%, as compared with the same period in fiscal 2024 This increase was primarily driven by higher expense in compliance focused outside services related to ongoing projects.

Previous wording

In the three months ended September 30, 2024, research and development expenses decreased $0.9 million, or 10%, as compared with the same period in fiscal 2024 This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design.

Current wording

In the three months ended December 31, 2024, research and development expenses decreased $1.1 million, or 12%, as compared with the same period in fiscal 2024 This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design.

Previous wording

In the three months ended September 30, 2024, restructuring expenses decreased $1.0 million, or 71% as compared with the same period in fiscal 2024 The decrease was the result of cost reduction initiatives in the previous year.

Current wording

In the three months ended December 31, 2024, restructuring expenses increased $0.8 million, or 170% as compared with the same period in fiscal 2024 The increase was the result of cost reduction initiatives in the current year.

Previous wording

In the three months ended September 30, 2024, interest expense increased $2.3 million, or 59%, as compared with the same period in fiscal 2024 due to a higher effective interest rate on our Term Loan.

Current wording

In the three months ended December 31, 2024, interest expense increased $2.9 million, or 74%, as compared with the same period in fiscal 2024 due to a higher effective interest rate on our Term Loan.

Previous wording

In September 30, 2024, the change in fair value of warrant liabilities increased $0.9 million, or (19)%, as compared with the same period in fiscal 2024 due to a lower average stock price in the second fiscal quarter of 2024.

Current wording

In December 31, 2024, the change in fair value of warrant liabilities increased $66.0 million, or (1,500)%, as compared with the same period in fiscal 2024, due to a lower average stock price in the second fiscal quarter of 2024.

Previous wording

In the six months ended September 30, 2024, product revenue decreased $23.7 million, or 23%, as compared to the same period in fiscal 2024. The primary driver of the decrease was a $20 million decrease in demand from our large hyperscale customers, as well as more general decreases in the overall tape market with declines in media and devices revenue. Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offered as a subscription. We expect the product revenue portion of our Primary and Secondary storage systems to decrease as we continue to transition to subscription-based offerings.

Current wording

In the nine months ended December 31, 2024, product revenue decreased $22.2 million, or 16%, as compared to the same period in fiscal 2024. The primary driver of the decrease was a $20 million decrease in demand from our large hyperscale customers, as well as more general decreases in the overall tape market with declines in media and devices revenue. Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offered as a subscription. We expect the product revenue portion of our Primary and Secondary storage systems to decrease as we continue to transition to subscription-based offerings.

Previous wording

Service and subscription revenue decreased $2.7 million, or 4%, in the six months ended September 30, 2024 compared to the same period in fiscal 2024. This decrease was primarily driven by certain long-lived products reaching their end-of-service-life, partially offset by increases in subscription-based revenue.

Current wording

Service and subscription revenue decreased $3.8 million, or 4%, in the nine months ended December 31, 2024 compared to the same period in fiscal 2024. This decrease was primarily driven by certain long-lived products reaching their end-of-service-life, partially offset by increases in subscription-based revenue.

Previous wording

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium. Royalty revenue saw a small increase of $0.1 million, or 1%, in the three months ended September 30, 2024 compared to the same period in 2023 due to product mix.

Current wording

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium. Royalty revenue saw a small increase of $0.4 million, or 5%, in the three months ended December 31, 2024 compared to the same period in fiscal 2024 due to product mix.

Previous wording

Product gross margin decreased 610 basis points, for the six months ended September 30, 2024, as compared with the same period in fiscal 2024. This decrease was primarily due to a less favorable mix of revenues, weighted towards our lower margin product lines, which were partially offset from improvements in our operational efficiency and logistics costs.

Current wording

Product gross margin decreased 420 basis points, for the nine months ended December 31, 2024, as compared with the same period in fiscal 2024. This decrease was primarily due to a less favorable mix of revenues, weighted towards our lower margin product lines, which were partially offset from improvements in our operational efficiency and logistics costs.

Previous wording

In the six months ended September 30, 2024, sales and marketing expense decreased $4.7 million, or 15%, compared with the same period in fiscal 2024. This decrease was primarily driven by improved operational efficiency and increased leverage of our channel.

Current wording

In the nine months ended December 31, 2024, sales and marketing expense decreased $6.5 million, or 14%, compared with the same period in fiscal 2024. This decrease was primarily driven by improved operational efficiency and increased leverage of our channel.

Previous wording

In the six months ended September 30, 2024, general and administrative expense increased $12.1 million, or 53%, compared with the same period in fiscal 2024. This increase was primarily driven by non-recurring costs related to our previously announced restatement of our historical financial statements, and other related projects.

Current wording

In the nine months ended December 31, 2024, general and administrative expense increased $14.4 million, or 41%, compared with the same period in fiscal 2024. This increase was primarily driven by non-recurring costs related to our previously announced restatement of our historical financial statements, and other related projects.

Previous wording

In the six months ended September 30, 2024, research and development expenses decreased $3.5 million, or 17%, as compared with the same period in fiscal 2024. This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design.

Current wording

In the nine months ended December 31, 2024, research and development expenses decreased $4.6 million, or 16%, as compared with the same period in fiscal 2024. This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design.

Previous wording

In the six months ended September 30, 2024, restructuring expenses decreased $1.1 million, or 41%, as compared with the same period in fiscal 2024. The decrease was the result of cost reduction initiatives in the prior year.

Current wording

In the nine months ended December 31, 2024, restructuring expenses decreased $0.2 million, or 8%, as compared with the same period in fiscal 2024. The decrease was the result of cost reduction initiatives in the prior year.

Previous wording

The change in other income (expense), net during the six months ended September 30, 2024 compared with the same period in fiscal 2024 was related primarily to fluctuations in foreign currency exchange rates during the three months ended September 30, 2024.

Current wording

The change in other income (expense), net during the nine months ended December 31, 2024 compared with the same period in fiscal 2024 was related primarily to fluctuations in foreign currency exchange rates during the three months ended December 31, 2024.

Previous wording

In the six months ended September 30, 2024, interest expense increased $2.9 million, or 41%, as compared with the same period in fiscal 2024 due to a higher effective interest rate on our Term Loan.

Current wording

In the nine months ended December 31, 2024, interest expense increased $5.8 million, or 52%, as compared with the same period in fiscal 2024 due to a higher effective interest rate on our Term Loan.

Previous wording

In September 30, 2024, the change in fair value of warrant liabilities increased $0.1 million, or 2%, as compared with the same period in fiscal 2024 due to a lower average stock price in the second fiscal quarter of 2024.

Current wording

In December 31, 2024, the change in fair value of warrant liabilities increased $63.8 million, or 868%, as compared with the same period in fiscal 2024 due to a lower average stock price in the second fiscal quarter of 2024.

Previous wording

In the six months ended September 30, 2024, loss on debt extinguishment was related to a prepayment of our Term Loan.

Current wording

In the nine months ended December 31, 2024, loss on debt extinguishment was related to a prepayment of our Term Loan.

Previous wording

The income tax provision for the six months ended September 30, 2024 and 2023 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance.

Current wording

The income tax provision for the nine months ended December 31, 2024 and 2023 is primarily influenced by foreign and state income taxes. Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. and certain foreign net deferred tax assets. Significant management judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal. Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance.

Previous wording

We had cash and cash equivalents of $16.7 million as of September 30, 2024, which consisted primarily of bank deposits and money market accounts. As of September 30, 2024, our total outstanding Term Loan debt was $104.7 million and PNC Credit Facility borrowings were $28.4 million. As of September 30, 2024 we had $0.1 million available to borrow under the PNC Credit Facility.

Current wording

We had cash and cash equivalents of $20.4 million as of December 31, 2024, which consisted primarily of bank deposits and money market accounts. As of December 31, 2024, our total outstanding Term Loan debt was $105.9 million and PNC Credit Facility borrowings were $37.5 million. As of December 31, 2024, we had $1.6 million available to borrow under the PNC Credit Facility.

Previous wording

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. For additional information about our debt, see the sections entitled “Risk Factors—Risks Related to Our Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the Annual Report.

Current wording

We are subject to various debt covenants under our debt agreements. Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations. As discussed in Note 1: Description of Business and Significant Accounting Policies—Going Concern, we expect to be in violation of our net leverage covenant as of the June 30, 2025 testing date and the violation will cause the outstanding Term Loan and PNC Credit Facility outstanding balances to become due as an event of default. As a result, we have classified the Term Loan and PNC Credit Facility as current liabilities in the accompanying consolidated balance sheet. We entered into a Standby Equity Purchase Agreement (the “SEPA”) on January 25, 2025, pursuant to which we have a right, but not the obligation, to sell up to $200 million of Common Stock at any time during the three-year period following the date of the SEPA. See Note 12: Subsequent Eventsfor additional information related to the SEPA. Additionally, the Company is evaluating strategies to obtain the additional funding, including potential covenant waivers. We may be unable to obtain additional funding. As such, there can be no assurance that we will be able to obtain additional liquidity when needed or under acceptable terms, if at all. For additional information about our debt, see the sections entitled “Risk Factors—Risks Related to Our Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the Annual Report.

Previous wording

Net cash used in operating activities was $17.2 million for the six months ended September 30, 2024. This use of cash was primarily attributed to lower earnings.

Current wording

Net cash used in operating activities was $20.3 million for the nine months ended December 31, 2024. This use of cash was primarily attributed to lower earnings.

Previous wording

Net cash used in operating activities was $11.3 million for the six months ended September 30, 2023. This use of cash was primarily attributed to cash used in operations excluding changes in assets and liabilities of $6.9 million in addition to cash used from working capital changes.

Current wording

Net cash used in operating activities was $20.7 million for the nine months ended December 31, 2023. This use of cash was primarily attributed to cash used in operations excluding changes in assets and liabilities of $8.0 million in addition to cash used from working capital changes.

Previous wording

Net cash used in investing activities was $3.2 million in the six months ended September 30, 2024, which was attributable to capital expenditures.

Current wording

Net cash used in investing activities was $4.3 million in the nine months ended December 31, 2024, which was attributable to capital expenditures.

Previous wording

Net cash used in investing activities was $3.9 million in the six months ended September 30, 2023, which was attributable to capital expenditures.

Current wording

Net cash used in investing activities was $5.0 million in the nine months ended December 31, 2023, which was attributable to capital expenditures.

Previous wording

Net cash provided by financing activities was $11.5 million for the six months ended September 30, 2024, which was related primarily to borrowings on our Term Loan.

Current wording

Net cash provided by financing activities was $19.4 million for the nine months ended December 31, 2024, which was related primarily to borrowings on our Term Loan.

Previous wording

Net cash provided by financing activities was $14.8 million for the six months ended September 30, 2023, which was related primarily to borrowings on our Term Loan of $14.1 million net of issuance costs.

Current wording

Net cash provided by financing activities was $24.1 million for the nine months ended December 31, 2023, which was related primarily to borrowings on the PNC Credit Facility of $14.6 million and borrowing on our Term Loan of $9.6 million net of issuance costs.