Item 7. Management’s Discussion and Analysis
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,
(in thousands) 2022 2021 2020
Total revenue $ 372,827 $ 349,576 $ 402,949
Total cost of revenue (1)
225,792 198,823 230,441
Gross profit 147,035 150,753 172,508
Operating expenses
Research and development (1)
51,812 41,703 36,301
Sales and marketing (1)
62,957 54,945 59,524
General and administrative (1)
45,256 42,001 54,457
Restructuring charges 850 3,701 1,022
Total operating expenses 160,875 142,350 151,304
Income (loss) from operations (13,840) 8,403 21,204
Other expense, net (251) (1,312) (261)
Interest expense (11,888) (27,522) (25,350)
Loss on debt extinguishment, net (4,960) (14,789) —
Loss before income taxes (30,939) (35,220) (4,407)
Income tax provision 1,341 239 803
Net loss $ (32,280) $ (35,459) $ (5,210)
(1) Includes stock-based compensation as follows:
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Year Ended March 31,
(in thousands) 2022 2021 2020
Cost of revenue $ 1,112 $ 672 $ 452
Research and development 5,843 2,881 984
Sales and marketing 2,516 1,757 1,165
General and administrative 4,358 4,314 4,147
Total $ 13,829 $ 9,624 $ 6,748
Comparison of the Years Ended March 31, 2022 and 2021
Revenue
Year Ended March 31,
(in thousands) 2022 % of
revenue 2021 % of
revenue $ Change % Change
Product revenue
Secondary storage systems $ 117,688 32 % $ 89,000 25 % $ 28,688 32 %
Primary storage systems 56,043 15 % 69,644 20 % $ (13,601) (20) %
Devices and media 50,030 13 % 51,164 15 % (1,134) (2) %
Total product revenue $ 223,761 60 % $ 209,808 60 % $ 13,953 7 %
Service and subscription revenue 133,689 36 % 124,904 36 % 8,785 7 %
Royalty revenue 15,377 4 % 14,864 4 % 513 3 %
Total revenue $ 372,827 100 % $ 349,576 100 % $ 23,251 7 %
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 Gross
margin % 2021 Gross
margin % $ Change Basis point change
Product gross profit $ 53,981 24.1 % $ 59,551 28.4 % $ (5,570) (430)
Service and subscription gross profit 77,677 58.1 % 76,338 61.1 % 1,339 (300)
Royalty gross profit 15,377 100.0 % 14,864 100.0 % 513 —
Gross profit $ 147,035 39.4 % $ 150,753 43.1 % $ (3,718) (370)
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 % of
revenue 2021 % of
revenue $ Change % Change
Research and development $ 51,812 14 % $ 41,703 12 % $ 10,109 24 %
Sales and marketing 62,957 17 % 54,945 16 % 8,012 15 %
General and administrative 45,256 12 % 42,001 12 % 3,255 8 %
Restructuring charges 850 — % 3,701 1 % (2,851) (77) %
Total operating expenses $ 160,875 43 % $ 142,350 41 % $ 18,525 13 %
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 % of
revenue 2021 % of
revenue $ Change % Change
Other expense, net $ (251) 0 % $ (1,312) 0 % $ (1,061) (81) %
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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 % of
revenue 2021 % of
revenue $ Change % Change
Interest expense (11,888) (3) % (27,522) (8) % (15,634) (57) %
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 % of
revenue 2021 % of
revenue $ Change % Change
Loss on debt extinguishment, net (4,960) (1) % (14,789) (4) % (9,829) (66) %
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 % of
revenue 2021 % of
revenue $ Change % Change
Income tax provision $ 1,341 — % $ 239 — % $ 1,102 461 %
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 % of
revenue 2020 % of
revenue $ Change % Change
Product revenue
Secondary storage systems $ 89,000 25 % $ 111,672 28 % $ (22,672) (20) %
Primary storage systems 69,644 20 % 77,152 19 % $ (7,508) (10) %
Devices and media 51,164 15 % 62,344 15 % (11,180) (18) %
Total product revenue $ 209,808 60 % $ 251,168 62 % $ (41,360) (16) %
Service and subscription revenue 124,904 36 % 131,050 33 % (6,146) (5) %
Royalty revenue 14,864 4 % 20,731 5 % (5,867) (28) %
Total revenue $ 349,576 100 % $ 402,949 100 % $ (53,373) (13) %
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 Gross
margin % 2020 Gross
margin % $ Change Basis point change
Product gross profit $ 59,551 28.4 % $ 71,408 28.4 % $ (11,857) —
Service and subscription gross profit 76,338 61.1 % 80,369 61.3 % (4,031) (20)
Royalty gross profit 14,864 100.0 % 20,731 100.0 % (5,867) —
Gross profit $ 150,753 43.1 % $ 172,508 42.8 % $ (21,755) 30
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 % of
revenue 2020 % of
revenue $ Change % Change
Research and development $ 41,703 12 % $ 36,301 9 % $ 5,402 15 %
Sales and marketing 54,945 16 % 59,524 15 % (4,579) (8) %
General and administrative 42,001 12 % 54,457 14 % (12,456) (23) %
Restructuring charges 3,701 1 % 1,022 — % 2,679 262 %
Total operating expenses $ 142,350 41 % $ 151,304 38 % $ (8,954) (6) %
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 % of
revenue 2020 % of
revenue $ Change % Change
Other expense $ (1,312) 0 % $ (261) 0 % $ 1,051 403 %
Interest expense (27,522) (8) % (25,350) (6) % 2,172 9 %
Loss on debt extinguishment, net (14,789) (4) % — — % 14,789 100 %
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 % of
revenue 2020 % of
revenue $ Change % Change
Interest expense (27,522) (8) % (25,350) (6) % 2,172 9 %
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 % of
revenue 2020 % of
revenue $ Change % Change
Loss on debt extinguishment, net (14,789) (4) % — — % 14,789 100 %
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 % of
revenue 2020 % of
revenue $ Change % Change
Income tax provision $ 239 — % $ 803 — % $ (564) (70) %
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,
( in thousands) 2022 2021 2020
Cash provided by (used in):
Operating activities (33,728) (767) $ (1,181)
Investing activities (14,124) (9,586) (4,599)
Financing activities 20,157 31,328 1,211
Effect of exchange rate changes (108) (108) (16)
Net change in cash, cash equivalents, and restricted cash $ (27,803) $ 20,867 $ (4,585)
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 than
5 years
Debt obligations (1)
$ 149,186 $ 12,355 $ 24,972 $ 111,859 $ —
Future lease commitments (2)
24,137 2,638 4,141 2,902 14,456
Purchase obligations (3)
64,601 64,601 — — —
Total $ 237,924 $ 79,594 $ 29,113 $ 114,761 $ 14,456
(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.
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