What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-04 · 154 added, 56 removed, 157 unchanged (57% of the section changed)

11 unchanged sentences

data center costs in support of our cloud-based services;

interest associated with our long term debt and income taxes.

and interest associated with our long-term debt and income taxes.

COVID-19 and Macroeconomic Conditions

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.

However, in fiscal 2022 continuing into fiscal 2023, our backlog has grown significantly, which has been driven primarily by our receipt of large purchase orders and our inability to satisfy those orders within our typical shipping timeline due to supply chain constraints.

For example, as of June 30, 2022, our backlog was $46.8 million and has increased to $67.2 million as of July 31, 2022.

The changes in our backlog are a result of the timing of receipt of large purchase orders.

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.

In addition, the instability of global economic conditions, inflationary risks, military actions and armed conflicts and associated increased international trade regulations are adding to the uncertainty of our business.

The COVID-19 pandemic has caused a significant disruption to the global supply chain, which to a certain extent continues to have a negative impact on our business.

Before the pandemic and disruptions in the global supply chain, our historical backlog was limited and typically represented less than 5% of quarterly revenues.

However, beginning in fiscal 2022 the backlog grew significantly, which was driven primarily by our receipt of large purchase orders and our inability to satisfy those orders within our typical shipping timeline due to supply chain constraints.

However, the significant increase in the backlog of $49.3 million to $96.1 million for the three months ended September 30, 2022 compared to $46.8 million at June 30, 2022 represented future orders placed by our customers to ensure continuity of supply and this increase was not driven by current unfulfilled orders due to supply chain constraints.

We anticipate that supply chain constraints will remain challenging, but will not significantly limit our ability to ship against customer demand and we expect to work down the current backlog over the next three to four quarters to historical pre-COVID levels.

In addition, the instability of global economic conditions, inflationary risks, rising interest rates, military actions and armed conflicts and associated increased international trade regulations are adding to the uncertainty of our business.

These adverse conditions could result in reductions in sales of our products and subscriptions for our services, longer sales cycles, increased costs to manufacture our products and increased price competition.

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We will continue to actively monitor the impact of COVID-19 and global economic conditions 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.

Global supply chain disruptions and the higher inflationary environment remain unpredictable and our past results may not be indicative of future performance.

Global supply chain disruptions and the higher inflationary and interest rate environment remain unpredictable and our past results may not be indicative of future performance.

See Part II, Item 1A, Risk Factors, of our most recent Annual Report on Form 10-K for information regarding the risks we face as a result of the COVID-19 pandemic and an uncertain global economy.

RESULTS OF OPERATIONS

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

(in thousands) 2022 2021 2022 2021

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(1) Includes stock-based compensation as follows:

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

(in thousands) 2022 2021 2022 2021

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Total $ 2,288 $ 3,072 $ 5,357 $ 6,273

Comparison of the Three Months Ended June 30, 2022 and 2021

Three Months Ended June 30,

Comparison of the Three Months Ended September 30, 2022 and 2021

Three Months Ended September 30,

(dollars in thousands) 2022 % of

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Product revenue

In the three months ended June 30, 2022, product revenue increased $8.1 million, or 15%, as compared to the same period in 2021.

Primary storage systems increased $4.2 million, or 38%, primarily driven from increased sales of our video surveillance solutions.

In the three months ended September 30, 2022, product revenue increased $8.3 million, or 15%, as compared to the same period in 2021.

Primary storage systems decreased $6.8 million, or 41%, primarily driven from a reduced number of large purchases from install base customers.

Secondary storage systems increased $17.8 million, or 68%, driven by higher demand in hyperscale use cases.

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Standard service contracts may be extended or include enhanced service, such as faster service response times.

Service and subscription revenue increased 2% in the three months ended June 30, 2022 compared to the same period in 2021 driven partially by growing sales of our recurring software subscription offerings as well as service revenue associated with newly acquired businesses.

Service and subscription revenue decreased 5% in the three months ended September 30, 2022 compared to the same period in 2021, partially driven by lower overall legacy service revenues offset by higher subscription revenue.

Royalty revenue

We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium.

Royalty revenue decreased $0.7 million, or 17%, in the three months ended June 30, 2022 compared to the same period in 2021 due to decreased market volume of older generation LTO media.

Royalty revenue decreased $0.7 million, or 17%, in the three months ended September 30, 2022 compared to the same period in 2021 due to decreased market volume of older generation LTO media.

Gross Profit and Margin

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands) 2022 Gross

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Product Gross Margin

Product gross margin decreased 530 basis points for the three months ended June 30, 2022, as compared with the same period in 2021.

This decrease was due primarily to recent cost increases in materials across our global supply chain.

We expect these cost increases to continue for the foreseeable future and are taking proactive measures to address the impact these cost increases could have on our business in the future.

Product gross margin decreased to 10.2% or by 14.6 percentage points for the three months ended September 30, 2022, as compared with the same period in 2021.

This decrease was due primarily to a $6.9 million extraordinary inventory reserve provision recorded during the three months ended September 30, 2022.

Due to longer purchasing lead times and other factors caused by the global supply chain disruptions occurring since the beginning of the COVID-19 pandemic, certain inventory has become obsolete due to next generation products being released and legacy products being discontinued.

In addition, following our integration of several past acquisitions, certain legacy products were discontinued and replaced with updated product offerings rendering the related inventory obsolete.

We do not believe that the magnitude of this inventory provision is indicative of our performance and is not expected to be repeated in the near term.

Excluding this extraordanary adjustment, gross margins have declined approximately 3.8 percentage points for the three months ended September 30, 2022, as compared to the same period in 2021 primarily due to a less favorable mix of revenues weighted towards our lower margin product lines of business partially offset by improvements in pricing and lower supply chain costs.

Service and Subscription Gross Margin

Service and subscription gross margins decreased 540 basis points for the three months ended June 30, 2022, as compared with the same period in 2021.

This was partially driven by cost pressures as a result of certain constraints in the global supply chain.

Service and subscription gross margins decreased 530 basis points for the three months ended September 30, 2022, as compared with the same period in 2021.

This was partially driven by lower overall service revenues, and by cost pressures as a result of certain constraints in the global supply chain.

Royalty Gross Margin

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Operating expenses

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands) 2022 % of

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Total operating expenses $ 39,000 39.3 $ 39,325 42.2 $ (325) (1)

In the three months ended June 30, 2022, research and development expense increased $0.8 million, or 7%, as compared with the same period in 2021.

This increase was primarily driven by an increase in personnel costs due to increased headcount from acquisitions.

In the three months ended June 30, 2022, sales and marketing expenses increased $2.0 million, or 14%, as compared with the same period in 2021.

This increase was driven by increased headcount as we invest in strategic areas to accelerate growth.

This increase in headcount includes those employees added through acquisitions over the year.

Both marketing expense and travel expense have also increased over the prior year as COVID-19 restrictions ease.

In the three months ended June 30, 2022, general and administrative expenses increased $0.5 million, or 4%, as compared with the same period in 2021.

In the three months ended September 30, 2022, research and development expense decreased $1.8 million, or 15%, as compared with the same period in 2021.

This decrease was primarily driven by cost reduction measures to consolidate acquired businesses.

In the three months ended September 30, 2022, sales and marketing expenses increased $0.1 million, or 1%, as compared with the same period in 2021.

Both marketing expense and travel expense have increased over the prior year as COVID-19 restrictions ease.

In the three months ended September 30, 2022, general and administrative expenses increased $0.5 million, or 4%, as compared with the same period in 2021.

This increase was largely driven by increased intangible amortization from recent acquisitions.

In the three months ended June 30, 2022, restructuring expenses increased $0.5 million, or 173%, as compared with the same period in 2021.

In the three months ended September 30, 2022, restructuring expenses increased $0.9 million as compared with the same period in 2021.

The increase was the result of cost reduction initiatives.

Other Income (Expense)

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands) 2022 % of

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Other income (expense) $ 2,431 2 $ 126 — $ 2,305 (1,829)

The decrease in other income (expense), net during the three months ended June 30, 2022 compared with the same period in 2021 was related primarily to fluctuations in foreign currency exchange rates.

The change in other income (expense), net during the three months ended September 30, 2022 compared with the same period in 2021 was related primarily to fluctuations in foreign currency exchange rates and the sale of certain intangible assets during the three months ended September 30, 2022.

Interest expense

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands) 2022 % of

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Interest expense (2,745) 3 (3,070) 3 325 11

In the three months ended June 30, 2022, interest expense decreased $1.8 million, or 46%, as compared with the same period in 2021 due to a lower principal balance and a lower effective interest rate on our Term Loan.

In the three months ended September 30, 2022, interest expense decreased $0.3 million, or 11%, as compared with the same period in 2021 due to a lower principal balance and a lower effective interest rate on our Term Loan.

Loss on debt extinguishment

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands) 2022 % of

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Loss on debt extinguishment — — (4,960) (5) 4,960 n/a

In the three months ended June 30, 2022, loss on debt extinguishment of $1.4 million was related to prepayment of our Term Loan.

Three Months Ended June 30,

In the three months ended September 30, 2022, the change in loss on debt extinguishment of $5.0 million was related to prepayment of our Senior Secured Term Loan in the prior year.

Three Months Ended September 30,

(dollars in thousands) 2022 % of

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Income tax provision $ 461 — $ 411 — $ 50 12

The income tax provision for the three months ended June 30, 2022 and 2021 is primarily influenced by foreign and state income taxes.

The income tax provision for the three months ended September 30, 2022 and 2021 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.

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Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance.

Comparison of the Six Months Ended September 30, 2022 and 2021

Six Months Ended September 30,

(dollars in thousands) 2022 % of

revenue 2021 % of

revenue $ Change % Change

Product revenue

Primary storage systems $ 25,402 13 $ 27,994 15 $ (2,592) (9)

Secondary storage systems 77,130 39 54,463 30 22,667 42

Devices and media 20,646 10 24,329 13 (3,683) (15)

Total product revenue 123,178 62 106,786 58 16,392 15

Service and subscription 66,116 34 67,189 37 (1,073) (2)

Royalty 6,918 4 8,303 5 (1,385) (17)

Total revenue $ 196,212 100 $ 182,278 100 $ 13,934 8

Product revenue

In the six months ended September 30, 2022, product revenue increased $16.4 million, or 15%, as compared to the same period in 2021.

Primary storage systems decreased $2.6 million, or 9%, primarily driven from a reduced number of large purchases from install base customers.

Secondary storage systems increased $22.7 million, or 42%, driven by higher demand in hyperscale use cases.

Service revenue

We offer a broad range of services including product maintenance, implementation, and training as well as software subscriptions.

Service revenue is primarily comprised of customer field support contracts which provide standard support services for our hardware.

Standard service contracts may be extended or include enhanced service, such as faster service response times.

Service and subscription revenue decreased 2% in the six months ended September 30, 2022 compared to the same period in 2021 partially driven by lower overall legacy service revenues offset by higher subscription revenue.

Royalty revenue

We receive royalties from third parties that license our LTO media patents through our membership in the LTO consortium.

Royalty revenue decreased $1.4 million, or 17%, in the six months ended September 30, 2022 compared to the same period in 2021 due to decreased market volume of older generation LTO media.

Gross Profit and Margin

Six Months Ended September 30,

(dollars in thousands) 2022 Gross

margin % 2021 Gross

margin % $ Change Basis point change

Product $ 18,696 15.2 $ 26,922 25.2 $ (8,226) (1,000)

Service and subscription 36,266 54.9 40,441 60.2 (4,175) (530)

Royalty 6,918 100.0 8,303 100.0 (1,385) —

Gross profit $ 61,880 31.5 $ 75,666 41.5 $ (13,786) (1,000)

Product Gross Margin

Product gross margin decreased to 15.2% or by 10.0 percentage points for the six months ended September 30, 2022, as compared with the same period in 2021.

This decrease was due primarily to a $6.9 million extraordinary inventory reserve provision recorded during the six months ended September 30, 2022.

In addition, following our integration of several past acquisitions, certain legacy products were discontinued and replaced with updated product offerings rendering the related inventory obsolete.

We do not believe that the magnitude of this inventory provision is indicative of our ongoing operations and is not expected to be repeated in the near term.

Excluding this non-recurring adjustment, gross margins have declined approximately 4.5 percentage points for the six months ended September 30, 2022, as compared to the same period in 2021 primarily due to a less favorable mix of revenues weighted towards our lower margin product lines of business partially offset by improvements in pricing and lower supply chain costs.

Service and Subscription Gross Margin

Service and subscription gross margins decreased 530 basis points for the six months ended September 30, 2022, as compared with the same period in 2021.

This was partially driven by lower overall service revenues, and by cost pressures as a result of certain constraints in the global supply chain.

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating expenses

Six Months Ended September 30,

(dollars in thousands) 2022 % of

revenue 2021 % of

revenue $ Change % Change

Research and development $ 22,671 11.6 $ 23,680 13.0 $ (1,009) (4)

Sales and marketing 31,555 16.1 29,414 16.1 2,141 7

General and administrative 24,254 12.4 23,293 12.8 961 4

Restructuring charges 1,646 0.8 274 0.2 1,372 501

Total operating expenses $ 80,126 40.8 $ 76,661 42.1 $ 3,465 5

In the six months ended September 30, 2022, research and development expense decreased $1.0 million, or 4%, as compared with the same period in 2021.

This decrease was primarily driven by cost reduction measures to consolidate acquired businesses.

In the six months ended September 30, 2022, sales and marketing expenses increased $2.1 million, or 7%, as compared with the same period in 2021.

Both marketing expense and travel expense have increased over the prior year as COVID-19 restrictions ease.

In the six months ended September 30, 2022, general and administrative expenses increased $1.0 million, or 4%, as compared with the same period in 2021.

This increase was largely driven by increased intangible amortization from recent acquisitions.

In the six months ended September 30, 2022, restructuring expenses increased $1.4 million, or 501%, as compared with the same period in 2021.

The increase was the result of cost reduction initiatives.

Other Income (Expense)

Six Months Ended September 30,

(dollars in thousands) 2022 % of

revenue 2021 % of

revenue $ Change % Change

Other income (expense) $ 3,182 2 $ (71) — $ 3,253 4,582

The change in other income (expense), net during the six months ended September 30, 2022 compared with the same period in 2021 was related primarily to fluctuations in foreign currency exchange rates and the sale of certain intangible assets during the six months ended September 30, 2022.

Interest expense

Six Months Ended September 30,

(dollars in thousands) 2022 % of

revenue 2021 % of

revenue $ Change % Change

Interest expense (4,836) 2 (6,956) 4 2,120 30

In the six months ended September 30, 2022, interest expense decreased $2.1 million, or 30%, as compared with the same period in 2021 due to a lower principal balance and a lower effective interest rate on our Term Loan.

Loss on debt extinguishment

Six Months Ended September 30,

(dollars in thousands) 2022 % of

revenue 2021 % of

revenue $ Change % Change

Loss on debt extinguishment (1,392) 1 (4,960) 3 3,568 n/a

In the six months ended September 30, 2022, the change in loss on debt extinguishment of $3.6 million was related to prepayments of our term debt.

Six Months Ended September 30,

(dollars in thousands) 2022 % of

revenue 2021 % of

revenue $ Change % Change

Income tax provision $ 872 — $ 424 — $ 448 106

The income tax provision for the six months ended September 30, 2022 and 2021 is primarily influenced by foreign and state income taxes.

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

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We have experienced negative impacts on sales due to global supply chain constraints, inflationary concerns and overall uncertainty in the macroeconomic environment 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.

The extent of the impacts depends, in part, on how long the negative trends in customer demand and supply chain levels continue.

We expect the impact of COVID-19 and market instability to continue to have a significant impact on our liquidity and capital resources.

We had cash and cash equivalents of $26.5 million as of June 30, 2022, which consisted primarily of bank deposits and money market accounts.

As of June 30, 2022 we had $11.8 million available to borrow under the PNC Credit Facility.

We are subject to various debt covenants under our debt agreements including a net leverage covenant and a $25 million minimum liquidity covenant .

We had cash and cash equivalents of $25.7 million as of September 30, 2022, which consisted primarily of bank deposits and money market accounts.

As of September 30, 2022 we had $9.1 million available to borrow under the PNC Credit Facility.

We are subject to various debt covenants under our debt agreements including a net leverage covenant and a minimum liquidity covenant.

Our failure to comply with our debt covenants could materially and adversely affect our financial condition and ability to service our obligations.

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The following table summarizes our consolidated cash flows for the periods indicated.

Three Months Ended June 30,

Six Months Ended September 30,

(in thousands) 2022 2021

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Cash Used In Operating Activities

Net cash used in operating activities was $18.3 million for the three months ended June 30, 2022.

This use of cash was primarily attributable to changes in working capital of $15.6 million driven by a decrease in deferred revenue of $13.6 million.

The decrease in deferred revenue reflects the seasonal nature of service contract renewals.

Net cash used in operating activities was $6.9 million for the three months ended June 30, 2021.

This use of cash is primarily attributable to changes in working capital of $10.0 million driven by an increase in manufacturing and service parts inventories of $4.4 million, an increase in accounts payable, accrued compensation, deferred revenue of $3.2 million, $4.9 million and $6.3 million, respectively, partially offset by a reduction in accounts receivable of $15.2 million.

The decrease in deferred revenue reflects the seasonal nature of service contract renewals.

Net cash used in operating activities was $17.9 million for the six months ended September 30, 2022.

This use of cash was primarily attributable to a decrease in deferred revenue of $17.7 million.

Net cash used in operating activities in the first fiscal quarter of 2022 was $18.3 million compared to $0.4 million net cash provided by operating activities in the second fiscal quarter of 2022.

Net cash used in operating activities was $15.3 million for the six months ended September 30, 2021.

This use of cash was primarily attributable to changes in working capital of $14.6 million driven by increases in manufacturing and service part inventories of $7.0 million, a decrease in deferred revenue of $9.0 million and a net change in other assets and liabilities of $5.8 million.

These were partially offset by cash generated by a $10.0 million decrease in accounts receivables.

Cash Used in Investing Activities

Net cash used in investing activities was $5.0 million in the three months ended June 30, 2022, which was primarily attributable to capital expenditures of $3.0 million and a $2.0 million deferred business acquisition payment.

Net cash used in investing activities was $1.2 million in the three months ended June 30, 2021, which included approximately $1.0 million related to capital expenditures.

Net cash used in investing activities was $9.8 million in the six months ended September 30, 2022, which was primarily attributable to capital expenditures of $7.4 million and a $2.0 million deferred business acquisition payment.

Net cash used in investing activities was $7.4 million for the six months ended September 30, 2021, which was primarily attributable to cash paid for our acquisition of Pivot3 of $5.0 million and capital expenditures of $2.4 million.

Cash Provided by Financing Activities

Net cash provided by financing activities was $44.6 million in the three months ended June 30, 2022, which was related primarily to $66.3 million of cash received from the Rights Offering of 30 million shares of our common stock offset by a $20 million prepayment of our term debt and a term debt principal amortization payment of $0.6 million

Net cash used in financing activities was $0.5 million in the three months ended June 30, 2021 related to a term debt principal amortization payment.

Net cash provided by financing activities was $48.0 million for the six months ended September 30, 2022, which was related primarily to $66.0 million of cash received from the Rights Offering of 30 million shares of our common stock offset by a $20.0 million prepayment of our term debt and a term debt principal amortization payment of $1.9 million

Net cash provided by financing activities was $12.7 million for the six months ended September 30, 2021, which was related primarily to borrowings under our credit facility, and proceeds from the new Term Loan offset by the repayment in full of the Senior Secured Term Loan.

Commitments and Contingencies

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We consider certain accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change.

Our accounting policies that include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain are summarized in our most recently filed Annual Report on Form 10-K for the fiscal year ended March 31, 2022 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Critical Accounting Estimates and Policies.” For additional information on our significant accounting policies, see Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

K for the fiscal year ended March 31, 2022 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies.” For additional information on our significant accounting policies, see Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Recently Issued and Adopted Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis