What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-02 compared with 2022-11-02 · 76 added, 88 removed, 223 unchanged (42% of the section changed)

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In particular, the disclosure contained in Part I, Item 1A in our Annual Report on Form 10-K, as updated by Part II, Item 1A in this Quarterly Report, 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, and our objectives for future operations.

plans, and our objectives for future operations.

Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements.

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

COVID-19 and Macroeconomic Conditions

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.

Also, certain of our customers and partners have been and others may become credit or cash constrained, making it difficult for them to fulfill their payment obligations to us or require us to extend their payment terms.

Given the dynamic nature of these macroeconomic conditions, we cannot reasonably estimate their full impact on our ongoing business, results of operations and overall financial performance.

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 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.

Macroeconomic Conditions

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.

During the quarter we continued to experience longer sales cycle for opportunities with our enterprise as well as commercial customers.

The macro environment remains unpredictable and our past results may not be indicative of future performance.

RESULTS OF OPERATIONS

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

Three Months Ended December 31, Nine Months Ended December 31,

(in thousands) 2022 2021 2022 2021

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Total operating expenses 38,521 42,435 118,647 119,095

Loss from operations (11,169) (938) (18,246) (995)

Income (loss) from operations 1,768 (7,225) (16,479) (8,218)

Other income (expense), net (544) (150) 2,638 (223)

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(1) Includes stock-based compensation as follows:

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

Three Months Ended December 31, Nine Months Ended December 31,

(in thousands) 2022 2021 2022 2021

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Total $ 2,981 $ 4,307 $ 8,340 $ 10,580

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

Three Months Ended September 30,

Comparison of the Three Months Ended December 31, 2022 and 2021

Three Months Ended December 31,

(dollars in thousands) 2022 % of

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Product revenue

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.

In the three months ended December 31, 2022, product revenue increased $16.9 million, or 29%, as compared to the same period in 2021.

Primary storage systems increased $0.2 million, or 1%, remaining relatively flat to the same period in 2021.

Secondary storage systems increased $20.1 million, or 66%, 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 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.

Service and subscription revenue decreased 1% in the three months ended December 31, 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 September 30, 2022 compared to the same period in 2021 due to decreased market volume of older generation LTO media.

Royalty revenue decreased $0.8 million, or 23%, in the three months ended December 31, 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 September 30,

Three Months Ended December 31,

(dollars in thousands) 2022 Gross

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Product Gross Margin

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.

Product gross margin decreased to 22.4% or by 50 basis points for the three months ended December 31, 2022, as compared with the same period in 2021.

This decrease was primarily due to a less favorable mix of revenues, weighted towards our lower margin product lines.

Service and Subscription Gross Margin

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.

Service and subscription gross margins increased 770 basis points for the three months ended December 31, 2022, as compared with the same period in 2021.

This increase was primarily driven by lower overhead costs across our support and repair functions.

Royalty Gross Margin

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Operating expenses

Three Months Ended September 30,

Three Months Ended December 31,

(dollars in thousands) 2022 % of

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Total operating expenses $ 38,521 34.6 $ 42,435 44.5 $ (3,914) (9)

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.

In the three months ended December 31, 2022, research and development expense decreased $3.4 million, or 23%, 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 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.

In the three months ended December 31, 2022, sales and marketing expenses decreased $0.4 million, or 2%, as compared with the same period in 2021.

Marketing program expense decreased slightly as we shifted investment to earlier in the year.

In the three months ended December 31, 2022, general and administrative expenses increased $0.4 million, or 4%, as compared with the same period in 2021.

This increase was largely driven by project cost in our facilities and IT organizations.

In the three months ended December 31, 2022, restructuring expenses decreased $0.6 million as compared with the same period in 2021.

The decrease was the result of cost reduction initiatives in the prior year.

Other Income (Expense)

Three Months Ended September 30,

Three Months Ended December 31,

(dollars in thousands) 2022 % of

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Other income (expense) $ (544) 0 $ (150) — $ (394) (263)

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.

The change in other income (expense), net during the three months ended December 31, 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 nine months ended December 31, 2022.

Interest expense

Three Months Ended September 30,

Three Months Ended December 31,

(dollars in thousands) 2022 % of

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Interest expense (2,701) 2 (2,431) 3 (270) (11)

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.

In the three months ended December 31, 2022, interest expense increased $0.3 million, or 11%, as compared with the same period in 2021 due to a higher effective interest rate on our Term Loan.

Loss on debt extinguishment

Three Months Ended September 30,

Three Months Ended December 31,

(dollars in thousands) 2022 % of

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Loss on debt extinguishment — — — — — n/a

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,

There were no debt extinguishments in the three months ended December 31, 2022 and 2021.

Three Months Ended December 31,

(dollars in thousands) 2022 % of

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Income tax provision $ 693 1 $ 1,254 — $ (561) (45)

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

The income tax provision for the three months ended December 31, 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,

Comparison of the Nine Months Ended December 31, 2022 and 2021

Nine Months Ended December 31,

(dollars in thousands) 2022 % of

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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.

In the nine months ended December 31, 2022, product revenue increased $33.3 million, or 20%, as compared to the same period in 2021.

Primary storage systems decreased $2.4 million, or 6%, primarily driven from a reduced number of large purchases from install base customers.

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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.

Service and subscription revenue decreased 1% in the nine months ended December 31, 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.

Royalty revenue decreased $2.2 million, or 19%, in the nine months ended December 31, 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,

Nine Months Ended December 31,

(dollars in thousands) 2022 Gross

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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.

Product gross margin decreased to 17.9% or by 650 basis points for the nine months ended December 31, 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 nine months ended December 31, 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 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.

Excluding this non-recurring adjustment, product gross margin has declined approximately 300 basis points for the nine months ended December 31, 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 and a reduction in royalty 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.

Service and subscription gross margins decreased 100 basis points for the nine months ended December 31, 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.

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Operating expenses

Six Months Ended September 30,

Nine Months Ended December 31,

(dollars in thousands) 2022 % of

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Total operating expenses $ 118,647 38.6 $ 119,095 42.9 $ (448) —

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.

In the nine months ended December 31, 2022, research and development expense decreased $4.4 million, or 11%, 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.

In the nine months ended December 31, 2022, sales and marketing expenses increased $1.8 million, or 4%, 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.

In the nine months ended December 31, 2022, general and administrative expenses increased $1.4 million, or 4%, as compared with the same period in 2021.

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

In the nine months ended December 31, 2022, restructuring expenses increased $0.8 million, or 89%, 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,

Nine Months Ended December 31,

(dollars in thousands) 2022 % of

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Other income (expense) $ 2,638 1 $ (223) — $ 2,861 1,283

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.

The change in other income (expense), net during the nine months ended December 31, 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 nine months ended December 31, 2022.

Interest expense

Six Months Ended September 30,

Nine Months Ended December 31,

(dollars in thousands) 2022 % of

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Interest expense (7,537) 2 (9,387) 3 1,850 20

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.

In the nine months ended December 31, 2022, interest expense decreased $1.9 million, or 20%, 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,

Nine Months Ended December 31,

(dollars in thousands) 2022 % of

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Loss on debt extinguishment (1,392) — (4,960) 2 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,

In the nine months ended December 31, 2022, the change in loss on debt extinguishment of $3.6 million was related to prepayments of our long term debt.

Nine Months Ended December 31,

(dollars in thousands) 2022 % of

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Income tax provision $ 1,564 1 $ 1,678 1 $ (114) (7)

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

The income tax provision for the nine months ended December 31, 2022 and 2021 is primarily influenced by foreign and state income taxes.

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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 $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 had cash and cash equivalents of $26.0 million as of December 31, 2022, which consisted primarily of bank deposits and money market accounts.

As of December 31, 2022 we had $5.7 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.

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

Six Months Ended September 30,

Nine Months Ended December 31,

(in thousands) 2022 2021

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Cash Used In Operating Activities

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.

Net cash used in operating activities was $19.6 million for the nine months ended December 31, 2022.

This use of cash was primarily attributed to cash used due related to manufacturing and service part inventories of $12.0 million and a decrease in deferred revenue of $14.4 million offset by an increase $7.2 million in accounts payable.

Net cash used in operating activities was $26.7 million for the nine months ended December 31, 2021.

This use of cash was primarily attributable to changes in working capital of $24.3 million driven by increases in manufacturing and service part inventories of $13.0 million, a decrease in deferred revenue of $8.6 million and a net change in other assets and liabilities of $12.2 million which includes an increase in prepaid inventory of approximately $5.5 million in order to secure manufacturing materials.

These were partially offset by a decrease in accounts receivable of $7.0 million and a $5.4 million increase in accounts payable.

Cash Used in Investing Activities

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.

Net cash used in investing activities was $12.6 million in the nine months ended December 31, 2022, which was primarily attributable to capital expenditures of $10.6 million and a $2.0 million deferred business acquisition payment.

Net cash used in investing activities was $11.8 million in the nine months ended December 31, 2021, which was primarily attributable to cash paid for our acquisition of our video surveillance business of $7.8 million and capital expenditures of $4.0 million.

Cash Provided by Financing Activities

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.

Net cash provided by financing activities was $53.0 million for the nine months ended December 31, 2022, which was related primarily to $66.7 million of net cash received from the Rights Offering of 30 million shares of our common stock and borrowings on our credit facility of $9.6 million offset by a $20.0 million prepayment of our term debt and term debt principal amortization payments and amendment fees totaling $3.3 million.

Net cash provided by financing activities was $9.6 million in the nine months ended December 31, 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—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.

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—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