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Item 7. Management’s Discussion and Analysis

2024-06-28 compared with 2023-06-06 · 522 added, 39 removed, 237 unchanged (70% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis compares the change in the consolidated financial statements for fiscal years 2023 and 2022 and should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report.

The following discussion gives effects to the restatement of our consolidated financial statements for the fiscal years ended March 31, 2023 and 2022, discussed in Note 14 to the consolidated financial statements of this Annual Report.

and 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.

For comparisons of fiscal years 2022 and 2021, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, , Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the SEC on June 8, 2022, and incorporated herein by reference.

Our fiscal year ends on March 31 of each calendar year.

"Fiscal 2024" in this Annual Report refers to the fiscal year ended March 31, 2024.

The following discussion contains forward-looking statements, such as statements regarding 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.

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and income taxes.

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement adjustments made to the previously reported consolidated financial statements for the fiscal years ended March 31, 2022 and March 31, 2023.

For additional information and a detailed discussion of the restatement, see Note 14:

Restatement of Previously Issued Financial Statements in the Notes to our consolidated financial statements included in this Annual Report under the caption Item 8.

Financial Statements and Supplementary Data .

Restatement adjustments have also been made to the previously reported consolidated financial statements for the quarterly periods ended June 30, 2022 and June 30, 2023 as well as the quarters ended September 30, 2022 and December 31, 2022.

For additional information related to the quarterly restatement, see Note 15:

Quarterly Financial Summary (Unaudited) in the Notes to our consolidated financial statements included in this Annual Report on Form 10-K under the caption Item 8.

Financial Statements and Supplementary Data .

RESULTS OF OPERATIONS

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(in thousands) 2024 2023 2022

Restated Restated

Total revenue $ 311,600 $ 422,077 $ 383,432

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Operating expenses

Research and development (1)

44,555 51,812

Sales and marketing (1) 60,893 66,034 62,957

66,034 62,957

General and administrative (1) 51,547 47,752 45,256

47,752 45,256

Research and development (1) 38,046 44,555 51,812

Restructuring charges 3,280 1,605 850

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Interest expense (15,089) (10,560) (11,888)

Change in fair value of warrant liability 5,137 10,250 60,030

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

Net loss before income taxes (36,003) (30,939)

Net income (loss) before income taxes (40,575) (16,428) 39,696

Income tax provision 711 1,940 1,341

Net loss $ (37,943) $ (32,280)

Net income (loss) $ (41,286) $ (18,368) $ 38,355

(1) Includes stock-based compensation as follows:

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Total $ 4,721 $ 10,750 $ 13,829

Comparison of the Years Ended March 31, 2024 and 2023 (restated)

Year Ended March 31,

(in thousands) 2024 % of

revenue 2023 % of

revenue $ Change % Change

Product revenue $ 174,879 56 % $ 274,854 65 % $ (99,975) (36) %

Service and subscription revenue 126,590 41 133,518 32 (6,928) (5) %

Royalty revenue 10,131 3 13,705 3 (3,574) (26) %

Total revenue $ 311,600 100 % $ 422,077 100 % $ (110,477) (26) %

Product Revenue

In fiscal 2024, product revenue decreased $100.0 million, or 36%, as compared to fiscal 2023.

The primary driver of the decrease was a $62.5 million decrease in demand from our large hyperscale customers, as well as more general decreases in the overall tape market with declines in media and devices revenue.

Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offered as a subscription.

We anticipate the product revenue portion of our Primary and Secondary storage systems to decrease as we continue to transition to subscription-based offerings.

Service and Subscription Revenue

Service and subscription revenue decreased $6.9 million, or 5%, in fiscal 2024 compared to fiscal 2023.

This decrease was due in part to certain long-lived products reaching their end-of-service-life, partially offset by new support bookings and the transition towards subscription-based licensing.

Royalty Revenue

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium.

Royalty revenue decreased $3.6 million, or 26%, in fiscal 2024, as compared to fiscal 2023, related to lower overall unit shipments.

Gross Profit and Margin

Year Ended March 31,

(in thousands) 2024 Gross

margin % 2023 Gross

margin % $ Change Basis point change

Product gross profit $ 38,459 22.0 % $ 54,823 19.9 % $ (16,364) 210

Service and subscription gross profit 76,299 60.3 % 74,736 56.0 % 1,563 430

Royalty gross profit 10,131 100.0 % 13,705 100.0 % (3,574) —

Gross profit $ 124,889 40.1 % $ 143,264 33.9 % $ (18,375) 614

Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business.

Product Gross Margin

Product gross margin increased 210 basis points for fiscal 2024, as compared to fiscal 2023.

This increase was due primarily to a $9.8 million inventory provision recorded during fiscal 2023.

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 had 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 was not repeated in fiscal 2024.

The other primary driver of product gross margin improvement in fiscal 2024 was a revenue mix less weighted towards hyperscalers, media, and devices.

These revenue lines typically carry a lower gross margin than sales of our other secondary and primary storage products.

Service and subscription Gross Margin

Service and subscription gross margin increased 430 basis points for fiscal 2024, as compared to fiscal 2023.

This increase was due primarily to improved operational costs as we implemented strict cost controls and improved our organization design.

It was also partially driven by service parts inventory write downs in fiscal 2023, caused by the transition of certain service logistics activities to a third party provider

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating expenses

Year Ended March 31,

(in thousands) 2024 % of

revenue 2023 % of

revenue $ Change % Change

Sales and marketing $ 60,893 20 % $ 66,034 16 % $ (5,141) (8) %

General and administrative 51,547 17 % 47,752 11 % 3,795 8 %

Research and development 38,046 12 % 44,555 11 % (6,509) (15) %

Restructuring charges 3,280 1 % 1,605 — % 1,675 104 %

Total operating expenses $ 153,766 49 % $ 159,946 38 % $ (6,180) (4) %

In fiscal 2024, sales and marketing expenses decreased $5.1 million, or 8%, as compared with fiscal 2023.

This decrease was primarily driven by decreased commission expense on lower revenue.

In fiscal 2024, general and administrative expenses increased $3.8 million, or 8%, as compared with fiscal 2023 This increase was primarily driven by large non-recurring costs related to our re-evaluation of Topic 606, and other related projects.

In fiscal 2024, research and development expenses decreased $6.5 million, or 15%, as compared with fiscal 2023.

This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design.

In fiscal 2024, restructuring expenses increased $1.7 million, or 104%, as compared with fiscal 2023.

This increase is driven by corporate restructuring activities as we consolidated our physical footprint and operations in certain markets.

Other expense, net

Year Ended March 31,

(in thousands) 2024 % of

revenue 2023 % of

revenue $ Change % Change

Other income (expense), net $ (1,747) (1) % $ 1,956 1 % $ 3,703 (189) %

In fiscal 2024, other income (expense), net decrease of $3.7 million or 189%, compared to fiscal 2023.

The decrease was primarily related to differences in foreign currency gains and losses during each period, as well as the non-recurring sale of $2.3 million IP licenses in fiscal 2023.

Interest expense

Year Ended March 31,

(in thousands) 2024 % of

revenue 2023 % of

revenue $ Change % Change

Interest expense $ 15,089 5 % $ 10,560 3 % 4,529 43 %

In fiscal 2024, interest expense increased $4.5 million, or 43%, as compared to fiscal 2023.

This increase was primarily due to a higher principal balance on our Term Loan as well as a higher interest rate.

Warrant liabilities

Year Ended March 31,

(in thousands) 2024 % of

revenue 2023 % of

revenue $ Change % Change

Change in fair value of warrant liabilities $ 5,137 2 % $ 10,250 2 % $ (5,113) (50) %

In fiscal 2024, the fair value of warrant liabilities decreased $5.1 million, or 50%, as compared to fiscal 2023.

The decrease was primarily due to a lower average stock price in fiscal 2024.

Loss on debt extinguishment, net

Year Ended March 31,

(in thousands) 2024 % of

revenue 2023 % of

revenue $ Change % Change

Loss on debt extinguishment, net $ — — % $ (1,392) — % $ 1,392 100 %

In fiscal 2023, loss on debt extinguishment, net was related to prepayment of our long-term debt.

Income tax provision

Year Ended March 31,

(in thousands) 2024 % of

revenue 2023 % of

revenue $ Change % Change

Income tax provision $ 711 — % $ 1,940 1 % $ 1,229 63 %

Our income tax provision is primarily influenced by foreign and state income taxes.

In fiscal 2024, the income tax provision decreased $1.2 million or 63%, compared to fiscal 2023, related primarily to lower current foreign taxes as a result of a decrease 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 judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets.

We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal.

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

Comparison of the Years Ended March 31, 2023 and 2022

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revenue $ Change % Change

Restated Restated

Product revenue $ 274,854 65 % $ 230,814 60 % $ 44,040 19 %

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The primary driver of the increase was demand from our large hyperscale customers, as well as continued strong demand globally for data protection and archive solutions.

Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offer as a subscription.

Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offered as a subscription.

We anticipate the product revenue portion of our Primary and Secondary storage systems to decrease as we continue to transition to subscription-based offerings.

The Devices and media also decreased partially driven by lower volume of LTO® media sales.

The devices and media also decreased partially driven by lower volume of linear-tape open media sales.

Service and Subscription Revenue

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Royalty Revenue

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

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium.

Royalty revenue decreased $1.7 million, or 11%, in fiscal 2023, as compared to fiscal 2022, related to lower overall unit shipments.

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margin % $ Change Basis point change

Restated Restated

Product gross profit $ 54,823 19.9 % $ 61,034 26.4 % $ (6,211) (650)

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Gross profit $ 143,264 33.9 % $ 157,640 41.1 % $ (14,376) (720)

Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business.

Product Gross Margin

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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, product gross margin has declined approximately 370 basis points for fiscal 2023, as compared to fiscal 2022 primarily due to the continuation of pricing pressure on materials cost and freight, as global supply chain constraints disrupted normal procurement channels.

Excluding this non-recurring adjustment, product gross margin declined approximately 370 basis points for fiscal 2023, as compared to fiscal 2022 primarily due to the continuation of pricing pressure on 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.

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revenue $ Change % Change

Research and development $ 44,555 11 % $ 51,812 14 % $ (7,257) (14) %

Restated Restated

Sales and marketing $ 66,034 16 % $ 62,957 16 % $ 3,077 5 %

General and administrative 47,752 11 % 45,256 12 % 2,496 6 %

Research and development 44,555 11 % 51,812 14 % (7,257) (14) %

Restructuring charges 1,605 — % 850 — % 755 89 %

Total operating expenses $ 159,946 38 % $ 160,875 42 % $ (929) (1) %

In fiscal 2023, research and development expense decreased $7.3 million, or 14%, as compared with fiscal 2022.

This decrease was the result of one-time acquisition-related costs that occurred in the prior year, as well as the overall consolidation of those acquisitions.

In fiscal 2023, sales and marketing expenses increased $3.1 million, or 5%, as compared with fiscal 2022.

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This increase was driven primarily by transition costs as we complete large projects in our IT and facilities infrastructure.

In fiscal 2023, research and development expense decreased $7.3 million, or 14%, as compared with fiscal 2022.

This decrease was the result of one-time acquisition-related costs that occurred in the prior year, as well as the overall consolidation of those acquisitions.

In fiscal 2023, restructuring expenses increased $0.8 million, or 89%, as compared with fiscal 2022.

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revenue $ Change % Change

Restated Restated

Other income (expense), net $ 1,956 1 % $ (251) 0 % $ 2,207 879 %

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revenue $ Change % Change

Restated Restated

Interest expense $ 10,560 3 % $ 11,888 3 % $ (1,328) (11) %

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This decrease was primarily due to a lower principal balance on our Term Loan.

Warrant liabilities

Year Ended March 31,

(in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Restated Restated

Change in fair value of warrant liabilities $ 10,250 2 % $ 60,030 16 % $ (49,780) (83) %

In fiscal 2023, the fair value of warrant liabilities decreased $49.8 million, or 83%, as compared to fiscal 2022.

This decrease was primarily due to a lower average stock price in fiscal 2023.

Loss on debt extinguishment, net

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revenue $ Change % Change

Restated Restated

Loss on debt extinguishment, net $ (1,392) — % $ (4,960) (1) % $ 3,568 72 %

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revenue $ Change % Change

Restated Restated

Income tax provision $ 1,940 1 % $ 1,341 — % 599 45 %

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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.

Significant management judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets.

We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal.

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

Comparison of the Three Months Ended December 31, 2023 and 2022

Three Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Product revenue $ 37,113 51 % $ 77,494 69 % $ (40,381) (52) %

Service and subscription 32,771 46 % 33,155 29 % (384) (1) %

Royalty 2,042 3 % 2,826 2 % (784) (28) %

Total revenue $ 71,926 100 % $ 113,475 100 % $ (41,549) (37) %

Product Revenue

In the three months ended December 31, 2023, product revenue decreased $40.4 million, or 52%, as compared to the same period in 2022.

The primary driver of the decrease was lower demand from our large hyperscale customers, as well as declines in the linear-tape open media market impacting both media cartridge sales and associated linear-tape open royalties.

Service Revenue

Service and subscription revenue decreased $0.4 million, or 1%, in the three months ended December 31, 2023 compared to the same period in 2022.

This decrease was due in part to certain long-lived products reaching their end-of-service-life, partially offset by new support bookings and the transition towards subscription-based licensing.

Royalty Revenue

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium.

Royalty revenue decreased $0.8 million, or 28%, in the three months ended December 31, 2023 compared to the same period in 2022 due to decreased market volume of older generation linear-tape open media.

Gross Profit and Margin

Three Months Ended December 31,

(dollars in thousands) 2023 Gross

margin % 2022 Gross

margin % $ Change Basis point change

Product $ 7,069 19.0 % $ 18,966 24.5 % $ (11,897) (550)

Service and subscription 20,070 61.2 % 20,776 62.7 % (706) (150)

Royalty 2,042 100.0 % 2,826 100.0 % (784) —

Gross profit $ 29,181 40.6 % $ 42,568 37.5 % $ (13,387) 310

Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business.

Product Gross Margin

Product gross margin decreased to 19.0%, or by 550 basis points, for the three months ended December 31, 2023, as compared with the same period in 2022.

Service and Subscription Gross Margin

Service and subscription gross margins decreased 150 basis points for the three months ended December 31, 2023, as compared with the same period in 2022.

This decrease was primarily driven by lower service revenues on a similar service cost basis.

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating Expenses

Three Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Sales and marketing $ 14,244 20 % $ 16,339 14 % $ (2,095) (13) %

General and administrative 11,893 17 % 10,969 10 % 924 8 %

Research and development 8,763 12 % 11,254 10 % (2,491) (22) %

Restructuring charges 497 1 % (41) — % 538 (1,312) %

Total operating expenses $ 35,397 49 % $ 38,521 34 % $ (3,124) (8) %

In the three months ended December 31, 2023, sales and marketing expenses decreased $2.1 million, or 13%, as compared with the same period in 2022.

This decrease was primarily driven by the pivot of existing sales and marketing investment towards high-growth markets.

In the three months ended December 31, 2023, general and administrative expenses increased $0.9 million, or 8%, as compared with the same period in 2022.

This increase was largely driven by higher project expense related to the re-evaluation of the Company's application of standalone selling price under Topic 606.

In the three months ended December 31, 2023, research and development expenses decreased $2.5 million, or 22%, as compared with the same period in 2022.

This decrease was primarily driven by cost reduction measures to streamline common development functions across business units, and further consolidate acquired businesses.

In the three months ended December 31, 2023, restructuring expenses increased $0.5 million as compared with the same period in 2022.

The increase was the result of cost reduction initiatives.

Other Income (Expense)

Three Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Other income (expense) $ (1,419) (2) % $ (544) (—) % $ (875) (161) %

The change in other income (expense), net during the three months ended December 31, 2023 compared with the same period in 2022 was related primarily to fluctuations in foreign currency exchange rates during the three months ended December 31, 2023.

Interest Expense

Three Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Interest expense $ 3,937 5 % $ 2,701 2 % $ 1,236 46 %

In the three months ended December 31, 2023, interest expense increased $1.2 million, or 46%, as compared with the same period in 2022 due to a higher effective interest rate on our Term Loan.

Loss on Debt Extinguishment

There were no debt extinguishments in the three months ended December 31, 2023 and 2022.

Three Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Income tax provision $ 510 1 % $ 693 1 % $ (183) (26) %

The income tax provision for the three months ended December 31, 2023 and 2022 is primarily influenced by foreign and state income taxes.

Due to our history of net losses in the United States, the protracted period for utilizing tax attributes in certain foreign jurisdictions, and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize most of our deferred tax assets.

Accordingly, we have established a full valuation allowance against our U.S.

and certain foreign net deferred tax assets.

Significant management judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets.

We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal.

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

Comparison of the Nine Months Ended December 31, 2023 and 2022

Nine Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Product revenue $ 138,635 58 % $ 203,192 65 % $ (64,557) (32) %

Service and subscription 94,229 39 % 99,937 32 % (5,708) (6) %

Royalty 7,235 3 % 9,744 3 % (2,509) (26) %

Total revenue $ 240,099 100 % $ 312,873 100 % $ (72,774) (23) %

Product Revenue

In the nine months ended December 31, 2023, product revenue decreased $64.6 million, or 32%, as compared to the same period in 2022.

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 $5.7 million or 6% in the nine months ended December 31, 2023 compared to the same period in 2022, partially driven by lower overall legacy service revenues offset by higher subscription revenue.

Royalty Revenue

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium.

Royalty revenue decreased $2.5 million, or 26%, in the nine months ended December 31, 2023 compared to the same period in 2022 due to decreased market volume of older generation linear-tape open media.

Gross Profit and Margin

Nine Months Ended December 31,

(dollars in thousands) 2023 Gross

margin % 2022 Gross

margin % $ Change Basis point change

Product $ 33,421 24.1 % $ 40,182 19.8 % $ (6,761) 430

Service and subscription 56,900 60.4 % 57,708 57.7 % (808) 270

Royalty 7,235 100.0 % 9,744 100.0 % (2,509) —

Gross profit $ 97,556 40.6 % $ 107,634 34.4 % $ (10,078) 620

Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business.

Product Gross Margin

Product gross margin increased to 24.1% or by 430 basis points for the nine months ended December 31, 2023, as compared with the same period in 2022.

This increase was primarily due to a more favorable mix of revenues, weighted towards our higher margin product lines, as well as improvements in our operational efficiency and logistics costs.

In addition, the prior year period included a $6.9 million inventory reserve provision recorded during the nine months ended December 31, 2022.

Service and Subscription Gross Margin

Service and subscription gross margin of 60.4% increased 270 basis points for the nine months ended December 31, 2023, as compared with the same period in 2022.

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

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating expenses

Nine Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Sales and marketing $ 45,800 19 % $ 47,894 15 % $ (2,094) (4) %

General and administrative 34,833 15 % 35,223 11 % (390) (1) %

Research and development 28,828 12 % 33,925 11 % (5,097) (15) %

Restructuring charges 3,164 1 % 1,605 1 % 1,559 97 %

Total operating expenses $ 112,625 47 % $ 118,647 38 % $ (6,022) (5) %

In the nine months ended December 31, 2023, sales and marketing expenses decreased $2.1 million, or 4% compared with the same period in 2022 as we pivoted existing sales and marketing investment towards high growth markets.

In the nine months ended December 31, 2023, general and administrative expenses decreased $0.4 million, or 1%, as compared with the same period in 2022.

This decrease was largely driven by a reduced facilities footprint, as well as other cost reduction efforts across the business, offset by higher project expense related to the re-evaluation of the Company's application of standalone selling price under Topic 606.

In the nine months ended December 31, 2023, research and development expense decreased $5.1 million, or 15%, as compared with the same period in 2022.

This decrease was primarily driven by cost reduction measures to streamline common development functions across business units, and further consolidate acquired businesses.

In the nine months ended December 31, 2023, restructuring expenses increased $1.6 million as compared with the same period in 2022.

The increase was the result of cost reduction initiatives.

Other Income (Expense)

Nine Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Other income (expense) $ (2,049) (1) % $ 2,638 1 % $ (4,687) 178 %

The change in other income (expense), net during the nine months ended December 31, 2023 compared with the same period in 2022 was related primarily to fluctuations in foreign currency exchange rates during the nine months ended December 31, 2023.

Interest expense

Nine Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Interest expense $ 10,992 5 % $ 7,537 2 % $ 3,455 46 %

In the nine months ended December 31, 2023, interest expense increased $3.5 million, or 46%, as compared with the same period in 2022 due to a higher effective interest rate on our Term Loan.

Loss on debt extinguishment

Nine Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Loss on debt extinguishment $ — — % $ (1,392) — % $ 1,392 100 %

In the nine months ended December 31, 2023, loss on debt extinguishment decreased $1.4 million as compared with the same period in 2022 due to a loss on debt extinguishment of $1.4 million for a prepayment of our Term Loan.

Nine Months Ended December 31,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Income tax provision $ 1,573 1 % $ 1,564 — % $ 9 1 %

The income tax provision for the nine months ended December 31, 2023 and 2022 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 judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets.

We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal.

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

Comparison of the Three Months Ended September 30, 2023 and 2022

Three Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Product revenue $ 42,947 57 % $ 64,110 64 % $ (21,163) (33) %

Service and subscription 30,505 40 % 32,977 33 % (2,472) (7) %

Royalty 2,228 3 % 3,478 3 % (1,250) (36) %

Total revenue $ 75,680 100 % $ 100,565 100 % $ (24,885) (25) %

Product Revenue

In the three months ended September 30, 2023, product revenue decreased $21.2 million, or 33%, as compared to the same period in 2022.

Service and subscription revenue decreased $2.5 million, or 7%, in the three months ended September 30, 2023 compared to the same period in 2022.

This decrease was due in part to certain long-lived products reaching their end-of-service-life, partially offset by new support bookings and the transition towards subscription-based licensing.

Royalty Revenue

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium.

Royalty revenue decreased $1.3 million, or 36%, in the three months ended September 30, 2023 compared to the same period in 2022 due to decreased market volume of older generation linear-tape open media.

Gross Profit and Margin

Three Months Ended September 30,

(dollars in thousands) 2023 Gross

margin % 2022 Gross

margin % $ Change Basis point change

Product $ 12,228 28.5 % $ 7,550 11.8 % $ 4,678 1,670

Service and subscription 18,279 59.9 % 18,231 55.3 % 48 460

Royalty 2,228 100.0 % 3,478 100.0 % (1,250) —

Gross profit $ 32,735 43.3 % $ 29,259 29.1 % $ 3,476 1,420

Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business.

Product Gross Margin

Product gross margin increased to 28.5%, or by 1,670 basis points, for the three months ended September 30, 2023, as compared with the same period in 2022.

This increase was primarily due to a more favorable mix of revenues, weighted towards our higher margin product lines, as well as improvements in our operational efficiency and logistics costs.

In addition, the prior year period included a $6.9 million inventory reserve provision recorded during the three months ended September 30, 2022.

Service and Subscription Gross Margin

Service and subscription gross margins increased 460 basis points for the three months ended September 30, 2023, as compared with the same period in 2022.

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

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating Expenses

Three Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Sales and marketing $ 15,717 21 % $ 15,593 16 % $ 124 1 %

General and administrative 10,241 14 % 11,940 12 % (1,699) (14) %

Research and development 9,152 12 % 10,546 10 % (1,394) (13) %

Restructuring charges 1,338 2 % 921 1 % 417 45 %

Total operating expenses $ 36,448 48 % $ 39,000 39 % $ (2,552) (7) %

In the three months ended September 30, 2023, sales and marketing expense increased $0.1 million, or 1%, as compared with the same period in 2022.

Overall costs remain relatively flat as we pivot existing sales and marketing investment towards high-growth markets.

In the three months ended September 30, 2023, general and administrative expenses decreased $1.7 million, or 14%, as compared with the same period in 2022.

This decrease was largely driven by a reduced facilities footprint, as well as other cost reduction efforts across the business.

In the three months ended September 30, 2023, research and development expenses decreased $1.4 million, or 13%, as compared with the same period in 2022.

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

In the three months ended September 30, 2023, restructuring expenses increased $0.4 million as compared with the same period in 2022.

The increase was the result of cost reduction initiatives.

Other Income (Expense)

Three Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Other income (expense) $ 367 0 % $ 2,431 2 % $ (2,064) 85 %

The change in other income (expense), net during the three months ended September 30, 2023 compared with the same period in 2022 was related primarily to fluctuations in foreign currency exchange rates during the three months ended September 30, 2023.

Interest Expense

Three Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Interest expense $ 3,855 5 % $ 2,745 3 % $ 1,110 40 %

In the three months ended September 30, 2023, interest expense increased $1.1 million, or 40%, as compared with the same period in 2022 due to a higher effective interest rate on our Term Loan.

Loss on Debt Extinguishment

There were no debt extinguishments in the three months ended September 30, 2023 and 2022.

Three Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Income tax provision $ 533 1 % $ 461 — % $ 72 16 %

The income tax provision for the three months ended September 30, 2023 and 2022 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 judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets.

We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal.

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

Comparison of the Six Months Ended September 30, 2023 and 2022

Six Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Product revenue $ 101,522 60 % $ 125,698 64 % $ (24,176) (19) %

Service and subscription 61,458 37 % 66,782 33 % (5,324) (8) %

Royalty 5,194 3 % 6,918 3 % (1,724) (25) %

Total revenue $ 168,174 100 % $ 199,398 100 % $ (31,224) (16) %

Product Revenue

In the six months ended September 30, 2023, product revenue decreased $24.2 million, or 19%, as compared to the same period in 2022.

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 $5.3 million, or 8%, in the six months ended September 30, 2023 compared to the same period in 2022, partially driven by lower overall legacy service revenues offset by higher subscription revenue.

Royalty Revenue

We receive royalties from third parties that license our linear-tape open media patents through our membership in the linear-tape open consortium.

Royalty revenue decreased $1.7 million, or 25%, in the six months ended September 30, 2023 compared to the same period in 2022 due to decreased market volume of older generation linear-tape open media.

Gross Profit and Margin

Six Months Ended September 30,

(dollars in thousands) 2023 Gross

margin % 2022 Gross

margin % $ Change Basis point change

Product $ 26,352 26.0 % $ 21,216 16.9 % $ 5,136 910

Service and subscription 36,830 59.9 % 36,932 55.3 % (102) 460

Royalty 5,194 100.0 % 6,918 100.0 % (1,724) —

Gross profit $ 68,376 40.7 % $ 65,066 32.6 % $ 3,310 810

Gross profit and margin percentages are key metrics that management monitors to assess the performance on the business.

Product Gross Margin

Product gross margin increased to 26.0%, or by 910 basis points, for the six months ended September 30, 2023, as compared with the same period in 2022.

This increase was primarily due to a more favorable mix of revenues, weighted towards our higher margin product lines, as well as improvements in our operational efficiency and logistics costs.

In addition, the prior year period included a $6.9 million inventory reserve provision recorded during the six months ended September 30, 2022.

Service and Subscription Gross Margin

Service and subscription gross margin of 59.9% increased 460 basis points for the six months ended September 30, 2023, as compared with the same period in 2022.

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

Royalty Gross Margin

Royalties do not have significant related cost of sales.

Operating expenses

Six Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Sales and marketing $ 31,557 19 % $ 31,555 16 % $ 2 — %

General and administrative 22,940 14 % 24,254 12 % (1,314) (5) %

Research and development 20,065 12 % 22,671 11 % (2,606) (11) %

Restructuring charges 2,667 2 % 1,646 1 % 1,021 62 %

Total operating expenses $ 77,229 46 % $ 80,126 40 % $ (2,897) (4) %

In the six months ended September 30, 2023, sales and marketing expense was flat compared with the same period in 2022 as we pivoted existing sales and marketing investment towards high-growth markets.

In the six months ended September 30, 2023, general and administrative expense decreased $1.3 million, or 5%, compared with the same period in 2022.

This decrease was largely driven by a reduced facilities footprint, as well as other cost reduction efforts across the business.

In the six months ended September 30, 2023, research and development expenses decreased $2.6 million, or 11%, as compared with the same period in 2022.

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

In the six months ended September 30, 2023, restructuring expenses increased $1.0 million as compared with the same period in 2022.

The increase was the result of cost reduction initiatives.

Other Income (Expense)

Six Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Other income (expense) $ (630) 0 % $ 3,182 2 % $ (3,812) 120 %

The change in other income (expense), net during the six months ended September 30, 2023 compared with the same period in 2022 was related primarily to fluctuations in foreign currency exchange rates during the three months ended September 30, 2023.

Interest expense

Six Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Interest expense $ 7,055 4 % $ 4,836 2 % $ 2,219 46 %

In the six months ended September 30, 2023, interest expense increased $2.2 million, or 46%, as compared with the same period in 2022 due to a higher effective interest rate on our Term Loan.

Loss on debt extinguishment

Six Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Loss on debt extinguishment $ — — % $ (1,392) (1) % $ 1,392 100 %

In the six months ended September 30, 2023, loss on debt extinguishment decreased $1.4 million as compared with the same period in 2022 due to a loss on debt extinguishment of $1.4 million for a prepayment of our Term Loan.

Six Months Ended September 30,

(dollars in thousands) 2023 % of

revenue 2022 % of

revenue $ Change % Change

Income tax provision $ 1,063 1 % $ 872 — % $ 191 22 %

The income tax provision for the six months ended September 30, 2023 and 2022 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 judgment is required in assessing our ability to realize any future benefit from our net deferred tax assets.

We intend to maintain this valuation allowance until sufficient positive evidence exists to support its reversal.

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

Liquidity and Capital Resources

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Our future liquidity requirements will depend on multiple factors, including our research and development plans and capital asset needs.

We had cash and cash equivalents of $26.0 million as of March 31, 2023, which excludes $0.2 million.

of short-term restricted cash as of March 31, 2023.

We had cash and cash equivalents of $25.7 million as of March 31, 2024, which excludes $0.2 million of short-term restricted cash.

Our total outstanding Term Loan debt was $87.9 million, and we had $27.3 million available to borrow under the PNC Credit Facility as of March 31, 2024.

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We have funded operations through the sale of common stock, term debt borrowings and revolving credit facility borrowings described in Note 5:

On June 1, 2023, the Company entered into amendments to the Term Loan and the PNC Credit Facility.

The amendments, among other things, (a) amended the total net leverage ratio financial covenant commencing with the fiscal quarter ended June 30, 2023;

(b) amended the minimum liquidity financial covenant to decrease the minimum liquidity to $15 million;

and (c) amended the “EBITDA” definition to increase the add-back cap on non-recurring items including restructuring charges during the fiscal years ended March 31, 2024 and 2025.

The Term Loan amendment also provided an advance of $15 million in additional Term Loan borrowings.

With the additional term debt borrowings, in addition to the amendments to the credit agreements, we forecasted that operating performance, cash, current working capital and borrowings available under the PNC Credit Facility will provide us with sufficient capital to fund operations for at least one year from the financial statement issuance date.

If required, there is no assurance that we would be able to obtain sufficient additional funds when needed or that such funds, if available, would be obtainable on terms satisfactory to us.

Our outstanding long-term debt amounted to $83.1 million as of March 31, 2023, net of $3.3 million in unamortized debt issuance costs and $5.0 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.

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.

On February 14, 2024, we entered into amendments to the Credit Agreements which waived testing of the total net leverage ratio financial covenant for the fiscal quarter ended December 31, 2023.

On May 24, 2024, we entered into amendments to the Credit Agreements which, among other things, waives compliance with our net leverage covenant as of March 31, 2024, reduced the daily minimum liquidity below $15.0 million until June 16, 2023 and waived any default that might arise as a result of the restatement of certain of our historical financial statements.

The Term Loan and PNC Credit Facility both mature on August 5, 2026 under the terms of the related agreements.

As discussed in Note 1 :

Description of Business and Significant Accounting Policies—Going Concern , we expect to be in violation of our net leverage covenant as of the June 30, 2024 testing date and the violation will cause the outstanding Term Loan and PNC Credit Facility outstanding balances to become due as an event of default.

As a result, we have classified the Term Loan and PNC Credit Facility as current liabilities in the accompanying consolidated balance sheet.

We are currently working to obtain additional covenant waivers or refinance the existing Term Debt and PNC Credit Facility.

Additionally, we are evaluating strategies to obtain additional funding to provide additional liquidity, including potential asset sales.

In the event we are unable to obtain an extension of the waiver, additional funding will be required to pay the amount due on the revolver and term loan.

However, we may be unable to obtain an extension of the waiver, or obtain additional funding.

As such, there can be no assurance that we will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

See "Risks Related to our Indebtedness" section of Item 1A.

Risk Factors.

Registration Rights Agreement

We have entered into a registration rights agreement with the holders of warrants previously issued to certain lenders in December 2018, June 2020 and June 2023 (the "Registration Rights Agreement").

The Registration Rights Agreement grants certain registration rights for the shares of common stock issuable upon the exercise of the warrants, including (i) the ability of a holder to request that the Company file a Form S-1 registration statement with respect to at least 40% of the registrable securities held by such holder, (ii) the ability of a holder to request that the Company file a Form S-3 registration statement with respect to outstanding registrable securities if at any time the Company is eligible to use a Form S-3 registration statement, and (iii) customary piggyback registration rights, subject to certain customary limitations.

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

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Net Cash Used in Operating Activities

Net cash used in operating activities was $10.2 million for the year ended March 31, 2024, primarily attributable to lower revenue and timing of certain vendor payments.

Net cash used in operating activities was $4.9 million for the year ended March 31, 2023, primarily attributable to cash provided by operating activities excluding changes in assets and liabilities of $1.5 million offset by cash used associated with working capital changes of $6.4 million including cash used related to manufacturing and service inventories of $5.3 million.

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 manufacturing and service inventories.

Net Cash Used in Investing Activities

Net cash used in investing activities was $5.9 million for the year ended March 31, 2024, primarily attributable to the implementation costs of a new Enterprise Resource Planning system.

Net cash used in investing activities was $15.6 million for the year ended March 31, 2023, primarily attributable to $12.6 million of capital expenditures and $3.0 million of cash paid related to the deferred purchase price for a prior business acquisition.

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 Provided by Financing Activities

Net cash provided by financing activities was $15.7 million for the year ended March 31, 2024 due primarily to borrowings under our Term Loan credit facility.

Net cash provided by financing activities was $41.2 million for the year ended March 31, 2023 due primarily to $66.2 million of net cash received from the rights offering of 30 million shares of our common stock offset in part 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 $20.2 million for the year ended March 31, 2022, primarily related 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

19 unchanged sentences

Total $ 168,073 $ 149,484 $ 3,776 $ 2,730 $ 12,083

(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, 2023, 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, 2023.

Term loan debt matures on August 5, 2026.

(1) Consists of principal on our Term Loan and PNC Credit Facility.

(2) Represents aggregate future minimum lease payments under non-cancelable operating leases.

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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 Accounting Standards Codification (“ASC”) Topic 606 to contracts with customers.

Most of our contracts contain multiple goods and services designed to meet each customers’ unique storage needs.

There are significant judgments used when applying Accounting Standards Codification (“ASC”) Topic 606 to contracts with customers.

Most of our contracts contain multiple goods and services designed to meet each customer's 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.

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 internal discounting practices, competitor pricing, competitor margins, performance obligations with similar customers and product groupings.

Determining the observable inputs and applying them to our performance obligations requires significant judgment.

We reassess standalone selling price determination periodically.

Product revenue may be impacted by a variety of price adjustments or other factors, including rebates, returns and stock rotation.

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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.

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.

Warrant Accounting

We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance ASC 480, Distinguishing Liabilities from Equity (“Topic 480”) and ASC 815, Derivatives and Hedging (“Topic 815”) .

The assessment considers whether the warrants are freestanding financial instruments pursuant to Topic 480, meet the definition of a liability pursuant to Topic 480, and whether the warrants meet all of the requirements for equity classification under Topic 815, including whether the warrants are indexed to the Company’s own shares of common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance or modification.

For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter.

This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s consolidated statement of operations.

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-K

Item 7. Management’s Discussion and Analysis