Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investors should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled “Risk Factors” and in other parts of this Annual Report on Form 10-K. See also the section titled “Note Regarding Forward-Looking Statements” in this report.
The following discussion of our financial condition and results of operations covers fiscal 2026 and fiscal 2025 items and year-over-year comparisons between fiscal 2026 and fiscal 2025. Discussions of fiscal 2024 items and year-over-year comparisons between fiscal 2025 and fiscal 2024 that are not included in this Form 10-K can be found in “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, 2025, that was filed with the SEC on August 26, 2025.
Overview and Highlights
We are a technology company whose mission is to deliver innovative solutions to forward-thinking organizations across the world. We design, manufacture and sell technology and services that help customers capture, create and share digital content, and protect it for decades. We emphasize innovative technology in the design and manufacture of our products to help our customers unlock the value in their video and unstructured data in new ways to solve their most pressing business challenges.
We generate revenue by designing, manufacturing, and selling technology and services. Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; data center costs in support of our cloud-based services; and income taxes.
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RESULTS OF OPERATIONS
Year Ended March 31,
(in thousands) 2026 2025
Total revenue $ 279,581 $ 274,058
Total cost of revenue (1)
176,540 164,226
Gross profit 103,041 109,832
Operating expenses
Sales and marketing (1)
52,016 52,320
General and administrative (1)
43,917 63,961
Research and development (1)
23,503 31,141
Restructuring charges 8,112 4,090
Total operating expenses 127,548 151,512
Loss from operations (24,507) (41,680)
Other expense, net (1,511) (710)
Interest expense (21,575) (23,607)
Change in fair value of warrant liability 11,315 (45,270)
Change in fair value of convertible note (4,119) —
Loss on debt extinguishment, net (59,641) (3,003)
Loss before income taxes (100,038) (114,270)
Income tax provision 1,008 821
Net loss $ (101,046) $ (115,091)
(1) Includes stock-based compensation as follows:
Year Ended March 31,
(in thousands) 2026 2025
Cost of revenue $ (21) $ 373
Research and development 73 495
Sales and marketing (66) 317
General and administrative (835) 1,643
Total $ (849) $ 2,828
Comparison of the Years Ended March 31, 2026 and 2025
Revenue
Year Ended March 31,
(in thousands) 2026 % of
revenue 2025 % of
revenue $ Change % Change
Product revenue $ 172,385 62 % $ 154,182 57 % $ 18,203 12 %
Service and subscription revenue 99,226 35 % 110,658 40 % (11,432) (10) %
Royalty revenue 7,970 3 % 9,218 3 % (1,248) (14) %
Total revenue $ 279,581 100 % $ 274,058 100 % $ 5,523 2 %
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Product Revenue
In fiscal 2026, product revenue increased $18.2 million, or 12%, as compared to fiscal 2025. The primary driver of this increase was strong demand across all secondary storage product lines including Scalar tape storage products, DXi backup appliances, and ActiveScale object storage appliances. Demand growth increased worldwide with product revenues increasing across all regions. Overall secondary storage revenue increased by $27.1 million, or 36.7% as compared to fiscal 2025. Devices and media revenues also increased by $6.1 million, or 17.7% as compared to fiscal 2025. These increases were partially offset by continuing declines in primary storage.
Service and Subscription Revenue
Service and subscription revenue decreased $11.4 million, or 10%, in fiscal 2026 compared to fiscal 2025. 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 $1.2 million, or 14%, in fiscal 2026, as compared to fiscal 2025, related to lower overall unit shipments.
Gross Profit and Margin
Year Ended March 31,
(in thousands) 2026 Gross
margin % 2025 Gross
margin % $ Change Basis point change
Product gross profit $ 36,186 21.0 % $ 34,452 22.3 % $ 1,734 (130)
Service and subscription gross profit 58,885 59.3 % 66,162 59.8 % (7,277) (50)
Royalty gross profit 7,970 100.0 % 9,218 100.0 % (1,248) —
Gross profit $ 103,041 36.9 % $ 109,832 40.1 % $ (6,791) (320)
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 130 basis points for fiscal 2026, as compared to fiscal 2025. This decrease was due primarily to a revenue mix slightly more weighted towards lower margin devices and media products. Product costs also fluctuated through the year from external factors such as import tariffs and component material costs.
Service and Subscription Gross Margin
Service and subscription gross margin decreased 50 basis points for fiscal 2026, as compared to fiscal 2025. This decrease was due primarily to higher shipping and handling costs and inventory carrying charges, partially offset by lowered internal costs from continued improvement in operational design.
Royalty Gross Margin
Royalties do not have significant related cost of sales.
Operating expenses
Year Ended March 31,
(in thousands) 2026 % of
revenue 2025 % of
revenue $ Change % Change
Sales and marketing $ 52,016 19 % $ 52,320 19 % $ (304) (1) %
General and administrative 43,917 16 % 63,961 23 % (20,044) (31) %
Research and development 23,503 8 % 31,141 11 % (7,638) (25) %
Restructuring charges 8,112 3 % 4,090 1 % 4,022 98 %
Total operating expenses $ 127,548 46 % $ 151,512 55 % $ (23,964) (16) %
In fiscal 2026, sales and marketing expenses decreased $0.3 million, or 1%, as compared with fiscal 2025. This decrease was primarily driven by an improved organizational structure following management changes in fiscal 2026.
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In fiscal 2026, general and administrative expenses decreased $20.0 million, or 31%, as compared with fiscal 2025 This decrease was primarily driven by large non-recurring projects not recurring in fiscal 2026 including the launch of a new ERP system in the prior year. Expenses also decreased as administrative efficiency gains were realized through more streamlined functions and process automation.
In fiscal 2026, research and development expenses decreased $7.6 million, or 25%, as compared with fiscal 2025. This decrease was the result of the efficiencies realized through improved organization design, better aligning commonalities between major products.
In fiscal 2026, restructuring charges increased $4.0 million, or 98%, as compared with fiscal 2025. 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) 2026 % of
revenue 2025 % of
revenue $ Change % Change
Other income (expense), net $ (1,511) (1) % $ (710) 0 % $ 801 113 %
In fiscal 2026, the change in other expense resulted in a net increase of $0.8 million or 113%, compared to fiscal 2025. The increase was primarily related to differences in foreign currency gains and losses during each period.
Interest expense
Year Ended March 31,
(in thousands) 2026 % of
revenue 2025 % of
revenue $ Change % Change
Interest expense $ (21,575) (8) % $ (23,607) (9) % 2,032 (9) %
In fiscal 2026, interest expense decreased by $2.0 million, or 9%, as compared to fiscal 2025. This decrease was primarily due to the restructuring of our Term Loan (as defined herein) in September 2025.
Warrant liabilities
Year Ended March 31,
(in thousands) 2026 % of
revenue 2025 % of
revenue $ Change % Change
Change in fair value of warrant liabilities $ 11,315 4 % $ (45,270) (17) % $ 56,585 (125) %
In fiscal 2026, we recorded a non-cash loss of $11.3 million related to the change in fair value of our forbearance warrant which was issued in September 2025. The loss was primarily driven by fluctuations in our stock price. We recorded a non-cash gain of $45.3 million in the same period in fiscal 2025 related to lender warrants issued to the holders of our Term Loan. These warrants were exercised in December 2024 and January 2025. This gain was primarily driven by fluctuations in our stock price.
Convertible note
Year Ended March 31,
(in thousands) 2026 % of
revenue 2025 % of
revenue $ Change % Change
Change in fair value of convertible note $ (4,119) (1) % $ — — % $ (4,119) 100 %
In fiscal 2026, we recorded a non-cash gain of $4.1 million related to the change in fair value of our convertible note issued in December 2025. This change was primarily driven by fluctuations in our stock price.
Loss on debt extinguishment, net
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Year Ended March 31,
(in thousands) 2026 % of
revenue 2025 % of
revenue $ Change % Change
Loss on debt extinguishment, net $ (59,641) (21) % $ (3,003) (1) % $ (56,638) 1,886 %
In fiscal 2026, we recorded a loss of $59.6 million on debt extinguishment primarily related to the September 2025 and December 2025 debt transactions, partially offset by a gain on termination of our revolving credit facility in August 2025. In fiscal 2025, loss on debt extinguishment, net was related to prepayment of our long-term debt.
Income tax provision
Year Ended March 31,
(in thousands) 2026 % of pretax income 2025 % of pretax income $ Change % Change
Income tax provision $ 1,008 (1) % $ 821 (1) % $ (187) (23) %
In fiscal 2026, the income tax provision increased $0.2 million or 23%, compared to fiscal 2025. The income tax provision increased in 2026 primarily due to a higher valuation allowance and a significant warrant mark-to-market adjustment, which together offset the federal statutory tax benefit from pre-tax losses. Additionally, the expiration of tax attributes contributed to the increase, as previously available deferred tax assets could no longer be used.
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, 2025 and 2024
Revenue
Year Ended March 31,
(dollars in thousands) 2025 % of
revenue 2024 % of
revenue $ Change % Change
Product revenue $ 154,182 57 % $ 174,879 55 % $ (20,697) (12) %
Service and subscription 110,658 40 % 126,590 41 % (15,932) (13) %
Royalty 9,218 3 % 10,131 3 % (913) (9) %
Total revenue $ 274,058 100 % $ 311,600 99 % $ (37,542) (12) %
Product Revenue
In fiscal 2025, product revenue decreased $20.7 million, or 12%, as compared to fiscal 2024. The primary driver of the decrease was a drop in demand from our large hyperscale customers in the first quarter of the prior year, as well as more general decreases in the overall tape market. Outside of the Tape and Hyperscale business, our remaining Secondary and Primary storage systems are also offered as a subscription.
Service and Subscription Revenue
Service and subscription revenue decreased $15.9 million, or 13%, in fiscal 2025 compared to fiscal 2024. 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 $0.9 million, or 9%, in fiscal 2025, as compared to fiscal 2024, related to lower overall unit shipments.
Gross Profit and Margin
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Year Ended March 31,
(dollars in thousands) 2025 Gross
margin % 2024 Gross
margin % $ Change Basis point change
Product $ 34,452 22.3 % $ 38,460 22.0 % $ (4,008) 30
Service and subscription 66,162 59.8 % 76,298 60.3 % (10,136) (50)
Royalty 9,218 100.0 % 10,131 100.0 % (913) —
Gross profit $ 109,832 40.1 % $ 124,889 40.1 % $ (15,057) —
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 30 basis points for fiscal 2025, as compared to fiscal 2024. This decrease was due primarily to a revenue mix less weighted towards higher margin tape products.
Service and Subscription Gross Margin
Service and subscription gross margin increased 50 basis points for fiscal 2025, as compared to fiscal 2024. This increase was due primarily to improved operational costs as we implemented strict cost controls and improved our organization design.
Royalty Gross Margin
Royalties do not have significant related cost of sales.
Operating Expenses
Year Ended March 31,
(dollars in thousands) 2025 % of revenue 2024 % of revenue $ Change % Change
Sales and marketing $ 52,320 19 % $ 60,893 20 % $ (8,573) (14) %
General and administrative 63,961 23 % 51,547 17 % 12,414 24 %
Research and development 31,141 11 % 38,046 12 % (6,905) (18) %
Restructuring charges 4,090 1 % 3,280 1 % 810 25 %
Total operating expenses $ 151,512 55 % $ 153,766 49 % $ (2,254) (1) %
In fiscal 2025, sales and marketing expenses decreased $8.6 million, or 14%, as compared with fiscal 2024. This decrease was primarily driven by an increase in operational cost management, as well as decreased commission expense on lower revenue.
In fiscal 2025, general and administrative expenses increased $12.4 million, or 24%, as compared with fiscal 2024 This increase was primarily driven by large non-recurring costs related to our re-evaluation of revenue recognition, and other non-recurring projects.
In fiscal 2025, research and development expenses decreased $6.9 million, or 18%, as compared with fiscal 2024. This decrease was the result of the continued consolidation of acquisition costs, and efficiencies realized through improved organization design.
In fiscal 2025, restructuring expenses increased $0.8 million, or 25%, as compared with fiscal 2024. This increase is driven by corporate restructuring activities as we consolidated our physical footprint and operations in certain markets.
Other Income (Expense)
Year Ended March 31,
(dollars in thousands) 2025 % of revenue 2024 % of revenue $ Change % Change
Other income (expense) $ (710) 0 % $ (1,746) (1) % $ 1,036 59 %
In fiscal 2025, other income (expense) resulted in a net decrease of $1.0 million or 59%, compared to fiscal 2024. The decrease was primarily related to differences in foreign currency gains and losses during each period.
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Interest Expense
Year Ended March 31,
(dollars in thousands) 2025 % of revenue 2024 % of revenue $ Change % Change
Interest expense $ (23,607) (9) % $ (15,089) (5) % $ (8,518) 56 %
In fiscal 2025, interest expense increased $8.5 million, or 56%, as compared to fiscal 2024. 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,
(dollars in thousands) 2025 % of revenue 2024 % of revenue $ Change % Change
Change in fair value of warrant liabilities $ (45,270) (17) % $ 5,137 2 % $ (50,407) (981) %
In fiscal 2025, we recorded a non-cash loss of $45.3 million related to the change in fair value of our warrant liabilities, compared to a non-cash gain of $5.1 million in the same period in fiscal 2024. This change was primarily driven by fluctuations in our stock price.
Loss on debt extinguishment
Year Ended March 31,
(dollars in thousands) 2025 % of revenue 2024 % of revenue $ Change % Change
Loss on debt extinguishment $ (3,003) (1) % $ — — % $ (3,003) 100 %
In fiscal 2025, loss on debt extinguishment, net was related to prepayment of our long-term debt.
Income Taxes
Year Ended March 31,
(dollars in thousands) 2025 % of pretax income 2024 % of pretax income $ Change % Change
Income tax provision $ 821 (1) % $ 711 (2) % $ 110 15 %
In fiscal 2025, the income tax provision increased $0.1 million, or 15%, compared to fiscal 2024. The income tax provision increased in 2025 primarily due to a higher valuation allowance and a warrant mark-to-market adjustment, which together offset the federal statutory tax benefit from pre-tax losses. Additionally, the expiration of tax attributes contributed to the increase, as previously available deferred tax assets could no longer be used.
Liquidity and Capital Resources
We consider liquidity in terms of the sufficiency of internal and external cash resources to fund our operating, investing and financing activities. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our balance sheet and proceeds from the sale of Common Stock under the SEPA (as defined herein). In fiscal 2025, there were also amounts available under our revolving credit facility agreement with PNC Bank, National Association, as amended from time to time (the “PNC Credit Facility”) however, this agreement was terminated in August 2025. We require significant cash resources to provide for our research and development activities, fund our working capital needs, and make capital expenditures. Our future liquidity requirements will depend on multiple factors, including our research and development plans and capital asset needs.
We had cash and cash equivalents of $15.6 million as of March 31, 2026, which excludes $0.7 million of short-term restricted cash. Our total outstanding Term Loan debt was $55.9 million and the fair value of the Convertible Note (as defined herein) was $90.0 million.
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We generated negative cash flows from operations of approximately $37.9 million and $23.6 million for the fiscal years ended March 31, 2026 and 2025, respectively, and generated net losses of approximately $101.0 million and $115.1 million for the fiscal years ended March 31, 2026 and 2025, respectively. We have funded operations through the sale of common stock under the SEPA and debt borrowings as described in Note 4: Debt .
On January 25, 2025, the Company entered into a Standby Equity Purchase Agreement (the "SEPA") with YA II PN, Ltd., a Cayman Islands exempt limited partnership ("YA"), in which pursuant to and subject to its terms, the Company has the right, but not the obligation, to sell up to $200.0 million of Common Stock at any time during the three-year period following the date of the SEPA. As of March 31, 2026, the Company has sold 8.7 million shares of Common Stock under the SEPA with net proceeds of approximately $91.0 million.
Subsequent to March 31, 2026, we completed several transactions which have significantly impacted our future liquidity. On June 1, 2026, the Company entered into Securities Purchase Agreements to issue and sell to certain accredited investors an aggregate of 10,615,712 shares of the Company’s Common Stock. After deducting placement agent fees and other offering expenses payable by the Company, the Company received net proceeds of $94.7 million. On June 4, 2026, the Company paid an aggregate of $57.8 million in connection with the termination of the Term Loan Credit Agreement. This fully paid down and extinguished our Term Loans (as defined herein). Also on June 4, 2026, the Company provided a notice to YA regarding its termination of the SEPA, effective June 11, 2026. There were no amounts owed to YA under the SEPA at the time the termination notice was provided. See Note 13 : Subsequent Events , for further details. With the cash proceeds, after repayment of the Term Loans, we forecast that operating performance, cash and current working capital will provide us with sufficient capital to fund operations for at least one year from the financial statement issuance date.
Cash Flows
The following table summarizes our consolidated cash flows for the periods indicated.
Year Ended March 31,
(in thousands) 2026 2025
Cash provided by (used in):
Operating activities $ (37,856) $ (23,613)
Investing activities (1,706) (4,947)
Financing activities 39,168 19,306
Effect of exchange rate changes 25 (3)
Net change in cash, cash equivalents, and restricted cash $ (369) $ (9,257)
Net Cash Used in Operating Activities
Net cash used in operating activities increased by $14.2 million to $37.9 million for the year ended March 31, 2026 compared to $23.6 million for the year ended March 31, 2025. The increase was primarily attributable increase in product costs and associated decrease gross profit in addition to large non-recurring costs related to our re-evaluation of Topic 606, and other non-recurring projects.
Net Cash Used in Investing Activities
Net cash used in investing activities was $1.7 million and $4.9 million for the years ended March 31, 2026 and 2025, respectively, primarily attributable to capital expenditures.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $39.2 million for the year ended March 31, 2026 due primarily to cash proceeds from the SEPA, partially offset by the repayment of the revolver in the first quarter of fiscal 2026.
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Net cash provided by financing activities was $19.3 million for the year ended March 31, 2025 due primarily to cash proceeds from the SEPA, partially offset by the repayment of the PNC Credit Facility in August 2025.
Commitments and Contingencies
Our contingent liabilities consist primarily of certain financial guarantees, both express and implied, related to product liability and potential infringement of intellectual property. We have little history of costs associated with such indemnification requirements and contingent liabilities associated with product liability may be mitigated by our insurance coverage. In the normal course of business to facilitate transactions of our services and products, we indemnify certain parties with respect to certain matters, such as intellectual property infringement or other claims. We also have indemnification agreements with our current and former officers and directors. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of our indemnification claims, and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our operating results, financial position or cash flows.
We are also subject to ordinary course of business litigation, See Note 10: Commitments and Contingencies , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Contractual Obligations
Contractual obligations are cash amounts that we are obligated to pay as part of certain contracts that we have entered into during the normal course of business. Below is a table that shows our contractual obligations as of March 31, 2026 (in thousands):
Payments Due by Period
(in thousands) Total 1 year or less 1 – 3 Years 3 –5 Years More than
5 years
Debt obligations (1)
$ 128,767 $ 55,906 $ 72,861 $ — $ —
Future lease commitments (2)
16,895 1,964 2,840 2,522 9,569
Purchase obligations (3)
76,758 76,758 — — —
Total $ 222,420 $ 134,628 $ 75,701 $ 2,522 $ 9,569
(1) Consists of principal on our Term Loan and Convertible Note.
(2) Represents aggregate future minimum lease payments under non-cancelable operating leases.
(3) Includes primarily non-cancelable inventory purchase commitments.
Off-Balance Sheet Arrangements
We do not currently have any other off-balance sheet arrangements and do not have any holdings in variable interest entities.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. On an ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider the following accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change. The following accounting policies include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain. For information on our
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significant accounting policies, including the policies discussed below, see Note 1: Description of Business and Significant Accounting Policies , to our consolidated financial statements.
Revenue Recognition
Our revenue is derived from three main sources: (a) products, (b) service and subscription, and (c) royalties. Our performance obligations are satisfied at a point in time or over time as stand ready obligations. Product revenue is recognized at the point in time when the customer takes control of the product, which typically occurs at the point of shipment. Service and subscription revenue consists of customer support agreements, software subscriptions, installation, and consulting and training. Our software subscriptions include term licenses which are recognized as revenue when the license has been delivered to the customer and related customer support, which is recognized ratably over the service period. Revenue from customer support agreements is recognized ratably over the contractual term of the agreement. Installation services are typically completed within a short period of time and revenue from these services is recognized at the point when installation is complete. A majority of our consulting and training revenue does not take significant time to complete therefore these obligations are satisfied upon completion of such services over time as each day is completed. We license certain products under royalty arrangements, pursuant to which our licensees periodically provide us with reports containing units sold to end users subject to the royalties. The reports substantiate that our performance obligation has been satisfied and we recognize royalty revenue based on the reports or when amounts can be reasonably estimated.
There are significant judgments used when applying Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers ("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 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. We use the expected value method to estimate the net consideration expected to be returned by the customer. We use historical data and current trends to drive our estimates. We record a reduction to revenue to account for these items that may result in variable consideration. We initially measure a returned asset at the carrying amount of the inventory, less any expected costs to recover the goods including potential decreases in value of the returned goods.
Income Taxes
Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and tax bases of assets and liabilities, measured at the enacted tax rates expected to apply to taxable income in the years in which those tax assets or liabilities are expected to be realized or settled. Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.
A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the tax provision.
We recognize the financial statement effects of an uncertain income tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. We recognize penalties and tax-related interest expense as a component of income tax expense in our consolidated statements of operations and comprehensive loss. See Note 9: Income Taxes , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Inventories
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Manufacturing Inventories
Our manufacturing inventories are recorded at the lower of cost or net realizable value, with cost being determined on a first-in, first-out (“FIFO”) basis. Costs include material, direct labor, and an allocation of overhead. Adjustments to reduce the cost of manufacturing inventory to its net realizable value, if required, are made for estimated excess, obsolete or impaired balances. Factors influencing these adjustments include declines in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates.
Service Parts Inventories
Our service parts inventories are recorded at the lower of cost or net realizable value, with cost being determined on a FIFO basis. Service parts inventories consist of both component parts, which are primarily used to repair defective units, and finished units, which are provided for customer use permanently or on a temporary basis while the defective unit is being repaired. We record adjustments to reduce the carrying value of service parts inventory to its net realizable value and dispose of parts with no use and a net realizable value of zero. Factors influencing these adjustments include product life cycles, end of service life plans and the volume of enhanced or extended warranty service contracts. Estimates of net realizable value involve significant estimates and judgments about the future, and revisions would be required if these factors differ from our estimates.
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.
Convertible Note
Pursuant to ASC Topic 825, Financial Instruments (“ASC 825”), the Company has elected the fair value option for the convertible note issued in December 2025 (the “Convertible Note”). The Convertible Note is initially recorded at its estimated fair value on the date of issuance and subsequently remeasured at fair value at each reporting period-end. Changes in fair value are recognized in earnings in “Change in fair value of Convertible Note” in the condensed consolidated statements of operations and comprehensive loss, which includes the component related to accrued interest. In accordance with ASC 825, the portion of the change in fair value attributable to instrument-specific credit risk is recognized in other comprehensive income. For the year ended March 31, 2026, the Company determined that the change attributable to instrument-specific credit risk was immaterial. See Note 11: Fair Value of Financial Instruments , with respect to the fair value option election, and Note 4: Debt , for a discussion of the Convertible Note.
Recently Issued and Adopted Accounting Pronouncements
For recently issued and adopted accounting pronouncements, see Note 1: Description of Business and Significant Accounting Policies , to our consolidated financial statements.
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