QUANTUM CORP /DE/ - Annual Report: 2020 (Form 10-K)

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•	The media and entertainment industry producing high-resolution content for movies and TV shows, including content in streaming services;

•	Large corporations producing video content for marketing and advertising, and for internal training and communication purposes;

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•	Surveillance cameras for city surveillance, critical infrastructure, higher education, retail, restaurants, and more;

•	Scientific research and applications;

•	Life sciences, genome sequencing and microscopy;

•	Military and defense applications that manage images and video from drones and satellites;

•	Video, image, and sensor data captured on the manufacturing floor;

•	Video, image, and sensor data produced by cars as part of ADAS and autonomous vehicle development.

•	The Quantum F-Series: A line of ultra-fast, highly available NVMe storage servers for editing, rendering, and processing of video content and other large unstructured datasets.

•	Quantum QXS-Series: A line of high performance, reliable hybrid storage arrays, offered with either HDDs, SSDs, or some combination of the two.

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•	Further disruptions to our supply chain, our operations or those of our strategic partners, customers or suppliers caused by employees or others contracting COVID-19, or governmental orders to contain the spread of COVID-19 such as travel restrictions, quarantines, shelter in place orders, trade controls, and business shutdowns;

•	A global economic downturn or a recession causing a decrease in short- or long-term demand for our products, resulting in industry oversupply and decreases of average selling prices (“ASPs”), which would negatively impact our sales and profitability;

•	Deterioration of worldwide credit markets that may limit our ability or increase our cost to obtain external financing to fund our operations and capital expenditures and result in a higher rate of losses on our accounts receivables due to customer credit defaults;

•	Extreme volatility in financial markets which has and may continue to adversely impact our stock price and our ability to access the financial markets on acceptable terms, or at all;

•	Increased data security and technology risk as many employees transition to work from home arrangements, including possible outages to systems and technologies critical to remote work and increased data privacy risk with cybercriminals attempting to take advantage of the disruption; and

•	Management’s ongoing commitment of significant time, attention and resources to respond to the pandemic.

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•	Our ability to invest in growing our business is constrained by the financial covenants contained in our credit facility, which require us to maintain a minimum fixed charge coverage ratio and liquidity levels;

•	We must dedicate a significant portion of our cash flow from operations and other capital resources to debt service, thereby reducing our ability to fund working capital, capital expenditures, research and development and other cash requirements;

•	Our flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete may be limited, including our ability to engage in mergers and acquisitions activity, which may place us at a competitive disadvantage;

•	We are subject to mandatory field audits and control of cash receipts by the lenders if we do not maintain liquidity above certain thresholds;

•	We may be more vulnerable to adverse economic and industry conditions; and

•	We may be unable to make payments on other indebtedness or obligations.

•	Incur debt;

•	Incur liens;

•	Make acquisitions of businesses or entities or sell certain assets;

•	Make investments, including loans, guarantees and advances;

•	Engage in transactions with affiliates;

•	Pay dividends or engage in stock repurchases; and

•	Enter into certain restrictive agreements.

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•	A change in competitive strategy that adversely affects a reseller’s willingness or ability to distribute our products;

•	The reduction, delay or cancellation of orders or the return of a significant amount of products;

•	Our inability to gain traction in developing new indirect sales channels for our branded products;

•	The loss of one or more of such distributors or resellers;

•	Any financial difficulties of such distributors or resellers that result in their inability to pay amounts owed to us; or

•	Changes in requirements or programs that allow our products to be sold by third parties to government customers.

•	Increased costs related to fulfillment of our warranty obligations;

•	The reduction, delay or cancellation of orders or the return of a significant amount of products;

•	Focused failure analysis causing distraction of the sales, operations and management teams; or

•	The loss of reputation in the market and customer goodwill.

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•	F-Series: an all-flash NVMe storage array – designed for the most demanding media workloads

•	R-Series: a ruggedized in-vehicle storage array purpose-built for autonomous vehicle development (to ingest large number of data streams) or for transportation surveillance applications;

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•	VS-Series: a highly resilient, hyper-converged surveillance storage system that meets all the needs of security teams; and

•	Distributed Cloud Services: a set of Quantum services that offers cloud-like simplicity and economics for on-premise environments.

•	Our new products will achieve market acceptance and significant market share, or that the markets for these products will continue or grow as we have anticipated;

•	Our new products will be successfully or timely qualified with our customers by meeting customer performance and quality specifications which must occur before customers will place large product orders; or

•	We will achieve high volume production of these new products in a timely manner, if at all;

•	We will introduce additional new products in the time frame we are forecasting; or

•	We will not experience technical, quality, performance-related or other difficulties that could prevent or delay the introduction and market acceptance of new products.

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•	competitors consolidating, having greater resources and becoming more competitive with us;

•	companies that we have not historically competed against entering into one or more of our primary markets and increasing competition in such market(s);

•	customers that are also competitors becoming more competitive with us and/or reducing their purchase of our products; and

•	competitors acquiring our current suppliers or business partners and negatively impacting our business model.

•	The continued use by our customers of tape media for storage;

•	The size of the installed base of devices and similar products that use tape media cartridges;

•	The performance of our strategic licensing partners, which sell tape media cartridges;

•	The relative growth in units of newer device products, since the associated media cartridges for newer products typically sell at higher prices than the media cartridges associated with older products;

•	The media consumption habits and rates of end users;

•	The pattern of device retirements;

•	The level of channel inventories; and

•	agreement on standards for newer generations of the tape media that generates our royalty revenue.

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•	open source license terms may be ambiguous and may subject us to unanticipated obligations regarding our products, technologies and intellectual property;

•	open source software generally cannot be protected under trade secret law; and

•	it may be difficult for us to accurately determine the origin of the open source code and whether the open source software infringes, misappropriates or violates third-party intellectual property or other rights.

•	import and export duties and value-added taxes;

•	import, export and trade regulation changes that could erode our profit margins or restrict our ability to transport our products;

•	reduced or limited protection of our intellectual property;

•	compliance with multiple and potentially conflicting regulatory requirements and practices;

•	commercial laws that favor local businesses;

•	exposure to economic fluctuations including inflationary risk and continuing sovereign debt risk;

•	shortages in component parts and raw materials;

•	the burden and cost of complying with foreign and U.S. laws governing corporate conduct outside the U.S. including the Foreign Corrupt Practices Act, the United Kingdom Bribery Act and other similar regulations;

•	adverse movement of foreign currencies against the U.S. dollar (the currency in which our results are reported) and uncertain global economic conditions generally;

•	inflexible employee contracts and employment laws that may make it difficult to terminate or change the compensation structure for employees in some foreign countries in the event of business downturns;

•	recruiting employees in highly competitive markets and wage inflation in certain markets;

•	potential restrictions on the transfer of funds between countries;

•	political instability, military, social and infrastructure risks, especially in emerging or developing economies;

•	natural disasters, including earthquakes, flooding, typhoons and tsunamis;

•	pandemics and epidemics, including the impact of COVID-19, and governmental restrictions on the operation of businesses, travel and other restrictions, which may vary from country-to-country; and

•	cultural differences that affect the way we do business.

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•	fluctuations in IT spending as a result of economic conditions or fluctuations in U.S. federal government spending;

•	failure by our contract manufacturers to complete shipments in the last month of a quarter during which a substantial portion of our products are typically shipped;

•	changes in product mix;

•	new product announcements by us or our competitors which may cause delays in purchasing;

•	customers canceling, reducing, deferring or rescheduling significant orders as a result of excess inventory levels, weak economic conditions or other factors;

•	seasonality, including customer fiscal year-ends and budget availability impacting customer demand for our products;

•	declines in large orders (defined as orders greater than $200,000);

•	declines in royalty or software revenues;

•	product development and ramp cycles and product performance or quality issues of ours or our competitors;

•	poor execution of and performance against expected sales and marketing plans and strategies;

•	reduced demand from our OEM or distributors, VAR, DMR and other large customers;

•	increased competition which may, among other things, increase pricing pressure or reduce sales;

•	restructuring actions or unexpected costs; and

•	foreign exchange fluctuations.

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•	quarterly variations in our results of operations;

•	failure to meet our expectations or the expectations of securities analysts and investors;

•	failure to comply with applicable regulatory requirements or any investigations or enforcement actions; related to a potential failure to comply with applicable regulations;

•	significant changes in our brand or reputation;

•	new products, services, innovations and strategic developments by our competitors or us, or business combinations and investments by our competitors or us;

•	changes in our capital structure, including issuance of additional debt or equity to the public, and the issuance of common stock upon exercise of our outstanding warrants;

•	large or sudden purchases or sales of stock by existing or new investors; and

•	the result of any litigation or governmental investigation, which could result in liabilities and reputational harm.

•	changes in interest and exchange rates;

•	a continued widespread decline in the U.S. or global economy as a result of the continued impact of COVID-19 or other pandemics or natural disasters;

•	fluctuations in the stock market in general and market prices for technology companies in particular; and

•	tariffs imposed by the U.S. Government on sales originating in or being shipped to countries with which we have on-going trade or other political conflicts.

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•	failure to realize anticipated synergies from the acquisition;

•	difficulties in assimilating and retaining employees;

•	potential incompatibility of business cultures or resistance to change;

•	coordinating geographically separate organizations;

•	diversion of management’s attention from ongoing business concerns;

•	coordinating infrastructure operations in a rapid and efficient manner;

•	the potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services;

•	failure of acquired technology or products to provide anticipated revenue or margin contribution;

•	insufficient revenues to offset increased expenses associated with the acquisition;

•	costs and delays in implementing or integrating common systems and procedures;

•	reduction or loss of customer orders due to the potential for market confusion, hesitation and delay;

•	impairment of existing customer, supplier and strategic relationships of either company;

•	insufficient cash flows from operations to fund the working capital and investment requirements;

•	difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

•	the possibility that we may not receive a favorable return on our investment, the original investment may become impaired, and/or we may incur losses from these investments;

•	dissatisfaction or performance problems with the acquired company;

•	the assumption of risks of the acquired company that are difficult to quantify, such as litigation;

•	the cost associated with the acquisition, including restructuring actions, which may require cash payments that, if large enough, could materially and adversely affect our liquidity; and

•	assumption of unknown liabilities or other unanticipated adverse events or circumstances.

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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

•	StorNext scale out file storage: A line of products designed for the highest speed ingest, processing, and analysis of video and other forms of unstructured data. Powered by the StorNext file system software and data management platform, this product line includes new NVMe flash storage servers (F-series) and hybrid SSD/HDD storage arrays.

•	Video Surveillance Systems: Quantum offers a broad portfolio of solutions designed for video surveillance and physical security, including network video recording servers (NVRs), hyperconverged (HCI) storage servers to host multiple physical security workloads, GPU-based analytics servers, and file and object storage systems for large scale surveillance archives.

•	ActiveScale Object Storage: Massively scalable object storage systems used to preserve and protect data with the highest levels of data durability.

•	Tape Storage: Low cost, ultra-secure storage systems for long term archiving and ransomware protection. Quantum provides both the storage systems and sells tape media under the Quantum brand.

•	Backup Storage Systems: high-performance, scalable storage for backup and multi-site disaster recovery.

•	Quantum Services: A full line of services including managed services and Storage-as-a-Service offerings, as well as maintenance, implementation, training and consulting services.

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•	Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•	Adjusted EBITDA does not reflect: (1) interest and tax payments that may represent a reduction in cash available to us; (2) capital expenditures, future requirements for capital expenditures or contractual commitments; (3) changes in, or cash requirements for, working capital needs; (4) the potentially dilutive impact

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•	Adjusted Net Income (Loss) does not reflect: (1) potential future restructuring activities; (2) the potentially dilutive impact of stock-based compensation expense; (3) loss on debt extinguishment; or (4) potential future restructuring expenses; and

•	Other companies, including companies in our industry, may calculate Adjusted EBITDA, Adjusted Net Income (Loss) or similarly titled measures differently, which reduces its usefulness as a comparative measure.

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Level 1:	Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2:	Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3:	Inputs are unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

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•	persuasive evidence of an arrangement exists,

•	delivery has occurred or services have been rendered,

•	the price to the buyer is fixed or determinable, and

•	when collectability is reasonably assured.

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We enhanced the controls over revenue recognition and the preparation, analysis, and review of significant account reconciliations and closing adjustments required to assess the appropriateness of revenue recognition and certain other account balances at period end. The enhanced controls have operated for a sufficient period of time in order for management to conclude, through testing, that these controls are designed and operating effectively.

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We assessed our accounting resource requirements across the Company and as a result have hired additional experienced accounting personnel and have taken steps to improve the overall control effectiveness and efficiency of our accounting and reporting processes. Our assessment was performed in the prior fiscal year, continuing into the current fiscal year, which has allowed for the hiring of additional personnel to have a sufficient period of time to operate relevant controls. In addition to these resources, we have enhanced the design of our existing controls and implemented certain new controls over the following areas: (1) our global risk assessment process, evaluation, and mitigation strategies; (2) updated our internal audit plan to include internal audit monitoring activities responsive to the issues identified in the independent investigation and review of our financial records; and (3)  implemented new procedures and enhanced controls governing our internal management-led Disclosure Committee and strengthened our sub-certification and external reporting processes associated with the review and approval of the content of our SEC filings and other public disclosures. The enhanced controls have operated for a sufficient period of time in order for management to conclude, through testing, that these controls are designed and operating effectively.

•	We have designed and where appropriate enhanced controls over the preparation, analysis and review of revenue recognition and significant account reconciliations. In addition, we have reinforced existing policies

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