QUANTUM CORP /DE/ 10-Q

ITEM 4. CONTROLS AND PROCEDURES Limitations on Effectiveness of Controls and Procedures 34 Table of Contents In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting described below. Notwithstanding the identified material weaknesses, management, including our Chief Executive Officer and Chief Financial Officer have determined, based on the procedures performed, that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented in accordance with U.S. generally accepted accounting principles. Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting using the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded that the Company’s internal control over financial reporting was not effective as of June 30, 2026, due to the material weaknesses described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Management did not adequately design and implement effective control activities resulting in the identification of the following material weaknesses: Revenue Recognition The Company did not maintain effective internal controls related to revenue recognition for the following: 1. Controls for reviewing and updating deferral schedules, which drive the timing of service revenue recognition. Specifically, the start and end dates in the deferral schedules were not consistently aligned with the contractual service periods. 2. Controls over the accuracy of the inputs into the sales order entry process. Specifically, the Company did not execute the controls which cover the review of data inputs in the sales order entry process over a sufficient proportion of the total revenue recognized for the year. These data points include price, quantity, and related customer data. 3. Controls over the allocation of revenue to performance obligations on a standalone selling price basis. Specifically, the Company did not sufficiently document evidence of review of the calculations allocating revenue to performance obligations based on the standalone selling price under Topic 606. Manufacturing Inventory The Company did not maintain effective internal controls related to manufacturing inventory. Specifically, controls to reconcile physical inventory with our underlying system records were not adequately executed as of March 31, 2026. Income taxes 35 Table of Contents The Company did not maintain effective internal controls over the review of the income tax provision for the year ended March 31, 2026. Management concluded that this deficiency constitutes a material weakness in our internal control over financial reporting. Nonetheless, we have concluded that this material weakness does not require a restatement of or change in our condensed consolidated financial statements for any prior annual or interim period. Control Environment Based on the material weaknesses identified, management concluded that the Company did not maintain effective entity-level controls within the control environment to prevent or detect material misstatements to the condensed consolidated financial statements. Specifically, the Company (i) lacked sufficiently qualified staff or resources to perform control activities and (ii) conducted inadequate monitoring activities resulting in untimely or ineffective identification of internal control risks to support the design implementation and evaluation of the internal controls necessary to provide effective oversight over financial reporting. While none of the material weaknesses resulted in material misstatements to our condensed consolidated financial statements, each creates a reasonable possibility that a material misstatement could occur and not be prevented or detected on a timely basis. Remediation Plan The Company has implemented and is implementing enhancements to address the identified material weaknesses. Controls for reviewing and updating deferral schedules Management has designed and is testing a process to automate the start and end date for the deferral schedule to align with the period over which service is delivered to the customer. We anticipate implementing this by the end of our second fiscal quarter. Controls over the accuracy of the inputs into the sales order entry process. Management is implementing tools to assist with automating the ingestion of the purchase order from the customer and, therefore, automating the review of data accuracy. We anticipate that manual review would still be required on an exception basis but the automation would allow the Company to increase the population reviewed to 100%. We anticipate implementing this by the end of fiscal year 2027. Controls over the allocation of revenue to performance obligations on a standalone selling price basis In fiscal year 2025, and as noted in Part II, Item 9A of our Annual Report on Form 10-K for the year ended March 31, 2025, the Company implemented a new process for allocation of revenue on a standalone selling price basis, but the Company did not sufficiently execute controls over the review of that process. After the start of fiscal year 2026, management implemented a detailed review and documentation process for the allocation of revenue to performance obligations. However, because the detailed review and documentation process did not operate for the full fiscal year, management has concluded that the material weakness remains as of June 30, 2026. Manufacturing Inventory Management is implementing two concurrent workstreams to address this control weakness. First, management is working with third-party logistics partners to implement enhanced Electronic Data Interchange ("EDI") processes that will provide timely, automated updates to inventory movement records, directly supporting the accuracy of third-party logistics location reconciliations. Second, management is establishing a formal reconciliation cadence with defined ownership, frequency, and review sign-off requirements. To support consistent execution, management is conducting targeted training on inventory accounting principles with the Inventory Operations Team. These actions are targeted for completion by the end of the third fiscal quarter of fiscal year 2027. Income taxes Management is strengthening our income tax control by improving documentation standards, providing enhanced technical oversight and mandatory training for the tax provision reviewer. We anticipate implementing these processes by the end of fiscal year 2027. Control Environment Management is addressing the staffing and monitoring deficiencies underlying this conclusion through targeted hiring to fill key financial reporting roles with appropriately qualified personnel, implementation of a formal monitoring 36 Table of Contents program with defined escalation procedures, and deployment of automation tools to reduce manual control risk. These actions will be evaluated on an ongoing basis as the Company works to remediate the underlying material weaknesses. The Company is committed to maintaining a strong internal control environment and believes the remediation effort will represent significant improvements in its controls over the control environment. Additional controls may also be required over time. While the Company believes that these efforts will improve its internal control over financial reporting, the Company will not be able to conclude whether the steps the Company is taking will remediate the material weaknesses in internal control over financial reporting until a sufficient period has passed to allow management to test the design and operational effectiveness of the new and enhanced controls. Until the remediation steps set forth above are fully implemented and evaluated, the material weaknesses will continue to exist. Changes in Internal Controls over Financial Reporting Except for the matters discussed above, there were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control performed during the fiscal quarter ended June 30, 2026, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 37 Table of Contents PART II ITEM 1. LEGAL PROCEEDINGS From time to time, we are involved in legal proceedings and claims arising in the ordinary course of business. See Note 10: Commitments and Contingencies to the unaudited condensed consolidated financial statements for a discussion of our legal matters.