SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark one)

☑	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ____________

  

---

COMMISSION FILE NUMBER 001-35810

QUALSTAR CORPORATION

 (Exact Name of registrant as specified in its charter)

 

CALIFORNIA	95-3927330
(State or other jurisdiction of incorporation or organization)   130 West Cochran Street, Unit C; Simi Valley, CA (Address of principal executive offices)	(I.R.S. Employer Identification No.)   93065 (Zip Code)

 

Registrant’s telephone number, including area code: (805) 583-7744

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:	Name of each exchange on which registered:
Common Stock	The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ☐     No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes ☐     No ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☑  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☑

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐     No ☑

 

As of June 30, 2017, the aggregate market value of the common equity held by non-affiliates of the registrant was approximately $7,415,671 based on the closing sales price as reported on the NASDAQ Stock Market.  As of March 8, 2018 there were 2,045,519 shares of common stock without par value outstanding.

 

 

---

 

QUALSTAR CORPORATION

 

FORM 10-K

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

 

INDEX

 

PART I
Item 1.	Business	3
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Mine Safety Disclosures	16
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 8.	Financial Statements and Supplementary Data	25
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	46
Item 9A.	Controls and Procedures	46
Item 9B.	Other Information	46
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	47
Item 11.	Executive Compensation	52
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
Item 13.	Certain Relationships and Related Transactions, and Director Independence	58
Item 14.	Principal Accountant Fees and Services	59
PART IV
Item 15.	Exhibits, Financial Statement Schedules	60
Item 16.	Form 10-K Summary	61
	Signatures	62

 

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Forward-looking statements inherently are subject to risks and uncertainties, some of which we cannot predict or quantify. Therefore, our actual results may differ materially and adversely from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “ITEM 1A — Risk Factors,” and in “ITEM 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Words such as “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to any such statements. Forward-looking statements contained within this document represent a good-faith assessment of Qualstar Corporation’s future performance for which management believes there is a reasonable basis. Qualstar Corporation disclaims any obligation to update the forward-looking statements contained herein, except as may be required by law.

 

  

PART I

 

 

 ITEM 1. BUSINESS

INTRODUCTION

 

Qualstar Corporation and its Subsidiaries (“Qualstar”, the “Company”, “we”, “us” or “our”) is organized into two strategic business segments, power solutions and data storage systems. Qualstar is a leading provider of data storage systems marketed under the Qualstar brand and of high efficiency and high-density power solutions marketed under the N2Power brand. Qualstar Corporation was incorporated in California in 1984 and operates two wholly-owned subsidiaries. N2Power, Inc. was formed in 2017 to operate the Company’s power supply business and Qualstar Corporation Singapore Private Limited (“QC Singapore,”) was created in 2014 to give the Company an engineering footprint in Singapore and better service our contract manufacturers and our Asian distribution partners and customers. Qualstar’s N2Power branded power solutions products provide unique power solutions to original equipment manufacturers (“OEMs”) for a wide range of markets, including communications networking, industrial, gaming, test equipment, LED/lighting, medical as well as other market applications. Data storage system products include highly scalable automated magnetic tape-based storage solutions used to store, retrieve and manage electronic data primarily in the network computing environment and to provide solutions for organizations requiring backup, recovery and archival storage of critical electronic information.

 

Our storage products provide data protection and archive storage systems which are used to record, retrieve and manage electronic data, primarily in networked computing environments.  Our storage products are compatible with a wide range of storage management software solutions such as those offered by QStar, Xendata, IBM, EMC, CommVault and Veritas.  We offer products addressing the storage needs of the small and medium-size business market, as well as, to the enterprise market. In addition to storage products, we offer service and support programs for our customers.

 

Our N2Power products provide high-efficiency and high-density AC/DC and DC/DC power solutions for a variety of applications including gaming products and data center technologies such as switches, routers, data storage, servers and networking communications equipment.   With a wide variety of feature-rich standard products and the ability to create custom and semi-custom products, we offer a comprehensive product line to OEMs that require high-value, high-efficiency power supplies to meet specific applications.

 

We design our products at our facilities in California and Singapore. We sell our products globally through authorized resellers and directly to OEMs. N2Power utilizes contract manufacturers in Asia to produce our power solutions products. Our storage products are manufactured by us at our factory in Simi Valley, California and by our OEM suppliers in other parts of the world.  

 

 

 DATA STORAGE INDUSTRY

 

Background

 

The data protection and archival storage markets are comprised of a few large suppliers and a number of medium and smaller companies that offer specialized products and capacity ranges.  Solutions include both disk based and tape-based systems and related software.

 

The proliferation of digital data, e-commerce, big data, digital media streaming, and advanced software applications has created exponential growth in the production of digital information.  As regulators and companies require the longer retention of and access to archived data, the market for products to store that data cost-effectively is needed.  We believe this trend will drive continued demand for tape-based data storage products.

 

Strategy

 

Our primary objective in our storage business is to be a global leader in highly scalable, cost effective data protection and archival storage for the information technology markets.  To achieve this objective, we plan to:

 

	●	Continue to expand our sales channels and geographies.  We have begun to accelerate the promotion of Qualstar storage solutions on a global basis and will continue to add resellers outside the US in addition to adding new US resellers.
	●	Launch effective marketing campaigns which will increase market awareness of the Qualstar brand as well as reinforce tape’s role within the storage arena. We plan on advertising in select industry vertical markets highlighting the storage solutions Qualstar provides for those sectors. We also plan on attending trade shows with our partners in order to leverage both their coverage of their markets and their branding in the marketplace.
	●	Produce expandable storage solutions that deliver scalability within the data center and more effective capital spending for our customers.   Expandability is a key requirement for many customers who are dealing with rapidly growing capacity needs on a regular basis. Expandability enables customers to easily and quickly add more storage while providing a cost-effective solution that can be readily budgeted during their planning cycles.
	●	Expand our product line through private label offerings.  We will continue to partner with other designers and manufacturers to offer private label products.  In this way, we can provide customers with a broad product offering that expands beyond the product choices they have today.
	●	Explore adjacent technologies to expand our functionality and footprint in the IT market.  Historically we have been focused on products using magnetic tape as the media in our systems and on automating the loading, unloading and storage of the media.  We will explore partnerships with software and disk manufacturers where reasonable to offer a complete data storage solution.
	●	Expand our cost effective, service and support programs in international markets.    We will investigate enhancing our service and support programs in international markets as we expand product sales in those regions.

 

  

Our Storage Solutions

 

Today’s Linear Tape-Open (“LTO”) based data storage solutions yield a compelling outcome for organizations struggling to cope with fast growing data, reliable data retention and budgetary pressure. Qualstar offers LTO based data storage devices for various vertically focused business units, including but not limited to, media and entertainment, oil and gas, high performance computing, education, telecom and life sciences.

 

 

We design, develop, manufacture and market storage products which deliver cost effective data protection and archival storage to small and medium sized businesses, and to more complex small and medium enterprise environments with stringent performance and data availability requirements.  We provide a wide range of storage solutions that span data storage capacities.

 

Q Series - Tape based data storage devices

 

Qualstar offers a full range of entry level and mid-range data storage solutions for customers ranging from 10 Terabytes to 6.72 Petabytes. Our Q1 appliance offers an all-in-one solution for on-location data storage needs where as our Q24, Q48 and scalable Q80 tape libraries satisfy the required data storage capacities as well as data transfer rates of entry level and mid-range customers.

 

RLS Series - Tape based data storage devices

 

These are our “Simply Reliable” robust tape libraries that are designed and manufactured in the United States to satisfy the data storage needs of mid-range customers. With built-in library enabled encryption, individual robots in each cabinet and elevator mechanism to transfer cartridges from one cabinet to other, these tape libraries offer robust data protection at a low cost of ownership. Ranging from 50 to 474 slots, using LTO 8 tape technology these libraries offer between 600 Terabytes and 5.69 Petabytes of data storage capacity and up to a 23.8 Terabytes per hour data transfer rate.

 

XLS Series - Enterprise Class Tape based storage devices

 

XLS is Qualstar’s highly modular enterprise library system delivering intelligence, density, flexibility, scalability, and ease of use, coupled with our proven record of reliability and value. XLS features Compass Architecture™, an advanced robotics design that yields superior reliability and density. XLS can be expanded from 435 tapes in easy increments to over 11,700 tapes to offer more than 140 Petabytes of data storage capacity. Our unique LRM (Library Resource Module) and MEM (Media Expansion Module) combination allows maximum density of 1368 Terabytes per sq. foot.

 

 

  

POWER SUPPLY INDUSTRY

 Background

 

The power supply industry is comprised of a few large suppliers and a vast number of smaller companies that focus on specialized products and markets.  Currently, the power solutions markets for our N2Power brand products include the Servers, Storage and Network (“SSN”), Industrial and Transportation (“IND”), Network Power Systems (“NPS”), Medical, Gaming and LED/Lighting markets.

 

We believe the following key trends will continue to drive demand for our power solutions products:

 

	●	Increasing amounts of power required by the communications infrastructure industry.  The proliferation of data centers and their related infrastructures, the internet, wireless communications, broadband applications, server and storage farms and other new technologies have increased exponentially the amount of information transmitted.  As a result, the push for higher bandwidth and more efficient and effective power solutions has been driving a faster replacement cycle for telecommunications equipment as well as strong infrastructure expansion.
	●	Increasing demand for high conversion efficiencies, high power density and digital power management.   Efforts in the EU, the United States and Asia to reduce energy consumption are increasing the demand for high conversion efficiencies and digital power control.  In addition, groups such as the Climate Savers Computing Initiative, consisting of a consortium of companies including Google and Intel and other eco-conscious businesses and conservation organizations are promoting the development, deployment and adoption of smart technologies that can both improve the efficiency of a computer’s power utilization and reduce the energy consumed when the computer is in an inactive state.  Because a large portion of electrical energy waste occurs during the power conversion process, power companies have an opportunity to improve the conversion efficiency to reduce the operating costs for the end user.  Our AC/DC power supplies provide conversion efficiency ratings up to 93%.  Our digital power control technologies allow us to achieve high levels of power conversion efficiency and control that are not possible with analog designs.  Higher conversion efficiencies help reduce overall power usage and therefore cut greenhouse gas emissions and total cost of infrastructure ownership.

 

 

 Strategy

 

Our primary objective in our power supply business is to be a global leader in high-efficiency, high-density power solutions for the data center equipment, medical, gaming, test equipment, transportation, industrial and telecommunications network power markets.  To achieve this objective, we plan to:

 

	●	Continue to expand our sales channels and geographies.  We promote the N2Power brand on a global basis and are targeting larger OEMs and distributers who have a presence in markets and geographies that we do not currently serve.
	●	Continue to increase volume with our current OEM customers.  Our OEM customers are constantly changing their products and introducing new products.  We are striving to become the supplier of choice within our OEM customer base to leverage our existing relationships and drive volume growth within the same sales channel.
	●	Continue to expand our footprint in the current markets we serve.  We are currently supporting the data center equipment, medical, gaming, test equipment, transportation, industrial and telecommunications systems markets.  We have secured several sizable OEM customers and are aiming to add new OEM customers in these markets.
	●	Expand our product line while continuing to drive for higher power levels and greater conversion efficiencies in a smaller footprint.   Minimizing space requirements within our customers’ products is critical, and as a result there is a continuing need for smaller packaging while delivering additional power.  Our product roadmap addresses these needs and our objective is to lead the industry with the greatest efficiency in the smallest footprint with the highest power available.  In this way, we can deliver advantages to our OEM customers as they leverage our technology in their product designs.
	●	Expand our product line through private label offerings.  We have identified a need for utilizing other manufacturers’ core products to complement our own, where we lack products in specific markets or power levels. To achieve this, we will utilize our relationships with other power solutions manufacturers.
	●	Organize our technology resources for fast time to market on derivative products. Our customers continually request derivative configurations to our existing products.  In order to serve this market effectively, we are organizing our engineering resources for fast turnaround on these designs to shorten our OEM customers’ design cycle, leading to faster time to market.

  

 

Our Power Solution Products

 

We design, develop, manufacture and market our power solution products, whose purpose is to convert, regulate, purify, manage or distribute electrical power for electronic equipment.  Our products are used in a variety of products and generally convert AC current from the grid to DC current, or modify the voltage being delivered (DC to DC).  We typically target markets where high efficiency and power density are important to our customers.

 

 

We sell standard, modified-standard and custom designed products.  Standard products are sold unmodified to our customers.  Modified-standard products are based on lightly modified versions of standard products.   Custom products are designed specifically to the customer’s specification and are not generally sold to other customers. Custom products may require non-recurring engineering and tooling costs to bring the product to production. We are also an Optimized Product Design Manufacturer (OPDM). With our core competencies in both power and mechanical design, we offer complete custom power assemblies and eliminate the need for our customers to purchase additional components to integrate our power supplies into their products.

 

N2Power continues to introduce new products, such as:

 

●

The newly designed XL270 has a footprint of only 4” x 2” one of the most compact 270-Watt supplies on the market. This model offers outputs of 12, 24, 30, 48 and 56 Volts along with a 5Watt/5Volt standby output and a 6 Watt/12 Volt auxiliary output, with current sharing capabilities.

 

●

The new XLM240 is a multi-purpose product that is certified for use in both IT and medical equipment. It offers 240 Watts of output cooled by a 10 cu. ft. minute fan, or 160 Watts with unobstructed convection cooling. The product is ultra-compact and is offered with 12, 15, 24 and 48-volt outputs.

 

●

New models have been added to the XLM product line. The XLM500 is certified for use in both IT and medical equipment. This unit has a footprint of 5” x 3” delivering up to 500 Watts. The model is offered in 12, 15, 24, and 48 Volt outputs and can be in an open-frame or U-frame.

 

 

CUSTOMERS

 

Our solution-focused product offerings are designed specifically for OEMs, information technology departments, and lower and middle market companies. We sell our storage products through our worldwide authorized distributor and reseller network. Power supplies are sold through distributors and direct through independent outside sales representatives. All of our products and services are designed and manufactured to address our customers’ stringent requirements and reliability standards. The following provides additional detail on our channels:

 

	●	Storage Reseller channel. Our reseller channel includes systems integrators, value added resellers (“VARs”) and value-added distributors (“VADs”). Our resellers frequently package our products as part of a comprehensive data processing system or with other storage devices to deliver a complete storage subsystem. Our resellers frequently recommend our products as replacement solutions when backup and archive systems are upgraded or bundle our products with storage management software specific to the end user's system. We support the reseller channel through our dedicated field sales representatives and technical support technicians.
	●	Storage OEM channel. OEM customers incorporate our storage products with their application software and other components to deliver a focused solution. Our products may or may not carry our label.
	●	N2Power OEM channel. We have supply agreements with our major power supply customers who incorporate our products into their server, gaming, network and industrial product offerings.

 

We divide our worldwide sales into three geographical regions:

 

	●	Americas, consisting of Mexico, United States, Canada and South America;
	●	EMEA, consisting of Europe, the Middle East and Africa; and
	●	APAC, consisting of Asia Pacific countries.

 

 

We support our customers in the Americas primarily through a network of trained distribution partners and representatives located throughout the Americas. We support our EMEA, APAC and other foreign customers through our distributors and resellers located throughout the regions.

 

Sales to customers outside the United States represent a significant portion of our sales. International sales are subject to various risks and uncertainties. See "Risk Factors" in Part I, Item 1A of this report. The following table sets forth foreign revenue by geographic area ($ in thousands):

 

		Twelve Months Ended December 31,
		2017				2016
Foreign revenue:
EMEA		$	1,910			$	1,955
APAC			1,878				2,293
Other foreign revenue			224				92
		$	4,012			$	4,340
Foreign revenue as a percentage of total net revenue			37.7	%			46.1	%

 

We provide a full range of marketing materials for branded products, including product specifications, sales literature and application notes. We also offer lead generation opportunities to key channel partners. Our sales management and engineering personnel provide support to the channel partners and visit potential customer sites to demonstrate the technical advantages of our products. We maintain press relations in the United States, and we participate in trade shows worldwide.

 

 

CUSTOMER SERVICE AND SUPPORT

 

Customer service and support are key elements of our company strategy and critical components of our commitment to making enterprise-class support and services available to companies of all sizes. Our technical support staff is trained to assist our customers with deployment and compatibility for any combination of hardware platforms, operating systems and backup, data protection and storage management software. Our application engineers assist with complex customer issues. We maintain global toll-free service and support phone lines and we also provide self-service and support through our website and email.

 

Standard warranties include:

 

	●	Three-year standard limited warranty on our RLS and XLS tape library products;
	●	Two-year standard limited warranty on our “Q-Series” products;
	●	Optional 24x7 or next business day onsite service on our products in many countries throughout the world; and
	●	Three-year return to factory warranty on our N2Power products.

 

ENGINEERING

 

In the year ended December 31, 2017, our power supply team introduced the XL270 and XL500, which are key additions to our product portfolio. These new products provide a broader N2Power selection to OEM engineers to utilize in their designs. We continue to perform engineering work to improve our current products and create new products.

 

 

Our engineering efforts have expanded to encompass both the USA and Singapore.  We have also formed strategic partnerships for supplementary engineering resources with third party companies in Europe and Asia to capture additional state-of-the-art technology driven power designs.  Growing our engineering both internally and externally will allow us to increase our product breadth by releasing more standard and modified standard power solution products in the future.

 

We incurred engineering costs of $0.5 million and $1.0 million for the twelve months ended December 31, 2017 and 2016, representing 5.0%, and 10.5% of net revenues, respectively.

 

MANUFACTURING AND SUPPLIERS

 

We perform product assembly, integration and testing for our storage products at our factory in Simi Valley, California. Our private label storage products are manufactured in various geographical locations by a select group of suppliers. Our N2Power branded products are manufactured in China at specifically qualified contract manufacturers.  We purchase tape drives, chassis, printed circuit boards, integrated circuits, and all other major components from outside suppliers. We carefully select suppliers based on their ability to provide quality parts and components which meet technical specifications and volume requirements. We actively monitor these suppliers but we are subject to substantial risks associated with the performance of our suppliers. For certain components, we qualify a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier. See "If our suppliers fail to meet our component and manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations" under the heading "Risk Factors" in Part I, Section 1A of this report. 

  

COMPETITION

 

The worldwide storage market is highly competitive. Competitors vary in size from small start-ups to large multi-national corporations which may have substantially greater financial, engineering and marketing resources than us. In the tape automation market, we believe our primary competitors are International Business Machines Corporation ("IBM"), Oracle/StorageTek, Dell Inc., Hewlett Packard, Sphere 3D (formally Overland Storage), Spectra Logic and Quantum Corporation. Key competitive factors include product features, reliability, durability, scalability and price. Barriers to entry in tape automation are relatively high as this is an established industry that is capital intensive.

 

Our primary power supply competitors are Artesyn, TDK Lambda, XP Power and Bel Power. Key competitive factors in these markets include price, performance, functionality, availability, interoperability, connectivity, time to market, enhancements and total value of ownership. Barriers to entry for power supply products are high as the industry is capital intensive.

 

The markets for all of our products are characterized by significant price competition and we anticipate that our products will continue to face substantial pricing pressure.

 

 

INTELLECTUAL PROPERTY

 

We rely on copyright protection of our firmware, as well as patent protection for some of our designs and products. We also rely on a combination of trademark, trade secret and other intellectual property laws to protect our proprietary rights. Despite our efforts to protect our proprietary rights, competition in our businesses is significant. We believe that, because of the rapid pace of technological change in the tape storage and power supply industries, patent, copyright, trademark and trade secret protection are less significant than factors such as market responsiveness, knowledge, ability and the experience of our personnel as well as timely new product introductions.

 

We enter into Employee Proprietary Information and Inventions Agreements with all employees and consultants to protect our technology and designs. However, we do not believe that such protection can preclude competitors from developing substantially equivalent products.

 

 

EMPLOYEES

 

As of December 31, 2017, we had 20 employees worldwide, 17 full-time and 3 part-time. We also employ a small number of consultants and temporary employees as needed. We are not a party to any collective bargaining agreement or other similar agreement. We believe that we have a good relationship with our employees.

  

AVAILABILITY OF SEC FILINGS

 

We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file periodic reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street N.E., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically. Our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Our website addresses are www.qualstar.com and www.n2power.com. Information contained on our web site is not part of this report on Form 10-K or our other filings with the SEC.

  

 ITEM 1A. RISK FACTORS

 

Our future results of operations are subject to risks and uncertainties over which we have limited control, and which could cause our actual results to differ materially from our expectations. We are subject to all of the business risks facing manufacturing companies, including business cycles and trends in the general economy, financial market conditions, unpredicted cost variances in raw materials and purchased components, demand variations and volatility, potential loss of key personnel, supply chain disruptions, government legislation and regulation, and natural causes. The following list of risk factors is not all-inclusive. Other factors and unanticipated events could adversely affect our financial position or results of operations. We believe that the most significant potential risk factors that could adversely impact us are the following:

  

We have had a history of operating losses and we may not sustain profitability.

 

The Company achieved profitability in the year ended December 31, 2017.  Prior to this year, the Company had a history of operating losses since fiscal year ended June 30, 2004. There is no assurance that management can sustain profitability.

 

We face intense industry competition, price erosion and product obsolescence, which, in turn, could reduce our operating results.

 

We operate in an industry that is generally characterized by intense competition and rapid technological change. We believe that the principal bases of competition in our markets are breadth of product line, quality of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are therefore common in our industry as competitors strive to retain or expand market share. Product obsolescence can lead to increases in unsellable inventory that may need to be written off and therefore could reduce our operating results. Similarly, price erosion can reduce our operating results by decreasing our revenues and our gross margins.

 

Our long-term operating results depend substantially upon our ability to continually develop, introduce, and market new and innovative products, to modify existing products, to respond to technological change, and to customize certain products to meet customer requirements. There are numerous risks inherent in this process, including the risks that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market new products and applications in a timely fashion to satisfy customer demands, which could result in a decrease in our net sales and a loss of market share to our competitors. Historically, we have had write-offs of excess and obsolete inventory which negatively impacted our results of operations. In the future, excess or obsolete inventory may need to be written off, and this in turn could reduce our operating results.

 

   

Changes in demand or downturns in the markets we serve could affect our business and operating results.

 

The industries into which we market and sell our products are cyclical and may experience downturns. These industries also experience volatility, and future volatility as well as downturns, or any failure of these industries to recover from downturns, could materially harm our business and operating results. Likewise, if we have difficulty managing growth in our businesses, it could materially and adversely affect us. In addition, our business and financial position may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending in the markets served by our or our customers’ products.

 

Our operating results may be impaired if demand for either technology declines or fails to develop as we expect.

 

We will continue to be subject to the risk of a decrease in revenues if demand for our products declines or if rising prices make it more difficult to sell them. If products incorporating other technologies gain comparable or superior market acceptance and competitive price advantage, our business, financial condition and operating results could be adversely and materially affected unless we successfully develop and market products incorporating the new technology.

 

Our principal competitors devote greater financial resources to developing, marketing and selling their products. Consequently, we may be unable to maintain or increase our market share.

 

We face significant competition in developing and selling our products. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive, or even obsolete. We have significantly fewer financial, technical, manufacturing, marketing and other resources than many of our competitors and these limited resources may impair the operating results of our business in many ways. For example, in the past our competitors have offered wider ranges of products, expanded the geographic scope of their markets, acquired other companies, and developed or acquired proprietary technologies that operate in conjunction with their products. 

  

 In the future, our competitors may leverage their greater resources to:

 

●

develop, manufacture and market products that are less expensive or technologically superior to ours;

 

●

reach a wider array of potential customers through a broader range of marketing and distribution channels;

 

●

respond more quickly to new or changing technologies, customer requirements and standards; or

 

●

reduce prices in order to preserve or gain market share.

 

We believe competitive pressures are likely to continue. We cannot guarantee that our resources will be sufficient to address this competition or that we will manage costs and adopt strategies capable of effectively utilizing our resources. If we are unable to respond to competitive pressures successfully, our prices and profit margins may fall and our market share may decrease.

 

We rely on indirect sales channels to market and sell our branded storage products and both direct and indirect sales channels to market and sell our branded power solutions products. A loss of or deterioration in our relationship with one or more of our resellers or distributors, or our inability to establish new indirect sales channels to drive growth of our products could negatively affect our operating results.

 

We sell the majority of our branded storage products to value-added resellers, who in turn sell our products to end users. In some cases, resellers integrate our tape libraries with products of other manufacturers and sell the combined products to their own customers. We sell our branded power solution products both direct to OEM customers (or their contract manufacturers) and to our distribution channel who in turn sell our products to OEM customers. The success of these sales channels is hard to predict, particularly over time, and we have no purchase commitments or long-term orders from them that assure us of any baseline sales through these channels. Several of our resellers and distributors carry competing product lines that they may promote over our products, which may negatively impact our sales. A reseller or distributor might not continue to purchase our products or market them effectively, and each reseller or distributor determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to their customers. Establishing new indirect sales channels globally is an important part of our strategy to drive growth of our revenue.

 

 

Our operating results could be adversely affected by any number of factors including:

 

●

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

 

●

Reaching fewer customers or losing sales due to ineffective efforts of resellers and distributors;

 

●

Reduced margins and increased costs associated with channel sales;

 

●

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

 

●

Any financial difficulties of our resellers, authorized distributors or direct OEM customers that result in their inability to pay amounts owed to us;

 

●

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

 

●

Changes in product requirements or certification programs that limit our ability for our products to be sold in our established current markets.

 

We do not have any exclusive agreements with our VARs or distributors who purchase our products on an individual purchase order basis. If we lose important VARs or distributors, or if they reduce their focus on our products or if we are unable to obtain additional VARs, our business could be negatively affected.

 

If our suppliers fail to meet our component and manufacturing needs, it could delay our production and our product shipments to customers and negatively affect our operations.

 

Our products comprise many components and subassemblies produced by outside suppliers. We depend greatly on these suppliers for items that are essential to the manufacture of our products, including tape drives, printed circuit boards and integrated circuits. For certain items, we qualify only a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier on the basis of price. From time to time, we have been unable to obtain sufficient components that we have needed due to shortages or quality issues from some of our suppliers. If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations.

 

We also rely on software vendors to develop and support software needed for operation of our automated tape library products and their integration into the user’s computing environment. Accordingly, the continued development and future growth of the market for our tape library products will depend partly upon the ability of these vendors to meet the overall data storage and management needs of tape library purchasers and our ability to maintain relationships with these firms.

 

The primary suppliers of our N2Power power supplies are located in China. If a manufacturer should be unable to deliver products to us on a timely basis or at all, our power supply business could be adversely affected. Though we have had many years of favorable experience with these suppliers, there can be no assurance that circumstances might not change and compel one or more of these suppliers to curtail or terminate deliveries to us. Moreover, the use of contract manufacturers to provide our power supplies typically requires that we place production orders several months in advance of our expected need for the products. This in turn leads to risks that we may lack sufficient inventory to sell to our customers where our expectations were conservative, or that we may order excess product inventory where our expectations were optimistic. We have in the past, experienced shortages of some parts needed to manufacture our power supplies.

  

If we fail to develop and introduce new products on a timely and cost-effective basis, or if our products do not contain the features required by the marketplace, we may eventually lose market share and sales to competitors.

 

The market for our products is characterized by changing technology and evolving industry standards. Our future results will depend on our ability to anticipate changes in technology, to develop new and enhanced products on a timely and cost-effective basis, and to introduce, manufacture and achieve market acceptance of these new and enhanced products. With respect to our tape library products in particular, the introduction of new storage technologies or the adoption of an industry standard different from our current product standards could render our existing products obsolete.

 

 

Development schedules for high technology products are inherently subject to uncertainty and there can be no assurance that we will be able to meet our product development schedules or that our development costs will be within budgeted amounts. If the products or product enhancements developed are not deliverable due to technical problems, quality issues or component shortages, or if such products or product enhancements are not accepted by the marketplace or are unreliable, then our business, financial condition and results of operations may be adversely affected.

 

If we fail to protect our intellectual property or if others use our proprietary technology without authorization, our competitive position may suffer.

 

We rely on copyright protection of our software, firmware and electronic circuits, as well as patent protection for some of our products and product features. We also rely on a combination of trademark, trade secret, and other intellectual property laws and various contract rights to protect our proprietary rights. Despite our efforts to protect our proprietary rights, however, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. As a consequence, these rights may not preclude competitors from developing products that are substantially equivalent or superior to our products. In addition, many aspects of our products are not subject to intellectual property protection and therefore can be reproduced by others.

 

Undetected manufacturing flaws could increase our costs, reduce our revenues and divert resources from our core business needs.

 

Despite our efforts to revise and update our manufacturing and test processes to address engineering and component changes, we may not be able to control and eliminate manufacturing flaws adequately. These flaws may include undetected software or hardware defects associated with a newly introduced product, a new version of an existing product, or a product that has been integrated into a system or apparatus with the products of other vendors. If we fail to adequately monitor, develop and implement appropriate test and manufacturing processes we could experience a rate of product failure that results in substantial shipment delays, warranty costs or damage to our reputation. Product flaws may also consume our limited engineering resources and interrupt our development efforts. Significant product failures would increase our costs and result in the loss of future sales and be harmful to our business.

 

Much of our business is subject to risks associated with operations in foreign countries.

 

We generate a significant percentage of our revenue internationally, and we believe that international sales will continue to represent a substantial portion of our revenues. In addition, our manufacturing of power supply products is performed by contract manufacturers in Asia. We face risks that the countries in which we conduct business, or in which we have customers, suppliers, or contract manufacturers could:

 

●

Experience financial, economic or political instability;

 

●

Adopt laws that make the enforcement of our contractual or other legal rights and remedies difficult or uncertain;

 

●

Provide inadequate intellectual property protection for our technology;

 

●

Impose restrictions on the export or import of technology that would affect our ability to obtain supplies from, or sell products into, such countries;

 

●

Impose tariffs, quotas, taxes, other market barriers; or

 

●

Impose other laws, regulations or policies adversely affecting trade, investment or taxes, including those relating to the repatriation of funds and to withholding taxes.

   

 

Other risks and costs associated with international operations include:

 

●

Currency exchange risk, to the extent that exchange rate fluctuations could make our products unaffordable to foreign purchasers or more expensive compared to those of foreign manufacturers;

 

●

Compliance with laws and regulations in various regions in which we operate;

 

●

Greater difficulty and longer delays in collecting accounts receivable from international customers; or

 

●

Increased risk of shipping disruptions particularly in foreign countries experiencing political instability.

 

Change of board and senior management, and retention of key personnel.

 

Turnover in key management positions could temporarily harm our financial performance and results of operations. Loss of certain members of our senior management may disrupt operations and relations with key customers and distributors and our operating results could be adversely affected. Our capacity to develop and implement new technologies depends on our ability to employ personnel with highly technical skills. If we cannot attract and retain key technical personnel, our technical expertise may suffer, and our operating results could be adversely affected. In addition, it could be difficult, time consuming and expensive to replace any key management member or other critical personnel and no guarantee exists that we will be able to recruit suitable replacements or assimilate new key management personnel into our organization to achieve our operating objectives.

 

Intellectual property infringement claims brought against us could result in a substantial liability and significant costs, and as a result, our business, financial condition and operating results may be materially and adversely affected.

 

From time to time, we may become subject to claims or inquiries regarding an alleged unauthorized use by us of another party’s intellectual property. While we currently believe the amount of ultimate liability, if any, with respect to any such actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any license discussion or litigation is uncertain. Adverse resolution of any infringement claim could subject us to substantial liabilities and require us to refrain from manufacturing and selling certain products. In addition, the costs incurred in intellectual property litigation can be substantial, regardless of the outcome. As a result, our business, financial condition and operating results could be materially and adversely affected.

 

Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may in turn affect our stock price.

 

Our quarterly revenues and operating results have fluctuated in the past, and are likely to vary in the future due to the various factors discussed above and others, including:

 

●

General economic conditions affecting spending and the rates of growth or decline in the markets we serve;

 

●

Variations in product order backlogs, and reductions in the size, delays in the timing, or cancellation of significant customer orders;

 

●

The timing of introductions and marketplace acceptance of new or enhanced products by us or our competitors;

 

●

Expansions or reductions in our relationships with distributors, VARs or OEM customers;

 

●

Unprofitable investments in engineering activities, or sales evaluation, testing, and acceptance processes;

 

●

Unforeseen warranty costs that exceed established reserves;

 

●

Timing and levels of our operating expenses; or

 

●

Emerging new technologies that change the nature of or need for our products.

 

 

We believe that period-to-period comparisons of our operating results may not necessarily be reliable indicators of our future performance. It is likely that in some future period our operating results will not meet your expectations or those of public market analysts. Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause investors and analysts to revalue our stock and this, in the aggregate, may cause fluctuations in our stock price.

 

Trading in our stock has historically been limited and our stock price has been volatile, which may affect your ability to sell your shares.

 

The average trading volume in our stock has been historically low, with little or no trading at all on some days. This, as well as the factors listed below, has caused the price of our stock to be volatile. Consequently, it may be difficult to sell your shares of our stock at the price you paid for them or at a price equal to that quoted on the NASDAQ Stock Market. Factors that may cause our stock price to fluctuate in the future include:

 

●

Quarterly variations in operating results, especially if they differ from our previously announced forecasts or forecasts made by analysts;

 

●

Announcements by us of anticipated future revenues or operating results, or by others concerning us, our competitors, our customers, or our industry;

 

●

The introduction of new technology or products by us or our competitors;

 

●

Comments about us and the data storage or power supply markets made by industry analysts or on Internet comment sites; or

 

●

Changes in earnings estimates by analysts or changes in accounting policies; in product pricing policies by us or our competitors; or in general economic conditions.

 

In addition, stock markets have experienced extreme price and volume volatility recently. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. These market fluctuations may adversely affect the market price of our common stock.

 

Certain provisions in our charter documents and California law may hinder or prevent a change in control of our company.

 

Certain provisions of our charter documents could make it difficult for a third party to obtain control of the Company. For example, our articles of incorporation and bylaws require that stockholders must timely inform our corporate secretary before a stockholders' meeting if they wish to nominate directors or submit proposals for shareholder approval and contain provisions that eliminate cumulative voting in the election of directors. In addition, subject to the rules of the NASDAQ Stock Market, our board of directors has the authority, without any action by the shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the rights and preferences of such shares. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders of our common stock.

 

Our success depends in part on our CEO, who simultaneously leads other public corporations.

 

Steven N. Bronson, our Chief Executive Officer and President, simultaneously serves as the President and Chief Executive Officer of Interlink Electronics, Inc. (NASDAQ: LINK) and Chief Executive Officer and Chairman of BKF Capital Group, Inc. (OTCMKTS: BKFG). As a result, he divides his time among these companies and does not devote his full business time and attention to Qualstar’s business. Mr. Bronson currently works on average approximately 20 to 30 hours per week for Qualstar. There can be no assurance, however, that the amount of time Mr. Bronson devotes to our Company will not diminish from time to time for limited or extended periods as his other business obligations require a greater portion of his attention. Mr. Bronson is not required to spend a minimum amount of time on Qualstar business. Our continued success depends in part upon the availability and performance of Mr. Bronson, who possesses unique and extensive industry knowledge and experience as well as a deep understanding of our business and strategy. A reduction in Mr. Bronson’s services to Qualstar from their current levels due to his obligations to Interlink Electronics, BKF Capital or other organizations with which he is affiliated could have a disruptive effect, adversely impacting our ability to manage our business effectively and execute our business strategy.

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

   

ITEM 2. PROPERTIES

 

Qualstar headquarters is located in Simi Valley, California. We occupy a building with 15,160 rentable square feet of space. Our three-year lease on this facility began December 15, 2014 and was renewed for an additional three years, expiring February 28, 2021. Rent for this facility is $11,000 per month. Prior to May 1, 2016, our headquarters were located in Westlake Village, California.

  

We lease a facility in Singapore with 1,359 square feet for our power supply engineering staff. The two-year lease was effective April 1, 2016 and renewed for one year, expiring March 31, 2019. Rent for this facility is $2,500 per month.

 

Qualstar entered into a lease for 5,400 square feet of rentable space at the Westlake Village, California facility, effective May 1, 2016 for our sales, finance and administration staff. Rent for this facility is approximately, $11,000 per month. On March 21, 2016, in order to reduce operating expenses, Qualstar subleased its Westlake Village facility for approximately $12,000 per month.  The term of the sublease will expire on January 31, 2020, the same date the term of the master lease expires.

 

On July 1, 2015, Qualstar Corporation entered into a one-year sublease agreement with Interlink Electronics, Inc. The sublease agreement is for 1,000 square feet of space in the Qualstar building located in Simi Valley, California. Qualstar receives rent each month, equal to the base rent per square foot in the master lease, plus additional rent for common area services, utilities and other shared expenses. The space is used by Interlink Electronics for engineering and light manufacturing.

 

ITEM 3. LEGAL PROCEEDINGS

 

 

Qualstar is subject to a variety of claims and legal proceedings that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in the aggregate, will not have a materially adverse impact on our financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. As of December 31, 2017, no accrual was necessary for fees and costs related to loss contingency matters.

  

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

  

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Qualstar’s common stock is traded on The NASDAQ Capital Market or NASDAQ (Symbol — QBAK). The following table sets forth the high and low closing sale prices of our common stock as reported by NASDAQ, during the periods indicated:

 

Period Ending	Date Range				High				Low
December 31, 2017:
First Quarter	January 1	—	March 31, 2017		$	10.00			$	2.70
Second Quarter	April 1	—	June 30, 2017		$	9.47			$	3.89
Third Quarter	July 1	—	September 30, 2017		$	13.20			$	5.16
Fourth Quarter	October 1	—	December 31, 2017		$	10.36			$	6.23
December 31, 2016:
First Quarter	January 1	—	March 31, 2016		$	4.92			$	2.28
Second Quarter	April 1	—	June 30, 2016		$	4.44			$	2.16
Third Quarter	July 1	—	September 30, 2016		$	5.90			$	2.65
Fourth Quarter	October 1	—	December 31, 2016		$	4.14			$	2.62

 

Holders

 

There were approximately 21 owners of record of Qualstar’s common stock as of March 8, 2018, not including beneficial owners who own their stock in street name through Cede & Co. and others.

 

Dividend Policy

 

No dividends were declared in the twelve months ended December 31, 2017 or 2016. Any future determination to pay dividends will be at the discretion of the Company’s Board of Directors and will depend upon, among many other factors, the Company’s results of operations, financial condition, capital requirements and any contractual restrictions.

 

Recent Sales of Unregistered Securities

 

None

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None 

 

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The following table provides additional information regarding Qualstar’s equity compensation plans as of December 31, 2017:

 

Plan category		(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)				(b) Weighted-average exercise price of outstanding options, warrants and rights (1)				(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (2))
Equity compensation plans approved by security holders			188,033			$	7.38				34,700
Equity compensation plans not approved by security holders			—				—				—
Totals			188,033			$	7.38				34,700

 

	(1)	Includes shares subject to stock options granted under the 2017 Stock Incentive Plan, the 2008 Stock Incentive Plan and the 1998 Stock Incentive Plan as of December 31, 2017. The 1998 Stock Incentive Plan and the 2008 Stock Incentive Plan have expired and no further options may be granted under those plans.
	(2)	Includes shares under the 2017 Stock Incentive Plan.

  

ITEM 6. SELECTED FINANCIAL DATA

 

Not required for smaller reporting companies.

 

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

 

 You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements included later in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Forward-Looking Statements.”

  

OVERVIEW

 

Qualstar Corporation was incorporated in California in 1984. Qualstar manufactures and sells automated tape libraries used to store, retrieve and manage electronic data under its Qualstar brand. Tape libraries consist of cartridge tape drives, tape cartridges and robotics to move the tape cartridges from their storage locations to the tape drives under software control. Qualstar’s tape libraries provide storage solutions for organizations requiring backup, recovery and archival storage of critical electronic information. Qualstar’s subsidiary, N2Power, Inc., designs, develops, manufactures and sells high efficiency AC-DC and DC-DC power supplies under the N2Power brand name.

 

Qualstar has developed a business plan to establish worldwide partnerships with other power supply and data storage related companies that will increase our engineering capabilities to develop new products and enable us to ‘private label’ and sell already established strategic products that fit within our portfolio of products.

 

Qualstar established a Singapore subsidiary in 2014, Qualstar Corporation Singapore Private Limited (“QC Singapore”), in furtherance of its plan to establish an engineering footprint in Asia.  QC Singapore has allowed us to hire strategic engineering personnel to assist in sustaining our current products and for new product development.  QC Singapore has helped us in servicing our Asian customers and allows us to enter into relationships with various Singapore technical schools that have a strong history of working with local businesses in development of new breakthrough technologies.

  

Beginning in the fiscal year ended June 30, 2015, the Company took substantial action to reduce overhead spending and to focus on achieving profitability. The Company reduced headcount, significantly downsized its facilities and reduced telecommunication costs.  

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our discussion and analysis of our consolidated financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to loss contingencies, product life cycles and inventory obsolescence, bad debts, sales returns, warranty costs, share-based compensation forfeiture rates, and the potential outcome of future tax consequences. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

 Revenue Recognition

 

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition,” when there is persuasive evidence that an arrangement exists, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured.  Title and risk of loss generally pass to our customers upon shipment.  In limited circumstances where either title or risk of loss pass upon destination or acceptance or when collection is not reasonably assured, we defer revenue recognition until such events occur.

 

In general, customers are allowed to return the product, free of penalty, within thirty days of shipment, if the product does not conform to its specifications. We record an allowance for estimated sales returns based on past experience and current knowledge of our customer base. Our experience has been such that only a very small percentage of products are returned. Should our experience change, however, we may require additional allowances for sales returns.

 

Revenue for established products that have previously satisfied a customer’s acceptance requirements and provide for full payment tied to shipment is generally recognized upon shipment and passage of title.  In limited cases where a prior history of customer acceptance cannot be demonstrated or sales where customer payment dates are not determinable or when collection is not reasonably assured, revenue is deferred until customer acceptance occurs or payment has been received.  On the limited shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our balance sheet representing the difference between the receivable recorded and the inventory shipped. 

 

Service contracts are sold by Qualstar to customers for a period of time to provide product support after the warranty expires. The service contracts allow customers to call Qualstar for technical support, replace defective parts and to have onsite service provided by Qualstar’s third party contract service providers.

 

Deferred revenue, which relates primarily to our service contracts, was approximately $927,000 and we had no deferred profit at December 31, 2017. Deferred revenue was approximately $892,000 and we had no deferred profit, at December 31, 2016.

  

 

 Fair Value of Financial Instruments

 

We measure fair value on all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least quarterly). See “Note 1 – Accounting Policies” in the accompanying notes to the consolidated financial statements. 

 

Allowance for Doubtful Accounts

 

We estimate our allowance for doubtful accounts based on an assessment of the collectability of specific accounts and the overall condition of accounts receivable. In evaluating the adequacy of the allowance for doubtful accounts, we analyze specific trade receivables, historical bad debts, customer credits, customer credit-worthiness and changes in customers’ payment terms and patterns. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make additional payments, then we may need to make additional allowances. Likewise, if we determine that we could realize more of our receivables in the future than previously estimated, we would adjust the allowance to increase income in the period we made this determination.

 

Inventory Valuation

 

We record inventories at the lower of cost or market value on a first in first out basis. We assess the value of our inventories periodically based upon numerous factors including expected product or material demand, current market conditions, technological obsolescence, current cost and net realizable value. If necessary, we write down our inventory for estimated obsolescence, potential shrinkage, or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If technology changes more rapidly than expected, or market conditions become less favorable than those projected by management, additional inventory write-downs may be required.

    

Warranty Obligations

 

We provide for the estimated cost of product warranties at the time revenue is recognized. We engage in extensive product quality programs and processes, including active monitoring and evaluation of product failure rates, material usage and estimation of service delivery costs incurred in correcting a product failure. However, should actual product failure rates, material usage, or service delivery costs differ from our estimate, revisions to the estimated warranty liability would be required. Historically our warranty costs have not been significant. 

 

Legal and Other Contingencies

 

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When legal costs that the entity expects to incur in defending itself in connection with a loss contingency accrual are expected to be material, the loss should factor in all costs and, if the legal costs are reasonably estimable, they should be accrued regardless of whether a liability can be estimated for the contingency itself. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. Changes in these factors could materially impact our financial statements. 

 

 

Share-Based Compensation

 

Share-based compensation is accounted for at fair value over the vesting period. We use the Black-Scholes option-pricing model to determine fair value of the award at the date of grant and recognize compensation expense over the vesting period. The inputs we use for the model require the use of judgment, estimates and assumptions regarding the expected volatility of the stock, the expected term the average employee will hold the option prior to the date of exercise, expected future dividends, and the number of share-based awards that are expected to be forfeited. Changes in these inputs and assumptions could occur and actual results could differ from these estimates, and our results of operations could be materially impacted. 

 

 

Accounting for Income Taxes

 

We estimate our tax liability based on current tax laws in the statutory jurisdictions in which we operate. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets.  We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.

 

We maintain a valuation allowance to reduce our deferred tax assets due to the uncertainty surrounding the timing of realizing the benefits of net deferred tax assets in future years. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event we were to determine that we would be able to realize all or part of our net deferred tax asset in the future, the valuation allowance would be decreased accordingly.

 

We may periodically undergo examinations by the federal and state regulatory authorities and the Internal Revenue Service. We may be assessed additional taxes and/or penalties contingent on the outcome of these examinations. Our previous examinations have not resulted in any unfavorable or significant assessments.

 

The Company has net operating loss carry-forwards for federal income tax purposes of approximately $32.0 million and net operating loss carry-forwards for state income tax purposes of approximately $21.0 million. The Company has engineering and other credits for tax purposes of $2.1 million. If not utilized, the federal net operating loss will start to expire beginning in 2026 and other tax credit carry-forwards will start to expire beginning in 2025. If not utilized, the state net operating loss carry-forward as of December 31, 2017 will expire beginning in 2018. The state engineering credit has no limit on the carry-forward period.

 

Recent Accounting Pronouncements

 

See Recent Accounting Guidance in “Note 1 Summary of Significant Accounting Policies" in the accompanying notes to the consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on our results of operations and financial condition.

 

 

RESULTS OF OPERATIONS

 

The following table reflects, as a percentage of net revenues, consolidated statements of operations data for the periods indicated. The table summarizes the revenue for the Company’s two business segments, data storage and power supplies, as discussed in Note 11 of our consolidated financial statements, in thousands.

 

		Twelve Months Ended December 31,
		2017								2016
Power supply revenues		$	6,297				59.2	%		$	5,601				59.5	%
Storage revenues:
Product			2,427				22.8	%			1,949				20.7	%
Service			1,917				18.0	%			1,867				19.8	%
Total storage revenues			4,344				40.8	%			3,816				40.5	%
Net revenues			10,641				100.0	%			9,417				100.0	%
Cost of goods sold			6,392				60.1	%			6,824				72.5	%
Gross profit			4,249				39.9	%			2,593				27.5	%
Operating expenses:
Engineering			535				5.0	%			990				10.5	%
Sales and marketing			1,239				11.6	%			1,229				13.1	%
General and administrative			1,818				17.1	%			1,587				16.9	%
Total operating expenses			3,592				33.8	%			3,806				40.5	%
Income (loss) from operations			657				6.2	%			(1,213	)			(12.9	)%
Other income			-				0.0	%			3				0.0	%
Income (loss) before income taxes			657				6.2	%			(1,210	)			(12.9	)%
Provision for income taxes			17				0.2	%			-				0.0	%
Net income (loss)		$	640				6.0	%		$	(1,210	)			(12.9	)%

 

  

Comparison of the Twelve Months Ended December 31, 2017 and 2016

 

Change in Net Revenues:  

		Twelve Months Ended December 31,
		2017								2016								Change
		Amount				% of net revenue				Amount				% of net revenue				Amount				%
Power supply revenues		$	6,297				59.2	%		$	5,601				59.5	%		$	696				12.4	%
Storage revenues			4,344				40.8	%			3,816				40.5	%			528				13.8	%
Net revenues		$	10,641				100.0	%		$	9,417				100.0	%		$	1,224				13.0	%

 

The increase in net revenues is attributed to the segment-specific factors as set forth below.

 

 

Segment Revenue 

 

Power Supplies – The increase in sales is attributed to increased demand from our existing gaming customers. Key customers that incorporate our power supplies have variable life cycles and production demands. As some projects are accelerating and others approach end of life, the timing of new production creates a fluctuation in sales.

 

Storage – For the fiscal year ending December 31, 2017 compared to the prior year period, we experienced revenue growth from the sale of both products and services in our data storage segment. The increase in product revenues is attributed to new reseller relationships focused on media and entertainment, which resellers have a high demand for tape technology. With the release of LTO8 (Linear Tape-Open) tape technology and the capacity of tape libraries increasing by approximately 50%, the Company has seen a shift in sales to entry level and mid-size libraries. Our product portfolio is targeted to this market. Our service revenue increased slightly compared to the previous year, primarily due to the product development service revenue received from our recent partnership with Sony Imaging Products & Solutions Inc. for the development of an enterprise class optical disk archive (“ODA”) library, offset by a slight reduction in our technical support revenue. Our technical support service revenue fluctuates with historical sales cycles and we have experienced a slight reduction in service contracts as our industry competes with cloud-based services.

 

Gross Profit: 

		Twelve Months Ended December 31,
		2017								2016								Change
		Amount				% of net revenue				Amount				% of net revenue				Amount				%
Gross profit		$	4,249				39.9	%		$	2,593				27.5	%		$	1,656				63.9	%

 

The gross profit increase is primarily attributed to the increase in sales, decrease in write-offs for obsolete inventory and reserves for slow moving items and improved profit margins on service contracts.

 

Operating Expenses:

		Twelve Months Ended December 31,
		2017								2016								Change
		Amount				% of net revenue				Amount				% of net revenue				Amount				%
Engineering		$	535				5.0	%		$	990				10.5	%		$	(455	)			(46.0	)%
Sales and marketing		$	1,239				11.6	%		$	1,229				13.1	%		$	10				0.8	%
General and administrative		$	1,818				17.1	%		$	1,587				16.9	%		$	231				14.6	%

 

Engineering

 

Engineering expenses decreased in the twelve months ended December 31, 2017 compared to 2016, as a result of the reduction in payroll and related expenses, consulting fees, compliance costs and facilities costs.

 

Sales and Marketing 

 

Sales and marketing expenses for the twelve months ended December 31, 2017 compared to 2016 remained flat.  In 2017, we incurred increased commissions related to our increase in sales which additional expenses were offset by a reduction in consulting fees, facilities costs and a decrease in marketing expenses.

 

General and Administrative 

 

General and administrative costs increased for the twelve months ended December 31, 2017 compared to 2016, primarily due to the increase in share-based compensation expense for stock options awarded to employees and board members, bonuses, accounting fees and reserve for bad debts which expenses were offset by a reduction in legal fees and facilities costs.

 

 

Other Income: 

 

For the twelve months ended December 31, 2017 compared to 2016, the Company had a decrease in investment income of $3,000, as the cash held in the investment account was moved to a non-interest-bearing account.

 

Provision for Income Taxes:  For the twelve months ended December 31, 2017, the Company recorded a $17,000 tax provision. The provision was related to state franchise and income tax due to the income allocation. The Company has federal net losses and does not require a provision for federal taxes for the twelve months ended December 31, 2017. No provision for income taxes was required for the twelve months ended December 31, 2016 for federal or state purposes.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash provided from operating activities was $1.0 million in the twelve months ended December 31, 2017 compared to $127,000 cash used in the twelve months ended December 31, 2016.

 

Cash used in investing activities was $40,000 in the twelve months ended December 31, 2017 compared to $45,000 in the twelve months ended December 31, 2016. Our investing activities primarily include tooling for new products, software upgrades, office furniture and fixtures and warehouse equipment for the leased facilities.

 

Cash was not used or acquired in financing activities in the twelve months ended December 31, 2017 and 2016.

 

The Company continues to focus on controlling operating expenses, maintaining profitability and improving cash flow.  By introducing private label products, we have been able to get similar or greater margins without developing new products ourselves, allowing for less headcount and product risk. Since 2013, the Company has been adjusting headcount, facilities costs and other operating expenses to attain profitability. All of these efforts and our increase in revenue have contributed to our positive cash flow.

 

As of December 31, 2017, we had $4.7 million in cash and cash equivalents, and $100,000 in restricted cash, used as collateral for our corporate credit cards. We believe that our existing cash and cash equivalents will be sufficient to fund our working capital and capital expenditure needs for at least twelve months from the date of this report. We may utilize cash to invest in businesses, products or technologies that we believe are strategic. We periodically evaluate other companies and technologies for possible investment. In addition, we have made and may in the future make investments in companies with whom we have identified potential synergies.

 

 

SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

The following is a summary of our future payments due, offset by sublease income, under contractual obligations as of December 31, 2017 (in thousands):

 

Contractual Obligations:		Total				Less than 1 Year				1 to 3 Years
Operating Leases		$	428			$	143			$	285

 

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

	Page
Financial Statements
Reports of Independent Registered Public Accounting Firms		26
Consolidated Balance Sheets		28
Consolidated Statements of Comprehensive Income (Loss)		29
Consolidated Statements of Shareholders’ Equity		30
Consolidated Statements of Cash Flows		31
Notes to Consolidated Financial Statements		32

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
Qualstar Corporation & Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Qualstar Corporation & Subsidiaries (the Company) as of December 31, 2017, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the consolidated results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

/s/RBSM LLP
We have served as the Company’s auditor since 2017.
Larkspur, CA
March 16, 2018

 

 

 Report of Independent Registered Public Accounting Firm

  

 

To the Board of Directors and Shareholders of

Qualstar Corporation and Subsidiary

 

We have audited the accompanying consolidated balance sheet of Qualstar Corporation and Subsidiary (collectively, the “Company”) as of December 31, 2016, and the related consolidated statements of comprehensive loss, shareholders' equity, and cash flows for the year ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Qualstar Corporation and Subsidiary as of December 31, 2016, and the consolidated results of their operations and their cash flows for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/Marcum LLP 

Marcum, LLP

Los Angeles, CA

March 16, 2017

 

 

QUALSTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

The accompanying notes are integral to the consolidated financial statements.

  

 

QUALSTAR CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

 

 

 

The accompanying notes are integral to the consolidated financial statements.

 

 

 

QUALSTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

 

The accompanying notes are integral to the consolidated financial statements.

 

 

QUALSTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

The accompanying notes are integral to the consolidated financial statements.

 

 

QUALSTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

  

 

 

 

 

 

 

 

  

 

 

 

  

 

    

 

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

  

 ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Qualstar’s disclosure controls and procedures as of December 31, 2017, pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over financial reporting

 

We did not make any changes in our internal control over financial reporting during the twelve months ended December 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control – Integrated Framework” in 2013. Based on our assessment, we have concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.

 

 

This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting due to the exemption of smaller reporting companies from the attestation requirements of Section 404 of the Sarbanes-Oxley Act.

   

ITEM 9B. OTHER INFORMATION

 

None.

 

 

PART III

  

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

  

DIRECTORS

 

The following table sets forth certain information about the current directors of our Company. Directors are elected annually and hold office until the next annual meeting of shareholders or until their successors are elected and qualified. There are no family relationships among any of our directors and executive officers. For biographical information regarding our directors, see the discussion under “Biographical Information — Directors,” below.

  

Name		Age		Position
Steven N. Bronson		52		President, Chief Executive Officer and Director
David J. Wolenski		56		Director and Chairman of the Board of Directors
Leonard A. Hagan		65		Director
Nicholas A. Yarymovych		53		Director

 

---

Leonard A. Hagan was elected to replace Dale Wallis and each of the other Directors was re-elected to serve on the Board at the annual meeting of Shareholders held on June 13, 2017.

 

 

EXECUTIVE OFFICERS AND OTHER KEY OFFICERS

 

The following table sets forth certain information about the current executive officers and other key officers of our Company. There are no family relationships among any of our directors and executive officers. For biographical information regarding our executive officers, see the discussion under “Biographical Information — Executive Officers and other Key Officers,” below.

  

Name	Age	Position
Steven N. Bronson	52	President and Chief Executive Officer
Louann L. Negrete	58	Chief Financial Officer

  

 

BIOGRAPHICAL INFORMATION

  

Background on Director Qualifications

 

All Board members are expected to possess certain personal characteristics necessary to creating a functional Board: high personal and professional ethics, integrity and values; practical wisdom and mature judgment; an inquisitive and objective perspective; professional experience at a policy-making level in business; time availability for in-person participation at Board and committee meetings; and a commitment to representing the long-term interests of our shareholders. Directors are elected annually and hold office until the next annual meeting of shareholders or until their successors have been elected and qualified.

 

Directors

 

Steven N. Bronson has served as our Chief Executive Officer and a member of our board since July 3, 2013. Mr. Bronson has over 35 years of business and entrepreneurial experience with a strong background in investment banking, operations and management. Mr. Bronson has been Chairman and Chief Executive Officer of BKF Capital Group Inc., since September 2008. In July 2010 he became Chairman and Chief Executive of Interlink Electronics, Inc., a global leader in the design of patented Force-Sensing Resistor™ (FSR™) technology and a pioneer in printed electronics. In addition, Mr. Bronson served as Chairman and Chief Executive Officer of Ridgefield Acquisition Corp. and 4net Software, Inc., both publicly traded companies.  The Board has concluded that Mr. Bronson should serve on our Board based on his positions as President and Chief Executive Officer of our company, as well as his substantial experience in the electronics industry.

 

 

David J. Wolenski currently serves as President of Electro-Mechanical Products, Inc. (“EMP”), a privately held company engaged in the manufacture of precision-machined components and thermal management systems for the Semiconductor, Laser, and Medical Device industries.  He has been a director on EMP’s board since August 2000.  From 1996 to 2000, Mr. Wolenski was Chief Executive Officer of OZO Automation, Inc. (OTCBB:OZOA), a publicly-traded company that produced robotic workstations for the electronics industry.  As Chief Executive Officer, he also managed the sale of OZO’s assets to JOT Automation of Olunsalo, Finland, and served as President of their Depaneling subsidiary from 2000 to 2001.  From 1983 to 1996, Mr. Wolenski held various positions with Johns Manville Corporation, a worldwide leader in fiberglass insulations and engineered products, which included managerial assignments in manufacturing, business development, and quality assurance.  His past board affiliations have included OZO Automation, Inc. where he was a director from 1996-1999, and Bio-Medical Automation, Inc., where he was a director from 1999-2000.  Mr. Wolenski holds a BS degree in Mechanical Engineering from the University of Colorado at Boulder (1983), and an MBA from the University of Colorado at Denver (1990).  The Board has concluded that Mr. Wolenski should serve on our Board based on his senior executive management experience at privately held and publicly held manufacturing companies and his prior experience as a director of other companies.

 

Leonard A. Hagan is a founding partner at Hagan & Burns CPA’s P.C. (“Hagan & Burns”) where he provides financial and regulatory services to the broker dealer community as well as tax planning services to the firm’s clients. Prior to founding Hagan & Burns in 1995, Mr. Hagan worked for several years at the accounting firm of S.D. Leidesdorf & Co. where he was a manager, which was then merged into Ernst & Whitney. Following his time at S.D. Leidesdorf & Co. and Ernst & Whitney, Mr. Hagan spent three years at Credit Suisse until he founded his own accounting firm. Mr. Hagan has over forty years’ experience as a Certified Public Accountant and over twenty years as a licensed Financial and Operation Principal. Mr. Hagan is registered today as the Financial and Operating Principal for the following broker dealers registered with the Securities and Exchange Commission: Livingston Securities, LLC, Spoke Financial LLC and Core Financial LLC. Mr. Hagan is also a director of Ridgefield Acquisitions Corp,  and BKF Capital Group Inc., each of which are publicly traded companies. Mr. Hagan earned a Bachelor of Arts degree in Economics from Ithaca College and continued his education at Cornell University where he received his MBA in accounting and finance. The Board has concluded that Mr. Hagan should serve on our Board based on his financial expertise and his experience of being a public company director.

 

Nicholas A. Yarymovych is currently the CEO and President (founder) of Cloudpointe, Inc.  Previously, he was the Senior Vice President of Global Consulting & Operations at NTT Data, Cloud Services Inc. and also served as NTT Centerstance’s Managing Partner. Mr. Yarymovych founded Ventus Technology Solutions, Inc. (Ventus) in 2001, one of the first Salesforce.com consulting partners and served as President and Chief Executive Officer. In early 2011, he merged Ventus with Centerstance, Inc. which was then acquired by NTT in late 2012. Throughout his 28-year professional consulting career, he has launched new business units, established professional services practices, developed core business strategies and led numerous operational turnarounds. Prior, Mr. Yarymovych served as Vice President of e-Business Solutions with QuickStart Technologies where he led the companies' e-business consulting services division. Prior to QuickStart, Mr. Yarymovych served as a Client Partner with Cambridge Technology Partners in their Strategy and Management Consulting Group. Currently, he serves as an advisor for several private equity firms. Mr. Yarymovych earned an M.B.A. in Management and Operations from Pepperdine University, a B.S. in Aerospace Engineering from the University of Southern California and has a Bachelor of Science degree in Astronautical Engineering from the U.S. Air Force Academy.  The Board has concluded that Mr. Yarymovych should serve on our Board based on his senior executive management experience and his experience with turnaround companies, mergers and acquisitions.

 

Executive Officers and Other Key Officers

 

Steven N. Bronson. See the discussion under “Biographical Information – Directors,” above.

 

Louann L. Negrete was appointed Chief Financial Officer on December 2, 2013. Ms. Negrete has more than 15 years of experience in public company accounting. Prior to joining Qualstar, Ms. Negrete was the Director of Corporate Accounting for LINE 6, Inc. Prior to Line 6 she was the Corporate Controller and CFO for 6 years at Interlink Electronics, Inc., a publicly traded company. She also served for 6 years as the Corporate Controller for publicly traded Biosource International, Inc. BioSource acquired two companies while she was controller and eventually the entire company was sold. She also held positions of controller at US Stamp and assistant controller at Patagonia, two other manufacturing companies.  Ms. Negrete holds a CPA license from the State of California. She graduated from California State University, Northridge with a BS degree in Business Administration, Accounting. 

 

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any officer or director during the past ten years. There are no family relationships between any of our directors, executive officers or other key personnel and any other of our directors, executive officers or other key personnel.

 

 

CORPORATE GOVERNANCE

 

Director Independence

 

Qualstar’s current Board members consist of Mr. Bronson, Mr. Wolenski, Mr. Hagan, and Mr. Yarymovych. The Board of Directors has determined that Messrs. Wolenski, Hagan, and Yarymovych are independent applying the definition of independence under the listing standards of the NASDAQ and SEC regulations.

 

Board Leadership Structure and Role in Risk Oversight

 

On June 27, 2014, the Board elected David J. Wolenski, an independent director, to serve as Chairman of the Board.

 

Committees

 

Our Board of Directors oversees our risk management. This oversight is administered primarily through the following committees: (i) an Audit Committee, (ii) a Compensation Committee and (iii) a Nominating and Corporate Governance Committee. Each Committee has only independent directors as members.

  

Audit Committee

 

The Audit Committee consists of three directors: Messrs. Hagan (chairman), Yarymovych and Wolenski. Each member of the committee is independent applying the definition of independence under the listing standards of NASDAQ and SEC regulations. The Audit Committee meets at least four times during the year. The Board has determined that Mr. Hagan qualifies as an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K.

 

Pursuant to the terms of the Audit Committee charter, our Audit Committee is required to consist of “independent” directors and shall serve at the pleasure of the Board of Directors. An “independent” director is defined as an individual who (a) is not an officer or salaried employee or an affiliate, (b) does not have any relationship that, in the opinion of the Board of Directors, would interfere with his or her exercise of independent judgment as an Audit Committee member, (c) meets the independence requirements of the SEC and NASDAQ or such other securities exchange or market on which our securities are traded and (d) except as permitted by the SEC and NASDAQ or such other securities exchange or market on which our securities are traded, does not accept any consulting, advisory or other compensatory fee from us.

 

The Audit Committee has a charter that requires the committee to oversee our accounting and financial reporting process, our system of internal controls regarding finance, accounting, legal compliance and ethics, and the audits of our financial statements, a current copy of which is available to stockholders on our website, www.qualstar.com. The primary duties of the Audit Committee consist of, among other things:

 

•

serving as an independent and objective party to monitor our financial reporting process, internal control system and disclosure control system;

 

•

reviewing and appraising the audit efforts of our independent accountants;

 

•

assuming direct responsibility for the appointment, compensation, retention and oversight of the work of the outside auditors and for the resolution of disputes between the outside auditors and our management regarding financial reporting issues;

 

•

providing an open avenue of communication among the independent accountants, financial and senior management and the Board; and

 

•

reviewing and approving all related party transactions.

 

 

Compensation Committee

 

Our Compensation Committee consists of three directors: Messrs. Yarymovych (chairman), Hagan and Wolenski. Each such member of the Compensation Committee is independent applying the definition of independence under the listing standards of NASDAQ and SEC regulations. The Compensation Committee meets at least two times during each year.

 

Each member of our Compensation Committee must (i) be one of our independent directors satisfying the independence requirements of NASDAQ and other applicable regulatory requirements; (ii) qualify as an “outside director” under Section 162(m) of the Internal Revenue Code, as amended; and (iii) meet the requirements of a “non-employee director” for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. Except as permitted by NASDAQ, members of the Compensation Committee must not accept any consulting, advisory or the other compensatory fee from us or any of our subsidiaries.

 

The Compensation Committee oversees the determination of all matters relating to employee compensation and benefits and specifically determines and approves salaries, bonuses and equity-based compensation for our executive officers.

 

We have adopted a Compensation Committee charter which outlines the Compensation Committee's primary duties which are to:

 

•

evaluate the performance of the Chief Executive Officer in light of our goals and objectives and determine the Chief Executive Officer's compensation based on this evaluation and such other factors as the Committee shall deem appropriate;

 

•

determine and approve all executive officer compensation;

 

•

approve the aggregate amounts and methodology for determination of all salary, bonus, and long-term incentive awards for all employees other than executive officers;

  

•

review and recommend equity-based compensation plans to the full Board of Directors and approve all grants and awards thereunder;

 

•

review and approve changes to our equity-based compensation plans other than those changes that require stockholder approval under the plans, the requirements of NASDAQ or any exchange on which our securities may be listed and/or any applicable law;

 

•

review and recommend to the full Board changes to our equity-based compensation plans that require stockholder approval under the plans, the requirements of NASDAQ or any exchange on which our securities may be listed and/or any applicable law;

 

•

review and approve changes in our retirement, health, welfare and other benefit programs that result in a material change in costs or the benefit levels provided;

 

•

administer our equity-based compensation plans; and

 

•

approve, as required by applicable law, the annual Committee report on executive compensation for inclusion in our proxy statement.

 

A current copy of the Compensation Committee charter is available to shareholders on our website, www.qualstar.com.

 

The Compensation Committee has responsibility for establishing, implementing and monitoring the Company’s compensation philosophy. Accordingly, the Compensation Committee strives to develop and maintain competitive, progressive programs that attract, retain and motivate high-caliber employees, foster teamwork, and maximize the long-term success of the Company by appropriately rewarding our employees for their achievements. The Compensation Committee evaluates risk and rewards associated with the Company’s overall compensation philosophy and structure.

 

 

The Compensation Committee has the authority, in its sole discretion, to retain or obtain advice from compensation consultants, independent legal counsel and other advisers, and is directly responsible for the retention, termination, compensation and oversight of the work of any such consultant, counsel or other adviser. In selecting a consultant, counsel or other adviser, the Compensation Committee must, as required by NASDAQ rules, take into consideration all factors relevant to such person's independence from management, including all factors that NASDAQ identifies in its listing standards. In April 2017, the Compensation Committee retained a compensation consultant to prepare an assessment of compensation for the Chief Executive Officer. The results of the assessment were taken into consideration when the Compensation Committee increased the salary of Mr. Bronson and awarded him 100,000 options on August 3, 2017, as further discussed in Item 11 below. The Compensation Committee is regularly advised by the Company’s outside legal counsel and has found no conflict of interest in such counsel’s continuing to provide advice to the Compensation Committee.

  

The Compensation Committee may form and delegate its authority to subcommittees as appropriate. To date, the Compensation Committee has not delegated such authority.

 

Additionally, the Chief Executive Officer may make recommendations to the Compensation Committee relating to executive and director compensation, but consistent with NASDAQ rules, he may not be present during deliberations or voting regarding his own compensation. The Compensation Committee meets with the Company’s Chief Executive Officer and other senior executives in order to obtain recommendations with respect to the Company’s compensation programs and practices for executives and other employees.  Management discusses with the Compensation Committee the practices that have been put in place to identify and mitigate, as necessary, potential risks.  With support from market compensation data, performance reviews and other information, management makes recommendations to the Compensation Committee on the base salaries, bonus targets and equity compensation for the executive officers and other employees.  The Compensation Committee takes management’s recommendations into consideration but is not bound by management’s recommendations with respect to executive compensation.  The Chief Executive Officer annually reviews the performance of each executive officer, other than himself. The Chief Executive Officer’s performance is reviewed by the Compensation Committee which makes recommendations to the full Board.

 

Nominating and Governance Committee

 

Our Nominating and Governance Committee consists of three directors: Messrs. Wolenski (chairman), Yarymovych and Hagan. The Nominating and Governance Committee is empowered by the Board of Directors to recommend qualified individuals to serve on our Board and to identify the manner in which the Nominating and Governance Committee evaluates nominees recommended for membership on the Board. All members of the Nominating and Governance Committee of the Board of Directors have been determined to be “independent directors” pursuant to the definition contained in the rules of NASDAQ and SEC regulations.

  

Shareholder Communications

 

Our Board of Directors has established a procedure that enables shareholders to communicate in writing with members of the Board of Directors. Any such communication should be addressed to our Secretary and should be sent to such individual c/o Qualstar Corporation. Any such communication must state, in a conspicuous manner, that it is intended for distribution to the entire Board of Directors. Under the procedures established by the Board of Directors, upon our Secretary's receipt of such a communication, a copy of such communication will be sent to each member of the Board of Directors, identifying it as a communication received from a shareholder. Absent unusual circumstances, at the next regularly scheduled meeting of the Board of Directors held more than two days after such communication has been distributed, the Board of Directors will consider the substance of any such communication.

 

Board and Committee Meeting Attendance

 

During the twelve months ended December 31, 2017, our Board of Directors held six meetings, our Audit Committee held seven meetings and our Compensation Committee held two meetings. Each director attended (or participated by telephone in) 100% of the total number of meetings of the Board and committees on which he served.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires Qualstar’s directors and executive officers, and persons who own more than ten percent of Qualstar’s common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish Qualstar with copies of all Section 16(a) forms they file.

 

 

To our knowledge, based solely on a review of the copies of Section 16(a) reports furnished to us and a review of the shareholders register, during the twelve months ended December 31, 2017, our officers, directors and greater than ten percent beneficial owners complied with all Section 16(a) filing requirements, except that Leonard A. Hagan filed one Form 3 late reporting one transaction on an untimely basis and William Gervais filed nine Form 4s late reporting fifteen transactions on an untimely basis.

 

Code of Ethics

 

Qualstar has adopted a written Code of Business Conduct and Ethics, which complies with the requirements for a code of ethics pursuant to Item 406(b) of Regulation S-K under the Securities Exchange Act of 1934, which applies to our chief executive officer, chief financial officer and persons performing similar functions. A copy of the Code of Business Conduct and Ethics has been filed as an exhibit to this report. A copy of the Code of Business Conduct and Ethics is also posted on our website at www.qualstar.com. A copy of the Code of Business Conduct and Ethics will be provided, without charge, to any shareholder who sends a written request to the Chief Financial Officer of Qualstar at 130 W. Cochran St. Unit C; Simi Valley, California 93065.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Overview

 

Qualstar’s executive compensation program is based on the same objectives that guide Qualstar in establishing all of its compensation programs:

 

●

Compensation fosters the long-term focus required for Qualstar’s success. In general, the compensation of Company executives includes longer-term incentives because they are in a greater position to influence longer-term results.

 

●

Compensation reflects the level of job responsibility, individual performance, and Company performance. As employee’s progress to higher levels in the organization, an increasing proportion of their pay should be linked to Company performance and shareholder returns because those employees are more able to affect Qualstar’s operating results.

 

●

Compensation reflects the value of the job in the marketplace. To attract and retain a highly skilled work force, we must remain competitive with the pay of other employers who compete with us for talent.

 

●

While compensation programs and individual pay levels will always reflect differences in job responsibilities, geographies and marketplace considerations, the overall structure of the compensation and benefit programs should be broadly similar and equitable across the organization.

 

Components of Executive Compensation

 

For the twelve months ended December 31, 2017, the principal components of compensation for named executive officers were: (1) base salary, (2) performance-based incentive compensation, (3) long-term equity incentive compensation, (4) personal benefits, and (5) other compensation. In determining the amount and relative allocation among each component of compensation for each named executive officer, the Compensation Committee considered, among other factors, the Company’s and each executive officer’s experience level and historical performance, compensation paid by companies comparable in size to Qualstar, data obtained from management’s recruitment activities, historical rates of executive compensation, Company revenues and profitability, and alignment with the Company’s overall compensation philosophy.

 

 

Summary Compensation Table

 

The following table shows information about the compensation awarded to, earned by and paid to Mr. Steven N. Bronson and Ms. Louann Negrete (collectively referred to as our “named executive officers”) during the years ended December 31, 2017 and 2016. Mr. Bronson and Ms. Negrete were the Company’s only two “named executive officers,” as defined under Item 402 of Regulation S-K promulgated by the SEC, for such fiscal years.

 

Summary Compensation Table

 

Name and Principal Position		Year		Salary				Bonus (1)				Option Awards (2)				All Other Compensation (3)				Total
Steven N. Bronson		2017		$	176,383			$	140,000			$	250,000			$	1,426			$	567,809
Chief Executive Officer		2016			178,462				40,000				—				817				219,279
Louann Negrete		2017			139,808				10,100				25,000				1,222				176,130
Chief Financial Officer		2016			135,000				10,250				—				2,797				148,047

 

(1)		The amounts shown in this column reflect discretionary bonuses paid to the named executive officers.
(2)		The amounts shown in this column represent the aggregate grant date fair value of the equity-based compensation granted to the named executive officers as computed in accordance with FASB ASC Topic 718.  Pursuant to SEC rules, these amounts exclude the impact of estimated forfeitures related to service-based vesting conditions.  The assumptions used in calculating the aggregate grant date fair value of the awards reported in the column are set forth in our financial statements included herein in Note 8. The amounts reported in this column reflect the accounting cost for these awards and do not correspond to the actual economic value that may be received by the named executive officers for the awards.
(3)		The amounts shown in this column represent premiums paid by the Company for disability, life and health insurance.

 

Components of Executive Compensation

 

Base Salary

 

Base salaries were set at levels that the Compensation Committee deemed to be sufficient to attract and retain highly talented executive officers capable of fulfilling the Company’s key objectives. Base salaries were also set with the goal of rewarding executive officers on a day-to-day basis for their time and services while encouraging them to strive for performance-based and long-term incentives.

 

Performance-Based Incentive Compensation

 

The Company utilized an annual discretionary cash bonus program, which was intended to reward executive officers based on the Company’s overall performance and the individual named executive officer’s contributions to that performance. In determining an annual discretionary bonus for each named executive officer, we evaluated performance as measured against certain objective financial metrics as well as individual performance goals. We believe that the performance-based incentive compensation provides incentives that are necessary to retain executives and reward them for our short-term performance in the pursuit of our larger business objectives and is designed to provide for a portion of our cash compensation for named executive officers to be variable based upon Company and individual performance.

 

 

Long-Term Equity Incentive Compensation

 

The Company has a long-term equity incentive plan, which is intended to retain executive officers and reward executive officers based on the Company’s performance.  Equity incentives, such as stock options and restricted stock awards, have been granted to executive officers as long-term incentives in order to align executives’ performance with the interests of the Company’s shareholders and also to encourage retention.  On August 3, 2017, the Compensation Committee awarded Mr. Bronson an option to purchase 100,000 shares of the Company’s common stock and Louann Negrete an option to purchase 10,000 shares of the Company’s common stock. The options are immediately exercisable at an exercise price of $7.08 per share, have a term of ten years and were granted pursuant to the Company’s 2017 Stock Option and Incentive Plan.  

 

Personal Benefits

 

As employees, the Company’s executives are eligible to participate in health and welfare benefits, as offered to our general workforce, designed to attract and retain a skilled workforce in a competitive marketplace.  These benefits help ensure that the Company has a healthy and focused workforce through reliable and competitive health and other personal benefits. 

 

These benefits were considered in relation to the total compensation package but did not materially impact decisions regarding other elements of executive officer compensation.

 

The Company also maintains a tax-qualified retirement plan (“401(k) Plan”) that provides eligible employees with an opportunity to save for retirement on a tax-advantaged basis. All employees are eligible to participate in the 401(k) Plan following three months of service of employment and may contribute up to 100% of their compensation on a pre-tax basis, not to exceed the annual IRS maximum. The Company, at the discretion of management, may make matching contributions in an amount equal to 25% of the first 6% of compensation contributed by eligible participants. However, the Company has suspended discretionary matching contributions effective as of August 2009.

    

Employment Agreement with Steven N. Bronson

 

The Company was party to an employment agreement with Mr. Bronson that commenced on June 1, 2016 and expired on December 31, 2016.  The employment agreement provided Mr. Bronson with a base salary of $160,000 and eligibility to earn a discretionary cash bonus up to 100% of his base salary, based on his achievement of various performance goals, as well as other general employment terms. 

 

Subsequent to the expiration of his employment agreement, on August 3, 2017 the Compensation Committee (i) approved an increase in Mr. Bronson’s base salary from $160,000 to $200,000, (ii)  approved a $100,000 cash bonus to Mr. Bronson based on the Company achieving profitability and positive cash flow for the six months ended June 30, 2017 and (iii) awarded Mr. Bronson an option to purchase 100,000 shares of the Company’s common stock as further described above under the heading “Long Term Equity Compensation”.  The Company is currently in the process of negotiating a new employment agreement with Mr. Bronson.

 

 

Tax and Accounting Implications

 

Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), we generally receive a federal income tax deduction for compensation paid to any of our named executive officers only to the extent total compensation does not exceed $1.0 million during any fiscal year or if it is “performance-based” under Section 162(m) of the Code. During the years ending December 31, 2017 and 2016, none of the executive officers of the Company had non-performance-based compensation in excess of $1,000,000.

 

Outstanding Equity Awards at Year Ending December 31, 2017

 

The following table provides information regarding outstanding equity awards held by each named executive officer as of December 31, 2017.

 

Outstanding Equity Awards at December 31, 2017

 

		Option Awards (1)
		Number of Securities Underlying Unexercised Options (#)								Option Exercise Price ($)			Option Expiration Date
Name		Exercisable				Unexercisable
Steven N. Bronson			16,667	(1)			—				7.38		8/20/2024
			100,000	(2)							7.08		8/3/2027
Louann Negrete			10,000	(1)							7.08		8/3/2027

 

 

(1)	Each stock option was granted pursuant to our 2008 Plan. The stock option vested immediately on the grant date, August 20, 2014.
(2)	Each stock option was granted pursuant to our 2017 Plan. The stock option vested immediately on the grant date, August 3, 2017.

 

Director Compensation

 

Each of our non-employee directors receives cash fees as compensation for his service on our Board of Directors and the committees of the Board of Directors on which he is a member.  During the fiscal year ending December 31, 2017, each of our non-employee directors received a stipend of $15,000 per year, paid quarterly, for service on the Board of Directors.  The Chairman of the Audit Committee received an additional stipend of $5,000 per year, paid quarterly, the Chairman of the Compensation Committee received an additional stipend of $3,000 per year, paid quarterly, the Chairman of the Nominating and Governance Committee received an additional stipend of $3,000 per year, paid quarterly, and the Chairman of the Board of Directors received an additional stipend of $7,500 per year, paid quarterly.  No additional stipends were paid for service on a committee of the Board of Directors other than as Chairman of such committee. No fees were paid for service on the Board of Directors to directors who were also employees of the Company. For the fiscal year ending December 31, 2017, our non-employee directors received equity awards for their service on the Company’s Board of Directors or the committees of the Board of Directors in the form of 5,000 stock options each. 

 

 

The table below sets forth cash compensation earned by each person who served as a non-employee director of our Board of Directors during the fiscal year ending December 31, 2017. Steven N. Bronson, who is our Chief Executive Officer, was an employee during the fiscal year ending December 31, 2017 and received no additional compensation for his service as a member of our Board of Directors. The compensation received by Mr. Bronson, as a named executive officer of the Company, is presented in “Executive Compensation—Summary Compensation Table” above.

 

Name		Fees Earned or Paid in Cash				Stock Awards (2)				Total
David J. Wolenski		$	25,500			$	12,500			$	38,000
Dale E. Wallis(1)			10,000				-				10,000
Leonard A. Hagan			10,932				12,500				23,432
Nicholas A. Yarymovych			18,000				12,500				30,500

 

(1)	Dale Wallis was not re-elected to the Board of Directors at the annual meeting on June 13, 2017.
(2)	The non-employee directors were awarded 5,000 stock options on August 3, 2017 pursuant to the Company’s 2017 Plan.  The options have an exercise price of $7.08 per share, a term of ten years and were fully vested upon grant.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS³

 

The following table sets forth information with respect to the beneficial ownership of our common stock as of March 8, 2017 for:

 

●

each person (or group of affiliated persons) who we know beneficially owns more than 5% of our common stock;

 

●

each of our directors;

 

●

each of the named executive officers; and

 

●

all of our directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. Except as indicated by footnote, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned, subject to community property laws where applicable. The percentage of shares beneficially owned is based on 2,045,519 shares of common stock outstanding as of March 8, 2018. Shares of common stock subject to options currently exercisable or exercisable within 60 days of March 8, 2018, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. The address for those individuals for which an address is not otherwise indicated is: c/o Qualstar Corporation, 130 W. Cochran St. Unit C, Simi Valley, California 93065.

 

 

		Common				Options Exercisable Within 60				Beneficial Ownership
Name		Shares Owned				Days (1)				Number				Percent
BKF Asset Holdings, Inc. (2)			548,085				—				548,085				26.8	%
Steven N. Bronson, Chief Executive Officer (3)			24,617				116,667				679,369				33.8	%
William J. Gervais (4)			157,224				—				157,224				7.7	%
1925 Angus Avenue, Unit B
Simi Valley, California 93063
Renaissance Technologies LLC (5)			116,802				—				116,802				5.7	%
800 Third Avenue; New York, New York 10022
Louann Negrete, Chief Financial Officer			—				10,000				10,000				*
Leonard A. Hagan, Director (6)			13,444				5,000				18,444				*
Nicholas A. Yarymovych, Director (7)			6,667				5,000				11,667				*
David J. Wolenski, Director (8)			833				5,000				5,833				*
All directors and officers as a group (5 persons)			593,646				141,667				735,313				36.0	%

 

*Less than 1.0%

 

(1)	Represents shares that may be acquired upon exercise of stock options which are either currently vested or will vest within 60 days of March 8, 2018.
(2)	Based on information contained in reports filed with the Securities and Exchange Commission, BKF Asset Holdings, Inc. is the owner of 548,085 shares of Qualstar common stock.
(3)	Based on information contained in reports filed with the Securities and Exchange Commission, Mr. Bronson, is the owner of 14,617 shares of Qualstar. Additionally, Mr. Bronson, as the Chairman and President and majority shareholder of BKF Asset Holdings, Inc., may be deemed to beneficially own the 548,085 shares of Qualstar held by BKF Asset Holdings, Inc.  Also, Mr. Bronson’s spouse holds 10,000 shares of Qualstar. Mr. Bronson was awarded a total of 16,667 stock options on August 20, 2014 and 100,000 options on August 3, 2017.
(4)	Based on information contained in reports filed with the Securities and Exchange Commission, William J Gervais, beneficially owns 157,224 shares as of January 26, 2018.
(5)	Based on information contained in reports filed with the Securities and Exchange Commission, Renaissance Technologies LLC, an investment adviser, beneficially owns 116,802 shares as of February 13, 2018.
(6)	Based on information contained in reports filed with the Securities and Exchange Commission, Leonard A. Hagan beneficially owns 13,444 shares as of December 21, 2017.   Mr. Hagan was awarded 5,000 stock options on August 3, 2017.
(7)	Based on information contained in reports filed with the Securities and Exchange Commission, Nicholas A. Yarymovych beneficially owns 6,667 shares as of November 19, 2014.  Mr. Yarymovych was awarded 5,000 stock options on August 3, 2017.
(8)	Based on information contained in reports filed with the Securities and Exchange Commission, David J. Wolenski beneficially owns 833 shares as of December 31, 2015. Mr. Wolenski was awarded 5,000 stock options on August 3, 2017.

  

 

Additional Equity Compensation Plan Information

 

Information regarding Qualstar’s equity compensation plans as of December 31, 2017 is included in Item 5 of this report and is incorporated herein by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

In accordance with the charter of the Audit Committee of our Board of Directors, the Audit Committee is responsible for reviewing any proposed transaction with any related person which involves a potential conflict of interest or for which approval is required under applicable Securities and Exchange Commission and NASDAQ rules. Currently, this review and approval requirement applies to any transaction to which Qualstar will be a party, in which the amount involved exceeds the lesser of $120,000 or one percent of the average of Qualstar’s total assets at year end for the last two completed fiscal years, and in which any of the following persons will have a direct or indirect material interest: (a) any of our directors or executive officers, (b) any nominee for election as a director, (c) any security holder who is known to us to own of record or beneficially more than five percent of our common stock, or (d) any member of the immediate family of any of the persons described in the foregoing clauses (a) through (c).

 

In the event that management becomes aware of any related person transaction, management will present information regarding the proposed transaction to the Audit Committee for review. Approval of a transaction with a related person requires the affirmative vote of a majority of the members of the Audit Committee or of a majority of the members of the full Board of Directors. If the related person transaction involves a member or members of the Board, approval requires a majority vote of the directors who do not have a financial interest in the transaction.

 

Steven N. Bronson is the Company’s CEO and President and is also the President and CEO and a majority shareholder of Interlink Electronics, Inc. (“Interlink”). Interlink reimburses Qualstar for leased space at the Simi Valley facility and for other administrative expenses paid by or on behalf of the Company. The total amount charged to Interlink for the twelve months ended December 31, 2017 and 2016, was $13,000 and $33,000, respectively. Interlink owed Qualstar $2,000 and $1,000 at December 31, 2017 and December 31, 2016, respectively.

 

The Company reimburses Interlink for expenses paid on the Company’s behalf. Interlink occasionally pays travel and other expenses incurred by Qualstar. The Company reimbursed Interlink $28,000 and $13,000 for the twelve months ended December 31, 2017 and 2016, respectively. Qualstar owed Interlink $17,000 and $2,000, at December 31, 2017 and December 31, 2016, respectively.

 

Director Independence

 

Our Board has determined that all of our current directors and Dale E. Wallis, who served on our Board during the 2017 fiscal year but did not stand for re-election at our 2017 annual shareholder meeting, at the time of their service, satisfied the “independent director” standards established by rules of The NASDAQ Stock Market, Inc. (“NASDAQ”), except for Steven N. Bronson.  Each director serving on the Audit Committee of our Board and Dale E. Wallis, who served on the Audit Committee of our Board during the 2017 fiscal year, at the time of their service also met the more stringent independence requirements established by Securities and Exchange Commission rules applicable to audit committees. Our Board has determined that no director has a relationship that would interfere with the exercise of independent judgment in carrying out his responsibilities as a director. There are no family relationships among any of the directors or executive officers of the Company.

 

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Fees Paid to Independent Registered Public Accountants

 

The table below includes the aggregate fees billed by RBSM, LLP, our independent registered public accounting firm for the year ended December 31, 2017, and Marcum LLP, our independent registered public accounting firm for the year ended December 31, 2016.

 

		Twelve Months Ended December 31,
		2017				2016
Audit Fees		$	84,362				128,235
Tax fees			37,500				45,720
All other fees			9,050				560
Total fees		$	130,912				174,515

 

Audit Fees.  Audit fees include fees for professional services rendered in connection with the audit of our consolidated financial statements for each year and reviews of our unaudited condensed consolidated quarterly financial statements, as well as fees related to consents and reports in connection with regulatory filings for those fiscal years.

 

Tax Fees.  Tax fees include fees for professional services rendered for tax compliance, tax advice and tax planning.

 

All Other Fees.  All other fees include fees for professional services rendered for financial reporting compliance with accounting standards.

 

Audit Committee Pre-Approval Policies and Procedures

 

Our Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent registered public accountants in accordance with applicable Securities and Exchange Commission rules. The Audit Committee adopted a written pre-approval policy on June 25, 2003, and all services performed by RBSM, Marcum LLP and Everest Ito Group have been pre-approved in accordance with the Audit Committee’s pre-approval policy. The Audit Committee generally pre-approves particular services or categories of services on a case-by-case basis. The independent registered public accountants and management periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accountants in accordance with these pre-approvals, and the fees for the services performed to date.

 

 

PART IV

  

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)  The financial statements are set forth under Item 8 of this Report on Form 10-K.

 

All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the required information is included in the financial statements or notes thereto.

 

(b)  Exhibits:

 

Exhibit No.		Description
3.1.1		Restated Articles of Incorporation, incorporated by reference to the designated exhibit to Qualstar’s registration statement on Form S-1 (Commission File No. 333-96009), declared effective by the Commission on June 22, 2000.
3.1.2		Certificate of Amendment of Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to Qualstar’s Report on Form 8-K dated June 14, 2016.
3.2		Bylaws, as amended and restated as of March 24, 2011, incorporated by reference to Exhibit 3.1 to Qualstar’s Report on Form 8-K dated March 30, 2011.
4.1		Rights Agreement, dated February 5, 2013, between Qualstar Corporation and Corporate Stock Transfer, Inc., as rights agent, incorporated by reference to Exhibit 4.1 to Qualstar’s Report on Form 8-K dated February 6, 2013.
4.2		Amendment No. 1 to the Rights Agreement, dated February 5, 2013, between Qualstar Corporation and Corporate Stock Transfer, Inc., as rights agent, incorporated by reference to Exhibit 4.2 to Qualstar’s Report on Form 8-K dated July 12, 2013.
10.1***		1998 Stock Incentive Plan, as amended and restated, incorporated by reference to the designated exhibit to Qualstar’s registration statement on Form S-1 (Commission File No. 333-96009), declared effective by the Commission on June 22, 2000.
10.2		Form of Indemnification Agreement, incorporated by reference to the designated exhibit to Qualstar’s registration statement on Form S-1 (Commission File No. 333-96009), declared effective by the Commission on June 22, 2000.
10.3***		2008 Stock Incentive Plan, incorporated by reference to Exhibit 10.1 to Qualstar’s Report on Form 10-Q/A for the fiscal quarter ended March 31, 2009.
10.4		Standard Multi-Tenant Offices Lease between K-Swiss, Inc. and Qualstar Corporation, dated December 8, 2014, concerning the property located at 31248 Oak Crest Dr, Westlake Village, CA 91361, incorporated by reference to Exhibit 10.12 to Qualstar’s report on Form 10-Q for the fiscal quarter ended December 31, 2014.
10.5		Industrial Real Estate Lease between Cypress Pointe Simi Valley, LLC and Qualstar Corporation, dated December 15, 2014 concerning the property located at 130 West Chochran St., Simi Valley, CA 93065, incorporated by reference to Exhibit 10.13 to Qualstar’s report on Form 10-Q for the fiscal quarter ended December 31, 2014.
10.6		Sublease Agreement between Interlink Electronics, Inc and Qualstar Corporation, dated July 1, 2015, concerning space at 130 West Cochran Street, Unit C; Simi Valley, CA 93065, incorporated by reference to Exhibit 10.14 to Qualstar’s report on Form 10-K for the year ended June 30, 2015.
10.7		Tenancy Agreement between Hudson Development PTE LTD and Qualstar Corporation Singapore PTE LTD, dated January 22, 2016 concerning space at 16 New Industrial Road, Singapore 536204, incorporated by reference to Exhibit 10.15 to Qualstar’s report on Form 10-KT for the transition year ended December 31, 2015.
10.8		Sublease agreement between Feld Care Therapy, Inc. d.b.a. Well Care Connects and Qualstar Corporation, dated March 22, 2016 concerning space at 31248 Oak Crest Drive Suite 120, Westlake Village, CA 91361, incorporated by reference to Exhibit 10.16 to Qualstar’s report on Form 10-KT for the transition year ended December 31, 2015.
10.9***		Employment Agreement with Steven N. Bronson, dated June 1, 2016 incorporated by reference to Exhibit 10.10 to Qualstar’s report on Form 8-K dated June 7, 2016.
10.10***		Qualstar Corporation 2017 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.1 to Qualstar’s report on Form 8-K/A dated June 13, 2017.
14.1		Code of Business Conduct and Ethics, incorporated by reference to the designated exhibit to Qualstar’s Report on Form 10-K for the fiscal year ended June 30, 2004.
21.1*		Subsidiaries of the Registrant
23.1*		Consent of Independent Registered Public Accounting Firm (Marcum LLP).
23.2*		Consent of Independent Registered Public Accounting Firm (SingerLewak LLP).
24.1*		Power of Attorney (included on signature page).
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Schema Document.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith

** Furnished herewith

*** Each a management contract or compensatory plan or arrangement.

 

 

ITEM 16. FORM 10-K Summary

 

None.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		QUALSTAR CORPORATION
Date: March 16, 2018	By:	/s/ STEVEN N. BRONSON
		Steven N. Bronson,
		Chief Executive Officer

 

POWER OF ATTORNEY 

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven N. Bronson  and Louann Negrete, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature	Title	Date
/s/ STEVEN N. BRONSON	Chief Executive Officer, President and Director	March 16, 2018
Steven N. Bronson
	(Principal executive officer)
/s/  LOUANN NEGRETE	Chief Financial Officer	March 16, 2018
Louann Negrete	(Principal financial and accounting officer)
/s/  DAVID J. WOLENSKI	Chairman of the Board of Directors	March 16, 2018
David J. Wolenski
/s/  LEONARD A. HAGAN	Director	March 16, 2018
Leonard A. Hagan
/s/  NICHOLAS A. YARYMOVYCH	Director	March 16, 2018
Nicholas A. Yarymovych

  

62