NOTES TO CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
NOTE
1
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated balance sheet as of
December 31, 2016,
has been derived from audited consolidated financial statements. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as our annual audited consolidated financial statements and in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.
Preparing
condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include estimates of loss contingencies, product life cycles and inventory obsolescence, bad debts, sales returns, share-based compensation, forfeiture rates, the potential outcome of future tax consequences of events that have been recognized in our financial statements or tax returns, and determining when investment impairments are other-than-temporary. Actual results and outcomes
may
differ from management’s estimates and assumptions.
On
June 5, 2017,
a wholly-owned subsidiary of Qualstar Corporation,
N2Power,
Inc., was created to operate the Company
’s internal business unit known as
N2Power.
The
N2Power
business unit is reflected in the Company’s SEC filings under the power supplies business segment. Following the establishment of
N2Power,
Inc., all assets (and liabilities) belonging to this subsidiary have been separated from the assets (and liabilities) of Qualstar.
The condensed co
nsolidated financial statements include our accounts and the accounts of each of our wholly owned subsidiaries in Qualstar Corporation Singapore Private Limited and
N2Power,
Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Interim results are
not
necessarily indicative of results for a full year.
The information included in this Form
10
-Q should be read in conjunction with information included in the Qualstar Corporation Annual Report on Form
10
-K for the year ended
December 31, 2016,
filed with the SEC on
March 16, 2017.
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.
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 provider. The Company records revenues for contract services at the amount of the service contract, but such amount is deferred at the beginning of the service term and amortized ratably over the life of the contract.
Deferred service revenue is shown separately in the
condensed consolidated balance sheets as current and long term. At
September 30, 2017,
we had deferred service revenue of approximately
$952,000.
At
December 31, 2016,
we had deferred service revenue of approximately
$892,000.
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
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, specific trade receivables, historical bad debts, customer credits, customer credit-worthiness and changes in customers
’ payment terms and patterns are analyzed. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make additional payments, then additional allowances
may
be needed. Likewise, if it is determined that more of our receivables
may
be realized in the future than previously estimated, we would adjust the allowance to increase income in the period of this determination.
Inventory Valuation
We record inventories at the lower of cost
(
first
-in,
first
-out basis) or market value. 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
the related 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 estimates, then 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 in accordance with ASC
450,
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
condensed consolidated financial statements.
Reclassifications
Certain prior
period amounts have been reclassified to conform to the current period presentation, with
no
changes to previously reported stockholders equity or net income (loss)
.
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 condensed consolidated financial statements on a recurring basis (at least quarterly).
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Share-Based Compensation
Share-based compensation is accounted for in accordance with ASC
718,
“Compensation
– Stock Compensation.” The Black-Scholes option-pricing model is used to determine fair value of the award at the date of grant and recognize compensation expense over the vesting period. The inputs 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 amount 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 impacted.
Accounting for Income Taxes
We estimate our tax liabilities based on current tax laws in the statutory jurisdictions in which we operate in accordance with ASC
740,
“Income Taxes.” 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 derecognition 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.
NOTE
2
– RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting guidance
not
yet adopted
In
May 2014,
the FASB issued ASU
2014
-
09
to clarify the principles for recognizing revenue and to develop a common revenue standard that will remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing rev
enue issues, improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provide more useful information to users of financial statements through improved disclosure requirements, and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. In
August 2015,
the FASB issued ASU
2015
-
14
as an update of ASU
2014
-
09.
The purpose is to allow more time to implement the guidance in Update
2014
-
09.
This Update defers the effective date of Update
2014
-
09
to annual reporting periods beginning after
December 15, 2017.
We are evaluating the impact Update
2014
-
09
may
have on our condensed consolidated financial statements.
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
In
February 2016,
the FASB issued ASU
2016
-
02
to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For related part
y leases, the basis will be the legally enforceable terms and conditions of the arrangement. This standard is effective for fiscal years beginning after
December 15, 2018.
We are evaluating the impact ASU
2016
-
02
may
have on our condensed consolidated financial statements.
In
August 2016,
the FASB issued ASU
2016
-
15
to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard is effective for fiscal years beginning after
December 15, 2017,
and is
not
expected to materially impact our condensed consolidated financial statements.
In
October 2016,
the FASB issued ASU
2016
-
16
to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.
This standard is effective for fiscal years beginning after
December 15, 2017,
and is
not
expected to materially impact our consolidated financial statements.
In
January 2017,
the FASB issued ASU
2017
-
01
clarifying the definition of a business and adding guidance to evaluate
whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This standard is effective for fiscal years beginning after
December 15, 2017,
and is
not
expected to materially impact our consolidated financial statements.
In
May 2017,
the FASB issued ASU
2017
-
09
to provide clarity and reduce both diversity in practice and cost and complexity, when applying the guidance for stock compensation, to a change to the terms or conditions of a share-based payment award. This standard is effective for fiscal years beginning after
December 15, 2017,
and is
not
expected to materially impact our consolidated financial statements.
NOTE
3
– SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, AND GEOGRAPHIC INFORMATION
We have
no
outstanding debt nor do we utilize auction rate securities or derivative financial instruments in our investment portfolio.
Cash and other investments
may
be in excess of FDIC insurance limits.
Our financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S.
dollars, a strengthening of the dollar could make our products less competitive in foreign markets.
|
|
Three Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Revenue
– geographic activity (in thousands):
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
$
|
|
|
%
|
|
|
|
$
|
|
|
%
|
|
|
|
$
|
|
|
%
|
|
|
|
$
|
|
|
%
|
|
North America
|
|
$
|
1,962
|
|
|
|
71.2
|
%
|
|
$
|
1,394
|
|
|
|
52.3
|
%
|
|
$
|
4,785
|
|
|
|
64.1
|
%
|
|
$
|
3,852
|
|
|
|
53.6
|
%
|
Europe
|
|
|
356
|
|
|
|
12.9
|
%
|
|
|
557
|
|
|
|
20.9
|
%
|
|
|
1,447
|
|
|
|
19.4
|
%
|
|
|
1,518
|
|
|
|
21.1
|
%
|
Asia Pacific
|
|
|
396
|
|
|
|
14.4
|
%
|
|
|
686
|
|
|
|
25.7
|
%
|
|
|
1,113
|
|
|
|
14.9
|
%
|
|
|
1,724
|
|
|
|
24.0
|
%
|
Other
|
|
|
41
|
|
|
|
1.5
|
%
|
|
|
29
|
|
|
|
1.1
|
%
|
|
|
116
|
|
|
|
1.6
|
%
|
|
|
92
|
|
|
|
1.3
|
%
|
|
|
$
|
2,755
|
|
|
|
100.0
|
%
|
|
$
|
2,666
|
|
|
|
100.0
|
%
|
|
$
|
7,461
|
|
|
|
100.0
|
%
|
|
$
|
7,186
|
|
|
|
100.0
|
%
|
One customer accounted for
14.6%
of the Company
’s net revenue for the
three
months ended
September 30, 2017.
One
customer accounted for
12.3%
of the Company’s net revenue for the
three
months ended
September 30, 2016.
One customer accounted for
15.0%
of the Company
’s net revenue for the
nine
months ended
September 30, 2017.
The customer’s accounts receivable balance totaled
9.3%
of net accounts receivable as of
December 31, 2016.
One customer accounted for
10.7%
of the Company’s net revenue for the
nine
months ended
September 30, 2016.
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTE
4
–
NET
EARNINGS
PER SHARE
Basic
net earnings per share has been computed by dividing net income or loss by the weighted average number of common shares outstanding.
Diluted net earnings per share has been computed by dividing net earnings by the weighted average common shares outstanding plus dilutive securities or other contracts to issue common stock as if these securities were exercised or converted to common stock.
The following table sets forth the computation of basic and diluted net
income or loss per share for the periods indicated, in thousands, except per share amounts.
|
|
Three Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2017
|
|
|
201
6
|
|
|
2017
|
|
|
2016
|
|
In thousands (except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss (a)
|
|
$
|
(148
|
)
|
|
$
|
(53
|
)
|
|
$
|
(31
|
)
|
|
$
|
(803
|
)
|
Weighted average outstanding shares of common stock (b)
|
|
|
2,042
|
|
|
|
2,042
|
|
|
|
2,042
|
|
|
|
2,042
|
|
Dilutive potential common shares from employee stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common stock and common stock equivalents (c)
|
|
|
2,042
|
|
|
|
2,042
|
|
|
|
2,042
|
|
|
|
2,042
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share (a)/(b)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.39
|
)
|
Diluted net loss per share (a)/(c)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.39
|
)
|
For the
three
and
nine
months ended
September 30, 2017
and
2016,
188,633
and
23,333
outstanding stock options, respectively, were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive.
NOTE
5
-
BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet accounts (in thousands):
Inventories
Inventories are stated at the lower of cost (
first
-in,
first
-out basis) or market. Inventories are comprised as follows (in thousands):
|
|
September
30,
2017
|
|
|
December 31,
2016
|
|
|
|
(
unaudited
)
|
|
|
|
|
|
Raw materials
|
|
$
|
32
|
|
|
$
|
45
|
|
Finished goods
|
|
|
1,050
|
|
|
|
1,315
|
|
Net inventory balance
|
|
$
|
1,082
|
|
|
$
|
1,360
|
|
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Property and equipment, net
The components of property and equipment are as follows
(in thousands):
|
|
September
30,
2017
|
|
|
December 31,
2016
|
|
|
|
(
unaudited
)
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
114
|
|
|
$
|
114
|
|
Furniture and fixtures
|
|
|
317
|
|
|
|
314
|
|
Machinery and equipment
|
|
|
1,020
|
|
|
|
1,039
|
|
|
|
|
1,451
|
|
|
|
1,467
|
|
Less accumulated depreciation and amortization
|
|
|
(1,279
|
)
|
|
|
(1,181
|
)
|
Property and equipment, net
|
|
$
|
172
|
|
|
$
|
286
|
|
Depreciation and amortization expense for the
three
months ended
September 30, 2017
and
2016
was
$36
,000
and
$44,000
(unaudited), respectively, and for the
nine
months ended
September 30, 2017
and
2016
was
$119
,000
and
$137,000
(unaudited), respectively.
Other Accrued Liabilities
The components of other liabilities are as follows (in thousands):
|
|
September
30,
2017
|
|
|
December 31
,
201
6
|
|
|
|
(
unaudited
)
|
|
|
|
|
|
Accrued warranty
|
|
$
|
283
|
|
|
$
|
236
|
|
Accrued outside commissions
|
|
|
41
|
|
|
|
28
|
|
Accrued contingent legal fees
|
|
|
21
|
|
|
|
25
|
|
Deferred rent
|
|
|
29
|
|
|
|
37
|
|
Other accrued liabilities
|
|
|
4
|
|
|
|
33
|
|
Total other accrued liabilities
|
|
$
|
378
|
|
|
$
|
359
|
|
NOTE
6
–CONTINGENCIES
Accrued Warranty
We provide for the estimated costs of hardware warranties at the time the related revenue is recognized. We estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions for tape libraries generally include parts and labor over a
three
-year period. The warranty for power supplies is generally
three
years. We regularly re-evaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Activity in the liability for product warranty, which is included in other accrued liabilities in the condensed consolidated balance sheets for the periods presented, is as follows (in thousands):
|
|
Nine
Months
Ended
September
30,
2017
|
|
|
Year
Ended
December 31,
201
6
|
|
|
|
(
unaudited
)
|
|
|
|
|
|
Beginning balance
|
|
$
|
236
|
|
|
$
|
187
|
|
Cost of warranty claims
|
|
|
(34
|
)
|
|
|
(157
|
)
|
Accruals for product warranties
|
|
|
81
|
|
|
|
206
|
|
Ending balance
|
|
$
|
283
|
|
|
$
|
236
|
|
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
NOTE
7
–CO
MMITMENTS
Lease Agreements
Qualstar
’s lease agreement for its
15,160
square foot facility located in Simi Valley, California, expires
February 28, 2018.
On
August 23, 2017,
Qualstar exercised the option to extend the lease term for an additional
three
years expiring
February 28, 2021.
Rent on this facility is
$11,000
per month with a step-up of
3%
annually. Qualstar subleases a portion of the warehouse space to Interlink Electronics, Inc. (Interlink) and is reimbursed for the space and other related expenses on a monthly basis. As described in Note
13,
Interlink is a related party.
Qualstar
also leases approximately
5,400
square feet of office space in Westlake Village, California. Our lease on this facility expires on
January 31,
202
0.
Rent on this facility is
$11,000
per month, with a step-up of
3%
annually. On
March 21, 2016,
we signed a sublease agreement for the Westlake Village facility. The tenant pays Qualstar
$12,000
per month with a step-up of
3%
annually.
Effective
April 1, 2016,
a
two
year lease was signed for
1,359
square feet for
$2,200
per month in Singapore
, which expires on
September 30, 2018.
The Company provides for rent expense on a straight-line basis over the lease terms.
Future minimum lease payments under these leases are as follows
, in thousands, (unaudited):
Years Ending December 31,
|
|
Minimum
L
ease
Payment
|
|
|
Sublease
Revenue
|
|
|
Net
Minimum
Lease
Payment
|
|
Remainder of
2017
|
|
$
|
72
|
|
|
$
|
(35
|
)
|
|
$
|
37
|
|
2018
|
|
|
268
|
|
|
|
(143
|
)
|
|
|
125
|
|
2019
|
|
|
267
|
|
|
|
(147
|
)
|
|
|
120
|
|
2020
|
|
|
148
|
|
|
|
(13
|
)
|
|
|
135
|
|
2021
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
Total Commitment
|
|
$
|
778
|
|
|
$
|
(338
|
)
|
|
$
|
440
|
|
Net r
ent expense for the
three
months ended
September 30, 2017
and
2016
was
$36,000
and
$48,000,
respectively and for the
nine
months ended
September 30, 2017
and
2016
was
$107,000
and
$148,000,
respectively.
NOTE
8
–
STOCK INCENTIVE PLANS AND
S
HARE-
BASED COMPENSATION
Share-Based Compensation
Share-based compensation expense associated with outstanding stock options during the
three
months ended
September 30, 2017
was
$413,000.
During the
three
months ended
September 30, 2016,
the Company did
not
incur any share based compensation expenses. Sh
are-based compensation expense for the
nine
months ended
September 30, 2017
and
2016
was
$413,000
and
$2,000,
respectively.
No
income tax benefit was recognized in the statements of comprehensive loss for share-based arrangements in any period presented.
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Stock Option Plan
The Company has t
hree share-based compensation plans as described below.
Qualstar
adopted the
1998
Stock Incentive Plan, (the
“1998
Plan”) under which incentive and nonqualified stock options and restricted stock could be granted for shares of common stock. The
1998
Plan expired in
2008
and
no
additional options
may
be granted under that plan. However,
3,333
options that were previously granted under the
1998
Plan will continue under their terms.
Qualstar adopted the
2008
Stock Incentive Plan (the “
2008
Plan”) under which incentive and nonqualified stock options and restricted stock
may
be granted for shares of common stock.
The
2008
Plan expires in
2018
and
no
additional options
may
be granted under that plan. However,
20,000
options that were previously granted under the
2008
Plan will continue under their terms.
The
2017
Stock Incentive Plan (the “
2017
Plan”) was approved by Qualstar shareholders on
June 13, 2017.
The
2017
Plan, permits the award of stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance shares, dividend equivalent rights and cash-based awards to employees (including executive officers), directors and consultants of the Company and its subsidiaries. The
2017
Plan authorizes the issuance of an aggregate of
200,000
shares of common stock and the plan is administered by the Compensation Committee of the Company’s Board of Directors.
With respect to options, the fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions, such as volatility, expected term and risk-free interest rate. Expected volatilities a
re based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination in determining forfeiture rates. The expected term of options granted is estimated based on the vesting term of the award, historical employee exercise behavior, expected volatility of the Company’s stock and an employee’s average length of service. The risk-free interest rate used in this model correlates to a U.S. constant rate Treasury security with a contractual life that approximates the expected term of the option award.
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Th
e following table summarizes stock option activity; the amounts shown have been retrospectively restated for the
one
-for-
six
reverse stock split, effective
June 14, 2016:
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2016
|
|
|
23,333
|
|
|
$
|
9.49
|
|
|
|
6.43
|
|
|
|
—
|
|
Granted
|
|
|
165,300
|
|
|
|
7.08
|
|
|
|
9.85
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited, canceled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at
September 30, 2017
|
|
|
188,633
|
|
|
|
7.38
|
|
|
|
9.33
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2017
|
|
|
188,633
|
|
|
$
|
7.38
|
|
|
|
9.33
|
|
|
$
|
—
|
|
NOTE
9
-
STOCKHOLDERS’ EQUITY
On
June 14, 2016,
upon receiving approval from the majority of the Company’s shareholders at the
2016
Annual Meeting, the Company implemented a
one
-for-
six
reverse stock split (the “Reverse Split”) of all outstanding shares of common stock, effective as of the close of business on
June 14, 2016.
The reverse split decreased the number of outstanding shares of common stock from
12,253,117
to approximately
2,042,020.
The Company’s authorized number of shares of common stock remains at
50,000,000
and the authorized number of shares of preferred stock of the Company remains at
5,000,000.
All share amounts in these financial statements reflect the Reverse Split of our issued and outstanding common stock, retroactively.
NOTE
1
0
– LEGAL PROCEEDINGS
The Company
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 material adverse impact on our condensed consolidated 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
September 30, 2017
, we had accrued aggregate current liabilities of
$39
,000
in probable fees and costs related to legal matters
.
NOTE
1
1
– INCOME TAXES
We did
not
record a provision or benefit for income taxes for
either the
three
or
nine
months ended
September 30, 2017
or
September 30, 2016,
due to our prior year operating losses. The Company has recorded a full valuation allowance against its net deferred tax assets based on the Company’s assessment regarding the realizable nature of these net deferred tax assets in future periods.
NOTE
1
2
– SEGMENT INFORMATION
In its operation of the business, management reviews certain financial information, including segmented internal profit and loss statements prepared on a basis consistent with U.S. GAAP. Our
two
segments are Power Supplies and
Data Storage. The
two
segments discussed in this analysis are presented in the way we internally manage and monitor performance for the
three
and
nine
months ended
September 30, 2017
and
2016.
Allocations for internal resources were made to the business segments for the
three
and
nine
months ended
September 30, 2017
and
2016.
The power supplies segment tracks certain assets separately, and all others are recorded in the storage segment for internal reporting presentations. The types of products and services provided by each segment are summarized below:
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
Power Supplies
— The Company designs and markets high-efficiency switching power supplies. We utilize contract manufacturers in Asia to produce the power supply products. These power supplies are used to convert AC line voltage to DC voltages, or DC voltages to other DC voltages for use in a wide variety of electronic equipment such as communications equipment, industrial machine tools, wireless systems, as well as medical and gaming devices. We sell our products globally through authorized resellers and directly to original equipment manufacturers (“OEMs”).
Storage
— The data storage industry is experiencing a tremendous increase in newly generated digital data due to Rich Media Content, Internet of Things, Data Mining and the Cloud. Tape based storage solution providers enable businesses to manage the massive growth of digital data assets in a cost-effective manner. For over
30
years, Qualstar’s innovations and customer-oriented focus has led to products that solved our customer’s needs for simplicity, scalability, reliability and affordable solutions. Our tape based data storage product lines address long-term archive, backup and recovery of electronic data. These products consist of networked libraries that store and move high density tape cartridges and high speed tape drives that stream data to and from the tape cartridges. These optimized solutions allow the video centric markets such as media and entertainment, oil and gas, surveillance, digital security and medical imaging to achieve targeted data workflows.
Segment revenue, income (loss) before taxes and total assets were as follows (in thousands):
|
|
Three Months Ended
September
30
,
|
|
|
Nine
Months Ended
September
30
,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Supplies
|
|
$
|
1,542
|
|
|
$
|
1,559
|
|
|
$
|
4,655
|
|
|
$
|
4,163
|
|
Storage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
791
|
|
|
|
652
|
|
|
|
1,658
|
|
|
|
1,633
|
|
Service
|
|
|
422
|
|
|
|
455
|
|
|
|
1,148
|
|
|
|
1,390
|
|
Total storage
|
|
$
|
1,213
|
|
|
$
|
1,107
|
|
|
$
|
2,806
|
|
|
$
|
3,023
|
|
R
evenue
|
|
$
|
2,755
|
|
|
$
|
2,666
|
|
|
$
|
7,461
|
|
|
$
|
7,186
|
|
|
|
Three Months Ended
September
30
,
|
|
|
Nine
Months Ended
September
30
,
|
|
|
|
2017
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Income (l
oss
)
before Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Supplies
|
|
$
|
4
|
|
|
$
|
(33
|
)
|
|
$
|
44
|
|
|
$
|
(491
|
)
|
Storage
|
|
|
(152
|
)
|
|
|
(20
|
)
|
|
|
(75
|
)
|
|
|
(312
|
)
|
Income (l
oss) before taxes
|
|
$
|
(148
|
)
|
|
$
|
(53
|
)
|
|
$
|
(31
|
)
|
|
$
|
(803
|
)
|
QUALSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)
|
|
September
30,
2017
|
|
|
December 31
,
2016
|
|
Total Assets
|
|
(unaudited)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,663
|
|
|
$
|
3,691
|
|
Restricted cash
|
|
|
100
|
|
|
|
100
|
|
Other assets
:
|
|
|
|
|
|
|
|
|
Power Supplies
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
944
|
|
|
|
1,158
|
|
Inventories, net
|
|
|
417
|
|
|
|
444
|
|
Property and equipment, net
|
|
|
34
|
|
|
|
35
|
|
Other assets
|
|
|
35
|
|
|
|
39
|
|
|
|
|
1,430
|
|
|
|
1,676
|
|
Storage
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
509
|
|
|
|
425
|
|
Inventories, net
|
|
|
665
|
|
|
|
916
|
|
Property and equipment, net
|
|
|
138
|
|
|
|
251
|
|
Other assets
|
|
|
206
|
|
|
|
204
|
|
|
|
|
1,518
|
|
|
|
1,796
|
|
Total
Assets
|
|
$
|
7,711
|
|
|
$
|
7,263
|
|
NOTE
1
3
– RELATED PARTY TRANSACTIONS
Steven N. Bronson is the Company
’s CEO 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
three
months ended
September 30, 2017
and
2016
was
$3
,000
and
$10
,000,
respectively
. The total amount charged to Interlink for the
nine
months ended
September 30, 2017
and
2016
was
$8,000
and
$3
0,000,
respectively
. Interlink owed Qualstar
$1
,000
and
$1
,000
at
September 30, 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
$1,000
and
$4,000
for the
three
months ended
September 30, 2017
and
2016,
respectively
. The Company reimbursed Interlink
$8,000
and
$11,000
for the
nine
months ended
September 30, 2017
and
2016,
respectively. Qualstar did
not
have a balance due to Interlink at
September 30, 2017.
At
December 31, 2016,
Qualstar owed Interlink
$2,000
.
NOTE
1
4
– SUBSEQUENT EVENTS
None