10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

  ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period December 31, 2014

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 000-30083

QUALSTAR CORPORATION

CALIFORNIA	95-3927330
(State of incorporation)	(I.R.S. Employer
	Identification No.)

31248 Oak Crest Drive Suite #120, Westlake Village, CA 91361

(805) 583-7744

3990B Heritage Oak Ct., Simi Valley, CA 93063 (former address)

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 website, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer  ☐ Non-accelerated filer     ☐ Smaller reporting company     ☑

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

Total shares of common stock without par value outstanding at January 29, 2015 are 12,253,117.

QUALSTAR CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2014

INDEX

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements
		●	Condensed Consolidated Balance Sheets — December 31, 2014 and June 30, 2014	1
		●	Condensed Consolidated Statements of Comprehensive Loss — Three and six months ended December 31, 2014 and 2013	2
		●	Condensed Consolidated Statements of Cash Flows — Six months ended December 31, 2014 and 2013	3
		●	Condensed Consolidated Statement of Changes in Shareholders’ Equity — Six months ended December 31, 2014	4
		●	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.	Qualitative and Quantitative Disclosures About Market Risk			20
Item 4.	Controls and Procedures			20

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item1A.	Risk Factors	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
	Signatures	23

PART I — FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

QUALSTAR CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31, 2014			June 30, 2014
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,242		$	5,462
Marketable securities		-			1,763
Accounts receivables, net of allowances of $73 at December 31, 2014, and $92 at June 30, 2014		2,625			1,412
Inventories		3,069			3,177
Prepaid expenses and other current assets		351			241
Total current assets		11,287			12,055
Property and equipment, net		628			663
Other assets		43			67
Total assets	$	11,958		$	12,785
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,262		$	952
Accrued payroll and related liabilities		348			322
Deferred service revenue, short term		1,049			954
Other accrued liabilities		508			1,174
Total current liabilities		3,167			3,402
Other long term liabilities		18			17
Deferred service revenue, long term		162			243
Total long term liabilities		180			260
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 5,000 shares authorized; no shares issued		-			-
Common stock, no par value; 50,000 shares authorized, 12,253 shares issued and outstanding as of December 31, 2014 and June 30, 2014		18,999			18,943
Accumulated other comprehensive income		-			1
Accumulated deficit		(10,388	)		(9,821	)
Total shareholders’ equity		8,611			9,123
Total liabilities and shareholders’ equity	$	11,958		$	12,785

See notes to condensed consolidated financial statements.

1

QUALSTAR CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited) 

  (In thousands, except per share data)

	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Net revenues	$	3,528		$	3,440		$	6,848		$	5,631
Cost of goods sold		2,428			1,931			4,522			3,661
Gross profit	$	1,100		$	1,509		$	2,326		$	1,970
Operating expenses:
Engineering		326			604			685			1,478
Sales and marketing		591			512			1,096			1,245
General and administrative		684			623			1,368			2,017
Restructuring		(245	)		26			(245	)		26
Total operating expenses	$	1,356		$	1,765		$	2,904		$	4,766
Loss from operations		(256	)		(256	)		(578	)		(2,796	)
Other income		11			5			11			18
Loss before income taxes		(245	)		(251	)		(567	)		(2,778	)
Provision for income taxes		-			-			-			-
Net loss	$	(245	)	$	(251	)	$	(567	)	$	(2,778	)
Change in unrealized (losses) gains on investments		-			(4	)		(1	)		6
Comprehensive loss	$	(245	)	$	(255	)	$	(568	)	$	(2,772	)
Loss per common share:
Basic and Diluted	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.23	)
Weighted average common shares outstanding:
Basic and Diluted		12,253			12,253			12,253			12,253

See notes to condensed consolidated financial statements.

2

QUALSTAR CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited)

(In thousands)

	Six Months Ended December 31,
	2014			2013
OPERATING ACTIVITIES:
Net loss	$	(567	)	$	(2,778	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		104			91
Loss on disposal of assets		5			4
Provision for bad debts and returns, net		(19	)		7
Provision for inventory reserve and adjustments		(287	)		(60	)
Share based compensation		56			(6	)
Loss on sale of marketable securities		8			-
Changes in operating assets and liabilities:
Accounts receivable		(1,193	)		489
Receivable from CTS for manufacturing inventories		-			644
Inventories		395			(1,031	)
Prepaid expenses and other current assets		(86	)		63
Accounts payable		310			(449	)
Accrued payroll and related liabilities		26			(217	)
Deferred service revenue		14			-
Other accrued liabilities		(665	)		(75	)
Total adjustments		(1,332	)		(540	)
Net cash used in operating activities	$	(1,899	)	$	(3,318	)
INVESTING ACTIVITIES:
Purchases of equipment		(74	)		(89	)
Proceeds from the sale of marketable securities		1,753			3,363
Net cash provided by investing activities	$	1,679		$	3,274
NET DECREASE IN CASH AND CASH EQUIVALENTS	$	(220	)	$	(44	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	$	5,462		$	1,966
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,242		$	1,922
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid	$	-		$	2

See notes to condensed consolidated financial statements.

3

QUALSTAR CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED DECEMBER 31, 2014

(Unaudited) 

(In thousands)

	Common Stock				Accumulated Other Comprehensive			Accumulated
	Shares		Amount		Income			Deficit			Total
Balance at June 30, 2014		12,253	$	18,943	$	1		$	(9,821	)	$	9,123
Share-based compensation		-		56		-			-			56
Comprehensive loss:
Change in unrealized gains on investments		-		-		(1	)		-			(1	)
Net loss		-		-		-			(567	)		(567	)
Comprehensive loss		-		-		-			-			(568	)
Balance at December 31, 2014		12,253	$	18,999	$	-		$	(10,388	)	$	8,611

See notes to condensed consolidated financial statements.

4

QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements, including balance sheets and related interim statements of comprehensive loss, cash flows, and shareholders’ equity, include all adjustments, consisting primarily of normal recurring items, which are necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Preparing 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.

The consolidated financial statements include our accounts and the accounts of our wholly-owned subisidiary in Singapore. 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 fiscal year ended June 30, 2014, filed with the U.S. Securities and Exchange Commission (“SEC”) on September 29, 2014.

Risks and Uncertainties

We are subject to a number of risks and uncertainties that may significantly impact our future operating results.  These risks and uncertainties are discussed under Part II, Item 1A, “Risk Factors” included in this Form 10-Q.  As our interim description of risks and uncertainties only includes any material changes to our annual description, we refer you to our risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, as filed with the SEC.

Revenue Recognition

We recognize revenue 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.

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 consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped.

Deferred revenue is shown separately in the balance sheet, and deferred profit is included in other accrued liabilities in the balance sheet.  At December 31, 2014, we had deferred revenue of approximately $1,211,000, and no deferred profit.  At June 30, 2014, we had deferred revenue of approximately $1,197,000 and deferred profit of approximately $8,000.

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 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

Marketable Securities

Marketable securities consist primarily of high-quality U.S. corporate securities, U.S. federal government debt securities, corporate and municipal bonds. Our marketable securities portfolio consists of short-term securities with original maturities of greater than three months from the date of purchase and remaining maturities of less than one year. Marketable securities are classified as “available-for-sale” and are recorded at fair value using the specific identification method; unrealized gains and losses are reflected in other comprehensive income until realized; realized gains and losses are included in earnings when the underlying securities are sold and are derived using the specific identification method for determining the cost of securities sold. If the credit ratings of the security issuers deteriorate or if market conditions deteriorate, we may be required to reduce the value of our investments through an impairment charge.

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 financial statements on a recurring basis (at least quarterly). See “Note 5 – Fair Value Measurements.”

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. 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 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 financial statements. We have accrued $48,000 for such contingencies.

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 QUALSTAR CORPORATION AND SUBSIDIARY

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.” 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 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 March 2013, the FASB issued ASU 2013-05, which applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The new guidance will be effective for us beginning July 1, 2015, and is not expected to impact our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance will be effective for us beginning July 1, 2015, and is not expected to impact our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09,to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that will remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue 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. The new guidance will be effective for us beginning July 1, 2017, and the Company is in the process of determining the potential impact and to our consolidated financial statements.

7

 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

In June 2014, the FASB issued ASU 2014-12 to resolve the diverse accounting treatment of share-based payment awards that require specific performance targets to be achieved in order for employees to become eligible to vest in the awards. The new guidance will be effective for us beginning July 1, 2016, and is not expected to impact our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15,  This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. We are currently evaluating this new standard and after adoption, we will incorporate this guidance in our assessment of going concern.

 NOTE 3 – SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, AND GEOGRAPHIC INFORMATION

We are exposed to interest rate risks.  Our investment income is sensitive to changes in the general level of U.S. interest rates. We have no outstanding debt nor do we utilize auction rate securities or derivative financial instruments in our investment portfolio.

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. Sales outside North America represented approximately 54.9% of net revenues in the three months ended December 31, 2014, and 41.2% of net revenues in the three months ended December 31, 2013. Sales outside North America represented approximately 51.3% of net revenues in the six months ended December 31, 2014, and 40.3% of net revenues in the six months ended December 31, 2013.

Two customers accounted for 14.4% and 10.4% of the Company’s net revenue for the three month period ended December 31, 2014.  The customers’ accounts receivable balance totaled approximately 31.1% and 7.9%, respectively, of net accounts receivable as of December 31, 2014. Two customers accounted for 15.1% and 10.5% of the Company’s net revenue for the three month period ended December 31, 2013. The customers’ accounts receivable balances totaled approximately 10.1% and 17.0%, respectively, of net accounts receivable as of December 31, 2013.

Two customers accounted for 11.9% and 10.6% of the Company’s net revenue for the six month period ended December 31, 2014.  The customers’ accounts receivable balance, totaled approximately 31.1% and 7.9%, respectively, of net accounts receivable as of December 31, 2014. Two customers accounted for 15.0% and 9.5% of the Company’s net revenue for the six month period ended December 31, 2013. The customers’ accounts receivable balances totaled approximately 10.1% and 17.0%, respectively, of net accounts receivable as of December 31, 2013.

NOTE 4 – LOSS PER SHARE

Basic loss per share has been computed by dividing net loss by the weighted average number of common shares outstanding.  Diluted loss per share has not been computed as the effect is antidilutive.

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
In thousands (except per share amounts):
Net loss (a)	$	(245	)	$	(251	)	$	(567	)	$	(2,778	)
Weighted average outstanding shares of common stock (b)		12,253			12,253			12,253			12,253
Dilutive potential common shares from employee stock options		—			—			—			—
Common stock and common stock equivalents (c)		12,253			12,253			12,253			12,253
Loss per share:
Basic net loss per share (a)/(b)	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.23	)
Diluted net loss per share (a)/(c)	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.23	)

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 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

NOTE 5 – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated observable market data for substantially the full term of the assets or liabilities.

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

NOTE 6 – CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES RECORDED AT FAIR VALUE

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable debt securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the available-for-sale designations as of each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term.

Available-for-sale securities are recorded at market value. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings when the underlying securities are sold and are derived using the specific identification method for determining the cost of securities sold. Realized loss on marketable securities for the six months ended December 31, 2014 was $8,000 and for the six months ended December 31, 2013 there was no loss.

The following tables summarize the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short-term marketable securities as of December 31, 2014 and June 30, 2014 (in thousands):

	December 31, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash & Cash Equivalents		Short-term Marketable Securities
Level 1:
Cash		609		-		-		609		609		-
Money Market Funds		4,633		-		-		4,633		4,633		-
Total	$	5,242	$	-	$	-	$	5,242	$	5,242	$	-

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 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

	June 30, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash & Cash Equivalents		Short-term Marketable Securities
Level 1:
Cash		617		-		-		617		617		-
Money Market Funds		4,845		-		-		4,845		4,845		-
Subtotal	$	5,462	$	-	$	-	$	5,462	$	5,462	$	-
Level 2:
U.S. Agency Securities		332		-		-		332		-		332
Corporate securities		1,354		1		-		1,355		-		1,355
Municipal securities		76		-		-		76		-		76
Subtotal	$	1,762	$	1	$	-	$	1,763		-	$	1,763
Total	$	7,224	$	1	$	-	$	7,225	$	5,462	$	1,763

NOTE 7 - 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):

	December 31, 2014			June 30, 2014
Raw materials	$	3,129		$	3,116
Finished goods		2,939			3,347
Subtotal		6,068			6,463
Less: Inventory reserve		(2,999	)		(3,286	)
Net inventory balance	$	3,069		$	3,177

Other Accrued Liabilities

	December 31, 2014		June 30, 2014
Accrued sales and use tax	$	12	$	17
Accrued commissions		72		48
Accrued audit fees		71		87
Accrued marketing coop expenses		39		28
Accrued legal expense		48		251
Deferred rent		-		84
Lease abandonment		48		445
Accrued royalty		49		45
Warranty reserve		168		159
Other accruals		1		10
Total other accrued liabilities	$	508	$	1,174

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 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

NOTE 8 –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 generally is 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 balance sheets, for the periods presented, is as follows (in thousands):

	Six months Ended December 31,
	2014			2013
Beginning balance	$	159		$	190
Cost of warranty claims		(26	)		(27	)
Accruals for product warranties		35			10
Ending balance	$	168		$	173

NOTE 9 –COMMITMENTS

Lease Termination

On December 15, 2014, Qualstar signed a lease termination agreement with the landlord of the facility at 3990B Heritage Oak Ct, Simi Valley, California. The lease termination agreement amends the original lease term expiration date from December 31, 2015 to February 28, 2015. In accordance with the termination agreement, the Company was required to pay $184,000 in termination fee. The Company has reduced costs and the total square footage from 56,000 square feet to 20,560 square feet to better align our current needs while still allowing space for growth. The current monthly rent payment for this lease is $44,000 plus additional fees. The combined payments for the new leases beginning February 1, 2015 is $20,000.

In the three and six months ended December 31, 2014, $70,000 was included in operating expenses attributed to the termination of the lease, with the $184,000 termination fee reduced by prepaid rent of $54,000 and offset by deferred rent of $60,000. The prepaid rent will be expensed February, 2015 as outlined in the agreement. The accrual for lease abandonment taken in prior periods as a restructuring expense was reversed in the amount of $245,000.

Lease Agreements

On December 8, 2014, the Company entered into a lease agreement with K-Swiss Inc., to lease approximately 5,400 square feet of office space at 31248 Oak Crest Drive, Westlake Village, California. The five year lease commences February 1, 2015 and ends January 31, 2020.

On December 15, 2014, the Company entered into a lease agreement with Cypress Pointe Simi Valley, LLC, to lease approximately 15,160 square feet of office/warehouse space at 130 West Cochran Street, Unit C, Simi Valley, California. The thirty-seven month lease commences February 1, 2015 and ends February 28, 2018.

The future lease payments are as follows:

Year ended June 30,	Lease commitments (in thousands)
2015	$	79
2016		231
2017		248
2018		212
2019		133
Thereafter		79
Total		982

11

 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

NOTE 10 – COMPREHENSIVE LOSS

For the six months ended December 31, 2014 and 2013, comprehensive loss amounted to approximately $568,000 and $2,772,000, respectively. The difference in net loss and comprehensive loss for the six months ended December 31, 2014 was $1,000, which relates to the realized loss from the sale of marketable securities. For the six months ended December 31, 2013 net loss and comprehensive loss differed by $6,000, which relates to the changes in the unrealized gains that the Company recorded for its available-for-sale marketable securities.

NOTE 11 – STOCK BASED COMPENSATION

The Company recorded share-based compensation associated with outstanding stock options and restricted stock grants during the three and six months ended December 31, 2014 of approximately $38,000 and $56,000, respectively, and for the three and six months ended December 31, 2013 of ($10,000) and ($6,000), respectively. No income tax benefit was recognized in the statements of comprehensive loss for share-based arrangements in any period presented.

Stock Options

On August 8, 2014, in accordance with Mr. Bronson’s employment agreement for the year ended June 30, 2014, the board of directors granted to Mr. Bronson stock options to purchase 100,000 shares of common stock with an exercise price of $1.23. The stock options granted fully vested on the date of grant and have a term of five years, expiring on August 20, 2019, unless exercised sooner. As a result of the stock options issued to Mr. Bronson, the Company recognized $27,000 non cash stock compensation expense in the six months ended December 31, 2014.

On October 8, 2014, the board of directors approved the issuance of stock options to Steven N. Bronson to purchase 100,000 shares of Qualstar common stock at an exercise price of $1.27. The stock options shall vest on June 30, 2015 and have a term of five years, expiring on June 30, 2020 unless exercised sooner. As a result of the stock options issued to Mr. Bronson, the Company recognized $9,000 noncash stock compensation expense in the six months ended December 31, 2014.

The Company did not grant any stock options during the six months ended December 31, 2013.

Restricted Stock Awards

The following table summarizes all restricted stock awards activity (in thousands, except per share amounts):

Restricted Stock Awards	Shares		Weighted Average Fair Value Price per Share
Nonvested at June 30, 2014		100,000	$	1.61
Granted (1)		—		—
Vested		—		—
Forfeited or expired
Nonvested at December 31, 2014		100,000	$	1.61

(1) Restricted stock was granted on April 1, 2014 to Daniel K. Jan of 100,000 shares to vest 33,333 on April 1, 2017; 33,333 to vest April 1, 2018 and 33,334 to vest April 1, 2019. The award is part of his employment agreement and the grant price is the closing price of the stock on April 1, 2014 of $1.61. The unvested shares are forfeited upon termination of his employment.

At December 31, 2014, the unrecognized compensation cost related to the non-vested share based compensation for restricted stock is $130,000.

12

 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

NOTE 12 – LEGAL PROCEEDINGS

Overland Storage, Inc.

On June 28, 2012, Overland Storage, Inc. (“Overland”) filed a patent infringement lawsuit against Qualstar Corporation (and others) in the U.S. District Court in the Southern District of California, alleging that certain of Qualstar’s automated tape libraries infringe claims of U.S. Patent No. 6,328,766 (the “’766 Patent”). The lawsuit is entitled: Overland Storage, Inc. (Plaintiff/Counterclaim Defendant) v. Qualstar Corporation (Defendant/ Counterclaim Plaintiff), and assigned Case No.: 12-cv-1605-JLS-BLM (the “Patent Litigation”). Overland is seeking injunctive relief as well as the recovery of unspecified monetary damages. Qualstar denies that it infringed the Overland patent and filed a counterclaim against Overland. The litigation was stayed pending Inter Partes Review (“IPR”) before the Patent Trial and Appeals Board (“PTAB”) (Case IPR 2013-00357). On November 7, 2014, the PTAB issued its final written decision finding that all eleven claims by Overland related to the ‘766 Patent were “unpatentable.” The PTAB denied Overland’s request for leave to amend its claims. Overland moved for reconsideration of the PTAB’s decision, but the request was denied by the PTAB on January 8, 2015. Overland has until March 12, 2015 to file an appeal of the PTAB’s decision with the Court of Appeals for the Federal Circuit. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

Lawrence D. Firestone and others

On August 12, 2013, Qualstar filed a complaint against former Chief Executive Officer Lawrence D. Firestone and others in the Superior Court of the State of California, County of Los Angeles entitled: Qualstar Corporation v. Lawrence D. Firestone, Stanley Corker, Carl W. Gromada, Robert A. Meyer, Robert Rich, Daniel Molhoek, Allen Alley, Gerald Laber, Steven Wagner, and DOES 1 through 10, inclusive, Case No.: BC 514889. On April 17, 2014, Defendant Firestone filed a cross-complaint against Qualstar. The matter has been resolved by the parties, and the claims subject to the Qualstar’s complaint and Lawrence D. Firestone’s cross-complaint have been withdrawn.

Needham & Company, LLC

On March 11, 2014, Qualstar filed a complaint against Needham & Company, LLC (“Needham”) entitled: Qualstar Corporation v. Needham & Company, LLC, pending in the Supreme Court of the State of New York, New York County and assigned index number 650773/14. Qualstar asserted claims against Needham for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment and negligence based on Needham’s provision of financial advisory services to Qualstar, between January 2013 and February 2013, in connection with the unsolicited partial tender offer for Qualstar submitted by BKF Capital Group, Inc. Needham moved to dismiss the complaint, and on January 5, 2015, the court granted Needham’s motion, thereby dismissing the entirety of the complaint. Qualstar has filed an appeal of the court’s ruling dismissing the complaint.

Other legal matters

Qualstar is also subject to a variety of other 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 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, 2014, we had accrued aggregate current liabilities of $48,000 in probable fees and costs related to these legal matters.

13

 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

NOTE 13 – INCOME TAXES

We did not record a provision or benefit for income taxes for the three and six months ended December 31, 2014 and 2013.   The Company has recorded a full valuation allowance against its net deferred tax assets based on the Company’s assessment regarding the realizability of these net deferred tax assets in future periods.

NOTE 14 – 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 six months ended December 31, 2014 and 2013. Allocations for internal resources were made for the three and six months ended December 31, 2014 and 2013. 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:

Power Supplies — We design, develop, and sell small, open frame, high-efficiency switching power supplies. 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 telecommunications equipment, machine tools, routers, switches, wireless systems and gaming devices.

Data Storage — We design, develop and sell automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. Tape libraries consist of cartridge tape drives, tape cartridges and robotics to move the cartridges from their storage locations to the tape drives under software control. Our tape libraries provide data storage solutions for organizations requiring backup, recovery and archival storage of critical data.

Segment revenue, loss before taxes and total assets were as follows (in thousands):

	Three Months Ended December 31,				Six Months Ended December 31,
	2014		2013		2014		2013
Revenue
Power Supplies	$	1,553	$	1,843	$	2,952	$	2 ,796
Data Storage:
Product		1,457		1,020		2,824		1,844
Service		518		577		1,072		991
Total data storage	$	1,975	$	1,597	$	3,896	$	2,835
Total revenue	$	3,528	$	3,440	$	6,848	$	5,631

14

 QUALSTAR CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(Continued)

	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Loss before Taxes
Power Supplies	$	(164	)	$	(69	)	$	(406	)	$	(387	)
Data Storage		(81	)		(182	)		(161	)		(2,391	)
Total loss before taxes	$	(245	)	$	(251	)	$	(567	)	$	(2,778	)

	December 31, 2014		June 30, 2014
Total Assets
Cash and marketable securities:
Cash and cash equivalents	$	5,242	$	5,462
Marketable securities		-		1,763
Total cash and marketable securities	$	5,242	$	7,225
Other assets:
Power Supplies		2,386		2,329
Data Storage		4,330		3,231
Total other assets	$	6,716	$	5,560
Total assets	$	11,958	$	12,785

  NOTE 15 – RELATED PARTY TRANSACTIONS

The Company entered into a license agreement, dated May 1, 2014 (the “License Agreement”) with BKF Capital Group, Inc. (“BKF”). Pursuant to the License Agreement, commencing on May 1, 2014, BKF shall have a license to occupy and use one furnished office, telephone and other services, located at Qualstar’s executive offices. Pursuant to the License Agreement, BKF shall pay to Qualstar a license fee $1,200 per month. For the three and six months ended December 31, 2014, BFK paid $3,600 and $7,200 to Qualstar as license fees, respectively. Steven N. Bronson, the Company’s Chairman and CEO, is also the Chairman, CEO and majority shareholder of BKF.

The Company has agreed to reimburse or to be reimbursed by Interlink Electronics, Inc. (“Interlink”), for IT, sales and marketing support and other expenses paid on behalf of the Company or Interlink. For the three months ended December 31, 2014 the Company reimbursed Interlink $16,000, net, and for the three months ended December 31, 2013 the Company reimbursed Interlink $63,000. For the six months ended December 31, 2014 the Company reimbursed Interlink $30,000, net, and for the six months ended December 31, 2013 the Company reimbursed Interlink $63,000. Steven N. Bronson is also the Chairman and CEO and a majority shareholder of Interlink.

15

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements in this Quarterly Report on Form 10-Q concerning the future business, operating results and financial condition of Qualstar including estimates, projections, statements relating to our business plans, objectives and operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements inherently are subject to risks and uncertainties, some of which we cannot predict or quantify. Our actual results may differ materially 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 Part II, Item 1A of this report and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 in “Item 1 Business,” “Item 1A Risk Factors,” and in “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You generally can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “may,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” or the negative thereof or variations thereon or similar terminology. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect the occurrence of events or circumstances in the future.

OVERVIEW

Qualstar Corporation and its Subsidiary (“Qualstar”, the “Company”, “we”, “us” or “our”) is a leading provider of high efficiency and high density power solutions marketed under the N2Power brand, and of data storage systems marketed under the Qualstar brand. Qualstar is organized into two strategic business units, power solutions and storage systems. Power solutions products include ultra-small high efficiency switching power supplies that provide unique power solutions to original equipment manufacturers for a wide range of markets: including telecommunications networking, industrial, gaming, test equipment, LED/lighting, medical as well as other market applications. Data storage system products include highly scalable automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in the network computing environment and provide solutions for organizations requiring backup, recovery and archival storage of critical electronic information.

On June 30, 2014, Qualstar formed Qualstar Corporation Singapore Private Limited, a Singapore corporation. This entity will enable us to hire and expand our engineering and product development staff in Singapore to support Qualstar’s overall product expansion. We also plan to use this entity to seek out and secure potentially strategic relationships with Singapore-based companies, technology institutes and colleges on joint development product initiatives.

In July 2002, Qualstar purchased the assets of N2Power, Incorporated, a supplier of ultra-small high-efficiency open frame switching power supplies. Power supplies are sold with the N2Power brand name as well as under a private label brand name to OEMs to incorporate into computer based products for telephony, industrial, gaming, test, networking equipment and other applications. N2Power is a division of Qualstar.

Qualstar continues to focus on returning the Company to profitability.  The two key elements of this strategy are cost reduction and sales growth. In order to grow sales, the Company has expanded its product portfolio in both the data storage business and power supplies.

In the first six months of fiscal 2015, the Company has increased production to meet the demand of our data storage sales. Our data storage segment added the Crossroads Systems ReadVerify Appliance (“RVA”) to its Qualstar storage product portfolio. Our power supply segment has expanded its AC-DC power supply offerings by adding the high-efficiency slim line DIN Rail Power Supplies and Medically Certified Power Supplies Series to its N2 Power brand product portfolio.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We describe our significant accounting policies in Note 1, “Summary of Significant Accounting Policies” of the accompanying Notes to Condensed Consolidated Financial Statements.

16

RESULTS OF OPERATIONS

(Unaudited) 

(In thousands, except for percentages)

	Three Months Ended December 31,												Six Months Ended December 31,
	2014						2013						2014						2013
	$			%			$			%			$			%			$			%
Power supply revenues	$	1,553			44.0	%	$	1,843			46.4	%	$	2,952			43.1	%	$	2,796			49.6	%
Storage revenues		1,975			56.0	%		1,597			53.6	%		3,896			56.9	%		2,835			50.4	%
Net revenues		3,528			100.0	%		3,440			100.0	%		6,848			100.0	%		5,631			100.0	%
Cost of goods sold		2,428			68.8	%		1,931			56.1	%		4,522			66.0	%		3,661			65.0	%
Gross profit	$	1,100			31.2	%	$	1,509			43.9	%	$	2,326			34.0	%	$	1,970			35.0	%
Operating expenses:
Engineering		326			9.2	%		604			17.6	%		685			10.0	%		1,478			26.2	%
Sales and marketing		591			16.8	%		512			14.9	%		1,096			16.0	%		1,245			22.1	%
General and administrative		684			19.4	%		623			18.1	%		1,368			20.0	%		2,017			35.8	%
Restructuring		(245	)		(6.9	)%		26			.8	%		(245	)		(3.6	)%		26			.5	%
Total operating expenses	$	1,356			38.5	%	$	1,765			51.4	%	$	2,904			42.4	%	$	4,766			84.6	%
Loss from operations		(256	)		(7.3	)%		(256	)		(7.5	)%		(578	)		(8.4	)%		(2,796	)		(49.6	)%
Other income		11			.3	%		5			.1	%		11			.2	%		18			.3	%
Net loss	$	(245	)		(7.0	)%		(251	)		(7.4	)%		(567	)		(8.2	)%		(2,778	)		(49.3	)%

The percentages in the table are based on net revenues.

17

Three months Ended December 31, 2014 Compared to Three months Ended December 31, 2013

Net Revenues

Net revenues increased to $3.5 million for the three months ended December 31, 2014 from $3.4 million for the three months ended December 31, 2013, an increase of $.1 million, or 2.9%.

Segment Revenue 

Power Supplies – Net revenues from power supplies were $1.5 million for the three months ended December 31, 2014 compared with $1.8 million for the three months ended December 31, 2013, a decrease of $0.3 million, or 16.7%.  

Data Storage – Net revenues from data storage were $2.0 million for the three months ended December 31, 2014 compared with $1.6 million for the three months ended December 31, 2013, an increase of $0.4 million, or 25.0%.  

Gross Profit: Gross profit decreased to $1.1 million for the three months ended December 31, 2014 from $1.5 million for the three months ended December 31, 2013.   This decrease of $0.4 million, or 26.7%, is primarily attributed to the $0.3 million in the sales of lower margin product and $0.1 million of additional inventory reserves in the three months ended December 31, 2014. The three months ended December 31, 2013 benefited from a material purchase variance attributed to the repurchase of inventory from the former contract manufacturer, Benchmark Electronics.

Engineering:  Engineering expenses decreased by $0.3 million, or 50.0%, to $0.3 million for the three months ended December 31, 2014 from $0.6 million for the three months ended December 31, 2013. This decrease is primarily attributed to a reduction in salaries as we reduced headcount and consultant expenses and closed the Colorado facility during the three months ended December 31, 2013.

Sales and Marketing:  Sales and marketing expenses increased by $0.1 million or 20%, to $0.6 million for the three months ended December 31, 2014 from $0.5 million for the three months ended December 31, 2013. The increase is primarily attributed to travel and tradeshow expenses.

General and Administrative:  General and administrative expenses remained consistent at $0.7 million for the three months ended December 31, 2014 and 2013.

Restructuring Expense: In fiscal year 2013, the Company evaluated production capacity, revenue and facility size, of the Simi Valley building and determined that a reduction in facility size to fit the production requirements was needed in the storage segment.  This resulted in an abandonment of square footage and a facility restructuring charge applied to the remaining contractual lease payments. The Company also closed the Colorado facility in October 2013 and expensed the remaining rent of $26,000 in the three months ended December 31, 2013. In the three months ended December 31, 2014, the Company terminated the Simi Valley building lease and reversed the abandonment charge as it related to the months after the lease termination date of February 28, 2015, in the amount of $0.2 million.

Other Income:  For the three months ended December 31, 2014, the net other income was $11,000 a $6,000 increase from $5,000 for the three months ended December 31, 2013 due to a change in managing the investments.

Provision for Income Taxes:  We did not record a provision or benefit for income taxes for the three months ended December 31, 2014 or 2013.

18

Six months Ended December 31, 2014 Compared to Six months Ended December 31, 2013

Net Revenues

Net revenues increased to $6.8 million for the six months ended December 31, 2014 from $5.6 million for the six months ended December 31, 2013, an increase of $1.2 million, or 21.4%.

Segment Revenue 

Power Supplies – Net revenues from power supplies were $2.9 million for the six months ended December 31, 2014 compared with $2.8 million for the six months ended December 31, 2013, an increase of $0.1 million, or 3.6%.  

Data Storage – Net revenues from data storage were $3.9 million for the six months ended December 31, 2014 compared with $2.8 million for the six months ended December 31, 2013, an increase of $1.1 million, or 39.3%.  

Gross Profit: Gross profit increased to $2.3 million for the six months ended December 31, 2014 from $2.0 million for the six months ended December 31, 2013.   This increase of $0.3 million, or 15.0%, is primarily attributed to the $0.4 million reserve for excess and obsolete inventory taken in the six months ended December 31, 2013 and a net recovery of the reserve in the six months ended December 31, 2014 of $0.3 million.

Engineering:  Engineering expenses decreased by $0.9 million, or 60.0%, to $0.6 million for the six months ended December 31, 2014 from $1.5 million for the six months ended December 31, 2013. This decrease is primarily attributed to a reduction in salaries as we reduced headcount and consultant expenses and closed the Colorado facility in September, 2013.

Sales and Marketing:  Sales and marketing expenses decreased by $0.1 million or 7.7%, to $1.1 million for the six months ended December 31, 2014 from $1.2 million for the six months ended December 31, 2013. The decrease is primarily attributed to a reduction in salaries and commissions as we reduced headcount and a reduction in advertising and promotional expenses.

General and Administrative:  General and administrative expenses decreased by $0.6 million or 30.0%, to $1.4 million for the six months ended December 31, 2014 from $2.0 million for the six months ended December 31, 2013. The decrease is primarily attributed to a reduction in legal expenses from the proxy contest in connection with the company’s 2013 annual shareholders meeting of $0.4 million.

Restructuring Expense: In the six months ended December 31, 2014, the Company terminated its lease and reversed the abandonment charge as it related to the months after the lease termination date of February 28, 2015, in the amount of $0.2 million. In the six months ended December 31, 2013, the Company took a $26,000 charge for the abandonment of the Colorado leased facility.

Other Income:  For the six months ended December 31, 2014, the net other income was $11,000 down from $18,000 for the six months ended December 31, 2013 due to a reduction in investment income.

Provision for Income Taxes:  We did not record a provision or benefit for income taxes for the six months ended December 31, 2014 or 2013.

19

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $1.9 million in the six months ended December 31, 2014, primarily attributed to the $0.6 million net loss for the period, an increase of $1.2 million in accounts receivables, a $0.1 million increase in prepaid expenses, and a decrease in other accrued liabilities of $0.7 million partially offset by a decrease of $0.1 million in total net inventory and an increase of $0.3 million of accounts payable. Net cash used in operating activities was $3.3 million in the six months ended December 31, 2013, primarily attributed to the net loss of $2.8 million for the period, an increase in inventory, and a decrease in accounts receivable and accounts payable.

Cash provided by investing activities was $1.7 million in the six months ended December 31, 2014, is primarily attributed to the sale of marketable securities of $1.8 million, partially offset by $0.1 million cash used to purchase equipment.   Cash provided by investing activities was $3.3 million in the six months ended December 31, 2013, attributed to proceeds from the sale marketable securities of $3.3 million, partially offset by $0.1 million cash used to purchase equipment.

Cash was not used in financing activities during the six months ended December 31, 2014 or 2013.

As of December 31, 2014, we had $5.2 million in cash and cash equivalents. The decrease in cash of $0.2 million from June 30, 2014 consisted mainly of the increase in receivables of $1.2 million and the decrease in other liabilities of $0.7 million offset with the sale of marketable securities of $1.8 million.

We believe that our existing cash and cash equivalents and cash flows from our operating activities, plus funds available from the sale of our marketable securities, will be sufficient to fund our working capital and capital expenditure needs for the next 12 months. We may utilize cash to invest in or acquire businesses, products or technologies that we believe are strategic. We periodically evaluate other companies and technologies for possible investment or acquisition by us. In addition, we have made and may in the future make investments in companies with whom we have identified potential synergies. However, we have no present commitments or agreements with respect to any material investment in or acquisition of other businesses or technologies.

ITEM 3.   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and sell them worldwide. We manufacture products in the United States and Asia. As a result, our financial results could be affected by factors such as 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 U.S. dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. We have no outstanding debt nor do we utilize derivative financial instruments. Therefore, no quantitative tabular disclosures are required.

ITEM 4. CONTROLS AND PROCEDURES

We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer to allow timely decisions regarding required disclosure.

Evaluation of disclosure and controls and procedures

As of the end of the period covered by this report, the Company 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 the Company's Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that the Company’s disclosure controls and procedures are operating in an effective manner to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

20

Changes in internal controls over financial reporting

There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that the Company's controls will succeed in achieving their stated goals under all potential future conditions.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Overland Storage, Inc.

On June 28, 2012, Overland Storage, Inc. (“Overland”) filed a patent infringement lawsuit against Qualstar Corporation (and others) in the U.S. District Court in the Southern District of California, alleging that certain of our automated tape libraries infringe claims of U.S. Patent No. 6,328,766 (the “’766 Patent”). The lawsuit is entitled: Overland Storage, Inc. (Plaintiff/Counterclaim Defendant) v. Qualstar Corporation (Defendant/ Counterclaim Plaintiff), and assigned Case No.: 12-cv-1605-JLS-BLM (the “Patent Litigation”). Overland is seeking injunctive relief as well as the recovery of unspecified monetary damages. We do not believe we infringe the Overland patent and we have filed a counterclaim. The litigation was stayed pending Inter Partes Review (“IPR”) before the Patent Trial and Appeals Board (“PTAB”) (Case IPR 2013-00357). On November 7, 2014, the PTAB issued its final written decision finding that all eleven claims by Overland related to the ‘766 Patent were “unpatentable.” The PTAB denied Overland’s request for leave to amend its claims. Because the sole patent at issue in the Patent Litigation was the ‘766 Patent, and Overland did not appeal the PTAB’s decision within the 60 day deadline, which was January 6, 2015, the PTAB’s decision is final and disposed of the sole basis for Overland’s claims against Qualstar in the Patent Litigation. The parties are currently awaiting the Court to take action on lifting the stay, so that Qualstar can move to formally dismiss the lawsuit.

Lawrence D. Firestone and others

On August 12, 2013, Qualstar filed a complaint against former Chief Executive Officer Lawrence D. Firestone and others in the Superior Court of the State of California, County of Los Angeles entitled: Qualstar Corporation v. Lawrence D. Firestone, Stanley Corker, Carl W. Gromada, Robert A. Meyer, Robert Rich, Daniel Molhoek, Allen Alley, Gerald Laber, Steven Wagner, and DOES 1 through 10, inclusive, Case No.: BC 514889. On April 17, 2014, Defendant Firestone filed a cross-complaint against Qualstar. The matter has been resolved by the parties, and the claims subject to the Qualstar’s complaint and Lawrence D. Firestone’s cross-complaint have been withdrawn.

Needham & Company, LLC

On March 11, 2014, Qualstar filed a complaint against Needham & Company, LLC (“Needham”) entitled: Qualstar Corporation v. Needham & Company, LLC, pending in the Supreme Court of the State of New York, New York County and assigned index number 650773/14. Qualstar asserted claims against Needham for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment and negligence based on Needham’s provision of financial advisory services to Qualstar, between January 2013 and February 2013, in connection with the unsolicited partial tender offer for Qualstar submitted by BKF Capital Group, Inc. Needham moved to dismiss the complaint, and on January 5, 2015, the court granted Needham’s motion, thereby dismissing the entirety of the complaint. Qualstar has filed an appeal of the court’s ruling dismissing the complaint.

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Other legal matters

Qualstar is also subject to a variety of other 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 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, 2014 we had accrued aggregate current liabilities of $48,000 in probable fees and costs related to these legal matters.

ITEM 1A.   Risk Factors

There have been no significant changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014.

ITEM 5. Other Information

On December 15, 2014, Qualstar signed a lease termination agreement (the “Termination Agreement”) with Liberty Property Limited Partnership the landlord for the Company’s office and warehouse located at 3990B Heritage Oak Ct, Simi Valley, California (the “Simi Valley Facility”). Pursuant to the Termination Agreement, the Company’s lease for the Simi Valley Facility will terminate on January 31, 2015, subject to a one-time thirty (30) day extension, instead of December 31, 2015. In accordance with the Termination Agreement, as consideration for the early termination of the Company’s lease for the Simi Valley Facility, the Company was required to pay an $184,000 termination fee. The above description of the Termination Agreement is only a summary and readers are referred to the Termination Agreement for its full terms and conditions. A copy of the Termination Agreement is attached to this Quarterly Report on Form 10-Q as Exhibit 10.11, and is incorporated herein by reference.

Effective February 9, 2015 the Company relocated its principal offices to 31248 Oak Crest Drive, Suite 120, Westlake Village, California 91361 (the “Westlake Office”). Our telephone number did not change. On December 8, 2014, the Company entered into a lease agreement with K-Swiss Inc., to lease the Westlake Office, which consists of approximately 5,400 square feet of office space at 31248 Oak Crest Drive, Westlake Village, California (the “Westlake Lease”). The Westlake Lease is for a term of five years commencing on February 1, 2015 and terminating on January 31, 2020. Pursuant to the Westlake Lease the Company is required to pay base rent in the amount of $119,880 per year payable in monthly installments of $9,990 per month, with an annual 3% increase. The Company also has the option to extend the Westlake Lease for an additional term of five (5) years. The above description of the Westlake Lease is only a summary and readers are referred to the Westlake Lease for its full terms and conditions. A copy of the Westlake Lease is attached to this Quarterly Report on Form 10-Q as Exhibit 10.12, and is incorporated herein by reference.

On December 15, 2014, the Company entered into a lease agreement with Cypress Pointe Simi Valley, LLC, to lease approximately 15,160 square feet of office/warehouse space at 130 West Cochran Street, Unit C, Simi Valley, California. (the “Cochran Lease”). The Cochran Lease is for a term of thirty-seven (37) months commencing on February 1, 2015 and terminating on February 28, 2018. Pursuant to the Cochran Lease the Company is required to pay base rent in the amount of $118,248 per year payable in monthly installments of $9,854 per month. The Company must also pay an additional pro-rata amount for taxes and other common charges under the Cochran Lease. The above description of the Cochran Lease is only a summary and readers are referred to the Cochran Lease for its full terms and conditions. A copy of the Cochran Lease is attached to this Quarterly Report on Form 10-Q as Exhibit 10.13, and is incorporated herein by reference.

Pursuant to the Termination Agreement, the Westlake Lease and the Cochran Lease, the Company has reduced the total square footage of office and warehouse space from 57,000 square feet to 21,000 square feet. This reduction in office and warehouse space is more aligned to the Company’s current needs, while still providing space for growth. Moreover, the reduction in space will have the effect of reducing the monthly rent from approximately $44,000 plus additional fees under the Simi Valley Facility lease to combined payments of approximately $20,000 plus additional fees under the Westlake Lease and the Cochran Lease.

ITEM 6.   EXHIBITS

Exhibit    No.	Exhibit Index
10.11	Lease Termination Agreement between Liberty Property Limited Partnership and Qualstar Corporation, dated December 15, 2014, concerning the property located at 3990B Heritage Oak Ct., Simi Valley, CA 93063.
10.12	Standard Multi-Tenant Offices Lease between K-Swiss, Inc. and Qualstar Corporation, dated December 8, 2014, concering the property located at 31248 Oak Crest Dr, Westlake Village, CA 91361.
10.13	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.
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

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SIGNATURES

Pursuant to the requirements 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
Dated: February 12, 2015	By:	/s/STEVEN N. BRONSON
		Steven. N. Bronson
		Chief Executive Officer and President
		(Principal Executive Officer)

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EX-10

Exhibit 10.11 LEASE TERMINATION AGREEMENT

THIS LEASE TERMINATION AGREEMENT (the "Agreement") is made and entered into this                  15^th day of December, 2014, by and between LIBERTY PROPERTY LIMITED PARTNERSHIP, a Pennsylvania limited partnership (the "Landlord"), and QUALSTAR CORPORATION, a California corporation (the "Tenant").

WITNESSETH:

A.             Pursuant to a Lease dated September 20, 2000 (the "Original Lease"), Landlord's predecessor-in-interest leased to Tenant certain premises (the "Premises") in a building located at and known as 3990 Heritage Oaks Court, Building C, Simi Valley, California (the "Property"). The Premises consists of approximately 56,845 rentable square feet located as more particularly described in the Lease.

B.             The Original Lease has been amended by the following amendment (the "Amendment"): First Amendment to Lease dated as of June 30, 2009. The Original Lease, as

. amended by the Amendment, is referred to in this Agreement as the “Lease"; Capitalized terms which are used but not otherwise defined in this Agreement shall have the meanings ascribed to them in the Lease.

C.             The Lease will expire, in accordance with its present terms, on December 31, 2015; however, the parties now desire to accelerate the expiration date and terminate the Lease effective as of the Termination Date (as defined below).

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

1. Termination.

Subject to Section 8.2 of this Agreement, the Lease is hereby terminated effective as of January 31,2015 (the "Termination Date"), with the same force and effect as if such date were the date originally set forth in the Lease for the expiration of the term ofthe Lease. Tenant may elect to extend the Termination Date one time for up to thirty (30) days by written notice to Landlord specifying the new Termination Date (the "Extension Notice"). The Extension Notice must be given in accordance with Lease no later than January 23, 2015. If Tenant does not give the Extension Notice by January 23, 2015, Tenant shall have no further right to extend the Termination Date.

2. Delivery of Possession.

Tenant shall surrender possession of the Premises to Landlord on the Termination Date, in the condition required by Sections 7.3, 7.5, 46, 47 and 54 of the Lease. Without limiting the generality of the foregoing, Tenant shall perform the following cleanup and repair work, at Tenant's sole cost and expense, no later than the Termination Date in a manner satisfactory to Landlord (the "Specific Delivery Work"):

2.1 Touch up or re-paint existing office areas as needed.

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2.2 Clean the existing carpet.

2.3 Clean thoroughly the remaining floor areas of the office areas.

2.4 Replace broken damaged and/or stained ceiling tiles.

2.5 Clean and sanitize break room and restrooms.

2.6 Broom clean the warehouse.

If Tenant fails to timely perform the Specific Delivery Work, Landlord shall have the right to perform the Specific Delivery Work and, in that event, Tenant shall pay Landlord the costs incurred by Landlord in performing the Specific Delivery Work upon demand.

3. Compliance With Lease Prior to Termination Date; Undetermined Rent.

3.1     During the period between the date of this Agreement the Termination Date, Tenant shall fully perform all of its obligations under the Lease. Without limiting the foregoing, Tenant shall continue to pay all rent and other charges under the Lease accruing through the Termination Date, all of which shall be prorated in accordance with Sections 4.1 and 4.2 of the Lease.

3.2     If any rent or other charges shall be undetermined as of the Termination Date ("Undetermined Charges"), Landlord may reasonably estimate such Undetermined Charges and require that Tenant pay the same prior to the Termination Date, subject to adjustment after the actual amount of the Undetermined Charges have been determined. Any Undetermined Charges which are not billed by Landlord prior to the Termination Date shall be billed following determination of the amount due, and Tenant shall pay such Undetermined Charges within ten

(10) days after its receipt of an invoice from Landlord. Tenant's obligation to pay the amounts required pursuant to this Section 3.2 shall survive termination of the Lease.

4. Additional Payments To Landlord.

As additional consideration for this Agreement:

4.1     Tenant hereby absolutely assigns, transfers and sets over to Landlord any security deposit under the Lease and any right to reimbursement in connection with any outstanding operating expense reconciliation; and

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4.2     Tenant shall pay Landlord the amount of $183,609.35 (the "Termination Fee"). The portion the Termination Fee in excess of the amount of the security deposit held by Landlord as of the date of this Agreement shall be paid by Tenant in cash or by wire transfer of immediately available funds simultaneously with the execution of this Agreement. The balance of the Termination Fee shall be paid to Landlord by application of the amount of any security deposit then held by Landlord under the Lease on the Termination Date (the "Remaining Security Deposit") and, if that balance exceeds the Remaining Security Deposit, that excess shall be paid by Tenant in cash or by wire transfer of immediately available funds no later than the Termination Date. In the event the Termination Date is extended pursuant to Section 1, above, the amount of the Termination Fee shall be reduced by for each day in the period commencing on (and including) February 1, 2015, and ending on (and including) the extended Termination Date. If after giving effect to that reduction in the Termination Fee and the application of the Remaining Security Deposit as provided above, the amount paid by Tenant exceeds the Termination Fee, Landlord shall refund that excess to Tenant within thirty (30) days after the extended Termination Date.

4.3     Tenant acknowledges that the early expiration and termination of the term of the Lease and Landlord's agreement to accept the Termination Fee is a valuable contemporaneous exchange of consideration for the release of Tenant from potential future rent and other obligations accruing under the Lease from and after the Termination Date that, but for the expiration and termination of the term of the Lease, Tenant would still be obligated to perform, including, without limitation, the payment of rent, provided for in the Lease.

5. Release.

Tenant hereby releases and forever discharges Landlord, its partl1e;s, shareholders, officers, directors, agents and employees, of and from any and all claims, acts, damages, demands, rights of action and causes of action which Tenant ever had, now has, or in the future may have, arising from or in any way connected with the Lease or the management or operation of the Building. Consistent with the foregoing unconditional release, Tenant expressly and voluntarily waives and relinquishes all rights and benefits under Section 1542 of the California Civil Code if in any way applicable to this Agreement. Section 1542 of the California Civil Code provides as follows:

"GENERAL RELEASE --CLAIMS EXTINGUISHED: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN TO HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR."

It is understood by Tenant that if the facts or law with respect to which the foregoing release is given hereunder tum out to be other than or different from the facts or law in that connection not known to be or believed by Tenant to be true, then Tenant hereto expressly assumes the risk of the facts or law turning out to be so different, and agrees that the foregoing release shall be in all respects effective and not subject to termination or rescission based upon such differences in facts or law.

6. Representations.

Tenant hereby makes the following representations and warranties to Landlord:

6.1 Tenant has full power and authority to execute this Agreement.

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 6.2     Tenant is the owner of the entire leasehold estate created by the Lease, free and clear of all liens, claims or encumbrances.

 6.3     Tenant has not made any assignment, sublease, transfer, conveyance or other disposition of the Lease or any interest in the Lease or the Premises.

 6.4     There are no proceedings pending or, to the best of Tenant's knowledge, threated by or against Tenant in bankruptcy, insolvency, or reorganization in any state or federal court.

 6.5     All insurance policies and maintenance, supply and service contracts with respect to the Premises which Landlord has not previously elected in writing to continue, have been legally and validly terminated or will be legally and validly terminated prior to the Termination Date. All liabilities and obligations of Tenant under such insurance policies and maintenance, supply and service contracts, have been or will be fully performed and discharged by Tenant prior to the Termination Date.

 6.6     All liabilities and obligations of Tenant under any contracts relating to const tion of improvements in the Premises have been or will be fully performed and     . . . discharged by Tenant prior to the Termination Date. No work has been done or is being done, nor have materials been delivered in, about, or to the Premises which has or have not been fully paid for, for which a mechanics' lien could be asserted under the laws of the State of California.

 6.7     Tenant has no knowledge of any pending or threatened claim, demand, obligation, liability, action or cause of action arising from or in any manner connected with the Lease or the Premises.

7. No Release of Accrued Obligations.

 Neither the termination of the Lease pursuant to this Agreement nor the acceptance of the Premises by Landlord shall in any way:

 7.1     release or relieve Tenant from any liability or obligation (a) arising or accruing prior to the Termination Date, or (b) arising out of or incurred in connection with events or other matters which took place prior to the Termination Date; or

 7.2     affect any obligation under the Lease which is intended to survive the expiration or sooner termination of the Lease.

8. Default; Remedies.

 8.1 It shall be a default under this Agreement (a "Default") if:

 8.1.1     Tenant shall violate or fail to perform any of its obligations under this Agreement; or

 8.1.2     any representation or warranty of Tenant under this Agreement shall be false in any way; or

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 8.1.3     if any payment, or any part thereof made in connection with this Agreement or the Lease is subsequently invalidated, declared to be fraudulent or preferential, set aside or avoided and/or required to be rescinded or returned by Landlord for any reason whatsoever (including, but not limited to, the insolvency, bankruptcy or reorganization of Tenant).

8.2            Upon the occurrence of a Default, in addition to all other rights and remedies available at law or in equity, Landlord may, at its election, terminate this Agreement in which case, (a) this Agreement shall be null and void and of no force or effect, (b) the Lease will not terminate on the Termination Date but shall continue in full force and effect for the balance of the term stated in the Lease, subject to the terms and conditions of the Lease, and (c) all payments made by Tenant under this Agreement and retained by Landlord shall be credited against Tenant's obligations under the Lease.

9. Failure To Deliver Possession on the Termination Date.

 If Tenant fails to surrender possession of the Premises to Landlord on the Termination Date, in addition to all other rights and remedies available at law or in equity, Landlord may:

 9.1       terminate this Agreement as provided in Section 8.2 ofthis Agreement;

 9.2       treat Tenant's possession as a holdover, in accordance with the provisions of Section 26 of the Lease;

 9.3       retake possession ofthe Premises, as set forth in Section 13.2 of the Lease, or in accordance with any other procedure available at law or in equity; and

 9.4       exercise the other rights and remedies set forth in this Agreement.

10. [INTENTIONALLY OMITTED]

11. Provisions Concerning Remedies.

 11.1     If proceedings shall be commenced by Landlord after the Termination Date to recover possession, Tenant specifically waives the right to notices as required by applicable law and agrees instead that five (5) days' notice shall be sufficient in all cases.

 11.2     In the event of breach or threatened breach by Tenant of any provision of this Agreement, Landlord shall have the right of injunction and the right to invoke any remedy allowed at law or in equity in addition to other remedies provided for in this Agreement.

 11.3     No right or remedy conferred upon or reserved to Landlord in this Agreement is intended to be exclusive of any other right or remedy herein or by law provided, but each shall be cumulative and in addition to every other right or remedy given in this Agreement or now or hereafter existing at law or in equity or by statute.

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 11.4     In the event that Landlord commences suit for the repossession of the Premises after the Termination Date, Tenant shall pay Landlord all expenses incurred in connection therewith, including reasonable attorneys' fees.

 11.5     TENANT HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY LANDLORD ON ANY MATTER ARISING OUT OF OR IN ANYWAY CONNECTED WITH THIS AGREEMENT.

12. Notices.

Any notices required or permitted to be given under this Agreement shall be given in writing and shall be delivered by (a) hand delivery, (b) commercial overnight courier that guarantees next day delivery and provides a receipt, or (c) legible facsimile or electronic transmission (followed by hard copy sent concurrently in accordance with preceding subsections (a) or (b)), and such notices shall be addressed as follows:

If to Landlord:

Liberty Property Limited Partnership 500 Chesterfield Parkway

Malvern, PA 19355

Attn:   Executive Vice President/

            Chief Investment Officer

With a copy to:

Liberty Property Limited Partnership

500 Chesterfield Parkway

Malvern, PA 19355

Attention: Legal Department

Facsimile No.: 610-644-2175

Ifto Tenant:

QUALSTAR CORPORATION

3990 Heritage Oaks Court, Building C

Simi Valley, California

Facsimile No.: _ _ _ _ _ _ _

With a copy to:

Facsimile No.: _ _ _ _ _ _ _

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or to such other address as either party may from time to time specify in writing to the other party. Any notice shall be effective only upon receipt (or refusal by the intended recipient to accept delivery). Notice given by facsimile or electronic transmission shall be effective upon receipt of the same (subject to the requirement that hard copy be sent concurrently in accordance with this Section). Any notice which is received on a Saturday, Sunday or a legal holiday, or after 5:00 p.m. prevailing local time at the place of receipt, shall be deemed received on the next business day.

13. Miscellaneous.

13.1      The submission of a draft of this Agreement by one party to another is not intended by either party to be an offer to enter into a legally binding contract. The parties shall be legally bound pursuant to the terms ofthis Agreement only if and when Landlord and Tenant have fully executed and delivered to each other a counterpart of this Agreement.

13.2      This Agreement and the Exhibits attached to this Agreement contain the final and entire agreement of Landlord and Tenant with respect to the termination of the Lease and are intended to be anr integration of all prior negotiations and understandings. Neither Landlord nor Tenant shall be bound by any covenants, agreements, statements, representations or warranties, oral or written, not contained in this Agreement. No change or modification to this Agreement shall be valid unless the same is in writing and signed by the parties to this Agreement. No waiver of any of the provisions of this Agreement shall be valid unless the same is in writing and is signed by the party against which it is sought to be enforced.

13.3      The headings and captions in this Agreement are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Agreement or any of the provisions hereof. Where the context so requires, the use of the singular shall include the plural and vice versa and the use of the masculine shall include the feminine and the neuter.

13.4      This Agreement shall be governed by and construed in accordance with the laws of the State of California.

13.5      For the purposes of any suit, action or proceeding involving this Agreement, Landlord and Tenant hereby expressly:

13.5.1     submit to the jurisdiction of all federal and state courts sitting in the State of California;

13.5.2     agree that any order, process, notice of motion or other application to or by any such court or a judge thereof may be served within or without such court's jurisdiction by registered or certified mail or by personal service, provided that a reasonable time for appearance is allowed;

13.5.3     agree that such courts shall have the exclusive jurisdiction over any such suit, action or proceeding commenced by any party;

13.5.4     agree upon the request of the other party to discontinue (or agree to the discontinuance of) any such suit, action or proceeding pending in any other jurisdiction;

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13.5.5     waive any objection to the laying ofvenue of any suit, action or proceeding arising out of or relating to this Agreement brought in any federal or state court sitting in the State of California;

13.5.6     waive any claim that any suit, action or proceeding brought in any federal or state court sitting in the State of California has been brought in an inconvenient forum.

13.6      This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.

13.7      The transmission of a signed counterpart of this Agreement by facsimile or by electronic transmission such as portable document file ("PDF") shall have the same force and effect as delivery of an original signed counterpart of this Agreement, and shall constitute valid and effective delivery for all purposes. If either party delivers a signed counterpart of this Agreement by transmission of a facsimile or electronic transmission such as PDF, it shall also send promptly thereafter by overnight courier or personal delivery a signed original counterpart of this Agreement to the other party, but failure to do so shall not render this Agreement void or voidable by either party.

13.8      This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns.

14. Conditions.

This Agreement is subject to and conditioned upon (i) any required consent or approval being granted by Landlord's mortgagees and/or ground lessors, without any fee or charge that is unacceptable to Landlord and (ii) Landlord entering into a new lease of the Premises with a new tenant on terms and conditions satisfactory to Landlord in its sole discretion (the "New Lease"). If any such consent shall be denied, or shall be granted subject to the payment of any fee or charge that is unacceptable to Landlord and/or the New Lease has not been executed by Landlord, (a) this Agreement shall be null and void and of no force or effect, (b) the Lease will not terminate on the Termination Date but shall continue in full force and effect for the balance of the term stated in the Lease, subject to the terms and conditions of the Lease, and (c) all payments made by Tenant under this Agreement and retained by Landlord shall be credited against Tenant's obligations under the Lease.

[Signature Page Follows.]

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IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be executed the day and year first above written.

LANDLORD:

LIBERTY PROPERTY LIMITED PARTNERSHIP

By: Liberty Property Trust, its sole general partner

By:     _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Name:   _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Title:  _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

TENANT

 QUALSTAR CORPORATION,

California corporation

By:     _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Name:   _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Title:  _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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EX-10

EX-10

EXHIBIT 10.13 INDUSTRIAL REAL ESTATE LEASE (MULTI-TENANT PROJECT NET LEASE)

ARTICLE 1:     BASIC TERMS

This ARTICLE 1 contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of this Lease referred to in this ARTICLE 1 explain and define the Basic Terms and are to be read in conjunction with the Basic Terms.

Section 1.1 Date of Lease: December 15, 2014.

Section 1.2 Landlord: Cypress Pointe Simi Valley, LLC, a California limited liability company.

Address of Landlord: 10940 Wilshire Boulevard, Suite 1900, Los Angeles, California 90024.

Section 1.3 Tenant: Qualstar Corporation, a California corporation.

Address of Tenant: 130 West Cochran Street, Unit C, Simi Valley, California 93065.

Section 1.4 Property: The "Property" shall refer to 130 West Cochran Street, Unit C, Simi Valley, California 93065, which Property is part of a multi-tenant project as shown on Exhibit “A” attached hereto and incorporated herein by this reference. The Property consists of approximately fifteen thousand one hundred sixty (15,160) rentable square feet of building area. The Property, the adjacent buildings shown on Exhibit “A”, and the adjacent parking areas, driveways and landscaped areas are sometimes collectively referred to herein as the “Project”.

Section 1.5 Lease Term: Thirty-seven (37) months beginning on February 1, 2015 (the “Commencement Date”) and ending on February 28, 2018. (See Section 2.3 for Option to extend this Lease.)

Section 1.6 Permitted Uses: Research and development, storage, light manufacturing and ancillary office use related to electronic components, data storage and power conversion products. (See ARTICLE 5.)

Section 1.7 Tenant’s Guarantor: None.

Section 1.8 Initial Security Deposit: Ten Thousand Four Hundred Fifty-Four Dollars and Eleven Cents ($10,454.11). (See Section 3.2.)

Section 1.9 Rent and Other Charges Payable by Tenant:

(a)       BASE RENT: The Base Rent shall be paid as provided in Section 3.1. The Base Rent paid by Tenant to Landlord for each month of the Lease Term shall be as follows:

Month of Lease Term	Base Rent Amount Per Month
1 through 12	$ 9,854.00
13 through 24	$10,149.62
25 through 37	$10,454.11

(i)     Abated Base Rent. Provided that Tenant is not then in default of any of Tenant’s obligations under this Lease, the Base Rent payable for the second (2^nd) month of the Lease Term shall be abated. During any period that the Base Rent is specified in this Paragraph 1.9(a) as being abated, the real property taxes, utilities, insurance premiums and other costs and charges as specified in this Lease shall continue to be due and payable by Tenant for such period that the Base Rent is abated.

TENANT’S INITIALS _______________

LANDLORD’S INITIALS _______________

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(b)       OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.2); (ii) Utilities (See Section 4.3); (iii) Insurance Premiums (See Section 4.4); (iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.7); (v) Maintenance, Repairs, Common Area Costs and Alterations (See ARTICLE 6).

(c)        FUNDS DUE UPON EXECUTION: Concurrently with the execution of this Lease, Tenant shall deliver to Landlord the sum of $22,579.80, which sum represents the Security Deposit ($10,454.11), the Base Rent for the 1^st month of the Lease Term ($9,854.00), and Tenant’s Pro Rata Share of operating expenses for the 1^st month of the Lease Term ($2,271.69).

Section 1.10 Limitations on Tenant’s Responsibilities: See Section 5.3(i) for Tenant not being responsible for pre-existing Hazardous Materials in violation of Environmental Laws, and ARTICLE 6 for limitations on Tenant’s responsibility for the foundation and structural items.

Section 1.11 Tenant’s Pro Rata Share: Tenant’s “Pro Rata Share” shall mean nine and 1383/10000ths percent (9.1383%), subject to Section 6.7.

Section 1.12 Riders: The following Riders are attached to and made a part of this Lease and incorporated herein by this reference: Construction Rider.

ARTICLE 2:     LEASE TERM

Section 2.1 Lease of Property for Lease Term. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.5 above and shall begin and end on the dates specified in Section 1.5 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The “Commencement Date” shall be the date specified in Section 1.5 above for the beginning of the Lease Term and delivery of possession of the Property to Tenant, unless advanced or delayed under any provision of this Lease.

Section 2.2 Early Access. Landlord will permit access to the Property by Tenant prior to the Commencement Date for the purpose of making the Property ready for Tenant’s use; provided that such early access is approved by the City of Simi Valley and is in compliance with and permitted under applicable laws, rules and regulations; and provided, further that such early access does not interfere with Landlord’s completion of any items of work to be performed on the Property by Landlord under the provisions of the Construction Rider. If Tenant accesses or occupies the Property prior to the Commencement Date, Tenant’s early access or occupancy of the Property shall be subject to all of the provisions of this Lease and the Construction Rider, and Tenant shall provide Landlord with evidence that Tenant has obtained the insurance required to be maintained by Tenant under this Lease. Early access or occupancy of the Property shall not advance the Commencement Date or the expiration date of this Lease. During such period of early access or occupancy, Tenant shall not be required to pay Base Rent, real property taxes, insurance premiums for insurance carried by Landlord, or Landlord charges for maintenance costs.

Section 2.3 Option to Extend.

(a)     Exercise. Landlord hereby grants to Tenant one (1) option (referred herein to as the "Option") to renew and extend the term of this Lease for a period of three (3) years (such three-year term is referred to herein as the "Option Term"). The Option must be exercised by written notice ("Option Notice") received by Landlord no later than the date that is six (6) months prior to the expiration of the then current term of the Lease and no earlier than the date that is nine (9) months prior to the expiration of the then current term of the Lease. Furthermore, the Option shall not be deemed to be properly exercised if Tenant is prohibited from exercising the Option pursuant to subparagraphs (i) or (ii), below. If the Option is not properly exercised within the Option Notice period in the manner prescribed herein, it shall expire and be of no further force and effect. Time is of the essence. Tenant may not revoke an election of the Option once Tenant makes an election to exercise such Option. Provided that Tenant has properly exercised the Option, the term of the Lease shall be extended for the Option Term, and all terms, covenants and conditions of the Lease shall remain unmodified and in full force and effect, except that the Base Rent shall be modified as set forth in Paragraphs 2.3(b) below.

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(i)     If Tenant is in default under any provision of this Lease, then Tenant may not exercise the Option. If Tenant's default is due to the fact that Tenant has failed to pay a monetary amount due under the Lease, then the Option may not be exercised until such monetary amount is paid before the Option Notice period expires. If such default is the result of Tenant's failure to perform a non-monetary obligation and Tenant has received written notice of such default, then Tenant may only exercise the Option if Tenant properly cures such non-monetary default within the stated cure period before the Option Notice period expires. The period of time within which the Option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise such Option because of Tenant's default.

(ii)     The Option granted to Tenant in this Lease is personal to Tenant and may not be exercised or assigned, voluntarily or involuntarily, by or to any person or entity (including, but not limited to, any consented to or permitted assignee or sublessee under Article Nine of this Lease) other than the named Tenant in Article One of this Lease. The Option herein granted to Tenant is not assignable to any person separate and apart from this Lease.

(b)     Base Rent. The Base Rent payable for the first twelve (12) months of the Option Term shall be an amount equal to one hundred and three percent (103%) times the Base Rent payable for the month immediately preceding the first month of the Option Term. Such Base Rent shall be increased on the 13^th and 25^th months of the Option Term ("Rental Adjustment Date(s)") by an amount equal to three percent (3%) of the Base Rent for the month immediately preceding such applicable Rental Adjustment Date.

Section 2.4 Holding Over. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant’s delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of this Lease and Landlord thereafter accepts rent from Tenant, Tenant’s occupancy of the Property shall be a “month-to-month” tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by fifty percent (50%).

ARTICLE 3:     BASE RENT

Section 3.1 Time and Manner of Payment. Upon execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Section 1.9(a) above for the first (1^st) month of the Lease Term. On the first day of the third (3^rd) month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord’s address or at such other place as Landlord may designate in writing. All Base Rent shall be due and timely paid whether or not Landlord sends a bill or invoice to Tenant. Landlord may require that all Base Rent and other amounts due and owing to Landlord under this Lease be paid to Landlord by electronic fund transfer, and Tenant shall comply with such requests.

Section 3.2 Security Deposit. Upon the execution of this Lease, Tenant shall deposit with Landlord a cash security deposit (the “Security Deposit”) in the amount set forth in Section 1.8 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant (and to pay for any obligations or expenses of Tenant under Article 6). If Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord’s written request. Tenant’s failure to do so shall be a material default under this Lease. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. Tenant hereby waives the provisions of California Civil Code Section 1950.7.

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Section 3.3 Termination; Return of Security Deposit. Within sixty (60) days after termination of this Lease under ARTICLE 7 (Damage or Destruction), ARTICLE 8 (Condemnation) or any other termination not resulting from Tenant’s default, and after Tenant has vacated the Property in the manner required by this Lease, provided that Tenant is not then in default, Landlord shall refund or credit to Tenant the unused portion of the Security Deposit.

ARTICLE 4:     OTHER CHARGES PAYABLE BY TENANT

Section 4.1 Additional Rent. All charges payable by Tenant other than Base Rent are called “Additional Rent.” Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term “rent” shall mean Base Rent and Additional Rent.

Section 4.2 Property Taxes.

(a)     Real Property Taxes. Tenant shall pay all real property taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvements existing on the Property or installed on the Property by or for the benefit of Tenant) for periods during the Lease Term (even if the property tax bill or supplemental bill is issued after the Lease Term). Landlord shall bill Tenant for such real property taxes due, and Tenant shall pay Landlord such taxes within fifteen (15) days of Landlord’s delivery of request for payment. Landlord may bill Tenant for such taxes prior to Landlord’s payment of such taxes to the governmental agency, and Landlord may bill Tenant for such taxes pursuant to Section 6.7. If Tenant does not pay over any such amount(s) to Landlord within fifteen (15) days of Landlord’s delivery of request for payment to Tenant, then Tenant shall be required to pay such amount(s) to Landlord with Tenant’s next rental installment, together with interest from the date of Landlord’s payment of such taxes, at the maximum interest rate then allowed by law. If Tenant continues to fail to pay such amount(s) to Landlord, then such amount(s) shall be treated as a failure of Tenant to pay Landlord a monetary amount due under the terms of this Lease, and Tenant shall be deemed to be in default under this Lease.

(b)     Definition of “Real Property Tax.” “Real property tax” or “real property taxes” means (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax, fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment or penalty on the Landlord’s right to receive, or the receipt of, rent or income from the Property or against Landlord’s business of leasing the Property; (iii) any tax, assessment or charge for fire protection, streets, sidewalks, road maintenance, landscaping, refuse or other services provided to the Property by any governmental agency; (iv) any tax imposed upon this transaction or based upon a reassessment of the Property due to a change in law, a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord’s or any other person’s interest in the Property; and (v) change in the property tax laws and any charge or fee replacing any tax previously included within the definition of real property tax. “Real property tax” does not, however, include Landlord’s federal or state income, franchise, inheritance or estate taxes.

(c)       Pro Rata Share of Real Property Tax. Landlord shall, at Landlord’s sole discretion, determine Tenant’s share of the real property taxes for the Property under Section 4.2(a) based upon the square footage of the Property and upon the amount of improvements contained in the Property. Tenant understands that the Property is part of a Project and may not be separately assessed by the applicable governmental agency, and Tenant understands that Landlord is determining the amount of Tenant’s real property taxes based upon the information reasonably available to Landlord. Landlord may, in Landlord’s sole and absolute discretion, base Tenant’s share of the real property taxes for the Property based upon the real property taxes for the entire Project multiplied times Tenant’s Pro Rata Share. Subject to Section 4.7 and Section 6.7, Tenant shall pay such share of real property taxes to Landlord within fifteen (15) days after receipt of Landlord’s written statement.

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(d)      Personal Property Taxes.

(i)     Tenant shall timely pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall use its best efforts to have personal property taxed separately from the Property.

(ii)     If any of Tenant’s personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes.

Section 4.3 Utilities and Janitorial Services. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal (subject to Landlord’s right under Section 6.7 to make same part of the Common Area Costs), and other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant’s proportionate share of the cost of such utilities and services and Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord’s written statement. Landlord shall not be liable in any way to Tenant for any failure, defect or interruption of, or change in the supply, character and/or quantity of utility service furnished to the Property for any reason. There shall not be any allowance to Tenant for a diminution of rental value, nor shall the same constitute an actual or constructive eviction of Tenant, in whole or in part, nor relieve Tenant from any of Tenant’s Lease obligations, and no liabilities shall arise on the part of Landlord by reason of inconvenience, annoyance or injury to Tenant’s business if there is an interruption of, or change in the supply, character and/or quantity of, any utility. Tenant shall obtain at Tenant’s cost and timely pay all amounts for regular janitorial service for the Property.

Section 4.4 Insurance Policies.

(a)     Liability Insurance. During the Lease Term, Tenant shall maintain and pay all premiums thereon for a policy of commercial general liability insurance (sometimes known as broad form comprehensive general insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord as an additional insured under such policy and shall obtain the appropriate endorsement to such policy showing Landlord as an additional insured. The initial amount of such insurance shall be at least Two Million Dollars ($2,000,000) per occurrence and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord’s professional insurance advisers and other relevant factors. The liability insurance obtained by Tenant under this Section 4.4(a) shall: (i) be primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant’s performance under Section 5.6, if the matters giving rise to the indemnity under Section 5.6 result from the acts or negligence of Tenant. The amount and coverage of such insurance shall not limit Tenant’s liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of the ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance.

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(b)     Property and Rental Income Insurance. During the Lease Term, Landlord shall maintain (at Tenant’s cost) policies of insurance covering loss of or damage to the Property (including tenant improvements constructed under any construction rider to this Lease which are attached to and become part of the Property) in the full amount of its replacement value. The deductible amount under such policies shall be an amount acceptable to, and determined by, Landlord. Such policy shall provide protection against perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), and any other perils which Landlord deems reasonably necessary. Landlord shall have the right (but no requirement) to obtain (at Tenant’s cost) flood or earthquake insurance if required by any lender holding a security interest in the Property. Tenant shall obtain and pay for insurance for Tenant’s equipment, inventory, furniture, fixtures and other assets which Tenant owns or Tenant holds for others on the Property, and are placed, used, held or installed by Tenant on the Property. During the Lease Term, Landlord shall also obtain (at Tenant’s cost) a rental income insurance policy, with loss payable to Landlord, in an amount equal to twelve (12) months’ Base Rent, plus estimated real property taxes and insurance premiums. Tenant shall be liable for the payment of any deductible amount under Landlord’s or Tenant’s insurance policies maintained by Landlord or Tenant pursuant to this Section 4.4. Tenant shall not do or permit anything to be done which invalidates any such insurance policies. All property insurance and rental income insurance shall provide for all payments of proceeds to be made to Landlord, and Landlord shall be the loss payee (and/or lender(s) designated by Landlord).

(c)      Payment of Premiums. Subject to Section 4.7 and Section 6.7, Tenant shall pay all premiums for the insurance policies described in Section 4.4(a) and (b) (whether such insurance is obtained by Landlord or Tenant) within fifteen (15) days after Tenant’s receipt of the amount due prepared by Landlord or the insurance company. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.4. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 4.4 is in full force and effect and containing such other information which Landlord reasonably requires (but Landlord shall from time to time have the right to require Tenant to furnish Landlord with a copy of such insurance policy).

(d)     Tenant’s Share of Insurance Premiums. Landlord shall pay the premiums on insurance policies covering the Property and other properties in the Project as to those insurance policies described under Section 4.4(b) required to be obtained (or elected to be obtained) by Landlord. Landlord shall determine Tenant’s share of the insurance premiums to be paid by Tenant based upon the square footage of the Property, and based upon the amount of improvements contained in the Property and other properties in the Project. Notwithstanding the immediately preceding sentence, Landlord may, in Landlord’s sole and absolute discretion, determine Tenant’s share of such insurance premiums hereunder by using the insurance premiums of the entire Project multiplied times Tenant’s Pro Rata Share. Subject to Section 4.7 and Section 6.7, such amount shall be paid by Tenant to Landlord within fifteen (15) days after Tenant’s receipt of a copy of the bill from Landlord (regardless of whether the Landlord has paid the insurance company at that time), and if Tenant fails to pay such amount within such time period, then same shall be treated as a failure of Tenant to pay a monetary amount under the terms of this Lease.

(e)     General Insurance Provisions.

(i)     Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days’ written notice prior to any cancellation or modification of such coverage.

(ii)     If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is canceled or modified during the Lease Term without Landlord’s consent, or if Tenant fails to pay premiums for any insurance policy, Landlord, as one of Landlord’s remedies, may obtain such insurance (or pay premiums on an existing insurance policy), in which case Tenant shall reimburse Landlord for the cost of such insurance and premiums within fifteen (15) days after receipt of a statement that indicates the cost of such insurance and premiums.

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(iii)     Tenant shall maintain all insurance required to be maintained by Tenant under this Lease with companies holding a “General Policy Rating” of A-12 or better, as set forth in the most current issue of “Best Key Rating Guide.” Tenant acknowledges that the insurance described in this Section 4.4 is for the primary benefit of Landlord. Landlord makes no representation as to the adequacy of any insurance (whether such insurance policy is maintained by Landlord or Tenant) to protect Landlord’s or Tenant’s interests of or in the Property. Tenant agrees that Landlord is not responsible for the performance of, nor is Landlord guaranteeing the performance of, payment by or financial viability of, any insurance company (whether insuring the Property or insuring any person for any liability). Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant.

(iv)     Unless prohibited under any applicable insurance policies maintained, Tenant hereby waives any and all rights of recovery against Landlord, or against the officers, partners, employees, agents or representatives of Landlord, for loss of or damage to Tenant’s property or the property of others under Tenant’s control, to the extent such loss or damage is actually reimbursed to Tenant from any proceeds from an insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Unless prohibited under any applicable insurance policy maintained, Landlord hereby waives any and all rights of recovery against Tenant, or against the officers, partners, employees, agents or representatives of Tenant, for loss of or damage to Landlord’s property or the property of others under Landlord’s control, to the extent such loss or damage is actually reimbursed to Landlord from any proceeds of an insurance policy for which Tenant pays the premium cost which is maintained for Landlord’s benefit under this Section 4.4 at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation.

(v)     Landlord may obtain a blanket insurance policy or policies for property and rental income insurance (or a separate blanket policy for any insurance risk) for the Property under Section 4.4(b) and any other properties. If Tenant’s use of the Property creates an extraordinary risk or increased premium, or if Tenant and/or the Property have a substantial amount of improvements (as determined by Landlord) so that the cost of the insurance premiums for any of the insurance required to be maintained under Section 4.4(b) for the Project increases, then the Tenant shall be solely responsible for paying for such amount of increased premium.

Section 4.5 Late Charges. Tenant’s failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within five (5) days after it becomes due (“Late Charge Due Date”), Tenant shall immediately pay Landlord a late charge equal to ten percent (10%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Tenant shall pay such late charge to Landlord immediately after the Late Charge Due Date, and if Tenant fails to so pay such amount to Landlord, then such nonpayment shall be considered a monetary default by Tenant and a failure by Tenant to pay rent under this Lease, and Tenant shall pay interest to Landlord on such unpaid late charge amount pursuant to Section 4.6, below (but not greater than the maximum amount permitted by law on such late charge and only to the extent permitted by law) from the Late Charge Due Date. Landlord’s acceptance of such late charge shall not constitute a waiver of Tenant’s default with respect to such overdue amount or prevent Landlord from exercising any of the other rights and remedies granted under this Lease.

Section 4.6 Interest on Past Due Obligations. Any amount owed by Tenant to Landlord under this Lease which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount (but not greater than the maximum interest rate permitted by law). The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law.

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Section 4.7 Impounds for Insurance Premiums and Real Property Taxes. If requested by any ground lessor or lender to whom Landlord has granted a security interest in the Property, or if Tenant is more than ten (10) days late in the payment of rent more than three (3) times in any consecutive twelve (12) month period, Tenant shall pay in advance the annual real property taxes and insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums due. Tenant shall pay any deficiency of funds in the impound account to Landlord upon written request. If Tenant defaults under this Lease, Landlord may apply any funds in the impound account to any obligation then due under this Lease. This Section 4.7 is in addition to the provisions contained in Section 6.7.

ARTICLE 5:     USE OF PROPERTY

Section 5.1 Permitted Uses. Tenant may use the Property only for the Permitted Uses set forth in Section 1.6, above.

Section 5.2 Manner of Use. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, or which annoys or interferes with the rights of any other tenants of Landlord or other parts of the Project, or which constitutes a nuisance or waste. Tenant may not place any equipment or items on the roof without Landlord’s written permission (which permission shall not be unreasonably withheld). Except as approved in writing by Landlord, Tenant shall not have any access to the roof area of the Project, shall not go onto the roof of the Project, and shall prohibit Tenant’s employees, customers and invitees from going onto the roof area of the Project. Tenant shall not keep any live animals inside or outside of the Property or Project, nor shall Tenant leave food either inside or outside of the Property or Project which would attract animals to the Property or Project. Subject to any specific requirements in the Construction Rider for Landlord to obtain specific permits, Tenant shall obtain and pay for all permits required for Tenant’s occupancy of the Property, and Tenant shall, at Tenant’s sole expense, promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, covenants, conditional use permits, conditions and restrictions, regulations, orders and requirements regulating the use or occupancy by Tenant of the Property, including the Occupational Safety and Health Act and the California Occupational Safety and Health Act, and regulations and rules thereunder. Tenant acknowledges that this Lease and Tenant’s leasehold interest under this Lease are subordinate to any covenants, conditions and restrictions presently or in the future promulgated or recorded in connection with the Property and as a requirement of any parcel map, and any amendments or modifications thereto (referred to in this Lease as “CC&Rs”). Tenant agrees to comply with any such CC&Rs and to pay any costs, assessments or charges under such CC&Rs which are charged or assessed against the Property. Tenant shall pay its Pro Rata Share of any assessments against the entire Project under any CC&Rs (unless such assessment is specifically against Tenant’s Property in which case Tenant shall pay such entire assessment).

Section 5.3 Hazardous Materials.

(a)     Definitions. As used in this Section 5.3, the following definitions shall apply:

(i)     “Environmental Laws” shall mean any and all federal, state and local laws, statutes, ordinances, rules and regulations now or hereafter in force, as amended from time to time, in any way relating to or regulating human health or safety, and industrial hygiene or environmental conditions, or protection of the environment, or pollution, or contamination of the air, soil, soil gas, surface water or ground water, any common law, including without limitation nuisance, trespass, negligence and strict liability and further including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act, the Clean Water Act, the Hazardous Substance Account Act, California Health and Safety Code provisions, the California Hazardous Waste Control Law, the California Medical Waste Management Act, and the California Porter-Cologne Water Quality Control Act.

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(ii)     “Hazardous Material” shall mean any and all hazardous or toxic substances or materials and/or wastes that are described and/or regulated as toxic or hazardous substances, wastes or materials, or pollutants or contaminants, or words of similar import, in any of the Environmental Laws, including, without limitation, asbestos, petroleum (including crude oil or any fraction thereof, machine or other oils, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas useable for fuel, or any mixture thereof), petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter, medical waste, metals, solvents, chlorinated compounds, and chemicals which may cause cancer or reproductive toxicity.

(iii)     “Release” shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment or the Property, including but not limited to the continuing migration of Hazardous Material into or through soil, surface water, or ground water.

(iv)     For purposes of this Section 5.3, the activities, acts, use, production, processing, manufacturing, generation, treatment, handling, storage and Release by “Tenant” shall mean those of Tenant, Tenant’s employees, contractors, sublessees, customers, licensees, guests, invitees and/or agents.

(b)     Covenants On Use of Property. Tenant shall not use, produce, process, manufacture, generate, treat, handle, store or dispose of any Hazardous Material in, on or under the Property or Project, or use the Property or Project for any such purposes, or Release any Hazardous Material into any air, soil, surface water or ground water at, on or about the Property or Project, or permit any person using or occupying the Property or Project or any part thereof to do any of the foregoing, which are in violation of any Environmental Laws. Tenant assumes the risk associated with any of Tenant’s Hazardous Material activities and the risk that Environmental Laws may change in the future. Tenant shall comply, and shall cause all persons using the Property or Project or any part thereof to comply, with all Environmental Laws applicable to the Property or Project, or the use or occupancy thereof, or any operations or activities therein or thereon at the Tenant’s sole cost. Tenant shall obtain all permits, licenses and approvals required by all applicable Environmental Laws for the use and occupancy of, and all operations and activities in, the Property, comply fully with all such permits, licenses and approvals, and keep all such permits, licenses and approvals in full force and effect. Landlord’s consent in allowing Tenant to permit or engage in any activity relating to Hazardous Material shall not be construed to mean Landlord in any way approves of the manner in which the Tenant is engaging in such activities, or that Landlord has determined that such activity or manner of activity is safe. In the event that Tenant shall permit Hazardous Material upon the Property or Project, or engage in activities relating to Hazardous Material on, about or above the Property or Project, Tenant shall, at Tenant’s expense, procure and maintain insurance coverage insuring Tenant and Landlord against any and all liability arising from such Hazardous Material or activities relating thereto. Tenant shall duly provide Landlord with a certificate of such insurance coverage, in such amounts and from such carriers as Landlord shall require. Tenant shall not install or use any storage tanks on the Property or Project below ground without Landlord’s prior written permission. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks below ground, and Landlord may refuse to allow the installation thereof for or not for any reason.

(c)      Presence of Hazardous Material on Property. Subject to Tenant not being responsible for pre-existing Hazardous Material under Section 5.3(i) below, in the event that any Hazardous Material is present or Released, or there is a threatened Release of Hazardous Material on, about or under the Property which has violated or which may violate an Environmental Law (or any nearby property which can migrate into or onto the Property), or that any violation of any Environmental Laws may have occurred at the Property, Tenant shall immediately give notice to Landlord thereof. Additionally, Tenant shall immediately furnish to Landlord copies of all written communications received by Tenant from any person or given by Tenant to any person concerning any past or present Release or threatened Release of Hazardous Material in, on or under the Property (or any nearby property which could migrate to the Property), or any past or present violation of any Environmental Laws which may affect the Property. Landlord shall have the right, but not the obligation, to obtain from Tenant, at any time, any additional information regarding Hazardous Material generated, produced, brought onto, used, stored, treated or disposed of by Tenant or any other person on or about the Property, and/or activities relating thereto, on or about the Property. Tenant shall immediately comply with Landlord’s requests.

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(d)     Landlord’s Right to Inspect and Audit. Landlord shall have the right, but not the obligation, to enter the Property to investigate at any time the presence of Hazardous Material, and/or the compliance with Environmental Laws, and/or to take all actions reasonably necessary to remediate any threat or breach of any Environmental Laws, or from any Release of Hazardous Material in, on, about or under the Property. As requested from time to time by Landlord, Tenant, at Tenant’s sole expense, shall have an environmental audit, and/or Landlord may have an environmental audit performed at Tenant’s cost (which may, in Landlord’s determination, include a Phase I and/or a Phase II environmental report), or other appropriate investigation of the Property conducted by a third party satisfactory to Landlord and approved by Landlord regarding the Release or threatened Release of Hazardous Material and/or compliance with Environmental Laws. Tenant acknowledges that any such inspections or reports undertaken by Tenant and Landlord are solely for the protection of Landlord, and agrees that Landlord has no duty to Tenant with respect to Hazardous Material or Environmental Laws as a result of any such inspections or reports.

(e)     Remediation Work. If any Release or threatened Release of Hazardous Material in, on, about or under the Property exists or occurs by any person during the term of this Lease or by Tenant at any time as to the Property or Project, or if any violation of Environmental Laws occurs during the term of this Lease or is caused by Tenant at any time: (i) Tenant shall immediately give notice of the condition or violation to Landlord; (ii) Tenant shall promptly investigate, define, clean up and remove all Hazardous Material (and in no event may Tenant leave any Hazardous Material on or under the Property or the Project) with all applicable governmental agency oversight and approval and restore the Property (or the Project as the case may be) to the same condition as such Property (or Project as the case may be) was prior to such Release of Hazardous Material, so that the Property (or Project as the case may be) may be used for any and all future unrestricted uses; and (iii) Tenant shall restore and cause the Property (or Project as the case may be) to be in full compliance with all applicable Environmental Laws (collectively, the “Remediation Work”). Tenant shall comply with any and all orders and directives of all persons and/or governmental agencies having jurisdiction over the Property or the Remediation Work. Tenant shall provide to Landlord and Landlord may review any and all correspondence, documents, communications, plans, applications, reports, work orders, manifests, orders, directives and/or specifications in connection with or relating to the Remediation Work before such Remediation Work is performed. Any such plans or specifications shall be prepared by a qualified, licensed engineer or contractor, which Landlord shall have the right to approve, and shall comply with all applicable Environmental Laws, and all other laws, ordinances, rules and regulations. Tenant shall obtain a “No Further Action” letter, or its equivalent, from the appropriate governmental agency(ies) in connection with the Remediation Work. Tenant shall be responsible at Tenant’s sole expense to obtain all permits, licenses, oversight, and approvals for the Remediation Work and to complete the Remediation Work diligently and in a timely manner. Tenant shall pay for all Remediation Work, including, without limitation, the cost of plans, fixing any damage to the Property (or the Project as the case may be), oversight costs, utilities, permits, fees, taxes and insurance premiums in connection therewith. Tenant shall furnish to Landlord promptly upon receipt, copies of all reports, studies, analysis, investigations, contracts, orders, directives, applications, manifests, permits, licenses, authorizations, correspondence, claims, complaints, pleadings and other information and communications received or prepared by Tenant at any time in connection with any Remediation Work. Landlord may elect at any time, and from time to time, to perform (or contract for the performance of) any Remediation Work which is Tenant’s responsibility, and in such event Tenant shall promptly reimburse Landlord for any costs or expenses thereof as same are incurred. Tenant shall provide Landlord with seven days’ prior written notice of any Remediation Work performed on or about the Property (or the Project as the case may be). Landlord may observe any Remediation Work.

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(f)       Right to Participate by Landlord. Landlord shall have the right, but not the obligation, to participate in any action or proceeding and governmental or agency meeting relating to any past or present Release or threatened Release of any Hazardous Material in, on or under the Property or the Project, or any past or present violation of any Environmental Laws at the Property or the Project, or any Remediation Work. Tenant shall provide immediate notice upon receipt to Landlord and allow Landlord to participate in any negotiations or discussions with any federal, state or local governmental agency, including environmental, occupational or public health and safety agencies with regard to Hazardous Material or any Environmental Laws, including all settlement or discussions regarding abatement or Remediation Work.

(g)     Indemnification by Tenant. Tenant shall indemnify, reimburse, defend and hold harmless Landlord (and its employees, partners, members, managers, agents, affiliates, successors, lenders, consultants, contractors and representatives) against all claims, demands, liabilities, losses, damages, costs and expenses in any way arising from, relating to, or connected with: (i) the existence, location, nature, use, generation, manufacture, storage, disposal, handling, or Release or threatened Release of any Hazardous Material in, on or under the Property by any person during the term of this Lease or by Tenant at any time as to the Property or the Project; (ii) any violation of Environmental Laws at the Property by any person during the term of this Lease or by Tenant at any time as to the Property or the Project; (iii) any breach of any duty to perform Remediation Work required of Tenant under this Section 5.3; and/or (iv) any breach of any covenant, representation or warranty made by Tenant hereunder, or any failure of Tenant to perform any of Tenant’s covenants or obligations in accordance with this Section 5.3. The foregoing indemnification shall include, without limitation, all expenses of investigation and monitoring, costs of containment, abatement, removal, repair, clean up, restoration and remedial work, penalties and fines, attorneys’ fees and disbursements, environmental engineering fees and costs, oversight and observations costs, and other response costs. The foregoing indemnification shall also include any lost rental amounts which Landlord does not receive from any person, including Tenant (including any lost rental amounts after the term of this Lease), diminution in the value of the Property or Project, and other damages caused by or as a result of the Release of Hazardous Material, violation of Environmental Laws, Remediation Work or because such Hazardous Material must be remediated from the Property (or Project as the case may be). If Tenant fails to perform any obligation of Tenant in accordance with this Section 5.3, Landlord shall have the right, but not the obligation, to perform such obligation on behalf of Tenant and at Tenant’s expense. It is agreed that Tenant’s duties and obligations of indemnification, reimbursement, defense and hold harmless under this Section specifically permit Landlord to hire (at Tenant’s costs) attorneys and environmental engineers to monitor and supervise and to advise Landlord as to any remediation and clean up activities and to perform and monitor any environmental studies of the Property (or Project), and to engage such attorneys and environmental engineers to represent and assist Landlord in the event of any litigation (or threat thereof), administrative proceedings or other governmental or private party actions. Tenant shall, on demand, pay to Landlord all sums expended by Landlord in the performance of any such obligations of Tenant, together with interest thereon after such demand at the maximum rate of interest then provided by law. The term “attorneys’ fees” under this Section shall mean fees charged by the attorneys in questions based upon such attorneys’ then prevailing hourly rates as opposed to any statutory presumption specified by any statute then in effect in the State of California. The burden of proof under this Section regarding establishment of a date upon which a Hazardous Material was or was not placed or appeared or did not appear in, on or under the Property shall be upon the Tenant.

(h)     Survivability and Remedies. All representations, warranties, covenants, and indemnifications by Tenant under this Section shall survive the termination of the Lease. Tenant waives the right to assert any statute of limitations as a bar to the enforcement of this Section or to any action brought to enforce the provisions of this Section. This Section shall not affect, impair or waive any rights or remedies of Landlord or any obligations imposed or created by Environmental Laws of Tenant with respect to Hazardous Materials (including Landlord’s rights of reimbursement or contribution under Environmental Laws). The remedies in this Section are cumulative and in addition to all remedies provided by law.

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(i)          Tenant Not Responsible for Pre-Existing Hazardous Material. Tenant shall not be responsible for those Hazardous Materials in violation of Environmental Laws existing on the Commencement Date of this Lease which are present on the Property prior to the first to occur of: (i) the date of Tenant’s first occupancy of the Property; or (ii) the Commencement Date of the Lease. Nothing herein shall release Tenant from responsibility for any Hazardous Material which Tenant Releases, or threatened Release onto, into, under or about the Property, or for any violation of Environmental Laws caused by Tenant.

Section 5.4 Outside Storage. In addition to any other provision specified in this Lease or as required by any law, rule or regulation, Tenant agrees to not have any outside storage of inventory or materials and to keep the exterior of the Property free from debris.

Section 5.5 Signs and Auctions. Tenant shall not place any signs on the Property without Landlord’s prior written consent. Landlord reserves the right to approve the size, type and appearance of any sign. Landlord may require that any sign be installed only by companies approved by Landlord. Upon the termination of the Lease, the Tenant shall remove any of Tenant’s installed signs at Tenant’s cost and expense and the Tenant shall repair any damage to the building or Property caused by such removal or by such sign. Tenant shall not conduct or permit any auctions or sheriff’s sales at the Property.

Section 5.6 Indemnity. Tenant shall indemnify, defend, and hold Landlord (and its employees, partners, members, managers, agents, affiliates, successors, lenders, consultants, contractors and representatives) harmless from and against any and all costs (including, without limitation, attorney’s fees), claims or liability arising from: (a) Tenant’s use of the Property or the Project; (b) the conduct of Tenant’s business or anything else done or permitted by Tenant to be done in or about the Property or the Project, including any contamination of the Property, the Project, or any other property resulting from the presence or use of Hazardous Material caused or permitted by Tenant; (c) any breach or default in the performance of Tenant’s obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; (e) any claims brought against Landlord by another tenant of the Project or person using the Project due to the negligence or acts of the Tenant; or (f) other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenant’s expense with counsel reasonably acceptable to Landlord or, at Landlord’s election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in connection with any such claim. Such indemnification shall include all of Landlord’s engineering fees, attorneys’ fees, expenses and costs should Tenant default or breach any of Tenant’s maintenance or repair obligations under this Lease. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property or the Project arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord. As used in this Section, the term “Tenant” shall include Tenant’s employees, agents, contractors, licensees, customers and invitees, if applicable.

Section 5.7 Landlord’s Access. Landlord or its agents may enter the Property at all reasonable times to show the Property to potential buyers, investors or tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant’s compliance with all applicable Environmental Laws and all laws governing the presence and use of Hazardous Material; or for any other purpose Landlord deems necessary. Landlord shall give Tenant prior notice of such entry, except in the case of an emergency. Additionally, Landlord may from time to time take interior and exterior photographs of the Property and perform surveys and measurements of the Property at all reasonable times. Landlord may place customary “For Sale” or “For Lease” signs on the Property.

Section 5.8 Quiet Possession. If Tenant pays the rent and complies with all of the terms of this Lease, and is not in default under this Lease, then Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease.

Section 5.9 Future Easements and Governmental Requirements. Tenant agrees that Tenant shall cooperate with Landlord in granting any easements and signing any easements, covenants, conditions or restrictions which may be required by any governmental agency or utility for the Property, or which Landlord may otherwise require, provided that such easement, condition or restriction does not materially interfere with Tenant’s use of the Property.

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ARTICLE 6:     CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS

Section 6.1 Existing Conditions. Except as otherwise provided in the Construction Rider, Tenant accepts the Property and the Project in its condition as of the execution of this Lease, subject to all recorded matters, laws, ordinances, conditional use permits, and governmental regulations and orders. Except as otherwise expressly provided herein or in the Construction Rider, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the Project or the suitability of the Property or the Project for Tenant’s intended use. The Property has not undergone an investigation by a Certified Access Specialist (CASp). Tenant acknowledges that prior to the execution of this Lease Tenant has investigated (including communicating with any governmental agency Tenant deems necessary) the adequacy and capacity of the Property’s mechanical and electrical systems; investigated with all governmental agencies that Tenant’s proposed business on the Property complies with all zoning laws; investigated with the fire department that Tenant’s proposed business on the Property complies with all fire department requirements; investigated restrictions of any conditional use permits; investigated the use of the Property for Tenant’s proposed purposes; and investigated the laws, rules and regulations of federal, state and local governmental bodies affecting the Property, including but not limited to zoning, parking requirements and fire department requirements for any of Tenant’s present or proposed uses of the Property. Specifically, Landlord is not responsible for the size or amount of the Property’s electrical system, plumbing system, and heating, ventilating and air conditioning system, and Tenant has investigated the adequacy of same for Tenant’s current and future needs. Tenant understands that the local utility provider can restrict the supply and amount of any utility to the Property. Tenant is solely relying upon Tenant’s own investigation, and neither Landlord nor any agent of Landlord has made any representations or warranties to Tenant regarding the items stated in the preceding three sentences. Unless otherwise specifically stated in this Lease, any statement in this Lease of the size or the square footage of the Property, or of any size that may have been utilized in calculating the Base Rent, is only an approximation which Landlord and Tenant agree is reasonable, and the Base Rent, and any other amounts, are not subject to revision, whether or not the actual size of the Property is more or less than such specified amount. Tenant agrees and acknowledges that Tenant, prior to signing this Lease, has satisfied itself with respect to the size of the Property and has made all investigations and measurements necessary with reference to such size.

Section 6.2 Exemption of Landlord From Liability. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant’s employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, roof, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property and the Project or from other sources or places; or (d) any act or omission of any other tenant of Landlord, including, but not limited to, another tenant of the Project. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant.

Section 6.3 Landlord’s Obligations. Subject to Section 6.7 (Common Area and Parking), ARTICLE 7 (Damage or Destruction), ARTICLE 8 (Condemnation), and the Construction Rider, Landlord has absolutely no responsibility to repair, maintain or replace any portion of the Property or the Project at any time. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord’s expense or to terminate this Lease due to the condition of the Property.

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Section 6.4 Tenant’s Obligations.

(a)     Tenant’s Maintenance and Repair Obligations. Except as otherwise provided in Section 6.7 (Common Area and Parking), ARTICLE 7 (Damage or Destruction), ARTICLE 8 (Condemnation), and the Construction Rider, Tenant shall keep, at Tenant’s sole cost and expense, all portions of the Property (including, but not limited to, all interior, systems, mechanical systems, plumbing, lighting, electrical, equipment, and heating, ventilating and air conditioning systems) in good order, condition and repair and maintain same (including interior repainting and refinishing, and any changes, modifications, retrofitting or repairs to any part of the Property by changes to governmental laws, rules or regulations effective after the Commencement Date). All contractors used by Tenant, and all repairs and maintenance, are subject to Landlord’s review and approval, including the color and quality of any replacement items, wall or floor coverings, or paint. Landlord shall have the right, in Landlord’s discretion, to require Tenant to use contractors approved by Landlord. For purposes of this paragraph, references to governmental laws shall include all present and future laws, rules, orders, ordinances, regulations, statutes, requirements, conditional use permits, codes and executive orders of all governmental authorities, including, but not limited to, the Americans With Disabilities Act, and all rules, regulations and governmental orders in connection therewith, and any of the foregoing relating to Hazardous Material, environmental matters, public health and safety matters, any applicable fire rating bureau or other body exercising similar functions, and all requirements of all insurance bodies or Landlord’s insurance companies affecting the Property. Tenant (and not Landlord) shall be responsible for the repair, maintenance and remediation of the Property due to the presence of any molds in compliance, including all notices thereunder, with the Toxic Mold Protection Act of 2001. If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term. If any part of the Property or the Project is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property under any other provision of this Lease. All portions of the Property shall be maintained by the Tenant so that it remains in a first class condition and Tenant shall replace such portions of the Property where necessary.

(b)     Maintenance Contracts. Tenant shall procure and maintain, at Tenant’s sole cost, (i) a preventive maintenance contract providing for the regular inspection, repair and maintenance (at least quarterly) of the heating, ventilating and air conditioning system on the Property by a licensed heating and air conditioning contractor or service company, and (ii) such other preventive maintenance contracts providing for the regular inspection, repair and maintenance of such other building systems or equipment as Landlord may require from time to time. Landlord shall have the right, at Landlord’s discretion, to require Tenant to utilize maintenance and/or inspection companies under this paragraph (b) approved by Landlord or to require Tenant to utilize maintenance and/or inspection companies designated by Landlord that service other parts of the Project or Landlord’s other properties. Landlord reserves the right to procure and maintain service contracts for such building systems or equipment as Landlord may from time to time determine in Landlord’s discretion (including the maintenance and monitoring of the fire sprinkler system), in which event Tenant shall pay to Landlord Tenant’s Pro Rata Share of such maintenance costs as a Common Area Cost. Under no circumstances shall Landlord be liable for any actual or consequential damages due to the failure of the monitoring, inspection and/or service of the fire sprinkler system or any other service contracts described herein (regardless of whether such services contract was procured or maintained by Landlord).

(c)      Tenant’s Failure. Tenant shall fulfill all of Tenant’s obligations under this Section 6.4 at Tenant’s sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.4, Landlord may, upon ten (10) days’ prior notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand.

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Section 6.5 Alterations, Additions and Improvements.

(a)     No Alterations Without Landlord’s Consent. Tenant shall not make any alterations, additions, or improvements to the Property without Landlord’s prior written consent, except for non-structural alterations which do not exceed Ten Thousand Dollars ($10,000) in cost cumulatively over the Lease Term and which are not visible from the outside of any building of which the Property is part. Notwithstanding the above, Tenant may not permanently alter the Property’s floor or any components of the Property by bead blasting, sand blasting or otherwise. Tenant, under no circumstances, may do any construction or improvements on the roof, place any equipment, vents, fans or heating or air conditioning equipment on the roof, or penetrate the roof membrane for any reason without Landlord’s written permission. If Tenant violates the rules or prohibitions as regarding the roof hereunder, then as one of Landlord’s remedies (in addition to any other remedy of Landlord under this Lease), Tenant shall be responsible for all roof repairs, and Landlord may require Tenant to promptly remove such violating item and to restore the roof to the roof’s condition prior to such violation. Even for those non-structural alterations which do not require Landlord’s approval under this Section 6.5(a), Tenant shall provide written notice to Landlord and a description of such improvements prior to the commencement of construction of same. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Section 6.5(a) upon Landlord’s written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. All work performed by Tenant’s contractors shall be performed pursuant to a written agreement between Tenant and such contractor (herein, a “Contractor Agreement”). Each such Contractor Agreement between Tenant and Tenant’s contractor shall contain a provision requiring that Tenant’s contractor maintain a policy of comprehensive commercial general liability insurance naming Landlord as an additional insured, insuring against liability for personal injury and property damage arising out of such contractor’s acts or omissions in connection with the performance of the work, with minimum limits of coverage of not less than One Million Dollars ($1,000,000) per occurrence (or such greater amount as may be reasonably required by Landlord). Each Contractor Agreement shall also contain a provision requiring that Tenant’s contractor indemnify, defend and hold Landlord harmless from all liabilities, claims, losses, expenses and costs (including, without limitation, attorney’s fees) arising from Tenant’s acts or omissions in connection with the performance of the work. Prior to the commencement of such work, Tenant shall deliver to Landlord a copy of the executed Contractor Agreement and the certificate of insurance evidencing that Landlord has been named as an additional insured under such policy maintained by Tenant’s contractor. Upon completion of any such work, Tenant shall provide Landlord with “as built” plans, copies of all construction contracts, copies of all permits, and proof of payment for all labor and materials.

(b)     Payment Required. Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least twenty (20) days’ prior written notice of the commencement of any work on the Property, regardless of whether Landlord’s consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property. For any repairs, improvements or alterations (including any repairs or reconstruction which Tenant performs under ARTICLE 7), Landlord may require Tenant to provide demolition and/or lien and completion bonds, letters of credit, or a cash deposit, in forms and amounts satisfactory to Landlord.

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Section 6.6 Condition Upon Termination. Upon the termination of this Lease, Tenant shall surrender the Property to Landlord, broom clean, free of debris and free of Tenant’s property, and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under ARTICLE 7 (Damage or Destruction). In addition, Landlord may require Tenant to remove (or Landlord can elect to do such removal and restoration at Tenant’s expense) any alterations, additions or improvements made by Tenant or at Tenant’s direction or any other tenant improvements (whether or not constructed with Landlord’s consent, except if Landlord’s written consent to such improvements, alterations or additions specifically states that such alterations, additions or improvements may remain on the Property after the Lease termination) prior to the expiration of this Lease (or after the expiration of this Lease at Landlord’s discretion) and to restore the Property to its prior condition, all at Tenant’s expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord’s property and shall be surrendered to Landlord upon the expiration or earlier termination of this Lease, except that Tenant may remove any of Tenant’s machinery or equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant’s expense, any damage to the Property caused by the removal of any such machinery or equipment. Notwithstanding any other provision of this Lease to the contrary, Tenant may not remove any of the following materials or equipment (which shall be deemed Landlord’s property) without Landlord’s prior written consent (however, if such items were installed by Tenant or are part of Tenant’s alterations, additions or improvements, Landlord may still require that these items be removed by Tenant at Tenant’s expense): any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations.

Section 6.7 Common Area and Parking. Tenant shall pay to Landlord Tenant’s Pro Rata Share (as defined in Section 1.11 above and Section 6.7(f) below) of Common Area Costs (as defined in Section 6.7 (d) below).

(a)     Common Area. As used in this Lease, the term “Common Area” shall mean all areas in the Project which are available for the common use of tenants of the Project and which are not leased or held for the exclusive use of Tenant or other tenants including, but not limited to, parking areas, driveways, sidewalks, access roads, corridors, landscaping and planted area. Landlord, from time to time, may change the size, location, nature and use of any of the Common Area, convert Common Area into leasable areas, construct additional parking facilities in the Common Area, and increase or decrease Common Area land, parking space and/or facilities. Tenant acknowledges that such activities may result in an inconvenience to Tenant and such activities and changes are permitted by Landlord.

(b)     Use of Common Area. Tenant shall have the nonexclusive right in common with other tenants and all others to whom Landlord has granted or may grant such rights to use the Common Area for the purposes intended, subject to such rules and regulations as Landlord may establish from time to time. Landlord may from time to time promulgate and issue rules and regulations, and Tenant agrees to comply with same. Tenant shall abide by such rules and regulations and shall cause others who use the Common Area with Tenant’s express or implied permission to abide by Landlord’s rules and regulations. At any time Landlord may close any Common Area to perform any acts in the Common Area as in Landlord’s judgment are desirable to improve the Project. Tenant shall not interfere with the rights of Landlord, other tenants, or any other person entitled to use the Common Area. Tenant may not construct any improvements within the Common Areas.

(c)      Vehicle Parking. Tenant is hereby granted the right to utilize forty-five (45) parking spaces in the Project on a non-exclusive basis. There may be other tenants of the Project which may have reserved parking spaces, and Tenant agrees to not park in such designated reserved spaces. Landlord reserves the right to designate specific parking spaces for specific tenants of the Project (which cost of designation shall be a Common Area Cost). Tenant’s parking shall be limited to vehicles no larger than standard size automobiles or pickup utility vehicles. Tenant shall not cause large trucks or other large vehicles to be parked overnight within the Project or on adjacent public streets. Temporary parking of large delivery vehicles in the Project or on the Property shall only be permitted under rules and regulations established by Landlord. Vehicles shall be parked only in striped parking spaces and not in driveways, loading areas or other locations not specifically designated for parking. Tenant agrees to comply with all parking requirements, rules and regulations of all governmental authorities as to the Project and as to any public streets. Handicap spaces shall only be used by those legally permitted to use them. If Tenant parks more vehicles in the parking area than the number set forth in this Lease, such conduct shall be a material breach of this Lease, subject to written notice to Tenant of such violation(s). In addition to Landlord’s other remedies under this Lease, Tenant shall pay a daily charge determined by Landlord for each such additional vehicle(s).

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(d)     Common Area Costs. As used in this Lease, the term “Common Area Costs” shall mean (i) all costs incurred by Landlord for the operation, maintenance, cleaning, replacing, repairing and keeping in good order of the Common Area, and (ii) all other costs incurred by Landlord relating to the ownership or operation of the Property or Project that are permitted to be billed or charged as a Common Area Cost under the provisions of this Lease. Common Area Costs shall include, but are not limited to, costs and expenses for the following: irrigation, gardening, landscaping, and pest control; utilities, water and sewage charges for the Common Area; maintenance of signs (other than Tenant’s signs which Tenant shall be responsible for paying for and maintaining); costs relating to the service contracts that Landlord elects to procure under Section 6.4(b) (including fire sprinkler system maintenance, monitoring and testing); premiums for liability, property damage, fire and other types of casualty and other insurance on the Common Area (however, Landlord may, in Landlord’s discretion, aggregate such insurance coverage on the Common Area with all of the buildings and properties in the Project, and allocate the cost of same as described in Section 4.4(d)); employee costs attributable to employees working on the Project; all property taxes and assessments levied on or attributable to the Common Area and all Common Area improvements (which shall be paid by Tenant in the same proration as the Property’s taxes under Section 4.2(c)); all personal property taxes levied on or attributable to personal property used in connection with the Common Area; personal property owned by Landlord which is used in the operation or maintenance of the Common Area; rental or lease payments paid by Landlord for rented or leased personal property used in the operation or maintenance of the Common Area; fees for required licenses and permits of the Common Area; repairing, maintaining, painting, and cleaning the exterior walls of buildings in the Project; striping, repairing, paving and maintenance of the parking areas; management fees relating to the operation of the Project (except while Cypress Pointe Simi Valley, LLC or any of its wholly owned subsidiary entities owns the Property no management fee shall be charged); repair or replacement of Common Area improvements; repairs to the roof membrane and any other non-structural element of the roof; and reserves for maintenance and repairs of any items that are chargeable to Tenant as Common Area Costs (including for maintenance and repair of the roof membrane). As to any reserves, Landlord shall not be required to segregate such reserves, pay interest on such reserves or to hold such reserve amounts in a separate account, and Landlord may retain all reserves upon the termination of this Lease, and Tenant is not entitled to be refunded any unused reserves. Landlord may, in Landlord’s sole discretion, have a waste and refuse disposal company service the Project and bill same as a Common Area Cost. Landlord may cause any or all of such services to be provided by third parties, and the cost of such service shall be included in Common Area Costs. Lighting of the Common Area may be allocated by Landlord in Landlord’s discretion, by having lights attached or wired to each adjacent property (including Tenant’s Property) to light the Common Area (in which case Tenant shall operate such lights during such hours as Landlord shall direct), and Tenant shall pay for the cost of maintaining and operating such lighting and utilities on Tenant’s separate electrical meter for which that Tenant shall solely pay as a non-Common Area Cost. Landlord may place monitoring and switching devices on all lighting of the Common Area, as Landlord may determine in its discretion.

(e)     Structural, Roof and Foundation. This Section 6.7 (including this paragraph (e)) is subject to ARTICLE 7 (Damage or Destruction) and ARTICLE 8 (Condemnation). Landlord shall be responsible, at Landlord’s cost and expense, to pay for repairing or replacing the structural components of the foundation, structural components of the exterior walls, and structural components of the roof (but not the roof membrane which shall not be considered a structural component), and the same shall not become part of the Common Area Costs to be paid by Tenant. In no event shall Landlord be responsible under this subparagraph (e) for any consequential damages to Tenant’s property, business or person, and Landlord’s sole responsibility under this subparagraph (e) is solely to repair items as described herein. Notwithstanding the above, Tenant shall be solely responsible and shall directly pay Landlord for any damage to the structure, foundation and/or roof caused by acts or negligence of Tenant or Tenant’s employees, contractors, customers, licensees, invitees, representatives or agents.

(f)        Tenant’s Share and Payment.

(i)     The Tenant’s Pro Rata Share, as defined in Section 1.11, may be modified by Landlord from time to time by Landlord considering the square footage of improvements of various properties in the Project, the type of improvements in the Project, any change as to the square footage and type of improvements, and such other factors as Landlord shall determine in Landlord’s sole, complete and absolute discretion. Additionally, if the Project is composed of more than one building, then Landlord, in Landlord’s sole discretion, may allocate certain Common Area Costs solely among those tenants in only one building, to the exclusion of the other building(s) in the Project.

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(ii)     Tenant shall pay Tenant’s annual Pro Rata Share of all Common Area Costs (prorated for any fractional month) and for any share of real property taxes and insurance premiums within fifteen (15) days of receipt of an invoice or written notice from Landlord that such costs are due and payable. Landlord may, at Landlord’s election, estimate in advance and bill to Tenant, from time to time, all real property taxes for which Tenant is liable under this Lease, all insurance premiums for which Tenant is liable under this Lease, and all Common Area Costs payable by Tenant hereunder, and Tenant shall pay same to Landlord within fifteen (15) days of billing. Landlord may adjust such estimates at any time based upon Landlord’s experience and reasonable anticipation of costs. Such adjustments shall be effective as of the next rent payment date after notice to Tenant. If Landlord delivered to Tenant a bill for periodic estimates of Common Area Costs, taxes and/or insurance premiums, then each year Landlord shall deliver to Tenant a statement setting forth in reasonable detail the Common Area Costs paid or incurred by Landlord during the preceding calendar year and Tenant’s share. Upon receipt of such statement, there shall be an adjustment between Landlord and Tenant (with payment to or credit given by Landlord as the case may be) so that Landlord shall receive the entire amount of Tenant’s share of such costs and expenses for such period.

(iii)     At Landlord’s election, such statements of estimated Common Area Costs (and at Landlord’s election any real property taxes and/or insurance premiums which Tenant is otherwise liable under this Lease) may be prorated and billed to Tenant monthly, quarterly, or at any other periodic intervals to be determined by Landlord. Tenant must pay such amounts, whether or not Tenant disagrees with such costs or their amounts, and if Tenant does so disagree, then Tenant’s sole recourse shall be to make any objections pursuant to Section 6.7(g), below, and to bring a separate legal cause of action against Landlord.

(g)     Tenant’s Right to Review Books and Records. Tenant shall have ninety (90) days from the receipt of any Landlord’s statement or invoice for Common Area Costs, taxes or insurance premiums to object to same in a writing delivered to Landlord. Any such objection must be in writing and must specify the particular item objected to. If Tenant fails to so object in writing within such ninety (90) day period, then such Common Area Costs, taxes and insurance premiums, as the case may be, shall be conclusively deemed correct. Tenant may not object to any Common Area Costs, taxes or insurance premiums if Tenant is then in default under the terms of this Lease. Tenant shall have the right to review, at Tenant’s sole cost and expense, Landlord’s books and records during normal business hours relating to the Common Area Costs, taxes and insurance premiums for the Project. Such inspection of Landlord’s records must be completed by the Tenant not later than thirty (30) days after such records are made available to the Tenant, and any reports prepared by Tenant’s employees, contractors or accountants or otherwise shall be delivered concurrently to the Landlord and the Tenant. If Landlord and Tenant are unable to resolve a dispute regarding the calculation of Common Area Costs, taxes or insurance premiums, then Tenant shall have the right to bring a legal action against Landlord in order to determine the correct amount of same under this Lease, which shall be Tenant’s exclusive remedy (and the Tenant may not setoff any rent or other amounts due by Tenant under the terms of this Lease). Tenant and any of Tenant’s employees, accountants, attorneys and other representatives shall keep any information gained from Tenant’s inspection of Landlord’s records confidential and shall not disclose same to any other person (including any other tenant of Landlord), except as may be required by law. If Tenant fails to timely exercise its rights to review or object to Landlord’s records in accordance with this Section 6.7(g), then such failure shall be conclusively deemed to constitute Tenant’s approval of Landlord’s statements of Common Area Costs, taxes or insurance premiums, as the case may be for the applicable period in question.

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(h)     Other Items Which May Be Classified as a Common Area Cost. Landlord may classify (as determined by Landlord) as a Common Area Cost those electrical, mechanical, structural, plumbing and irrigation systems, and other items used in common by two (2) or more tenant spaces in the Project and allocated among such tenants as Landlord shall determine. Any such item which is classified as a Common Area Cost by Landlord shall be maintained by Landlord and billed to Tenant as a Common Area Cost hereunder.

Section 6.8 Security. Landlord shall not be responsible for the providing of security or guard services of any kind to the Property or Project, and Tenant shall solely be responsible for the security of Tenant, Tenant’s employees, customers, invitees, contractors and other persons on the Property, and any property of those persons. In no event shall Landlord be responsible to Tenant or any employees, contractors, invitees, customers or agents of Tenant for any acts of terrorism, war, or violence of any kind occurring in the Property or the Project.

ARTICLE 7:     DAMAGE OR DESTRUCTION

Section 7.1 Partial Damage to Property. If the Property is “partially damaged” (as defined below), then the following provisions shall apply.

(a)     Notice By Tenant. Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. Subject to Section 7.2, if the shell portion of the Property is only partially damaged (i.e., less than sixty percent (60%) of the square feet of the shell portion of the Property is damaged and remains untenable as a result of such damage) and if the proceeds received by Landlord from the insurance policies described in Section 4.4(b) are sufficient to pay for all of the necessary repairs to the shell, then this Lease shall remain in effect and Landlord shall repair the damage to the shell portion of the Property (plus the tenant improvements to the extent of any remaining available insurance proceeds applicable to the Property) as soon as reasonably possible (but subject to force majeure events), and Tenant shall pay to Landlord any deductible amounts under any insurance policy.

(b)     Insurance Proceeds Not Sufficient. Subject to Section 7.2, in the event the shell portion of the Property is partially damaged, if the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair of the shell portion of the Property, or if the cause of the damage to the shell is not covered by the insurance policies which are maintained under Section 4.4(b), Landlord may elect either to: (i) repair the damage to the shell portion of the Property (and not the tenant improvements) as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within sixty (60) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate this Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the “deductible amount” (if any) under any insurance policies and shall be responsible to repair at Tenant’s cost the tenant improvements portion of the Property for which insurance proceeds are not received by Landlord, and if the damage was due to an act, omission or negligence of Tenant, or Tenant’s customers, licensees, visitors, employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord for such repair. In the event of damage to the tenant improvements portion of the Property, Tenant shall be responsible to pay for the repair of the tenant improvements portion of the Property to the extent not paid for by insurance, and Landlord shall have the right to review, direct and approve the repairs or reconstruction of any tenant improvements. If Landlord elects to terminate this Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall pay for the repair of any damage to the Property (including the shell and tenant improvements) and the entire building in which the Property is located. Tenant shall pay the cost of such repairs under the immediately preceding sentence, except that upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord’s termination notice. Landlord shall have the right to supervise and manage any repair or construction under this ARTICLE 7.

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Section 7.2 Damage Caused by Tenant. If the insurance proceeds received by Landlord are not sufficient (without considering any deductible amount) to pay the entire cost of repair or reconstruction of the Property (including the shell and tenant improvements), and such damage (whether partial or total) was caused by an act, omission or negligence by Tenant or Tenant’s employees, customers, licensees, visitors, contractors, invitees or agents, then: (i) Tenant shall pay the cost (including any insurance deductible amounts) of the repairs or reconstruction of the Property not paid for by insurance; and (ii) Landlord may elect by written notice to Tenant for this Lease to terminate or remain in effect.

Section 7.3 Substantial or Total Destruction. Subject to Section 7.2, if the shell portion of the Property is substantially or totally destroyed by any cause (i.e., the damage to the shell portion of the Property is greater than partial damage as described in Section 7.1), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the immediately preceding sentence, if the shell portion of the building on the Property (excluding tenant improvements) can be rebuilt within nine (9) months after the date of destruction, Landlord may elect to rebuild such shell portion of the Property, in which case this Lease shall remain in full force and effect. If Landlord elects to reconstruct or repair the damage to the shell portion of the Property, then Tenant shall pay for the costs of the repair or reconstruction of any tenant improvements not paid for by insurance proceeds, and Landlord shall reconstruct and repair such tenant improvements to the extent of such available insurance proceeds or to the extent that Tenant pays for the repair or reconstruction of the tenant improvements. Landlord shall notify Tenant of such election to reconstruct the shell after such destruction, but not later than one hundred twenty (120) days after Landlord’s receipt of Tenant’s written notice to Landlord of the occurrence of total or substantial destruction.

Section 7.4 Temporary Reduction of Rent. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this ARTICLE 7, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Landlord receives the proceeds of rental continuation insurance covering such period of time. However, the reduction shall not exceed the sum of one year’s payment of Base Rent, insurance premiums and real property taxes. Except for such possible reduction in Base Rent, insurance premiums and real property taxes, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property.

Section 7.5 Damage During Last Six Months. If the damage to the Property is by a casualty and occurs during the last six (6) months of the Lease Term (including any options to extend then exercised) and such damage will require more than sixty (60) days to repair, Landlord may elect to terminate this Lease as of the date the damage occurred. Landlord shall give written notification to Tenant of such election within thirty (30) days after Landlord’s actual knowledge of the occurrence of the damage.

Section 7.6 Waiver. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of this ARTICLE 7 shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Property.

Section 7.7 References to Shell and Tenant Improvements Under this ARTICLE 7. References to “shell” in this ARTICLE 7 shall mean the roof, foundation, exterior walls, slab floor, hardscape, and structural elements of the building portion of the Property, specifically excluding tenant improvements. References to “tenant improvements” in this ARTICLE 7 shall mean floor coverings, wall coverings, interior electrical, lighting, interior plumbing, mechanical systems, any elevators, heating, ventilating and air conditioning systems, all mechanical units, restrooms and plumbing fixtures, drop ceilings and finished ceilings, interior walls and doors, cabinetry, and any items described as tenant improvements in the Construction Rider.

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ARTICLE 8:     CONDEMNATION

If all or any portion of the building portion of the Property (but not the land) is taken under the power of eminent domain or sold under the threat of that power (all of which are called “Condemnation”), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. Landlord and Tenant hereby waive all rights under California law to terminate this Lease in the event of a Condemnation and agree that in the event of a Condemnation, the provisions of this ARTICLE 8 shall apply. If more than sixty percent (60%) of the floor area of the portion of the building constituting the Property (not including other buildings or portions of buildings in the Project) which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent shall be reduced in proportion to the reduction in the floor area of the building constituting the Property. Any award for taking or damaging of all or any part of the Property under the power of eminent domain, any payment made under the threat of the exercise of such power, and any Condemnation award or payment, including but not limited to any payment for Lease bonus value, compensation for reduction in the value of the leasehold, and the taking of the fee or otherwise, shall be distributed and paid solely to Landlord. Tenant shall be entitled to compensation for Condemnation for the goodwill of Tenant’s business if there is a separate award to Tenant by the condemning authority for the loss of Tenant’s goodwill. If this Lease is not terminated, Landlord shall repair any damage to the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord’s expense.

ARTICLE 9:     ASSIGNMENT AND SUBLETTING

Section 9.1 Restrictions on Assignment or Subletting.

(a)     Prohibition. Except as expressly set forth herein, Tenant shall not assign, mortgage, pledge, encumber, or otherwise transfer this Lease, whether by operation of law or otherwise, and shall not sublet or permit the Property or any part thereof to be used or occupied by others, without Landlord’s prior consent in each instance in compliance with the provisions of this ARTICLE 9. Any assignment, sublease, mortgage, pledge, encumbrance or transfer in contravention of the provisions of this ARTICLE 9 shall be void.

(b)     Collection of Rent. If, without Landlord’s consent, this Lease is assigned, or any part of the Property is sublet or occupied by anyone other than Tenant or this Lease or the Property or any of Tenant’s leasehold interest is encumbered (by operation of law or otherwise), Landlord may collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the Base Rent or Additional Rent. No such collection of rent shall be deemed to be (i) a waiver of the provisions of this ARTICLE 9, (ii) an acceptance of the assignee, subtenant or occupant as tenant, or (iii) a release of Tenant from the performance of Tenant’s covenants hereunder. Tenant shall remain fully liable for Tenant’s obligations under this Lease, regardless of any assignment or subletting.

(c)     Further Assignment/Subletting. Landlord’s consent to any assignment or subletting shall not relieve Tenant from the obligation to obtain Landlord’s express consent to any further assignment or subletting. In no event shall any permitted subtenant assign or encumber its sublease or further sublet any portion of its sublet space, or otherwise suffer or permit any portion of the sublet space to be used or occupied by others.

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Section 9.2 Tenant’s Notice and Landlord’s Right of Termination. If Tenant contemplates an assignment of this Lease or a sublease of all or any portion of the Property which would result, individually or when aggregated with any prior subletting then remaining in effect, in Tenant occupying less than ninety percent (90%) of the rentable square feet of the Property, then Tenant shall give Landlord written notice (the “Intention to Transfer Notice”) thereof (whether or not an assignee or sublessee or the terms of the contemplated assignment or sublease have been determined), which Intention to Transfer Notice shall specify (a) the date Tenant desires the contemplated assignment or sublease to be effective (the “Contemplated Effective Date”), and (b) with respect to a contemplated sublease of all or a part of the Property, a description of the portion of the Property contemplated to be sublet (such portion of the Property, or in the case of an intended assignment, the entire Property, hereinafter referred to as the “Contemplated Transfer Space”), and (c) that such Intention to Transfer Notice is delivered to Landlord pursuant to this Section 9.2 in order to allow Landlord to elect to recapture the Contemplated Transfer Space. Such Intention to Transfer Notice shall specify that it is delivered to Landlord pursuant to this Section 9.2 and shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord’s designee) shall be granted the right, at Landlord’s option: (i) to terminate this Lease with respect to the Contemplated Transfer Space, upon the terms and conditions hereinafter set forth, or (ii) if the contemplated transaction is an assignment of this Lease or a subletting of at least ten percent (10%) of the rentable square footage of the Property, to terminate this Lease with respect to the entire Property. Such option may be exercised by written notice from Landlord to Tenant within forty-five (45) days after Landlord’s receipt of the Contemplated Transfer Notice. If Landlord declines, or fails to elect in writing in a timely manner, to terminate this Lease with respect to the Contemplated Transfer Space or the entire Property, as the case may be, under this Section 9.2, then, subject to the other terms of this ARTICLE 9, for a period of three (3) months (the “Three-Month Period”) commencing on the last day of such forty-five (45) day period, Landlord shall not have any right to recapture the Contemplated Transfer Space with respect to any assignment or subletting made in writing during the Three-Month Period to the sublessee or assignee designated in the Intention to Transfer Notice, provided that any such assignment or subletting is substantially on the terms set forth in the Intention to Transfer Notice, and provided further that any such assignment or subletting shall be subject to the remaining terms of this ARTICLE 9. If such an assignment or subletting is not so consummated in writing within the Three-Month Period (or if an assignment or subletting is so consummated, then upon the expiration of the term of any assignment or subletting of such Contemplated Transfer Space consummated within such Three-Month Period), Tenant shall again be required to submit a new Intention to Transfer Notice to Landlord with respect to any contemplated assignment or subletting, as provided above in this Section 9.2.

Section 9.3 Consequences of Landlord’s Termination. If Landlord exercises its option to terminate all or a portion of this Lease pursuant to Section 9.2: (a) this Lease shall end and expire with respect to all or a portion of the Property for which Landlord elects in writing to terminate, as the case may be, on the Contemplated Effective Date; (b) Base Rent and Tenant’s payments for Additional Rent shall be apportioned, paid or refunded as of such date; (c) Tenant, upon Landlord’s request, shall enter into an amendment of this Lease ratifying and confirming such total or partial termination, and setting forth any appropriate modifications to the terms and provisions hereof; (d) Landlord shall be free to lease the Contemplated Transfer Space or the Property, as the case may be, or any part thereof, to Tenant’s prospective assignee or subtenant; (e) if this Lease shall end with respect to a portion of the Property, Tenant shall, at Tenant’s sole cost and expense, separately demise (in a manner acceptable to Landlord and in compliance with all laws and regulations) such portion of the Property, and make available all utility services (and separate meters) so as to make such portion of the Property a self-contained rental unit satisfactory in all respects to Landlord and in compliance with all legal requirements and building code; and (f) Landlord and Tenant shall have no further liability under this Lease with respect to that portion of the Property so terminated, provided that Landlord shall return any unapplied portion of the Security Deposit to Tenant and Tenant shall remain liable, with respect to the period of its tenancy prior to such termination, for the performance of all obligations under this Lease with respect to such portion of the Property so terminated (including, without limitation, Tenant’s payment of reconciliation of common area expenses), and Landlord shall have all the rights and remedies with respect to such obligations as set forth in this Lease, and provided further that any provisions of this Lease which would otherwise expressly survive the expiration or earlier termination of this Lease shall survive such termination pursuant to Section 9.2.

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Section 9.4 Conditions to Assignment/Subletting.

(a)     Required Items of Tenant. If Landlord does not exercise any of Landlord’s options provided under Section 9.2, and provided that no event of default by Tenant then exists, Landlord’s consent to the proposed assignment or subletting shall not be unreasonably withheld. Such consent shall be granted or denied, as the case may be, within thirty (30) days after Landlord’s receipt of: (a) a true and complete statement detailing the identity of the proposed assignee or subtenant, the nature of its business, its proposed use of any Hazardous Material, and its proposed use of the Property; (b) a nonrefundable deposit of an amount equal to One Thousand Five Hundred Dollars ($1,500) (which amount shall be increased from the Commencement Date to date of payment by the increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index, for all urban consumers for the geographic area of the Property on the basis of 1981-1984 = 100), which deposit amount shall be applied by Landlord against Landlord’s attorneys’ fees and legal costs for which Tenant is obligated to reimburse Landlord under this ARTICLE 9; (c) current financial information with respect to the proposed assignee or subtenant, including its most recent financial statements; and (d) any other information Landlord may reasonably request, provided that:

(i)     in Landlord’s reasonable judgment, the proposed assignee or subtenant is engaged in a business or activity, and the Property will be used in a manner, which: (a) is in keeping with the then standards of the Project and business park in which the Property is located, and will not cause an increase in wear and tear on the Property from the prior use; (b) limits the use of the Property to uses permitted under this Lease; and (c) does not violate any restrictions or covenants set forth in this Lease, any loan which may encumber the Property or Project, the business of the proposed assignee or subtenant and the proposed use of the Property, and (d) will not create a risk of release of Hazardous Materials on the Property;

(ii)     the proposed assignee or subtenant has sufficient financial means to perform all of its obligations under this Lease or the sublease, as the case may be, and Landlord has been furnished with reasonable proof thereof;

(iii)     the form of the proposed sublease or instrument of assignment shall be reasonably satisfactory to Landlord and shall comply with the provisions of this Lease;

(iv)     there shall be not more than two (2) separately demised subtenants of the Property;

(v)     Tenant shall, upon demand, reimburse Landlord for all expenses and attorneys’ fees incurred by Landlord in connection with such assignment or sublease and the granting of the requested consent, including any investigations as to the acceptability of the proposed assignee or subtenant, reviewing any plans and specifications for alterations or modifications of the Property proposed to be made in connection therewith;

(vi)     if the proposed subtenant or assignee is an entity organized under the laws of any jurisdiction other than the United States or any state thereof, or is not a United States citizen, if an individual, such person shall waive any immunity to which it may entitled, and shall be subject to the service of process in, and the jurisdiction of the courts of, the State of California; and

(vii)     in Landlord’s reasonable judgment, the proposed assignee or subtenant shall not be of a type or character, or engaged in a business or activity, or owned or controlled by or identified with any entity, which may result in protests or civil disorders at, or other disruptions of the normal business activities in, the Property, Project or business park in which the Property is located.

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(b)     Agreements. With respect to each and every subletting and/or assignment authorized by Landlord under the provisions of this Lease, it is further agreed that:

(i)     the form of the proposed assignment or sublease shall be satisfactory to Landlord and shall comply with the provisions of this ARTICLE 9;

(ii)     no sublease shall be for a term ending later than the expiration date of this Lease, and no sublease of the entire Property shall be for a term ending later than one day prior to the expiration date of this Lease or such sublease of the entire Property shall be classified as an assignment;

(iii)     no sublease and/or assignment shall be effective, and no subtenant or assignee shall take possession of any part of the Property, until an executed counterpart of such sublease or assignment has been delivered to Landlord and approved by Landlord as provided in Section 9.4(a);

(iv)     if an event of default by Tenant shall occur at any time prior to the effective date of such assignment or subletting, then Landlord’s consent thereto, if previously granted, shall be immediately deemed revoked without further notice to Tenant, and if such assignment or subletting would have been permitted without Landlord’s consent pursuant to Section 9.8, such permission shall be void and without force and effect, and in either such case, any such assignment or subletting shall constitute a further event of default by Tenant hereunder; and

(v)     each sublease and/or assignment shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate. Tenant and each subtenant shall be deemed to have agreed that upon the occurrence and during the continuation of an event of default by Tenant hereunder, Tenant has hereby assigned to Landlord, and Landlord may, at its option, accept such assignment of, all right, title and interest of Tenant as sublandlord under such sublease, together with all modifications, extensions and renewals thereof then in effect, and such subtenant shall, at Landlord’s option and upon notice from Landlord, attorn to Landlord pursuant to the then executory provisions of this Lease other than the monetary terms of this Lease, which monetary terms shall be governed by the executory terms of such sublease, except that Landlord shall not be: (a) liable for any previous act or omission of Tenant under such sublease; (b) subject to any counterclaim, offset or defense, which theretofore accrued to such subtenant against Tenant; (c) bound by any previous modification of such sublease not consented to by Landlord, or by any prepayment of more than one month’s rent and additional rent under such sublease; (d) bound to return such subtenant’s security deposit, if any, except to the extent that Landlord shall receive actual possession of such deposit and such subtenant shall be entitled to the return of all or any portion of such deposit under the terms of its sublease; or (e) obligated to make any payment to or on behalf of such subtenant, or to perform any work in the subleased space or the Property, or in any way to prepare the subleased space for occupancy, beyond Landlord’s obligations under this Lease.

Section 9.5 Binding on Tenant; Indemnification of Landlord. Notwithstanding any assignment or subletting or any acceptance of monies or payment by Landlord from any assignee or subtenant, Tenant shall remain fully liable for the payment of all Base Rent and Additional Rent due and for the performance of all other terms, covenants and conditions contained in this Lease on Tenant’s part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant or assignee or anyone claiming under or through any subtenant or assignee shall be deemed to be a default under this Lease by Tenant. Tenant shall indemnify, defend, protect and hold harmless Landlord from and against any and all losses or liabilities resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or anyone claiming under or through any subtenant or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease, irrespective of whether Landlord shall give or decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise any of its options under this ARTICLE 9.

Section 9.6 Tenant’s Failure to Complete. If Landlord consents to a proposed assignment or sublease and Tenant fails to execute and deliver to Landlord such assignment or sublease within ninety (90) days after the giving of such consent, then Tenant shall again comply with all of the provisions and conditions of Section 9.2 and Section 9.4 hereof before assigning this Lease or subletting all or part of the Property.

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Section 9.7 Profits on Assignment or Subleasing. If Tenant shall enter into any assignment or sublease permitted hereunder or consented to by Landlord, Tenant shall, within sixty (60) days of Landlord’s consent to such assignment or sublease, deliver to Landlord a complete list of Tenant’s reasonable brokerage fees actually paid to third-party brokers not affiliated or related to Tenant (which brokerage fees may in no event may be greater than five percent (5%) of the total rents to be received by Tenant for such assignment or sublease). Tenant shall deliver to Landlord evidence of the payment of such fees promptly after the same are paid. In consideration of such assignment or subletting, Tenant shall pay to Landlord the following amounts:

(a)     Assignment. In the case of an assignment, on the effective date of the assignment, an amount equal to fifty percent (50%) of all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment after first deducting Tenant’s reasonable third-party brokerage fees (which brokerage fee deduction is subject to the limits under the first paragraph of this Section 9.7) in connection with such transaction; or

(b)     Sublease. In the case of a sublease, fifty percent (50%) of all sums and any other consideration payable under the sublease to Tenant by the subtenant which exceeds on a per square foot basis the Base Rent accruing during the term of the sublease in respect of the subleased space after first deducting Tenant’s reasonable third-party brokerage fees (which brokerage fee deduction is subject to the limits under the first paragraph of this Section 9.7) in connection with such transaction. The sums payable under this clause shall be paid by Tenant to Landlord as and when paid by the subtenant to Tenant.

(c)     Written Statement. Tenant shall provide to Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property, and any transaction related thereto, within ten (10) days after the transactional documentation is executed, and Landlord may inspect from time to time Tenant’s books and records to verify the accuracy of the amounts due by Tenant under this Section 9.7. Upon written request, Tenant shall promptly furnish to Landlord certified photocopies of all transactional documentation, which shall be certified by Tenant as being true and correct.

Section 9.8 Transfers of Interests in Tenant, and Assignment or Sublease to a Related Party.

(a)     Entity Transfers. If Tenant is a corporation, the transfer by one or more transfers, directly or indirectly, by merger, assignment, operation of law or otherwise, of a majority of the number of shares of stock and/or voting control of Tenant shall be deemed a voluntary assignment of this Lease; provided, however, that the provisions of this Section 9.8(a) shall not apply to the transfer of shares of stock of Tenant if and so long as Tenant’s stock is publicly traded on a United States domestic nationally recognized stock exchange. For purposes of this Section 9.8 the term “transfers” shall be deemed to include the issuance of new stock or of treasury stock which results in a majority of the stock of Tenant being held by a person or persons that do not hold a majority of the stock of Tenant on the Commencement Date. If Tenant is a partnership or limited liability company, the transfer by one or more transfers, directly or indirectly, by operation of law or otherwise, of a majority interest in the capital or profit interest of the partnership or limited liability company, or transfer of control of the partnership or limited liability company, shall be deemed a voluntary assignment of this Lease. If Tenant is a limited liability company, trust, or any other legal entity (including a corporation or a partnership), the transfer by one or more transfers, directly or indirectly, of control of such entity, however characterized, shall be deemed a voluntary assignment of this Lease. The provisions of Section 9.1 shall not apply to transactions with an entity into or with which Tenant is merged or consolidated, or to which substantially all of Tenant’s assets are transferred, so long as: (i) such transfer was made for a legitimate independent business purpose and not for the purpose of transferring this Lease; (ii) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (a) the net worth of Tenant immediately prior to such merger, consolidation or transfer, and (b) the net worth of the original Tenant on the date of this Lease; (iii) the persons who owned a controlling interest in Tenant on the Commencement Date also own a controlling interest in the surviving entity in such merger; (iv) proof satisfactory to Landlord of such net worth is delivered to Landlord at least ten (10) days prior to the effective date of any such transaction; and (v) Landlord receives copies of all relevant documents regarding such merger, including the filed certificate of merger prior to or within twenty (20) days of such merger.

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(b)     Sublease or Assignment to a Related Entity. Notwithstanding the foregoing, Tenant may enter into an assignment or sublease with any Related Entity (as defined below), without obtaining Landlord’s consent and without the application of Landlord’s termination rights under Section 9.2 or Landlord’s right to share in profits under Section 9.7, provided that: (i) Tenant provides Landlord with prior written notice of such sublease or assignment to such Related Entity and any documentation or information reasonably requested by Landlord regarding such assignment or subletting or such Related Entity; (ii) such assignment or subletting is not a subterfuge by Tenant to avoid its obligations under this Lease; and (iii) the Related Entity is, in Landlord’s reasonable judgment, of a character and engaged in a business which is in keeping with the standards for the Property and the occupancy thereof. Such sublease shall not be deemed to vest in any such Related Entity any right or interest in this Lease or the Property nor shall it relieve, release, impair or discharge any of Tenant’s obligations hereunder. For purposes of this Lease, the term “Related Entity” shall mean any entity that controls, is controlled by, or is under common control with Tenant. For purposes of the immediately preceding sentence, the term “control” shall mean the direct or indirect common ownership of not less than fifty percent (50%) of the equity ownership interests of the applicable entity.

(c)      Applicability. The limitations set forth in this Section 9.8 shall apply to subtenant(s), assignee(s) and guarantor(s) of this Lease, if any, and any transfer by any such entity in violation of this Section 9.8 shall be a transfer in violation of Section 9.1, and this ARTICLE 9.

(d)     Modifications; Takeover Agreements. Any modification, amendment or extension of a sublease and/or any other agreement by which a landlord (or its affiliate) of a building other than the Property agrees to assume or perform the obligations of the Tenant under this Lease shall be deemed a sublease for the purposes of Section 9.1 hereof.

Section 9.9 Assumption of Obligations. Any assignment, sublease or transfer, whether made with Landlord’s consent or without Landlord’s consent, if and to the extent permitted hereunder, shall not be effective unless and until the assignee or sublessee executes, acknowledges and delivers to Landlord: (i) an agreement in form and substance satisfactory to Landlord whereby the assignee or sublessee (a) assumes Tenant’s obligations under this Lease and (b) agrees that, notwithstanding such assignment, sublease or transfer, the provisions of Section 9.1 hereof shall be binding upon it in respect of all future assignments, subleases and transfers; and (ii) certificates or policies of insurance as required of the Tenant under this Lease.

Section 9.10 Tenant’s Liability. The joint and several liability of Tenant and any successors-in-interest of Tenant and the due performance of Tenant’s obligations under this Lease shall not be discharged, released or impaired by any agreement or stipulation made by Landlord, or any grantee, sublessee or assignee of Landlord, extending the time, or modifying any of the terms and provisions of this Lease, or by any waiver or failure of Landlord, or any grantee, sublessee or assignee of Landlord, to enforce any of the terms and provisions of this Lease.

ARTICLE 10:     DEFAULTS; REMEDIES

Section 10.1 Covenants and Conditions. Tenant’s performance of each of Tenant’s obligations under this Lease is a condition as well as a covenant. Tenant’s right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions.

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Section 10.2 Defaults. Tenant shall be in material default under this Lease:

(a)     Abandonment. If Tenant abandons the Property or if Tenant’s vacation of the Property results in the cancellation of any insurance described in Section 4.4;

(b)     Failure to Pay. If Tenant fails to pay rent or any other charge or amount when due;

(c)     Nonperformance. If Tenant fails to perform any of Tenant’s non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant’s failure to perform constitutes a non-curable breach of this Lease. The notice required by this paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement;

(d)     General Assignment and Bankruptcy. (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant’s assets located at the Property or of Tenant’s interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant’s assets located at the Property or of Tenant’s interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this paragraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant’s interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease;

(e)     Guaranty Not Revocable. If any guarantor of this Lease revokes or otherwise terminates, or purports to revoke or otherwise terminate, any guaranty of all or any portion of Tenant’s obligations under this Lease. Unless otherwise expressly provided in writing, no guaranty of this Lease is revocable; and/or

(f)      Accuracy of Financial Statements. If any financial statement of Tenant, any assignee or subtenant of Tenant, or any guarantor of Tenant given to Landlord is materially false or misleading.

Section 10.3 Remedies. On the occurrence of any default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have:

(a)     Types of Remedies. Terminate Tenant’s right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant’s default, including: (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Tenant would have paid for the balance of the Lease Term after the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord’s reasonable attorneys’ fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the “worth at the time of the award” is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the “worth at the time of the award” is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Section 10.3(a), or (ii) proceeding under Section 10.3(b).

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(b)     Maintain Tenant’s Right of Possession. Maintain Tenant’s right to possession (in California under California Civil Code Section 1951.4, as amended, or its successor provision), in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlord’s rights and remedies under this Lease, including the right to recover the rent as it becomes due. Landlord and Tenant agree that the limitations on assignment and subletting contained in ARTICLE 9 of this Lease are reasonable. Landlord and Tenant specifically agree that Landlord’s acts, if any, of maintenance or preservation, and Landlord’s efforts to relet the Property, or the appointment of a receiver to protect Landlord’s interest under this Lease, shall not constitute a termination of Tenant’s right to possession.

(c)     Other Remedies. Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located.

Section 10.4 Repayment of Abated Rent and Other Inducements. If this Lease provides for a postponement of any monthly rental payments, a period of “free” rent, “abated rent”, or other rent concession, such postponed rent, “free” rent, or other rent concession is sometime referred to herein as the “Abated Rent.” If this Lease provides for the giving or paying of any sum or other consideration by Landlord to or for the benefit of Tenant (including, without limitation, the payment by Landlord of any broker’s commission), then the giving or paying of any such sum or other consideration is sometimes referred to herein as the “Other Inducements”. Landlord’s agreement to provide any such Abated Rent or Other Inducements shall be deemed contingent upon Tenant’s full, faithful and punctual performance of Tenant’s obligations under this Lease. Tenant acknowledges that its right to receive the benefit of the Abated Rent and the Other Inducements is absolutely conditioned upon Tenant’s full, faithful and punctual performance of its obligations under this Lease. If Tenant defaults in the performance of any of its obligations under this Lease, the Abated Rent shall immediately become due and payable in full, the Other Inducements shall be deemed revoked, and this Lease shall be enforced as if there were no such abatement or other inducement, and in such case such the Abated Rent and such Other Inducements shall be immediately due and payable by Tenant to Landlord.

Section 10.5 Cumulative Remedies. Landlord’s exercise of any right or remedy shall not prevent it from exercising any other right or remedy.

ARTICLE 11:     PROTECTION OF LENDERS

Section 11.1 Subordination. This Lease is, and shall be, subordinated to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or this Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant’s obligations under this Lease shall not be increased in any material way (the performance of ministerial acts or providing notices shall not be deemed material). Notwithstanding any provision of this Section 11.1, Tenant’s right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant’s obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground Lease, deed of trust or mortgage or the date of recording thereof.

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Section 11.2 Attornment. If Landlord’s interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord’s interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord’s interest.

Section 11.3 Signing of Documents. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document.

Section 11.4 Estoppel Certificates.

(a)     Requirements. Upon Landlord’s written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been canceled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or this Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord’s request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct.

(b)     Tenant’s Nondelivery. If Tenant does not deliver such statement to Landlord within such ten (10) day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been canceled or terminated except as otherwise represented by Landlord; (iii) that not more than one month’s Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under this Lease. In such event, Tenant shall be estopped from denying the truth of such facts.

Section 11.5 Tenant’s Financial Condition. Within ten (10) days after written request from Landlord, Tenant, any assignee or subtenant or Tenant, and any guarantor of Tenant’s obligations shall deliver to Landlord such financial statements and tax returns as Landlord reasonably requires to verify the financial condition (including net worth) of Tenant, any assignee or subtenant of Tenant, or any guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements of Tenant, any assignee or subtenant of Tenant, or any guarantor of Tenant that may be required by such lender to facilitate the financing or refinancing of the Property. Tenant represents and warrants to Landlord that each such financial statement that has been heretofore delivered to Landlord (or which may be hereafter delivered to Landlord) is true, complete and accurate in all respects as of the date of such financial statement. All financial statements shall be treated as confidential and shall be used only for the purposes set forth in this Lease.

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ARTICLE 12:     LEGAL COSTS

Section 12.1 Legal Proceedings. If Tenant or Landlord shall be in breach or default under this Lease, such party (the “Defaulting Party”) shall reimburse the other party (the “Nondefaulting Party”) upon demand for any legal fees and legal costs that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such attorneys’ fees and costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys’ fees and costs. The losing party in such action shall pay such attorneys’ fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord’s interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended (whether such bankruptcy proceeding affects Tenant or any other person affiliated with or related to Tenant). Tenant shall defend Landlord against any such claim or action at Tenant’s expense with counsel reasonably acceptable to Landlord or, at Landlord’s election, Tenant shall reimburse Landlord for any legal fees or costs Landlord incurs in any such claim or action.

Section 12.2 Landlord’s Consent. Tenant shall pay Landlord’s attorneys’ fees, costs and expenses incurred in connection with Tenant’s request for Landlord’s consent under ARTICLE 9 (Assignment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord’s consent.

ARTICLE 13:     MISCELLANEOUS PROVISIONS

Section 13.1 Non-Discrimination. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof.

Section 13.2 Landlord’s Liability; Certain Duties.

(a)     “Landlord”. As used in this Lease, the term “Landlord” means only the current owner or owners of the fee title to the Property or the leasehold estate under a ground lease of the Property at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord has title to the fee interest in the Property. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease.

(b)     Tenant’s Notice of Landlord’s Default. Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant’s notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) day period and thereafter diligently pursued to completion.

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(c)          Liability. Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord’s interest in the Property, and neither the Landlord nor its partners, shareholders, members, officers, managers, employees or other principals shall have any personal liability under this Lease.

Section 13.3 Severability. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect.

Section 13.4 Interpretation. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term “Tenant” shall include Tenant’s agents, employees, contractors, invitees, successors or others using the Property with Tenant’s expressed or implied permission. This Lease, and any guaranty executed in connection therewith, is to be deemed prepared jointly by the Landlord and the Tenant, and any uncertainty or ambiguity existing therein, if any, shall not be interpreted against any party, but instead, according to the application of the rules of interpretation of contracts. Both Landlord and Tenant acknowledge the right and opportunity to have been represented by legal counsel in the preparation of this Lease and any accompanying guaranty. Therefore, this Lease and any guaranty thereof shall be interpreted as if prepared by both the Landlord and the Tenant.

Section 13.5 Incorporation of Prior Agreements; Modifications. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void.

Section 13.6 Notices. All notices required or permitted under this Lease shall be in writing and shall be personally delivered, sent by facsimile, delivered by next-day overnight delivery by a recognized overnight mail and delivery company, sent by certified mail, return receipt requested, or sent by United States mail postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.3 above, except that upon Tenant’s taking possession of the Property, the Property shall be Tenant’s address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.2 above. All notices shall be effective upon personal delivery; if mailed, then three (3) days after deposit in the United States mail; the next business day if sent by overnight delivery service; or if sent by facsimile, then upon the sending of such facsimile provided a copy of same is mailed by United States mail to the address and in the manner provided for in this paragraph or sent by next-day delivery by a recognized overnight mail delivery company (regardless of when such mailed or next-day delivered copy is received if also sent by facsimile). Either party may change its notice address upon written notice to the other party.

Section 13.7 Waivers. All waivers must be in writing and signed by the waiving party. Landlord’s failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement.

Section 13.8 Recordation. Tenant shall not record this Lease (nor a notice or memorandum of same) without prior written consent from Landlord. Landlord may require that a “Short Form” memorandum of this Lease be executed by both parties and be recorded.

Section 13.9 Binding Effect; Choice of Law. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant’s successor unless the rights or interests of Tenant’s successor are acquired in accordance with the terms of this Lease. The laws of the State of California shall govern this Lease.

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LANDLORD’S INITIALS _______________

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Section 13.10 Corporate Authority; Partnership Authority. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. On the date this Lease is signed, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant’s Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person or entity signing this Lease for Tenant represents and warrants that he or it is a general partner of the partnership, that he or it has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner’s withdrawal or addition. On the date this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant’s recorded statement of partnership or certificate of limited partnership. If Tenant is a limited liability company, each person or entity signing this Lease for Tenant represents and warrants that he or it is the manager of the limited liability company, that he or it has full authority to sign for the limited liability company, and that this Lease binds the limited liability company. Tenant shall give written notice to Landlord of any limited liability company’s manager’s withdrawal or addition. On the date this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant’s certificate of organization and operating agreement of the limited liability company.

Section 13.11 Joint and Several Liability. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant.

Section 13.12 Force Majeure. If Landlord cannot perform any of its obligations due to events beyond Landlord’s control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord’s control include, but are not limited to, acts of God, war, acts of terrorism, civil commotion, labor disputes, strikes, fire, flood, earthquake or other casualty, shortages of labor or material, government regulation or restriction and weather conditions.

Section 13.13 Execution of Lease. This Lease may be executed in counterparts, and when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord’s delivery of this Lease to Tenant shall not be deemed an offer to lease and shall not be binding upon either party until executed and delivered by both parties.

Section 13.14 Survival. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease.

ARTICLE 14:     BROKERS

Section 14.1 No Other Brokers. Tenant represents and warrants to Landlord that the only agents, brokers, finders or other parties with whom Tenant has dealt or who are or may be entitled to any commission or fee in connection with this Lease as the result of the past or present representation of Tenant or otherwise through Tenant’s acts is Lee & Associates LA North/Ventura, Inc. (Grant Fulkerson) (herein, “Tenant’s Broker”). In reliance on and subject to said representation and the full performance by Tenant of Tenant’s obligations under this Lease, Landlord agrees to pay to Tenant’s Broker a brokers commission in an amount and on the terms set forth in a separate written agreement (the “Brokers Agreement”) entered into by and among Landlord, Tenant’s Broker, and Lee & Associates LA North/Ventura, Inc. (Michael Tingus) (herein “Landlord’s Broker”). Tenant’s Broker and Landlord’s Broker are sometimes collectively referred to herein as the “Brokers”. Except for the payment of the broker’s commission to Tenant’s Broker in accordance with the Brokers Agreement, Tenant shall indemnify, defend and hold Landlord harmless from and against all costs and liabilities (including, without limitation, attorneys’ fees and litigation expenses) arising from claims asserted by any agent, broker, finder or other party with whom Tenant has dealt or who is or may be entitled to any commission or fee in connection with this Lease as the result of the past or present representation of Tenant or otherwise through Tenant’s acts.

TENANT’S INITIALS _______________

LANDLORD’S INITIALS _______________

32

ARTICLE 15:     CONFIDENTIALITY AGREEMENT

Landlord and Tenant hereby agree to keep strictly confidential all of the rental amounts and other terms of this Lease and not to disclose same to any person except for a Permitted Person). For purposes of this ARTICLE 15, a “Permitted Person” shall mean the employees, partners, directors, officers and managers of Tenant and Landlord, Tenant’s and Landlord’s respective lenders, and purchaser or prospective purchaser of the Property, any Landlord’s appraiser of the Property, any sublessee or assignee of the Lease and any of Landlord’s or Tenant’s attorneys and accountants. The terms of this Lease and the rental amounts may be specifically disclosed by either Landlord or Tenant in any legal action or proceeding in order to enforce the terms of this Lease. Additionally, such information may be disclosed by Landlord and Tenant to the extent required by law for a subpoena from any person or governmental agency, provided that the recipient of such subpoena provides written notice of such subpoena to the other party prior to such disclosure and allows such other party ample opportunity to file objections to such subpoena.

TENANT’S INITIALS _______________

LANDLORD’S INITIALS _______________

33

Landlord and Tenant have initialed and signed this Lease below and have initialed all Riders which are attached to or incorporated by reference in this Lease.

“LANDLORD”
Cypress Pointe Simi Valley, LLC,
a California limited liability company
By:	Cypress Management Company, Inc.,
	a California corporation, Manager
	By:
	Brian L. Harvey, President
“TENANT”
Qualstar Corporation,
a California corporation

By:

Name:

Its:

By:

Name:

Its:

TENANT’S INITIALS _______________

LANDLORD’S INITIALS _______________

34

EX-31

EXHIBIT 31.1

SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Steven N. Bronson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Qualstar Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 12, 2015	/s/ STEVEN N. BRONSON
	Steven N. Bronson
	Principal Executive Officer

EX-31

EXHIBIT 31.2

SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Louann Negrete, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Qualstar Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 12, 2015	/s/ LOUANN NEGRETE
	Louann Negrete
	Principal Financial Officer

EX-32

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven N. Bronson, Chief Executive Officer of Qualstar Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1) the Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 12, 2015	/s/ STEVEN N. BRONSON
	Steven N. Bronson
	Principal Executive Officer

EX-32

 

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Louann Negrete, Chief Financial Officer of Qualstar Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1) the Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 12, 2015	/s/ LOUANN NEGRETE
	Louann Negrete
	Principal Financial Officer

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Note 9 - Commitments (Details) - Future Lease Payments (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014
Future Lease Payments [Abstract]
2015	$ 79
2016	231
2017	248
2018	212
2019	133
Thereafter	79
Total	$ 982

XML

Note 14 - Segment Information (Details) - Total Assets by Segment (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Cash and marketable securities:
Cash and cash equivalents	$ 5,242	$ 5,462	$ 1,922	$ 1,966
Marketable securities		1,763
Total cash and marketable securities	5,242	7,225
Other assets:
Total other assets	6,716	5,560
Total assets	11,958	12,785
Power Supplies [Member]
Other assets:
Power Supplies and Tape Libraries	2,386	2,329
Tape Libraries [Member]
Other assets:
Power Supplies and Tape Libraries	$ 4,330	$ 3,231

XML

Note 14 - Segment Information (Details) - Segment Revenue (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenue	$ 3,528	$ 3,440	$ 6,848	$ 5,631
Power Supplies [Member]
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenue	1,553	1,843	2,952	2,796
Tape Libraries [Member] | Product [Member]
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenue	1,457	1,020	2,824	1,844
Tape Libraries [Member] | Service [Member]
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenue	518	577	1,072	991
Tape Libraries [Member]
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenue	$ 1,975	$ 1,597	$ 3,896	$ 2,835

XML

Note 6 - Cash, Cash Equivalents and Marketable Securities Recorded at Fair Value (Details) (USD $)	6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Cash and Cash Equivalents [Abstract]
Marketable Securities, Realized Gain (Loss)	$ (8,000)	$ 0

XML

Note 7 - Balance Sheet Details (Tables)

6 Months Ended

Dec. 31, 2014

Disclosure Text Block Supplement [Abstract]

Schedule of Inventory, Current [Table Text Block]

	December 31, 2014			June 30, 2014
Raw materials	$	3,129		$	3,116
Finished goods		2,939			3,347
Subtotal		6,068			6,463
Less: Inventory reserve		(2,999	)		(3,286	)
Net inventory balance	$	3,069		$	3,177

Schedule of Other Accrued Liabilities [Table Text Block]

	December 31, 2014		June 30, 2014
Accrued sales and use tax	$	12	$	17
Accrued commissions		72		48
Accrued audit fees		71		87
Accrued marketing coop expenses		39		28
Accrued legal expense		48		251
Deferred rent		-		84
Lease abandonment		48		445
Accrued royalty		49		45
Warranty reserve		168		159
Other accruals		1		10
Total other accrued liabilities	$	508	$	1,174

XML

Note 11 - Stock Based Compensation (Details) - Restricted Stock Awards Activity (Restricted Stock [Member], USD $)	6 Months Ended
	Dec. 31, 2014
Restricted Stock [Member]
Note 11 - Stock Based Compensation (Details) - Restricted Stock Awards Activity [Line Items]
Nonvested at June 30, 2014	100,000,000
Nonvested at June 30, 2014	$ 1.61
Granted (1)	0	[1]
Granted (1)	$ 0	[1]
Vested	0
Vested	$ 0
Nonvested at December 31, 2014	100,000,000
Nonvested at December 31, 2014	$ 1.61

[1] Restricted stock was granted on April 1, 2014 to Daniel K. Jan of 100,000 shares to vest 33,333 on April 1, 2017; 33,333 to vest April 1, 2018 and 33,334 to vest April 1, 2019. The award is part of his employment agreement and the grant price is the closing price of the stock on April 1, 2014 of $1.61. The unvested shares are forfeited upon termination of his employment.

XML

Note 8 - Contingencies (Details) - Product Warranty Liability (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Product Warranty Liability [Abstract]
Beginning balance	$ 159	$ 190
Cost of warranty claims	(26)	(27)
Accruals for product warranties	35	10
Ending balance	$ 168	$ 173

XML

Note 14 - Segment Information (Details) - (Loss) Income Before Taxes by Segment (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Loss before Taxes
(Loss) Income Before Taxes	$ (245)	$ (251)	$ (567)	$ (2,778)
Power Supplies [Member]
Loss before Taxes
(Loss) Income Before Taxes	(164)	(69)	(406)	(387)
Tape Libraries [Member]
Loss before Taxes
(Loss) Income Before Taxes	$ (81)	$ (182)	$ (161)	$ (2,391)

XML

Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information

6 Months Ended

Dec. 31, 2014

Risks and Uncertainties [Abstract]

Concentration Risk Disclosure [Text Block]

 NOTE 3 – SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, AND GEOGRAPHIC INFORMATION

We are exposed to interest rate risks.  Our investment income is sensitive to changes in the general level of U.S. interest rates. We have no outstanding debt nor do we utilize auction rate securities or derivative financial instruments in our investment portfolio.

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. Sales outside North America represented approximately 54.9% of net revenues in the three months ended December 31, 2014, and 41.2% of net revenues in the three months ended December 31, 2013. Sales outside North America represented approximately 51.3% of net revenues in the six months ended December 31, 2014, and 40.3% of net revenues in the six months ended December 31, 2013.

Two customers accounted for 14.4% and 10.4% of the Company’s net revenue for the three month period ended December 31, 2014.  The customers’ accounts receivable balance totaled approximately 31.1% and 7.9%, respectively, of net accounts receivable as of December 31, 2014. Two customers accounted for 15.1% and 10.5% of the Company’s net revenue for the three month period ended December 31, 2013. The customers’ accounts receivable balances totaled approximately 10.1% and 17.0%, respectively, of net accounts receivable as of December 31, 2013.

Two customers accounted for 11.9% and 10.6% of the Company’s net revenue for the six month period ended December 31, 2014.  The customers’ accounts receivable balance, totaled approximately 31.1% and 7.9%, respectively, of net accounts receivable as of December 31, 2014. Two customers accounted for 15.0% and 9.5% of the Company’s net revenue for the six month period ended December 31, 2013. The customers’ accounts receivable balances totaled approximately 10.1% and 17.0%, respectively, of net accounts receivable as of December 31, 2013.

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Note 12 - Legal Proceedings (Details) (USD $)	Dec. 31, 2014
Disclosure Text Block Supplement [Abstract]
Loss Contingency, Accrual, Current	$ 48,000

XML

Note 14 - Segment Information (Tables)

6 Months Ended

Dec. 31, 2014

Note 14 - Segment Information (Tables) [Line Items]

Reconciliation of Revenue from Segments to Consolidated [Table Text Block]

	Three Months Ended December 31,				Six Months Ended December 31,
	2014		2013		2014		2013
Revenue
Power Supplies	$	1,553	$	1,843	$	2,952	$	2 ,796
Data Storage:
Product		1,457		1,020		2,824		1,844
Service		518		577		1,072		991
Total data storage	$	1,975	$	1,597	$	3,896	$	2,835
Total revenue	$	3,528	$	3,440	$	6,848	$	5,631

Reconciliation of Assets from Segment to Consolidated [Table Text Block]

	December 31, 2014		June 30, 2014
Total Assets
Cash and marketable securities:
Cash and cash equivalents	$	5,242	$	5,462
Marketable securities		-		1,763
Total cash and marketable securities	$	5,242	$	7,225
Other assets:
Power Supplies		2,386		2,329
Data Storage		4,330		3,231
Total other assets	$	6,716	$	5,560
Total assets	$	11,958	$	12,785

(Loss) Income Before Taxes By Segment [Member]

Note 14 - Segment Information (Tables) [Line Items]

Reconciliation of Other Significant Reconciling Items from Segments to Consolidated [Table Text Block]

	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Loss before Taxes
Power Supplies	$	(164	)	$	(69	)	$	(406	)	$	(387	)
Data Storage		(81	)		(182	)		(161	)		(2,391	)
Total loss before taxes	$	(245	)	$	(251	)	$	(567	)	$	(2,778	)

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Note 11 - Stock Based Compensation (Tables)

6 Months Ended

Dec. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

Restricted Stock Awards	Shares		Weighted Average Fair Value Price per Share
Nonvested at June 30, 2014		100,000	$	1.61
Granted (1)		—		—
Vested		—		—
Forfeited or expired
Nonvested at December 31, 2014		100,000	$	1.61

(1) Restricted stock was granted on April 1, 2014 to Daniel K. Jan of 100,000 shares to vest 33,333 on April 1, 2017; 33,333 to vest April 1, 2018 and 33,334 to vest April 1, 2019. The award is part of his employment agreement and the grant price is the closing price of the stock on April 1, 2014 of $1.61. The unvested shares are forfeited upon termination of his employment.

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Note 13 - Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Income Tax Disclosure [Abstract]
Income Tax Expense (Benefit)	$ 0	$ 0	$ 0	$ 0

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Note 1 - Summary of Significant Accounting Policies (Details) (USD $)	Dec. 31, 2014	Jun. 30, 2014
Accounting Policies [Abstract]
Deferred Profit	$ 0	$ 8,000
Deferred Revenue	1,211,000	1,197,000
Loss Contingency, Estimate of Possible Loss	$ 48,000

XML

Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information (Details)	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Customer 1 [Member] | Sales Revenue, Net [Member] | Customer Concentration Risk [Member]
Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information (Details) [Line Items]
Concentration Risk, Percentage	14.40%	15.10%	11.90%	15.00%
Customer 1 [Member] | Accounts Receivable [Member] | Customer Concentration Risk [Member]
Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information (Details) [Line Items]
Concentration Risk, Percentage	31.10%	10.10%	31.10%	10.10%
Customer 2 [Member] | Sales Revenue, Net [Member] | Customer Concentration Risk [Member]
Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information (Details) [Line Items]
Concentration Risk, Percentage	10.40%	10.50%	10.60%	9.50%
Customer 2 [Member] | Accounts Receivable [Member] | Customer Concentration Risk [Member]
Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information (Details) [Line Items]
Concentration Risk, Percentage	7.90%	17.00%	7.90%	17.00%
Sales Revenue, Net [Member] | Geographic Concentration Risk [Member] | Outside North America [Member]
Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information (Details) [Line Items]
Concentration Risk, Percentage	54.90%	41.20%	51.30%	40.30%
Sales Revenue, Net [Member] | Customer Concentration Risk [Member]
Note 3 - Significant Customers, Concentration of Credit Risk, and Geographic Information (Details) [Line Items]
Number Of Major Customers, Concentration Risk	2	2	2	2

XML

Note 2 - Recent Accounting Pronouncements

6 Months Ended

Dec. 31, 2014

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting guidance not yet adopted

In March 2013, the FASB issued ASU 2013-05, which applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The new guidance will be effective for us beginning July 1, 2015, and is not expected to impact our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance will be effective for us beginning July 1, 2015, and is not expected to impact our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09,to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that will remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue 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. The new guidance will be effective for us beginning July 1, 2017, and the Company is in the process of determining the potential impact and to our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12 to resolve the diverse accounting treatment of share-based payment awards that require specific performance targets to be achieved in order for employees to become eligible to vest in the awards. The new guidance will be effective for us beginning July 1, 2016, and is not expected to impact our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15,  This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. We are currently evaluating this new standard and after adoption, we will incorporate this guidance in our assessment of going concern.

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Note 4 - Loss Per Share (Details) - Computation of Basic and Diluted Net Loss Per Share (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Computation of Basic and Diluted Net Loss Per Share [Abstract]
Net loss (a) (in Dollars)	$ (245)	$ (251)	$ (567)	$ (2,778)
Weighted average outstanding shares of common stock (b)	12,253	12,253	12,253	12,253
Dilutive potential common shares from employee stock options	0	0	0	0
Common stock and common stock equivalents (c)	12,253	12,253	12,253	12,253
Loss per share:
Basic net loss per share (a)/(b) (in Dollars per share)	$ (0.02)	$ (0.02)	$ (0.05)	$ (0.23)
Diluted net loss per share (a)/(c) (in Dollars per share)	$ (0.02)	$ (0.02)	$ (0.05)	$ (0.23)

XML

Note 10 - Comprehensive Loss (Details) (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Disclosure Text Block [Abstract]
Comprehensive Income (Loss), Net of Tax, Attributable to Parent	$ (245,000)	$ (255,000)	$ (568,000)	$ (2,772,000)
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Net of Tax		$ (4,000)	$ (1,000)	$ 6,000

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014
Current assets:
Cash and cash equivalents	$ 5,242	$ 5,462
Marketable securities		1,763
Accounts receivables, net of allowances of $73 at December 31, 2014, and $92 at June 30, 2014	2,625	1,412
Inventories	3,069	3,177
Prepaid expenses and other current assets	351	241
Total current assets	11,287	12,055
Property and equipment, net	628	663
Other assets	43	67
Total assets	11,958	12,785
Current liabilities:
Accounts payable	1,262	952
Accrued payroll and related liabilities	348	322
Deferred service revenue, short term	1,049	954
Other accrued liabilities	508	1,174
Total current liabilities	3,167	3,402
Other long term liabilities	18	17
Deferred service revenue, long term	162	243
Total long term liabilities	180	260
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 5,000 shares authorized; no shares issued	0	0
Common stock, no par value; 50,000 shares authorized, 12,253 shares issued and outstanding as of December 31, 2014 and June 30, 2014	18,999	18,943
Accumulated other comprehensive income		1
Accumulated deficit	(10,388)	(9,821)
Total shareholders’ equity	8,611	9,123
Total liabilities and shareholders’ equity	$ 11,958	$ 12,785

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Note 14 - Segment Information (Details)	6 Months Ended
	Dec. 31, 2014
Segment Reporting [Abstract]
Number of Reportable Segments	2

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Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) (USD $) Share data in Thousands	Common Stock [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Retained Earnings [Member]	Total
Balance at June 30, 2014 at Jun. 30, 2014	$ 18,943,000	$ 1,000	$ (9,821,000)	$ 9,123,000
Balance at June 30, 2014 (in Shares) at Jun. 30, 2014	12,253
Share-based compensation	56,000			56,000
Change in unrealized gains on investments		(1,000)		(1,000)
Net loss			(567,000)	(567,000)
Comprehensive loss				(568,000)
Balance at December 31, 2014 at Dec. 31, 2014	$ 18,999,000		$ (10,388,000)	$ 8,611,000
Balance at December 31, 2014 (in Shares) at Dec. 31, 2014	12,253

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Note 7 - Balance Sheet Details (Details) - Inventories at Lower of FIFO Cost or Market (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014
Inventories at Lower of FIFO Cost or Market [Abstract]
Raw materials	$ 3,129	$ 3,116
Finished goods	2,939	3,347
Subtotal	6,068	6,463
Less: Inventory reserve	(2,999)	(3,286)
Net inventory balance	$ 3,069	$ 3,177

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Accounting Policies, by Policy (Policies)

6 Months Ended

Dec. 31, 2014

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements, including balance sheets and related interim statements of comprehensive loss, cash flows, and shareholders’ equity, include all adjustments, consisting primarily of normal recurring items, which are necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Preparing 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.

The consolidated financial statements include our accounts and the accounts of our wholly-owned subisidiary in Singapore. 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 fiscal year ended June 30, 2014, filed with the U.S. Securities and Exchange Commission (“SEC”) on September 29, 2014.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Risks and Uncertainties

We are subject to a number of risks and uncertainties that may significantly impact our future operating results.  These risks and uncertainties are discussed under Part II, Item 1A, “Risk Factors” included in this Form 10-Q.  As our interim description of risks and uncertainties only includes any material changes to our annual description, we refer you to our risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, as filed with the SEC.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

We recognize revenue 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.

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 consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped.

Deferred revenue is shown separately in the balance sheet, and deferred profit is included in other accrued liabilities in the balance sheet.  At December 31, 2014, we had deferred revenue of approximately $1,211,000, and no deferred profit.  At June 30, 2014, we had deferred revenue of approximately $1,197,000 and deferred profit of approximately $8,000.

Marketable Securities, Policy [Policy Text Block]

Marketable Securities

Marketable securities consist primarily of high-quality U.S. corporate securities, U.S. federal government debt securities, corporate and municipal bonds. Our marketable securities portfolio consists of short-term securities with original maturities of greater than three months from the date of purchase and remaining maturities of less than one year. Marketable securities are classified as “available-for-sale” and are recorded at fair value using the specific identification method; unrealized gains and losses are reflected in other comprehensive income until realized; realized gains and losses are included in earnings when the underlying securities are sold and are derived using the specific identification method for determining the cost of securities sold. If the credit ratings of the security issuers deteriorate or if market conditions deteriorate, we may be required to reduce the value of our investments through an impairment charge.

Fair Value of Financial Instruments, Policy [Policy Text Block]

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 financial statements on a recurring basis (at least quarterly). See “Note 5 – Fair Value Measurements.”

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

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, Policy [Policy Text Block]

Inventory Valuation

We record inventories at the lower of cost 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.

Standard Product Warranty, Policy [Policy Text Block]

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 estimates, then revisions to the estimated warranty liability would be required. Historically our warranty costs have not been significant.

Commitments and Contingencies, Policy [Policy Text Block]

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 financial statements. We have accrued $48,000 for such contingencies.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Share-Based Compensation

Share-based compensation is accounted for in accordance with ASC 718, “Compensation – Stock Compensation.” 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 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.

Income Tax, Policy [Policy Text Block]

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.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent accounting guidance not yet adopted

In March 2013, the FASB issued ASU 2013-05, which applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The new guidance will be effective for us beginning July 1, 2015, and is not expected to impact our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance will be effective for us beginning July 1, 2015, and is not expected to impact our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09,to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that will remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue 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. The new guidance will be effective for us beginning July 1, 2017, and the Company is in the process of determining the potential impact and to our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12 to resolve the diverse accounting treatment of share-based payment awards that require specific performance targets to be achieved in order for employees to become eligible to vest in the awards. The new guidance will be effective for us beginning July 1, 2016, and is not expected to impact our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15,  This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. We are currently evaluating this new standard and after adoption, we will incorporate this guidance in our assessment of going concern.

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Note 7 - Balance Sheet Details (Details) - Other Accrued Liabilities (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014
Note 7 - Balance Sheet Details (Details) - Other Accrued Liabilities [Line Items]
Accrued sales and use tax	$ 12	$ 17
Accrued commissions	72	48
Deferred rent		84
Lease abandonment	48	445
Accrued royalty	49	45
Warranty reserve	168	159
Other accruals	1	10
Total other accrued liabilities	508	1,174
Accrued marketing coop expenses	39	28
Accrued Audit [Member]
Note 7 - Balance Sheet Details (Details) - Other Accrued Liabilities [Line Items]
Accrued professional fees	71	87
Accrued Contingent Legal Fees [Member]
Note 7 - Balance Sheet Details (Details) - Other Accrued Liabilities [Line Items]
Accrued professional fees	$ 48	$ 251

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Note 6 - Cash, Cash Equivalents and Marketable Securities Recorded at Fair Value (Tables)

6 Months Ended

Dec. 31, 2014

Cash and Cash Equivalents [Abstract]

Available-for-sale Securities [Table Text Block]

	December 31, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash & Cash Equivalents		Short-term Marketable Securities
Level 1:
Cash		609		-		-		609		609		-
Money Market Funds		4,633		-		-		4,633		4,633		-
Total	$	5,242	$	-	$	-	$	5,242	$	5,242	$	-

	June 30, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash & Cash Equivalents		Short-term Marketable Securities
Level 1:
Cash		617		-		-		617		617		-
Money Market Funds		4,845		-		-		4,845		4,845		-
Subtotal	$	5,462	$	-	$	-	$	5,462	$	5,462	$	-
Level 2:
U.S. Agency Securities		332		-		-		332		-		332
Corporate securities		1,354		1		-		1,355		-		1,355
Municipal securities		76		-		-		76		-		76
Subtotal	$	1,762	$	1	$	-	$	1,763		-	$	1,763
Total	$	7,224	$	1	$	-	$	7,225	$	5,462	$	1,763

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Note 1 - Summary of Significant Accounting Policies

6 Months Ended

Dec. 31, 2014

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements, including balance sheets and related interim statements of comprehensive loss, cash flows, and shareholders’ equity, include all adjustments, consisting primarily of normal recurring items, which are necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Preparing 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.

The consolidated financial statements include our accounts and the accounts of our wholly-owned subisidiary in Singapore. 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 fiscal year ended June 30, 2014, filed with the U.S. Securities and Exchange Commission (“SEC”) on September 29, 2014.

Risks and Uncertainties

We are subject to a number of risks and uncertainties that may significantly impact our future operating results.  These risks and uncertainties are discussed under Part II, Item 1A, “Risk Factors” included in this Form 10-Q.  As our interim description of risks and uncertainties only includes any material changes to our annual description, we refer you to our risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, as filed with the SEC.

Revenue Recognition

We recognize revenue 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.

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 consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped.

Deferred revenue is shown separately in the balance sheet, and deferred profit is included in other accrued liabilities in the balance sheet.  At December 31, 2014, we had deferred revenue of approximately $1,211,000, and no deferred profit.  At June 30, 2014, we had deferred revenue of approximately $1,197,000 and deferred profit of approximately $8,000.

Marketable Securities

Marketable securities consist primarily of high-quality U.S. corporate securities, U.S. federal government debt securities, corporate and municipal bonds. Our marketable securities portfolio consists of short-term securities with original maturities of greater than three months from the date of purchase and remaining maturities of less than one year. Marketable securities are classified as “available-for-sale” and are recorded at fair value using the specific identification method; unrealized gains and losses are reflected in other comprehensive income until realized; realized gains and losses are included in earnings when the underlying securities are sold and are derived using the specific identification method for determining the cost of securities sold. If the credit ratings of the security issuers deteriorate or if market conditions deteriorate, we may be required to reduce the value of our investments through an impairment charge.

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 financial statements on a recurring basis (at least quarterly). See “Note 5 – Fair Value Measurements.”

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. 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 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 financial statements. We have accrued $48,000 for such contingencies.

Share-Based Compensation

Share-based compensation is accounted for in accordance with ASC 718, “Compensation – Stock Compensation.” 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 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.

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Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) (USD $) In Thousands, except Per Share data, unless otherwise specified	Dec. 31, 2014	Jun. 30, 2014
Accounts Receivables, allowances (in Dollars)	$ 73	$ 92
Preferred stock, par value (in Dollars per share)	$ 0	$ 0
Preferred stock, shares authorized	5,000	5,000
Preferred stock, shares issued	0	0
Common stock, par value (in Dollars per share)	$ 0	$ 0
Common stock, shares authorized	50,000	50,000
Common stock, shares issued	12,253	12,253
Common stock, shares outstanding	12,253	12,253

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Note 11 - Stock Based Compensation

6 Months Ended

Dec. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 11 – STOCK BASED COMPENSATION

The Company recorded share-based compensation associated with outstanding stock options and restricted stock grants during the three and six months ended December 31, 2014 of approximately $38,000 and $56,000, respectively, and for the three and six months ended December 31, 2013 of ($10,000) and ($6,000), respectively. No income tax benefit was recognized in the statements of comprehensive loss for share-based arrangements in any period presented.

Stock Options

On August 8, 2014, in accordance with Mr. Bronson’s employment agreement for the year ended June 30, 2014, the board of directors granted to Mr. Bronson stock options to purchase 100,000 shares of common stock with an exercise price of $1.23. The stock options granted fully vested on the date of grant and have a term of five years, expiring on August 20, 2019, unless exercised sooner. As a result of the stock options issued to Mr. Bronson, the Company recognized $27,000 non cash stock compensation expense in the six months ended December 31, 2014.

On October 8, 2014, the board of directors approved the issuance of stock options to Steven N. Bronson to purchase 100,000 shares of Qualstar common stock at an exercise price of $1.27. The stock options shall vest on June 30, 2015 and have a term of five years, expiring on June 30, 2020 unless exercised sooner. As a result of the stock options issued to Mr. Bronson, the Company recognized $9,000 noncash stock compensation expense in the six months ended December 31, 2014.

The Company did not grant any stock options during the six months ended December 31, 2013.

Restricted Stock Awards

The following table summarizes all restricted stock awards activity (in thousands, except per share amounts):

Restricted Stock Awards	Shares		Weighted Average Fair Value Price per Share
Nonvested at June 30, 2014		100,000	$	1.61
Granted (1)		—		—
Vested		—		—
Forfeited or expired
Nonvested at December 31, 2014		100,000	$	1.61

(1) Restricted stock was granted on April 1, 2014 to Daniel K. Jan of 100,000 shares to vest 33,333 on April 1, 2017; 33,333 to vest April 1, 2018 and 33,334 to vest April 1, 2019. The award is part of his employment agreement and the grant price is the closing price of the stock on April 1, 2014 of $1.61. The unvested shares are forfeited upon termination of his employment.

At December 31, 2014, the unrecognized compensation cost related to the non-vested share based compensation for restricted stock is $130,000.

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Document And Entity Information	6 Months Ended
	Dec. 31, 2014	Jan. 29, 2015
Document and Entity Information [Abstract]
Entity Registrant Name	QUALSTAR CORP
Document Type	10-Q
Current Fiscal Year End Date	--06-30
Entity Common Stock, Shares Outstanding		12,253,117
Amendment Flag	false
Entity Central Index Key	0000758938
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Dec. 31, 2014
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2

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Note 12 - Legal Proceedings

6 Months Ended

Dec. 31, 2014

Disclosure Text Block Supplement [Abstract]

Legal Matters and Contingencies [Text Block]

NOTE 12 – LEGAL PROCEEDINGS

Overland Storage, Inc.

On June 28, 2012, Overland Storage, Inc. (“Overland”) filed a patent infringement lawsuit against Qualstar Corporation (and others) in the U.S. District Court in the Southern District of California, alleging that certain of Qualstar’s automated tape libraries infringe claims of U.S. Patent No. 6,328,766 (the “’766 Patent”). The lawsuit is entitled: Overland Storage, Inc. (Plaintiff/Counterclaim Defendant) v. Qualstar Corporation (Defendant/ Counterclaim Plaintiff), and assigned Case No.: 12-cv-1605-JLS-BLM (the “Patent Litigation”). Overland is seeking injunctive relief as well as the recovery of unspecified monetary damages. Qualstar denies that it infringed the Overland patent and filed a counterclaim against Overland. The litigation was stayed pending Inter Partes Review (“IPR”) before the Patent Trial and Appeals Board (“PTAB”) (Case IPR 2013-00357). On November 7, 2014, the PTAB issued its final written decision finding that all eleven claims by Overland related to the ‘766 Patent were “unpatentable.” The PTAB denied Overland’s request for leave to amend its claims. Overland moved for reconsideration of the PTAB’s decision, but the request was denied by the PTAB on January 8, 2015. Overland has until March 12, 2015 to file an appeal of the PTAB’s decision with the Court of Appeals for the Federal Circuit. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

Lawrence D. Firestone and others

On August 12, 2013, Qualstar filed a complaint against former Chief Executive Officer Lawrence D. Firestone and others in the Superior Court of the State of California, County of Los Angeles entitled: Qualstar Corporation v. Lawrence D. Firestone, Stanley Corker, Carl W. Gromada, Robert A. Meyer, Robert Rich, Daniel Molhoek, Allen Alley, Gerald Laber, Steven Wagner, and DOES 1 through 10, inclusive, Case No.: BC 514889. On April 17, 2014, Defendant Firestone filed a cross-complaint against Qualstar. The matter has been resolved by the parties, and the claims subject to the Qualstar’s complaint and Lawrence D. Firestone’s cross-complaint have been withdrawn.

Needham & Company, LLC

On March 11, 2014, Qualstar filed a complaint against Needham & Company, LLC (“Needham”) entitled: Qualstar Corporation v. Needham & Company, LLC, pending in the Supreme Court of the State of New York, New York County and assigned index number 650773/14. Qualstar asserted claims against Needham for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment and negligence based on Needham’s provision of financial advisory services to Qualstar, between January 2013 and February 2013, in connection with the unsolicited partial tender offer for Qualstar submitted by BKF Capital Group, Inc. Needham moved to dismiss the complaint, and on January 5, 2015, the court granted Needham’s motion, thereby dismissing the entirety of the complaint. Qualstar has filed an appeal of the court’s ruling dismissing the complaint.

Other legal matters

Qualstar is also subject to a variety of other 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 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, 2014, we had accrued aggregate current liabilities of $48,000 in probable fees and costs related to these legal matters.

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Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (USD $) Share data in Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Net revenues	$ 3,528,000	$ 3,440,000	$ 6,848,000	$ 5,631,000
Cost of goods sold	2,428,000	1,931,000	4,522,000	3,661,000
Gross profit	1,100,000	1,509,000	2,326,000	1,970,000
Operating expenses:
Engineering	326,000	604,000	685,000	1,478,000
Sales and marketing	591,000	512,000	1,096,000	1,245,000
General and administrative	684,000	623,000	1,368,000	2,017,000
Restructuring	(245,000)	26,000	(245,000)	26,000
Total operating expenses	1,356,000	1,765,000	2,904,000	4,766,000
Loss from operations	(256,000)	(256,000)	(578,000)	(2,796,000)
Other income	11,000	5,000	11,000	18,000
Loss before income taxes	(245,000)	(251,000)	(567,000)	(2,778,000)
Provision for income taxes	0	0	0	0
Net loss	(245,000)	(251,000)	(567,000)	(2,778,000)
Change in unrealized (losses) gains on investments		(4,000)	(1,000)	6,000
Comprehensive loss	$ (245,000)	$ (255,000)	$ (568,000)	$ (2,772,000)
Loss per common share:
Basic and Diluted (in Dollars per share)	$ (0.02)	$ (0.02)	$ (0.05)	$ (0.23)
Weighted average common shares outstanding:
Basic and Diluted (in Shares)	12,253	12,253	12,253	12,253

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Note 6 - Cash, Cash Equivalents and Marketable Securities Recorded at Fair Value

6 Months Ended

Dec. 31, 2014

Cash and Cash Equivalents [Abstract]

Cash and Cash Equivalents Disclosure [Text Block]

NOTE 6 – CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES RECORDED AT FAIR VALUE

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable debt securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the available-for-sale designations as of each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term.

Available-for-sale securities are recorded at market value. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings when the underlying securities are sold and are derived using the specific identification method for determining the cost of securities sold. Realized loss on marketable securities for the six months ended December 31, 2014 was $8,000 and for the six months ended December 31, 2013 there was no loss.

The following tables summarize the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short-term marketable securities as of December 31, 2014 and June 30, 2014 (in thousands):

	December 31, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash & Cash Equivalents		Short-term Marketable Securities
Level 1:
Cash		609		-		-		609		609		-
Money Market Funds		4,633		-		-		4,633		4,633		-
Total	$	5,242	$	-	$	-	$	5,242	$	5,242	$	-

	June 30, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash & Cash Equivalents		Short-term Marketable Securities
Level 1:
Cash		617		-		-		617		617		-
Money Market Funds		4,845		-		-		4,845		4,845		-
Subtotal	$	5,462	$	-	$	-	$	5,462	$	5,462	$	-
Level 2:
U.S. Agency Securities		332		-		-		332		-		332
Corporate securities		1,354		1		-		1,355		-		1,355
Municipal securities		76		-		-		76		-		76
Subtotal	$	1,762	$	1	$	-	$	1,763		-	$	1,763
Total	$	7,224	$	1	$	-	$	7,225	$	5,462	$	1,763

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Note 5 - Fair Value Measurements

6 Months Ended

Dec. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 5 – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated observable market data for substantially the full term of the assets or liabilities.

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

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Note 4 - Loss Per Share (Tables)

6 Months Ended

Dec. 31, 2014

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
In thousands (except per share amounts):
Net loss (a)	$	(245	)	$	(251	)	$	(567	)	$	(2,778	)
Weighted average outstanding shares of common stock (b)		12,253			12,253			12,253			12,253
Dilutive potential common shares from employee stock options		—			—			—			—
Common stock and common stock equivalents (c)		12,253			12,253			12,253			12,253
Loss per share:
Basic net loss per share (a)/(b)	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.23	)
Diluted net loss per share (a)/(c)	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.23	)

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Note 13 - Income Taxes

6 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 13 – INCOME TAXES

We did not record a provision or benefit for income taxes for the three and six months ended December 31, 2014 and 2013.   The Company has recorded a full valuation allowance against its net deferred tax assets based on the Company’s assessment regarding the realizability of these net deferred tax assets in future periods.

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Note 9 - Commitments

6 Months Ended

Dec. 31, 2014

Disclosure Text Block Supplement [Abstract]

Commitments Disclosure [Text Block]

NOTE 9 –COMMITMENTS

Lease Termination

On December 15, 2014, Qualstar signed a lease termination agreement with the landlord of the facility at 3990B Heritage Oak Ct, Simi Valley, California. The lease termination agreement amends the original lease term expiration date from December 31, 2015 to February 28, 2015. In accordance with the termination agreement, the Company was required to pay $184,000 in termination fee. The Company has reduced costs and the total square footage from 56,000 square feet to 20,560 square feet to better align our current needs while still allowing space for growth. The current monthly rent payment for this lease is $44,000 plus additional fees. The combined payments for the new leases beginning February 1, 2015 is $20,000.

In the three and six months ended December 31, 2014, $70,000 was included in operating expenses attributed to the termination of the lease, with the $184,000 termination fee reduced by prepaid rent of $54,000 and offset by deferred rent of $60,000. The prepaid rent will be expensed February, 2015 as outlined in the agreement. The accrual for lease abandonment taken in prior periods as a restructuring expense was reversed in the amount of $245,000.

Lease Agreements

On December 8, 2014, the Company entered into a lease agreement with K-Swiss Inc., to lease approximately 5,400 square feet of office space at 31248 Oak Crest Drive, Westlake Village, California. The five year lease commences February 1, 2015 and ends January 31, 2020.

On December 15, 2014, the Company entered into a lease agreement with Cypress Pointe Simi Valley, LLC, to lease approximately 15,160 square feet of office/warehouse space at 130 West Cochran Street, Unit C, Simi Valley, California. The thirty-seven month lease commences February 1, 2015 and ends February 28, 2018.

The future lease payments are as follows:

Year ended June 30,	Lease commitments (in thousands)
2015	$	79
2016		231
2017		248
2018		212
2019		133
Thereafter		79
Total		982

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Note 7 - Balance Sheet Details

6 Months Ended

Dec. 31, 2014

Disclosure Text Block Supplement [Abstract]

Supplemental Balance Sheet Disclosures [Text Block]

NOTE 7 - 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):

	December 31, 2014			June 30, 2014
Raw materials	$	3,129		$	3,116
Finished goods		2,939			3,347
Subtotal		6,068			6,463
Less: Inventory reserve		(2,999	)		(3,286	)
Net inventory balance	$	3,069		$	3,177

Other Accrued Liabilities

	December 31, 2014		June 30, 2014
Accrued sales and use tax	$	12	$	17
Accrued commissions		72		48
Accrued audit fees		71		87
Accrued marketing coop expenses		39		28
Accrued legal expense		48		251
Deferred rent		-		84
Lease abandonment		48		445
Accrued royalty		49		45
Warranty reserve		168		159
Other accruals		1		10
Total other accrued liabilities	$	508	$	1,174

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Note 8 - Contingencies

6 Months Ended

Dec. 31, 2014

Loss Contingency [Abstract]

Contingencies Disclosure [Text Block]

NOTE 8 –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 generally is 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 balance sheets, for the periods presented, is as follows (in thousands):

	Six months Ended December 31,
	2014			2013
Beginning balance	$	159		$	190
Cost of warranty claims		(26	)		(27	)
Accruals for product warranties		35			10
Ending balance	$	168		$	173

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Note 10 - Comprehensive Loss

6 Months Ended

Dec. 31, 2014

Disclosure Text Block [Abstract]

Comprehensive Income (Loss) Note [Text Block]

NOTE 10 – COMPREHENSIVE LOSS

For the six months ended December 31, 2014 and 2013, comprehensive loss amounted to approximately $568,000 and $2,772,000, respectively. The difference in net loss and comprehensive loss for the six months ended December 31, 2014 was $1,000, which relates to the realized loss from the sale of marketable securities. For the six months ended December 31, 2013 net loss and comprehensive loss differed by $6,000, which relates to the changes in the unrealized gains that the Company recorded for its available-for-sale marketable securities.

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Note 6 - Cash, Cash Equivalents and Marketable Securities Recorded at Fair Value (Details) - Summary of Available-for-Sale Securities (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2014
Level 1:
Adjusted Cost	$ 7,224	$ 5,242
Unrealized Gains	1
Fair Value	7,225	5,242
Cash & Cash Equivalents	5,462	5,242
Short-term Marketable Securities	1,763
Fair Value, Inputs, Level 1 [Member] | Cash [Member]
Level 1:
Adjusted Cost	617	609
Fair Value	617	609
Cash & Cash Equivalents	617	609
Fair Value, Inputs, Level 1 [Member] | Money Market Funds [Member]
Level 1:
Adjusted Cost	4,845	4,633
Fair Value	4,845	4,633
Cash & Cash Equivalents	4,845	4,633
Fair Value, Inputs, Level 1 [Member]
Level 1:
Adjusted Cost	5,462
Fair Value	5,462
Cash & Cash Equivalents	5,462
Fair Value, Inputs, Level 2 [Member] | US Government Agencies Debt Securities [Member]
Level 1:
Adjusted Cost	332
Fair Value	332
Short-term Marketable Securities	332
Fair Value, Inputs, Level 2 [Member] | Corporate Debt Securities [Member]
Level 1:
Adjusted Cost	1,354
Unrealized Gains	1
Fair Value	1,355
Short-term Marketable Securities	1,355
Fair Value, Inputs, Level 2 [Member] | US States and Political Subdivisions Debt Securities [Member]
Level 1:
Adjusted Cost	76
Fair Value	76
Short-term Marketable Securities	76
Fair Value, Inputs, Level 2 [Member]
Level 1:
Adjusted Cost	1,762
Unrealized Gains	1
Fair Value	1,763
Short-term Marketable Securities	$ 1,763

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Note 15 - Related Party Transactions

6 Months Ended

Dec. 31, 2014

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

  NOTE 15 – RELATED PARTY TRANSACTIONS

The Company entered into a license agreement, dated May 1, 2014 (the “License Agreement”) with BKF Capital Group, Inc. (“BKF”). Pursuant to the License Agreement, commencing on May 1, 2014, BKF shall have a license to occupy and use one furnished office, telephone and other services, located at Qualstar’s executive offices. Pursuant to the License Agreement, BKF shall pay to Qualstar a license fee $1,200 per month. For the three and six months ended December 31, 2014, BFK paid $3,600 and $7,200 to Qualstar as license fees, respectively. Steven N. Bronson, the Company’s Chairman and CEO, is also the Chairman, CEO and majority shareholder of BKF.

The Company has agreed to reimburse or to be reimbursed by Interlink Electronics, Inc. (“Interlink”), for IT, sales and marketing support and other expenses paid on behalf of the Company or Interlink. For the three months ended December 31, 2014 the Company reimbursed Interlink $16,000, net, and for the three months ended December 31, 2013 the Company reimbursed Interlink $63,000. For the six months ended December 31, 2014 the Company reimbursed Interlink $30,000, net, and for the six months ended December 31, 2013 the Company reimbursed Interlink $63,000. Steven N. Bronson is also the Chairman and CEO and a majority shareholder of Interlink.

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Note 8 - Contingencies (Tables)

6 Months Ended

Dec. 31, 2014

Loss Contingency [Abstract]

Schedule of Product Warranty Liability [Table Text Block]

	Six months Ended December 31,
	2014			2013
Beginning balance	$	159		$	190
Cost of warranty claims		(26	)		(27	)
Accruals for product warranties		35			10
Ending balance	$	168		$	173

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Note 15 - Related Party Transactions (Details) (USD $)	3 Months Ended		6 Months Ended		0 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	May 01, 2014
Interlink Electronics, Inc. [Member] | Reimbursement of Expenses Paid by Company[Member]
Note 15 - Related Party Transactions (Details) [Line Items]
Related Party Transaction, Amounts of Transaction	$ 16,000	$ 63,000	$ 30,000	$ 63,000
Per Month [Member] | License Agreement [Member]
Note 15 - Related Party Transactions (Details) [Line Items]
Operating Leases, Income Statement, Sublease Revenue					1,200
License Agreement [Member]
Note 15 - Related Party Transactions (Details) [Line Items]
Related Party Transaction, Expenses from Transactions with Related Party	$ 3,600		$ 7,200

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Note 11 - Stock Based Compensation (Details) (USD $)	3 Months Ended		6 Months Ended			0 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2014		Dec. 31, 2013	Aug. 08, 2014	Apr. 01, 2017	Apr. 01, 2018	Apr. 01, 2019	Apr. 01, 2014	Oct. 08, 2014
Note 11 - Stock Based Compensation (Details) [Line Items]
Allocated Share-based Compensation Expense	$ 38,000	$ (10,000)	$ 56,000		$ (6,000)
Employee Service Share-based Compensation, Tax Benefit from Compensation Expense			0		0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in Shares)					0
Share Price (in Dollars per share)									1.61
Employee Stock Option [Member] | Chief Executive Officer [Member]
Note 11 - Stock Based Compensation (Details) [Line Items]
Allocated Share-based Compensation Expense			27,000
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period						5 years
Restricted Stock [Member] | Share-based Compensation Award, Tranche One [Member] | Executive Vice President [Member]
Note 11 - Stock Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period (in Shares)							33,333
Restricted Stock [Member] | Share-based Compensation Award, Tranche Two [Member] | Executive Vice President [Member]
Note 11 - Stock Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period (in Shares)								33,333
Restricted Stock [Member] | Share-based Compensation Award, Tranche Three [Member] | Executive Vice President [Member]
Note 11 - Stock Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period (in Shares)									33,334
Restricted Stock [Member] | Executive Vice President [Member]
Note 11 - Stock Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period (in Shares)										100,000
Restricted Stock [Member]
Note 11 - Stock Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period (in Shares)			0	[1]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period (in Shares)			0
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	130,000		130,000
Chief Executive Officer [Member]
Note 11 - Stock Based Compensation (Details) [Line Items]
Allocated Share-based Compensation Expense			$ 9,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in Shares)						100,000					100,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price (in Dollars per share)						1.23					$ 1.27
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period											5 years

[1] Restricted stock was granted on April 1, 2014 to Daniel K. Jan of 100,000 shares to vest 33,333 on April 1, 2017; 33,333 to vest April 1, 2018 and 33,334 to vest April 1, 2019. The award is part of his employment agreement and the grant price is the closing price of the stock on April 1, 2014 of $1.61. The unvested shares are forfeited upon termination of his employment.

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
OPERATING ACTIVITIES:
Net loss	$ (567,000)	$ (2,778,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	104,000	91,000
Loss on disposal of assets	5,000	4,000
Provision for bad debts and returns, net	(19,000)	7,000
Provision for inventory reserve and adjustments	(287,000)	(60,000)
Share based compensation	56,000	(6,000)
Loss on sale of marketable securities	8,000	0
Changes in operating assets and liabilities:
Accounts receivable	(1,193,000)	489,000
Receivable from CTS for manufacturing inventories		644,000
Inventories	395,000	(1,031,000)
Prepaid expenses and other current assets	(86,000)	63,000
Accounts payable	310,000	(449,000)
Accrued payroll and related liabilities	26,000	(217,000)
Deferred service revenue	14,000
Other accrued liabilities	(665,000)	(75,000)
Total adjustments	(1,332,000)	(540,000)
Net cash used in operating activities	(1,899,000)	(3,318,000)
INVESTING ACTIVITIES:
Purchases of equipment	(74,000)	(89,000)
Proceeds from the sale of marketable securities	1,753,000	3,363,000
Net cash provided by investing activities	1,679,000	3,274,000
NET DECREASE IN CASH AND CASH EQUIVALENTS	(220,000)	(44,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	5,462,000	1,966,000
CASH AND CASH EQUIVALENTS, END OF PERIOD	5,242,000	1,922,000
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid	$ 0	$ 2,000

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Note 4 - Loss Per Share

6 Months Ended

Dec. 31, 2014

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

NOTE 4 – LOSS PER SHARE

Basic loss per share has been computed by dividing net loss by the weighted average number of common shares outstanding.  Diluted loss per share has not been computed as the effect is antidilutive.

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
In thousands (except per share amounts):
Net loss (a)	$	(245	)	$	(251	)	$	(567	)	$	(2,778	)
Weighted average outstanding shares of common stock (b)		12,253			12,253			12,253			12,253
Dilutive potential common shares from employee stock options		—			—			—			—
Common stock and common stock equivalents (c)		12,253			12,253			12,253			12,253
Loss per share:
Basic net loss per share (a)/(b)	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.23	)
Diluted net loss per share (a)/(c)	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.23	)

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Note 9 - Commitments (Tables)

6 Months Ended

Dec. 31, 2014

Disclosure Text Block Supplement [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Year ended June 30,	Lease commitments (in thousands)
2015	$	79
2016		231
2017		248
2018		212
2019		133
Thereafter		79
Total		982

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Note 9 - Commitments (Details) (USD $)	3 Months Ended	6 Months Ended	0 Months Ended	3 Months Ended	0 Months Ended
	Dec. 31, 2014	Dec. 31, 2014	Feb. 01, 2015	Feb. 28, 2015 sqft	Dec. 15, 2014	Dec. 08, 2014
Note 9 - Commitments (Details) [Line Items]
Gain (Loss) on Contract Termination	$ (70,000)	$ (70,000)
Increase (Decrease) in Prepaid Rent	(54,000)	(54,000)
Deferred Rent Credit	60,000	60,000
Restructuring Reserve, Accrual Adjustment		245,000
Subsequent Event [Member] | Simi Valley, California [Member]
Note 9 - Commitments (Details) [Line Items]
Area of Real Estate Property (in Square Feet)			20,560
Operating Lease Monthly Rent			20,000
Simi Valley, California [Member] | Cypress Pointe Simi Valley, LLC [Member]
Note 9 - Commitments (Details) [Line Items]
Area of Real Estate Property (in Square Feet)				15,160
Lessee Leasing Arrangements, Operating Leases, Term of Contract				37 months
Simi Valley, California [Member]
Note 9 - Commitments (Details) [Line Items]
Payment for Early Termination Fee, Operating Leases					184,000
Area of Real Estate Property (in Square Feet)					56,000
Operating Lease Monthly Rent		$ 44,000
Westlake Village, California [Member] | K-Swiss, Inc. [Member]
Note 9 - Commitments (Details) [Line Items]
Area of Real Estate Property (in Square Feet)						5,400
Lessee Leasing Arrangements, Operating Leases, Term of Contract						5 years

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Note 14 - Segment Information

6 Months Ended

Dec. 31, 2014

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

NOTE 14 – 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 six months ended December 31, 2014 and 2013. Allocations for internal resources were made for the three and six months ended December 31, 2014 and 2013. 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:

Power Supplies — We design, develop, and sell small, open frame, high-efficiency switching power supplies. 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 telecommunications equipment, machine tools, routers, switches, wireless systems and gaming devices.

Data Storage — We design, develop and sell automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. Tape libraries consist of cartridge tape drives, tape cartridges and robotics to move the cartridges from their storage locations to the tape drives under software control. Our tape libraries provide data storage solutions for organizations requiring backup, recovery and archival storage of critical data.

Segment revenue, loss before taxes and total assets were as follows (in thousands):

	Three Months Ended December 31,				Six Months Ended December 31,
	2014		2013		2014		2013
Revenue
Power Supplies	$	1,553	$	1,843	$	2,952	$	2 ,796
Data Storage:
Product		1,457		1,020		2,824		1,844
Service		518		577		1,072		991
Total data storage	$	1,975	$	1,597	$	3,896	$	2,835
Total revenue	$	3,528	$	3,440	$	6,848	$	5,631

	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Loss before Taxes
Power Supplies	$	(164	)	$	(69	)	$	(406	)	$	(387	)
Data Storage		(81	)		(182	)		(161	)		(2,391	)
Total loss before taxes	$	(245	)	$	(251	)	$	(567	)	$	(2,778	)

	December 31, 2014		June 30, 2014
Total Assets
Cash and marketable securities:
Cash and cash equivalents	$	5,242	$	5,462
Marketable securities		-		1,763
Total cash and marketable securities	$	5,242	$	7,225
Other assets:
Power Supplies		2,386		2,329
Data Storage		4,330		3,231
Total other assets	$	6,716	$	5,560
Total assets	$	11,958	$	12,785