qbak20170930

qbak20170930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑

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

For the quarterly period ended September 30, 2017

☐

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

For the Transition Period From to

Commission file number 001-35810

QUALSTAR CORPORATION

(Exact name of registrant as specified in its charter)

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

130 West Cochran Street, Unit C, Simi Valley, CA 93065

(Address of principal executive offices) (zip code)

(805) 583-7744

(Registrant’s telephone number, including area code)

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☑
(do not check if smaller reporting company)	Emerging growth company ☐

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

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

At November 1, 2017, the issuer had 2,042,019 shares of common stock, no par value, issued and outstanding.

QUALSTAR CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

INDEX

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements

		●	Condensed Consolidated Balance Sheets — September 30, 2017 (unaudited) and December 31, 2016	1

		●	Unaudited Condensed Consolidated Statements of Operations — Three and Nine months ended September 30, 2017 and 2016	2

		●	Unaudited Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2017 and 2016	3

		●	Notes to unaudited Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			15

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

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Mine Safety Disclosures	21

Item 5.	Other Information	21

Item 6.	Exhibits	22

	Signatures	23

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

QUALSTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30, 2017			December 31, 2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	4,663		$	3,691
Restricted cash		100			100
Accounts receivables, net		1,453			1,583
Inventories, net		1,082			1,360
Prepaid expenses and other current assets		171			166
Total current assets		7,469			6,900
Non-current assets:
Property and equipment, net		172			286
Other assets		70			77
Total assets	$	7,711		$	7,263

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	902		$	888
Accrued payroll and related liabilities		206			222
Deferred service revenue, short term		850			787
Other accrued liabilities		378			359
Total current liabilities		2,336			2,256
Long term liabilities:
Other long term liabilities		52			63
Deferred service revenue		102			105
Total long term liabilities		154			168
Total liabilities		2,490			2,424

Shareholders’ equity:
Preferred stock, no par value; 5,000 shares authorized; no shares issued		-			-
Common stock, no par value; 50,000 shares authorized, 2,042 shares issued and outstanding as of September 30, 2017 and December 31, 2016		19,476			19,063
Accumulated deficit		(14,255	)		(14,224	)
Total shareholders’ equity		5,221			4,839
Total liabilities and shareholders’ equity	$	7,711		$	7,263

See notes to condensed consolidated financial statements.

QUALSTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2017

2016

2017

2016

Net revenues

2,755

2,666

7,461

7,186

Cost of goods sold

1,697

1,905

4,616

5,002

Gross profit

1,058

761

2,845

2,184

Operating expenses:

Engineering

131

232

427

850

Sales and marketing

360

276

886

933

General and administrative

715

306

1,563

1,194

Total operating expenses

1,206

814

2,876

2,977

Loss from operations

(148

)

(53

)

(31

)

(793

)

Other expenses

(10

)

Loss before income taxes

(148

)

(53

)

(31

)

(803

)

Provision for income taxes

Net Loss

(148

)

(53

)

(31

)

(803

)

Loss per common share:

Basic and diluted

(0.07

)

(0.03

)

(0.02

)

(0.39

)

Weighted average common shares outstanding:

Basic and diluted

2,042

See notes to condensed consolidated financial statements.

QUALSTAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net loss	$	(31	)	$	(803	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		119			137
Loss on disposal of assets		5			15
Provision for inventory obsolescence		233			424
Recovery of bad debts and returns		(7	)		(23	)
Share based compensation		413			2
Changes in operating assets and liabilities:
Accounts receivable		137			(79	)
Inventories		45			468
Prepaid expenses and other current assets		2			(23	)
Accounts payable		14			(51	)
Accrued payroll and related liabilities		(16	)		(148	)
Deferred service revenue		60			(586	)
Other accrued liabilities		8			382
Total adjustments		1,013			518
Net cash provided by (used in) operating activities	$	982		$	(285	)

Cash flows from investing activities:
Purchases of equipment		(10	)		(27	)
Net cash used in investing activities	$	(10	)	$	(27	)
Net increase (decrease) in cash, restricted cash and cash equivalents	$	972		$	(312	)
Cash, restricted cash and cash equivalents at beginning of period	$	3,791		$	3,963
Cash, restricted cash and cash equivalents at end of period	$	4,763		$	3,651
Supplemental cash flow disclosures:
Income taxes paid	$	3		$	8

See notes to condensed consolidated financial statements.

QUALSTAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2016, has been derived from audited consolidated financial statements. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as our annual audited consolidated financial statements and in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.

Preparing condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include estimates of loss contingencies, product life cycles and inventory obsolescence, bad debts, sales returns, share-based compensation, forfeiture rates, the potential outcome of future tax consequences of events that have been recognized in our financial statements or tax returns, and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.

On June 5, 2017, a wholly-owned subsidiary of Qualstar Corporation, N2Power, Inc., was created to operate the Company’s internal business unit known as N2Power. The N2Power business unit is reflected in the Company’s SEC filings under the power supplies business segment. Following the establishment of N2Power, Inc., all assets (and liabilities) belonging to this subsidiary have been separated from the assets (and liabilities) of Qualstar.

The condensed consolidated financial statements include our accounts and the accounts of each of our wholly owned subsidiaries in Qualstar Corporation Singapore Private Limited and N2Power, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Qualstar Corporation Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 16, 2017.

Revenue Recognition

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

Service contracts are sold by Qualstar to customers for a period of time to provide product support after the warranty expires. The service contracts allow customers to call Qualstar for technical support, replace defective parts and to have onsite service provided by Qualstar’s third party contract service provider. The Company records revenues for contract services at the amount of the service contract, but such amount is deferred at the beginning of the service term and amortized ratably over the life of the contract.

Deferred service revenue is shown separately in the condensed consolidated balance sheets as current and long term. At September 30, 2017, we had deferred service revenue of approximately $952,000. At December 31, 2016, we had deferred service revenue of approximately $892,000.

QUALSTAR CORPORATION AND SUBSIDIARIES

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

Allowance for Doubtful Accounts

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

Inventory Valuation

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

Warranty Obligations

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

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When legal costs that the entity expects to incur in defending itself in connection with a loss contingency accrual are expected to be material, the loss should factor in all costs and, if the legal costs are reasonably estimable, they should be accrued in accordance with ASC 450, regardless of whether a liability can be estimated for the contingency itself. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. Changes in these factors could materially impact our condensed consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation, with no changes to previously reported stockholders equity or net income (loss).

Fair Value of Financial Instruments

We measure fair value on all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis (at least quarterly).

QUALSTAR CORPORATION AND SUBSIDIARIES

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

Share-Based Compensation

Share-based compensation is accounted for in accordance with ASC 718, “Compensation – Stock Compensation.” The Black-Scholes option-pricing model is used to determine fair value of the award at the date of grant and recognize compensation expense over the vesting period. The inputs for the model require the use of judgment, estimates and assumptions regarding the expected volatility of the stock, the expected term the average employee will hold the option prior to the date of exercise, expected future dividends, and the amount of share-based awards that are expected to be forfeited. Changes in these inputs and assumptions could occur and actual results could differ from these estimates, and our results of operations could be impacted.

Accounting for Income Taxes

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

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

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

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting guidance not yet adopted

In May 2014, the FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard that will remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing 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. In August 2015, the FASB issued ASU 2015-14 as an update of ASU 2014-09. The purpose is to allow more time to implement the guidance in Update 2014-09. This Update defers the effective date of Update 2014-09 to annual reporting periods beginning after December 15, 2017. We are evaluating the impact Update 2014-09 may have on our condensed consolidated financial statements.

QUALSTAR CORPORATION AND SUBSIDIARIES

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

In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For related party leases, the basis will be the legally enforceable terms and conditions of the arrangement. This standard is effective for fiscal years beginning after December 15, 2018. We are evaluating the impact ASU 2016-02 may have on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15 to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, and is not expected to materially impact our condensed consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16 to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This standard is effective for fiscal years beginning after December 15, 2017, and is not expected to materially impact our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01 clarifying the definition of a business and adding guidance to evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This standard is effective for fiscal years beginning after December 15, 2017, and is not expected to materially impact our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 to provide clarity and reduce both diversity in practice and cost and complexity, when applying the guidance for stock compensation, to a change to the terms or conditions of a share-based payment award. This standard is effective for fiscal years beginning after December 15, 2017, and is not expected to materially impact our consolidated financial statements.

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

We have no outstanding debt nor do we utilize auction rate securities or derivative financial instruments in our investment portfolio. Cash and other investments may be in excess of FDIC insurance limits.

Our financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets.

	Three Months Ended September 30,										Nine Months Ended September 30,
	2017					2016					2017					2016
Revenue – geographic activity (in thousands):	(unaudited)					(unaudited)					(unaudited)					(unaudited)
		$	%				$	%				$	%				$	%
North America	$	1,962		71.2	%	$	1,394		52.3	%	$	4,785		64.1	%	$	3,852		53.6	%
Europe		356		12.9	%		557		20.9	%		1,447		19.4	%		1,518		21.1	%
Asia Pacific		396		14.4	%		686		25.7	%		1,113		14.9	%		1,724		24.0	%
Other		41		1.5	%		29		1.1	%		116		1.6	%		92		1.3	%
	$	2,755		100.0	%	$	2,666		100.0	%	$	7,461		100.0	%	$	7,186		100.0	%

One customer accounted for 14.6% of the Company’s net revenue for the three months ended September 30, 2017. One customer accounted for 12.3% of the Company’s net revenue for the three months ended September 30, 2016.

One customer accounted for 15.0% of the Company’s net revenue for the nine months ended September 30, 2017. The customer’s accounts receivable balance totaled 9.3% of net accounts receivable as of December 31, 2016. One customer accounted for 10.7% of the Company’s net revenue for the nine months ended September 30, 2016.

QUALSTAR CORPORATION AND SUBSIDIARIES

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

NOTE 4 – NET EARNINGS PER SHARE

Basic net earnings per share has been computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net earnings per share has been computed by dividing net earnings by the weighted average common shares outstanding plus dilutive securities or other contracts to issue common stock as if these securities were exercised or converted to common stock.

The following table sets forth the computation of basic and diluted net income or loss per share for the periods indicated, in thousands, except per share amounts.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
In thousands (except per share amounts):
Net Loss (a)	$	(148	)	$	(53	)	$	(31	)	$	(803	)
Weighted average outstanding shares of common stock (b)		2,042			2,042			2,042			2,042
Dilutive potential common shares from employee stock options		—			—			—			—
Common stock and common stock equivalents (c)		2,042			2,042			2,042			2,042
Loss per share:
Basic net loss per share (a)/(b)	$	(0.07	)	$	(0.03	)	$	(0.02	)	$	(0.39	)
Diluted net loss per share (a)/(c)	$	(0.07	)	$	(0.03	)	$	(0.02	)	$	(0.39	)

For the three and nine months ended September 30, 2017 and 2016, 188,633 and 23,333 outstanding stock options, respectively, were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive.

NOTE 5 - BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet accounts (in thousands):

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or market. Inventories are comprised as follows (in thousands):

	September 30, 2017		December 31, 2016
	(unaudited)
Raw materials	$	32	$	45
Finished goods		1,050		1,315
Net inventory balance	$	1,082	$	1,360

QUALSTAR CORPORATION AND SUBSIDIARIES

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

Property and equipment, net

The components of property and equipment are as follows (in thousands):

	September 30, 2017			December 31, 2016
	(unaudited)
Leasehold improvements	$	114		$	114
Furniture and fixtures		317			314
Machinery and equipment		1,020			1,039
		1,451			1,467
Less accumulated depreciation and amortization		(1,279	)		(1,181	)
Property and equipment, net	$	172		$	286

Depreciation and amortization expense for the three months ended September 30, 2017 and 2016 was $36,000 and $44,000 (unaudited), respectively, and for the nine months ended September 30, 2017 and 2016 was $119,000 and $137,000 (unaudited), respectively.

Other Accrued Liabilities

The components of other liabilities are as follows (in thousands):

	September 30, 2017		December 31, 2016
	(unaudited)
Accrued warranty	$	283	$	236
Accrued outside commissions		41		28
Accrued contingent legal fees		21		25
Deferred rent		29		37
Other accrued liabilities		4		33
Total other accrued liabilities	$	378	$	359

NOTE 6 –CONTINGENCIES

Accrued Warranty

We provide for the estimated costs of hardware warranties at the time the related revenue is recognized. We estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions for tape libraries generally include parts and labor over a three-year period. The warranty for power supplies is generally three years. We regularly re-evaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

Activity in the liability for product warranty, which is included in other accrued liabilities in the condensed consolidated balance sheets for the periods presented, is as follows (in thousands):

	Nine Months Ended September 30, 2017			Year Ended December 31, 2016
	(unaudited)
Beginning balance	$	236		$	187
Cost of warranty claims		(34	)		(157	)
Accruals for product warranties		81			206
Ending balance	$	283		$	236

QUALSTAR CORPORATION AND SUBSIDIARIES

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

NOTE 7 –COMMITMENTS

Lease Agreements

Qualstar’s lease agreement for its 15,160 square foot facility located in Simi Valley, California, expires February 28, 2018. On August 23, 2017, Qualstar exercised the option to extend the lease term for an additional three years expiring February 28, 2021. Rent on this facility is $11,000 per month with a step-up of 3% annually. Qualstar subleases a portion of the warehouse space to Interlink Electronics, Inc. (Interlink) and is reimbursed for the space and other related expenses on a monthly basis. As described in Note 13, Interlink is a related party.

Qualstar also leases approximately 5,400 square feet of office space in Westlake Village, California. Our lease on this facility expires on January 31, 2020. Rent on this facility is $11,000 per month, with a step-up of 3% annually. On March 21, 2016, we signed a sublease agreement for the Westlake Village facility. The tenant pays Qualstar $12,000 per month with a step-up of 3% annually.

Effective April 1, 2016, a two year lease was signed for 1,359 square feet for $2,200 per month in Singapore, which expires on September 30, 2018.

The Company provides for rent expense on a straight-line basis over the lease terms.

Future minimum lease payments under these leases are as follows, in thousands, (unaudited):

Years Ending December 31,	Minimum Lease Payment		Sublease Revenue			Net Minimum Lease Payment
Remainder of 2017	$	72	$	(35	)	$	37
2018		268		(143	)		125
2019		267		(147	)		120
2020		148		(13	)		135
2021		23					23
Total Commitment	$	778	$	(338	)	$	440

Net rent expense for the three months ended September 30, 2017 and 2016 was $36,000 and $48,000, respectively and for the nine months ended September 30, 2017 and 2016 was $107,000 and $148,000, respectively.

NOTE 8 –STOCK INCENTIVE PLANS AND SHARE-BASED COMPENSATION

Share-Based Compensation

Share-based compensation expense associated with outstanding stock options during the three months ended September 30, 2017 was $413,000. During the three months ended September 30, 2016, the Company did not incur any share based compensation expenses. Share-based compensation expense for the nine months ended September 30, 2017 and 2016 was $413,000 and $2,000, respectively. No income tax benefit was recognized in the statements of comprehensive loss for share-based arrangements in any period presented.

QUALSTAR CORPORATION AND SUBSIDIARIES

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

Stock Option Plan

The Company has three share-based compensation plans as described below.

Qualstar adopted the 1998 Stock Incentive Plan, (the “1998 Plan”) under which incentive and nonqualified stock options and restricted stock could be granted for shares of common stock. The 1998 Plan expired in 2008 and no additional options may be granted under that plan. However, 3,333 options that were previously granted under the 1998 Plan will continue under their terms.

Qualstar adopted the 2008 Stock Incentive Plan (the “2008 Plan”) under which incentive and nonqualified stock options and restricted stock may be granted for shares of common stock. The 2008 Plan expires in 2018 and no additional options may be granted under that plan. However, 20,000 options that were previously granted under the 2008 Plan will continue under their terms.

The 2017 Stock Incentive Plan (the “2017 Plan”) was approved by Qualstar shareholders on June 13, 2017. The 2017 Plan, permits the award of stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance shares, dividend equivalent rights and cash-based awards to employees (including executive officers), directors and consultants of the Company and its subsidiaries. The 2017 Plan authorizes the issuance of an aggregate of 200,000 shares of common stock and the plan is administered by the Compensation Committee of the Company’s Board of Directors.

With respect to options, the fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions, such as volatility, expected term and risk-free interest rate. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination in determining forfeiture rates. The expected term of options granted is estimated based on the vesting term of the award, historical employee exercise behavior, expected volatility of the Company’s stock and an employee’s average length of service. The risk-free interest rate used in this model correlates to a U.S. constant rate Treasury security with a contractual life that approximates the expected term of the option award.

QUALSTAR CORPORATION AND SUBSIDIARIES

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

The following table summarizes stock option activity; the amounts shown have been retrospectively restated for the one-for-six reverse stock split, effective June 14, 2016:

Options

Shares

Weighted

Average

Exercise

Price per

Share

Weighted

Average

Remaining

Contractual

Term

(years)

Aggregate

Intrinsic

Value

Outstanding at December 31, 2016

23,333

9.49

6.43

—

Granted

165,300

7.08

9.85

—

Exercised

—

Forfeited, canceled or expired

—

Outstanding at September 30, 2017

188,633

7.38

9.33

—

Exercisable at September 30, 2017

188,633

7.38

9.33

—

NOTE 9 - STOCKHOLDERS’ EQUITY

On June 14, 2016, upon receiving approval from the majority of the Company’s shareholders at the 2016 Annual Meeting, the Company implemented a one-for-six reverse stock split (the “Reverse Split”) of all outstanding shares of common stock, effective as of the close of business on June 14, 2016. The reverse split decreased the number of outstanding shares of common stock from 12,253,117 to approximately 2,042,020. The Company’s authorized number of shares of common stock remains at 50,000,000 and the authorized number of shares of preferred stock of the Company remains at 5,000,000. All share amounts in these financial statements reflect the Reverse Split of our issued and outstanding common stock, retroactively.

NOTE 10 – LEGAL PROCEEDINGS

The Company is subject to a variety of claims and legal proceedings that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in the aggregate, will not have a material adverse impact on our condensed consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. As of September 30, 2017, we had accrued aggregate current liabilities of $39,000 in probable fees and costs related to legal matters.

NOTE 11 – INCOME TAXES

We did not record a provision or benefit for income taxes for either the three or nine months ended September 30, 2017 or September 30, 2016, due to our prior year operating losses. The Company has recorded a full valuation allowance against its net deferred tax assets based on the Company’s assessment regarding the realizable nature of these net deferred tax assets in future periods.

NOTE 12 – SEGMENT INFORMATION

In its operation of the business, management reviews certain financial information, including segmented internal profit and loss statements prepared on a basis consistent with U.S. GAAP. Our two segments are Power Supplies and Data Storage. The two segments discussed in this analysis are presented in the way we internally manage and monitor performance for the three and nine months ended September 30, 2017 and 2016. Allocations for internal resources were made to the business segments for the three and nine months ended September 30, 2017 and 2016. The power supplies segment tracks certain assets separately, and all others are recorded in the storage segment for internal reporting presentations. The types of products and services provided by each segment are summarized below:

QUALSTAR CORPORATION AND SUBSIDIARIES

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

Power Supplies — The Company designs and markets high-efficiency switching power supplies. We utilize contract manufacturers in Asia to produce the power supply products. These power supplies are used to convert AC line voltage to DC voltages, or DC voltages to other DC voltages for use in a wide variety of electronic equipment such as communications equipment, industrial machine tools, wireless systems, as well as medical and gaming devices. We sell our products globally through authorized resellers and directly to original equipment manufacturers (“OEMs”).

Storage — The data storage industry is experiencing a tremendous increase in newly generated digital data due to Rich Media Content, Internet of Things, Data Mining and the Cloud. Tape based storage solution providers enable businesses to manage the massive growth of digital data assets in a cost-effective manner. For over 30 years, Qualstar’s innovations and customer-oriented focus has led to products that solved our customer’s needs for simplicity, scalability, reliability and affordable solutions. Our tape based data storage product lines address long-term archive, backup and recovery of electronic data. These products consist of networked libraries that store and move high density tape cartridges and high speed tape drives that stream data to and from the tape cartridges. These optimized solutions allow the video centric markets such as media and entertainment, oil and gas, surveillance, digital security and medical imaging to achieve targeted data workflows.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

2017

2016

2017

2016

Revenue

Power Supplies

1,542

1,559

4,655

4,163

Storage:

Product

791

652

1,658

1,633

Service

422

455

1,148

1,390

Total storage

1,213

1,107

2,806

3,023

Revenue

2,755

2,666

7,461

7,186

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Income (loss) before Taxes
Power Supplies	$	4		$	(33	)	$	44		$	(491	)
Storage		(152	)		(20	)		(75	)		(312	)
Income (loss) before taxes	$	(148	)	$	(53	)	$	(31	)	$	(803	)

QUALSTAR CORPORATION AND SUBSIDIARIES

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

	September 30, 2017		December 31, 2016
Total Assets	(unaudited)
Cash and cash equivalents	$	4,663	$	3,691
Restricted cash		100		100
Other assets:
Power Supplies
Accounts receivable, net		944		1,158
Inventories, net		417		444
Property and equipment, net		34		35
Other assets		35		39
		1,430		1,676
Storage
Accounts receivable, net		509		425
Inventories, net		665		916
Property and equipment, net		138		251
Other assets		206		204
		1,518		1,796
Total Assets	$	7,711	$	7,263

NOTE 13 – RELATED PARTY TRANSACTIONS

Steven N. Bronson is the Company’s CEO and is also the President and CEO and a majority shareholder of Interlink Electronics, Inc. (“Interlink”). Interlink reimburses Qualstar for leased space at the Simi Valley facility and for other administrative expenses paid by or on behalf of the Company. The total amount charged to Interlink for the three months ended September 30, 2017 and 2016 was $3,000 and $10,000, respectively. The total amount charged to Interlink for the nine months ended September 30, 2017 and 2016 was $8,000 and $30,000, respectively. Interlink owed Qualstar $1,000 and $1,000 at September 30, 2017 and December 31, 2016, respectively.

The Company reimburses Interlink for expenses paid on the Company’s behalf. Interlink occasionally pays travel and other expenses incurred by Qualstar. The Company reimbursed Interlink $1,000 and $4,000 for the three months ended September 30, 2017 and 2016, respectively. The Company reimbursed Interlink $8,000 and $11,000 for the nine months ended September 30, 2017 and 2016, respectively. Qualstar did not have a balance due to Interlink at September 30, 2017. At December 31, 2016, Qualstar owed Interlink $2,000.

NOTE 14 – SUBSEQUENT EVENTS

None

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 the Company 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 year ended December 31, 2016 in “Item 1 Business,” “Item 1A Risk Factors,” and in “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are generally identified 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 Subsidiaries (“Qualstar”, the “Company”, “we”, “us” or “our”) manufactures and markets data storage system products and compact, high efficiency power solutions. Our data storage devices include highly scalable automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in the network computing environment. Our data storage devices include models ranging from entry level to enterprise and are a cost-effective solution for organizations requiring backup, recovery and archival storage of critical electronic information. The distribution channels for our date storage devices include resellers, system integrators, and original equipment manufacturers (“OEMs”). In addition, the Company is a leading provider of standard, semi-custom and custom power solutions marketed under the N2Power brand. Our power solution products provide OEM designers increased functionality while reducing thermal loads and cooling requirements and lowering operating costs. Our power solution products are currently sold to OEMs in a wide range of markets, including telecom/networking equipment, audio/visual, industrial, gaming and now medical with our new product offerings.

The Company is focused on expanding sales in both business units in two key areas: adding key customers and expanding its product portfolio. The data storage business is adding more strategic partners that will expand our geographic footprint and increase the reach to additional industries. The power supply business unit is expanding its customer base in specific market verticals, such as the gaming industry. In addition to adding new internally designed and private label products, the power supply business is focusing on providing value add services in establishing itself as an optimized product development manufacturer (OPDM) for current and future new customers. This will allow N2Power to act as a one-stop shop providing solutions for more complex power assembly units and chassis solutions for their OEM customers.

The Company continues to expand its product portfolio through internal development, private labeling and establishing worldwide partnerships with other power supply and data storage related companies. These new relationships will increase our product development engineering capabilities and help us stay at the forefront of both the data storage and power supply industries.

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.

RESULTS OF OPERATIONS - (Unaudited)

The following table is presented in thousands, except for percentages. The percentages in the table are based on net revenues.

	Three Months Ended September 30,												Nine Months Ended September 30,
	2017						2016						2017						2016
		$		%				$		%				$		%				$		%
Power supply revenues	$	1,542			56.0	%	$	1,559			58.5	%	$	4,655			62.4	%	$	4,163			57.9	%
Storage revenues		1,213			44.0	%		1,107			41.5	%		2,806			37.6	%		3,023			42.1	%
Net revenues		2,755			100.0	%		2,666			100.0	%		7,461			100.0	%		7,186			100.0	%
Cost of goods sold		1,697			61.6	%		1,905			71.5	%		4,616			61.9	%		5,002			69.6	%
Gross profit		1,058			38.4	%		761			28.5	%		2,845			38.1	%		2,184			30.4	%
Operating expenses:
Engineering		131			4.8	%		232			8.7	%		427			5.7	%		850			11.8	%
Sales and marketing		360			13.1	%		276			10.4	%		886			11.9	%		933			13.0	%
General and administrative		715			26.0	%		306			11.5	%		1,563			20.9	%		1,194			16.6	%
Total operating expenses		1,206			43.8	%		814			30.5	%		2,876			38.5	%		2,977			41.4	%
Income (loss) from operations		(148	)		(5.4	)%		(53	)		(2.0	)%		(31	)		(0.4	)%		(793	)		(11.0	)%
Other expense		-			-	%		-			-	%		-			-	%		(10	)		(0.2	)%
Net income (loss)	$	(148	)		(5.4	)%	$	(53	)		(2.0	)%	$	(31	)		(0.4	)%	$	(803	)		(11.2	)%

Comparison of the Three Months Ended September 30, 2017 and 2016 (unaudited)

Change in Net Revenues:

	Three Months Ended September 30,
	2017					2016					Change
	Amount		% of net revenue			Amount		% of net revenue			Amount			%
Power supply revenues	$	1,542		56.0	%	$	1,559		58.5	%	$	(17	)		(1.1	)%
Storage revenues		1,213		44.0	%		1,107		41.5	%		106			9.6	%
Net revenues	$	2,755		100.0	%	$	2,666		100.0	%	$	89			3.3	%

The increase in net revenues for the three months ended September 30, 2017 compared to the prior year period is attributable to the segment-specific factors described below.

Segment Revenue

Power Supplies – The decrease in power supply sales in the three months ended September 30, 2017 compared to the prior year period is attributable to the end of a project for a customer that was not fully offset with new projects. Key customers that incorporate our power supplies have variable life cycles and production demands. As some projects reach end of life, the timing of new production creates a fluctuation in sales.

Storage – The increase in storage revenues in the three months ended September 30, 2017 compared to the prior year period is attributable to the increased sales of higher valued, larger libraries compared to the sales of smaller libraries in the prior period.

Gross Profit:

	Three Months Ended September 30,
	2017					2016					Change
	Amount		% of net revenue			Amount		% of net revenue			Amount		%
Gross profit	$	1,058		38.4	%	$	761		28.5	%	$	297		39.0	%

The gross profit increase for the three months ended September 30, 2017 compared to the prior year period is primarily attributed to decreases in payroll costs, overhead costs and freight costs and a decrease in the provision for obsolete inventory.

Operating Expenses:

	Three Months Ended September 30,
	2017					2016					Change
	Amount		% of net revenue			Amount		% of net revenue			Amount			%
Engineering	$	131		4.8	%	$	232		8.7	%	$	(101	)		(43.5	)%
Sales and marketing	$	360		13.1	%	$	276		10.4	%	$	84			30.4	%
General and administrative	$	715		26.0	%	$	306		11.5	%	$	409			133.7	%

Engineering

Engineering expenses decreased in the three months ended September 30, 2017 from the prior year period as a result of a reduction in payroll and related expenses, and lower engineering materials and facilities costs.

Sales and Marketing

Sales and marketing expenses increased during the three months ended September 30, 2017 from the prior year period, primarily as a result of increased share-based compensation and commission expenses, offset by a reduction in other payroll and related expenses.

General and Administrative

General and administrative costs increased during the three months ended September 30, 2017 from the prior year period. General and administrative costs increased primarily due to share-based compensation expense for stock options awarded to employees and board members, bonuses and legal and other professional fees, offset by a reduction in accounting fees and facilities costs.

Provision for Income Taxes: We did not record a provision or benefit for income taxes for each of the three months ended September 30, 2017 and 2016, due to our prior year operating losses. There were no changes to the valuation allowance during the three months ended September 30, 2017.

Comparison of the Nine Months Ended September 30, 2017 and 2016 (unaudited)

Change in Net Revenues:

	Nine Months Ended September 30,
	2017					2016					Change
	Amount		% of net revenue			Amount		% of net revenue			Amount			%
Power supply revenues	$	4,655		62.4	%	$	4,163		57.9	%	$	492			11.8	%
Storage revenues		2,806		37.6	%		3,023		42.1	%		(217	)		(7.2	)%
Net revenues	$	7,461		100.0	%	$	7,186		100.0	%	$	275			3.8	%

The increase in net revenues during the nine months ended September 30, 2017 compared to the prior year period is attributable to the segment-specific factors described below.

Segment Revenue

Power Supplies – The increase in power supply sales during the nine months ended September 30, 2017 compared to the prior year period is attributable to our continued emphasis on power solutions for our current and new gaming OEM customers.

Storage – The decrease in storage revenues in the nine months ended September 30, 2017 compared to the prior year period is attributable to the changing data storage market dynamics. Business owners are eliminating onsite data storage systems and preferring to select cloud based solutions.

Gross Profit:

	Nine Months Ended September 30,
	2017					2016					Change
	Amount		% of net revenue			Amount		% of net revenue			Amount		%
Gross profit	$	2,845		38.1	%	$	2,184		30.4	%	$	661		30.3	%

Gross profit during the nine months ended September 30, 2017 increased from the prior year period due to a decrease in payroll and related expenses, a decrease in freight costs and a decrease in warranty repairs and returns.

Operating Expenses:

	Nine Months Ended September 30,
	2017					2016					Change
	Amount		% of net revenue			Amount		% of net revenue			Amount			%
Engineering	$	427		5.7	%	$	850		11.8	%	$	(423	)		(49.8	)%
Sales and marketing	$	886		11.9	%	$	933		13.0	%	$	(47	)		(5.0	)%
General and administrative	$	1,563		20.9	%	$	1,194		16.6	%	$	369			30.9	%

Engineering

The decrease in engineering expenses for the nine months ended September 30, 2017 as compared to the prior year period is a result of the reduction in payroll and related costs, and reduced materials and facilities costs.

Sales and Marketing

The Company’s reduced sales and marketing expenses for the nine months ended September 30, 2017 compared to the period ended September 30, 2016 resulted from lower payroll and related costs from reduced headcount, lower consulting costs, reduced promotional materials and reduced facilities expenses offset by an increase in share-based compensation, travel and commission expenses.

General and Administrative

The increase in general and administrative costs for the nine months ended September 30, 2017 compared to the prior year period is primarily attributable to increased share-based compensation expenses for stock options awarded to employees and board members, and increased bonus expenses, offset by a reduction in payroll and related expenses from reduced headcount and lower legal and facilities costs.

Other Expense:

	Nine Months Ended September 30,
	2017					2016						Change
	Amount		% of net revenue			Amount			% of net revenue			Amount		%
Other expense	$	-		-	%	$	(10	)		(0.2	)%		10		100.0	%

For the period ended September 30, 2016, net other expense consists of a loss on the disposal of assets related to our facility relocation offset by interest income earned on cash held in money market accounts for operations.

Provision for Income Taxes: We did not record a provision or benefit for income taxes for the nine months ended September 30, 2017 and 2016, due to our prior year operating losses. There were no changes to the valuation allowance.

CONTRACTUAL OBLIGATIONS

The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2016 has not materially changed since the report was filed.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Our principal source of liquidity is cash generated from operations. Net cash provided by operating activities was $982,000 for the nine months ended September 30, 2017 compared to the net cash used by operating activities of $285,000 for the nine months ended September 30, 2016.

The cash provided by operating activities for the nine months ended September 30, 2017 of $982,000 consisted of the operating loss for the period of $31,000, offset by cash provided by net working capital of $250,000 and non-cash adjustments of $763,000, primarily share-based compensation, provision for inventory reserves and depreciation for the period.

Investing Activities

Cash used in investing activities was $10,000 and $27,000 for the nine months ended September 30, 2017 and 2016, respectively, relating to the purchase of office equipment.

Financing Activities

Cash was not provided by or used in financing activities during either the nine months ended September 30, 2017 or 2016.

As of September 30, 2017, cash, restricted cash and cash equivalents increased $972,000 to $4,763,000 from $3,791,000 at December 31, 2016.

The Company’s efforts to control costs in prior periods are reflected in the positive cash flow in this quarter and the preceding two quarters.

We believe that our existing cash and cash equivalents and cash flows from our operating activities will be sufficient to fund our working capital and capital expenditure needs for at least twelve months from the date of this report. We may utilize cash to invest in or acquire businesses, products or technologies that we believe are additive to the strategic expansion of the Company. We periodically evaluate other companies and technologies for possible investment or acquisition. 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. In the event that we require additional capital to meet our business needs, there can be no assurance that additional funding will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms.

ITEM 3. Qualitative and Quantitative Disclosures about Market Risk

Not applicable.

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 management, including our principal executive officer and our principal financial officer, as applicable, 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, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our disclosure controls and procedures are operating in an effective manner to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Changes in internal controls over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our 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 our controls will succeed in achieving their stated goals under all potential future conditions.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

Qualstar is subject to a variety of claims and legal proceedings that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in the aggregate, will not have a 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.

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 year ended December 31, 2016.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File Number

Exhibit

Filing Date

Filed
Herewith

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

**Furnished herewith

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: November 8, 2017	By:	/s/STEVEN N. BRONSON
		Steven. N. Bronson
		Chief Executive Officer and President
		(Principal Executive Officer)