QUALSTAR CORP

Public health threats could have an adverse effect on our operations and financial results.

Public health threats could adversely affect our ongoing or planned business operations. In particular, the outbreak in December 2019 of a novel coronavirus (COVID-19) in China has resulted in quarantines, restrictions on travel and other business and economic disruptions. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of the third parties with whom we engage, including the suppliers, distributers, resellers and other third parties with whom we conduct business, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and adversely impacted.

Our first quarter of 2020 has been impacted by the extended Chinese New Year holiday and the unprecedented change in the global business environment brought on by COVID-19. At this time, in our power supply business, we are experiencing a delay in shipping dates to our customers, as our subcontracted manufacturers rebuild to full capacity. Although the Company has experienced few cancellations at this time, the Company is also seeing customers delay orders in both business segments as they reassess their needs.  At this time, it is difficult for us to predict the impact these events will have on our future revenue.

As previously indicated, the Company records a valuation allowance against its net deferred income tax assets in accordance with ASC 740 “Income Taxes” when in management’s judgment, it is more likely than not that the deferred income tax assets will not be realized in the foreseeable future. For the year ended December 31, 2019 and 2018, the Company placed a valuation allowance on net deferred tax assets. With the exception of a small amount of deferred California taxes, the Company continues to fully offset its deferred tax assets with a valuation allowance, despite generating income in 2018 and 2017 given the Company’s significant book losses prior to 2017 and the current year book and tax loss. With regard to California deferred tax assets, since Qualstar files on a separate company basis, and Qualstar generated book income for 2017 and 2018, and a small loss for 2019, the Company expects to generate income in the subsequent year, therefore the Company reduced a small amount of the valuation allowance related to Qualstar’s separate company net operating loss carryovers.

The Company granted to Steven N. Bronson, the Company’s President and Chief Executive Officer, 50,000 restricted stock units (the “Restricted Stock Units”) for shares of the Company’s common stock under the terms of the Company’s 2017 Stock Option and Incentive Plan and an associated Restricted Stock Unit Agreement with Mr. Bronson (the “Restricted Stock Unit Agreement”).  The Restricted Stock Units were awarded pursuant to that certain employment agreement entered into between the Company and Mr. Bronson on April 13, 2019.  25,000 of the 50,000 restricted stock units vested and the underlying 25,000 shares of common stock became issuable as approved by the Company’s Compensation Committee on December 18, 2019. The share-based compensation of $139,000 was recorded for the twelve months ended December 31, 2019. No share-based compensation associated with outstanding stock options and restricted stock grants was recorded during the twelve months ended December 31, 2018.  No income tax benefit was recognized in the statements of comprehensive income (loss) for share-based arrangements in any period presented.

Steven N. Bronson has more than 35 years of business and entrepreneurial experience and has established a proven track record of success in finance, operations, and management—turning around the fortunes of numerous public technology companies in the process. In July 2013, Mr. Bronson became a board member and the Chief Executive Officer of Qualstar Corporation (NASDAQ: QBAK), a leading provider of high-quality data storage solutions, and high-density power solutions marketed under the N2Power brand. He was able to return the struggling company to profitability by replacing its executive team and board and implementing cost-cutting measures and aggressive sales efforts. As worldwide data accumulation increases, Qualstar’s high-capacity, low-cost taped-based solutions are well-positioned to meet this growing demand. In July 2010, Mr. Bronson was appointed Chairman and Chief Executive Officer of Interlink Electronics, Inc. (OTC: LINK), a global leader in Force Sensing Resistor (FSR®) technology, printed electronics, and sensor fusion. While returning Interlink to profitability, he expanded the Interlink’s global footprint and commitment to R&D and acquisitions. This groundwork has developed Interlinks capabilities and expertise in emerging markets like the Internet of Things. Mr. Bronson is also the Chairman, Chief Executive Officer and President of Ridgefield Acquisition Corp. (OTC: RDGA) since 1996. Ridgefield Acquisition Corp. is a public shell that is seeking a merger, acquisition or business combination with a viable operating entity. Mr. Bronson became the Chief Executive Officer of BKF Capital Group, Inc. (OTC: BKFG) in September 2008 and charted a new course for the company. BKF is a holding company, with two active operating subsidiaries, BKF Asset Holdings, Inc., and recently formed Bronson Financial LLC. BKF Asset Holdings, Inc., which invests meaningful stakes in private and public companies, and Bronson Financial LLC, was created in February 2020, to register as an investment banking firm with FINRA. Mr. Bronson currently holds the series 4, 7, 24, 53, 55, 63, 65, 66, and 79 licenses.