Qualstar: Fiscal 2Q13 Financial Results

(in US$ million)	2Q11	2Q12	6 mo. 11	6 mo. 12
Revenues	3.6	3.4	8.2	6.8
*Growth*		-6%		*-17%*
Net income (loss)	(1.0)	(1.7)	(0.9)	(3.6)

Qualstar Corporation reported financial results for its second fiscal quarter ended December 31, 2012 as its transformation continues under new leadership.

Fiscal 2013 Second Quarter Financial Results
Bookings for the second fiscal quarter were $4.9 million representing 39% sequential growth over the fiscal first quarter and a book to bill of 1.46:1.

The company closed the quarter with $2.9 million in backlog with the majority to be delivered in the third fiscal quarter.

Revenues for the second quarter of fiscal 2013 were $3.4 million, compared to $3.6 million for the same quarter of fiscal 2012, a decrease of $200,000 or 5.6%, and sequentially flat to the fiscal first quarter.

GAAP net loss including restructuring charges of $511,000 or $0.04 per share was $1.7 million or $0.14 per basic and diluted share. Excluding the adjustment in labor and overhead, pro forma non-GAAP net loss was $970,000 or $0.08 per share. This compares to GAAP net loss of $971,000, or $0.08 per basic and diluted share for the second quarter of fiscal 2012.

“Our fiscal second quarter represented a turning point for Qualstar as we implemented our most important and significant steps to transition from a manufacturing-based company to a more nimble, lower overhead company focused on engineering and sales,” said Larry Firestone, president and CEO. “We booked business at a rate of just under $20 million annually in the second quarter and began the third quarter with very strong backlog. Combined with the work we have done to improve gross margins and lower inventories, we believe our strategy to focus Qualstar on our core markets of storage and power supply products will result in long-term growth, sustainable profitability and increasing returns for investors.”

Strategic Plan Implementation
Since last June, under Firestone’s leadership, Qualstar’s management has taken swift and decisive action to transform Qualstar and create sustainable value for all shareholders, including:

Initiated five-year strategic plan

Restructuring the company for greater efficiency

Outsourced library manufacturing to CTS: Decreasing inventory and expanding gross margins
Exited and consolidated certain facilities: Exited Canoga Park; Shrunk Boulder; Exiting the Simi valley location and moving to smaller more suitable quarters
Reduced workforce: Exited legacy product lines and old drive technologies
Renegotiated service contract

Fully integrated N2Power into Qualstar

Reorganized into two engineering team
Re-engaging resellers
Initiated discussions with first tier 1 channel partner

Strengthened management team
and sales and engineering staff

Bill Lurie, VP of engineering
Steve Wagner, VP of sales for N2Power
James Steger, Operations leadership

Delivered bookings in the annual range of $20 million
for the second quarter; above our breakeven point

Added two experienced board members

Allen Alley
Daniel Molhoek

Introduced new products and technology
to expand addressable market potential

Availability of LTO-6
Encryption Key Management for XLS
Expandable Rack Mount Tape Libraries

Exited legacy products and technologies

TLS and RLS 8000 – Selling below cost
Touchless Mouse and Touchless Pointing

Storage revenues grew 35.4% to $2.1 million for the second quarter compared to $1.6 million in the second quarter of fiscal 2012, an increase of $554,000, and 11.3% sequentially, up from $1.9 million in the first fiscal quarter. The increase was primarily driven by higher sales of XLS tape libraries. N2Power revenues were $1.2 million for the quarter, compared to $2.0 million in the prior year quarter, a decrease of $755,000, or 38.1% as the softness in the network and telephony markets continued.

Gross profit increased to $1.3 million, or 37.8%, from $827,000, or 23.3% from the year ago quarter. Our pro forma gross profit, for the second fiscal quarter excluding the $192,000 related to changes in labor and overhead rates was $1.5 million, or a record 43.5% gross margin. Our focus on reducing above the line costs and outsourcing manufacturing has delivered these results.

Fiscal second quarter operating expenses which included $511,000 of restructuring charges were $3.0 million up from $1.8 million for the second quarter of 2012. Engineering expenses for the second quarter of were $742,000, or 22.1% of revenues, compared to $650,000 or 18.3% of revenues, for the second quarter of fiscal 2012 driven by recruiter expenses for our engineering department. Sales and marketing expenses were $804,000, or 24.0% of revenues, compared to $448,000 or 12.6% of revenues, in the corresponding period last year. This increase was primarily attributed to the cost of recruiting and adding to our sales force as well as the cost of advertising and promotion. General and administrative expenses were $919,000 or 27.4% of revenues, compared to $741,000, or 20.8% of revenues, for the same period last year. The increase in G&A expenses is primarily attributed to increases in professional fees and general business insurance, partially offset by a decrease in bad debt expense.

Cash, cash equivalents and marketable securities were $17.8 million at December 31, 2012, a decrease of $3 million from June 30, 2012. Inventory, net of reserves, at December 31, 2012 was $3.6 million, compared to $4.5 million at June 30, 2012.