Qualstar: Fiscal 3Q13 Financial Results

Qualstar Corporation reported financial results for its third fiscal quarter ended March 31, 2013.

The company reported fiscal third quarter revenues of $3.0 million compared to $3.5 million in the second quarter of fiscal 2013 and $4.6 million in the third quarter of fiscal 2012.

Revenues were impacted this quarter by a change in the revenue recognition policy for the service business and also by the initiation and subsequent termination of a tender offer for shares of the company’s stock by BKF Capital Group, Inc., which adversely affected bookings and revenues for new equipment in the storage business.

The net loss in the fiscal third quarter was $3.3 million or $0.27 per basic and diluted share compared to a net loss of $1.7 million or $0.14 per basic and diluted share in the second quarter of fiscal 2013 and a net loss of $553,000 or $0.05 per basic and diluted share in the third quarter of fiscal 2012.

Non-GAAP revenues for the fiscal third quarter were $3.4 million. As a result of a modification to our service agreements, Qualstar changed the recognition of its service revenues. Revenues from service agreements will now be deferred and recognized ratably over the term of the service agreement. As a result, the company recorded a one-time, non-cash increase to deferred revenues in the fiscal third quarter of approximately $454,000 with an equal offset to revenues. Non-GAAP net loss was $1.3 million or $0.11 per basic and diluted share in the third quarter of fiscal 2013. Non-GAAP measures in the fiscal third quarter exclude a one-time charge of $641,000 in general and administrative expenses related to shareholder activism matters and $913,000 of restructuring costs. A reconciliation of non-GAAP income is provided in the tables below.

The book to bill was 1.2:1. Bookings were $3.5 million for the third quarter of fiscal 2013 down sequentially from $4.9 million in the second quarter of fiscal 2013. Backlog at the end of the fiscal third quarter was $3.4 million, of which $2.7 million is deliverable in the fourth quarter of fiscal 2013.

"The March quarter was a challenging one for Qualstar," said Larry Firestone, president and CEO. "The majority of our resources were focused on ensuring a smooth transition of our manufacturing to CTS. In the midst of this effort, we were faced with a tender offer for a controlling interest in the company from BKF Capital Group, which noticeably impacted our bookings momentum during the quarter as customers delayed purchasing decisions. Despite these challenges, we met our critical manufacturing timelines and successfully executed on this phase of Qualstar’s strategic plan.

"Our focus and commitment to transforming Qualstar into a leveraged business model with scalable, outsourced manufacturing has enabled us to accomplish a great deal in just the last nine months. Now, we are moving to the next phase of our strategic plan to grow revenues as we strive to deliver value to our shareholders."

Including the $454,000 of deferred service revenue, storage revenues were $1.4 million for the third quarter of fiscal 2013, a 32.2% sequential decrease from the $2.1 million in the second quarter of fiscal 2013 and a 25.2% decrease from the $1.9 million in the third quarter of fiscal 2012. The sequential decline in revenues was the result of lower bookings for new equipment in the storage business.

N2Power revenues were $2.0 million for the quarter, compared to $2.7 million in the prior year quarter, a decrease of $700,000, or 26.7%, due to short-term inventory tightening in the network and telephony market. On a sequential basis, N2Power revenues increased 60.2% from $1.2 million in the second quarter of fiscal 2013.

Gross margin for the fiscal third quarter was 29.5% compared with 25.8% in the same period a year ago. This increase was driven by the restructuring efforts, a product mix-shift and decreases in material costs and rent. On a non-GAAP basis, gross profit for the fiscal third quarter was $1.3 million or 39.0%, after adjusting for the $454,000 effect of the charge in service revenue.

Operating expenses were $4.2 million in the fiscal third quarter including $913,000 of restructuring charges and $641,000 of expenses related to shareholder activism. This compares to $1.8 million for the third quarter of 2012. Engineering expenses for the fiscal third quarter were $854,000, or 28.9% of revenues, compared to $696,000, or 15.1% of revenues, for the third quarter of fiscal 2012. The increase in expenses was driven by the addition of engineering personnel in N2Power. Sales and marketing expenses for the fiscal third quarter were $846,000 or 28.7% of revenues compared to $451,000, or 9.8% of revenues, in the corresponding period last year. The increase was driven by additions to the storage sales force and increased advertising and promotional expenses. General and administrative expenses in the fiscal third quarter were $1.6 million, or 53.4% of revenues, compared to $644,000 or 14.0% of revenues for the same period last year. The increase in G&A expenses was primarily due to the $641,000 of expenses related to shareholder activism matters, including the tender offer by BKF Capital Group.

Cash, cash equivalents and marketable securities were $16.7 million as of March 31, 2013, a decrease of $1.1 million from December 31, 2012. Cash was used during this period for restructuring actions, support of operating losses and expenses in response to the BKF Capital Group tender offer.

Inventory, net of reserves, was $2.6 million compared to $4.5 million at June 30, 2012, as we successfully transitioned our component and raw material inventory for our storage products to our outsourced manufacturer to free up working capital.