2. Investment in Qualstar

On July 3, 2013, Steven Bronson, BKF’s Chairman, was appointed the interim Chief Executive Officer and President of Qualstar Corporation (“Qualstar”). This resulted in the 18.3% of the Company’s ownership in Qualstar to be accounted for using the equity method, a change from available for sale, on the basis that BKF can assert significant influence over the operations of Qualstar. The retroactive application of the equity method resulted in a decrease to retained earnings at December 31, 2012 of approximately $1,222,000. The retroactive application of the equity method resulted in a decrease to retained earnings at December 31, 2012 of approximately $1,222,000, loss on equity investment for the three months and nine months ended September 30, 2012 in the amount of approximately $482,000 and $708,000, respectively. In addition, the basic and diluted earning per share were restated for the three months and nine months ended September 30, 2012 to $(0.08) and $(0.19), respectively.

The investment in Qualstar is accounted for using the equity method as prescribed by Accounting Standard Codification Section 323, under which the Company’s carrying amount of its investment in common stock of Qualstar is the initial cost adjusted for the Company’s share of Qualstar’s earnings and losses, and further adjusted for any distributions or dividends. At September 30, 2013 the Company held 2,239,419 common shares of Qualstar, representing approximately 18.3% of the outstanding shares. The investment in Qualstar was approximately $1,054,000 at September 30, 2013. The market value of the Company’s shares in Qualstar was approximately $3.1 million at September 30, 2013.

During the three months and nine months ended September 30, 2013, the Company recorded a loss on its investment in Qualstar of approximately $629,000 and $1,471,000, respectively. These losses do not include the quarterly results of Qualstar as of September 30, 2013, as Qualstar’s financial statements were not available at the time we prepared our financial statements. Therefore, all balances related the Company’s investment in Qualstar are recorded on a three month (quarterly) lag. This lag is consistent from period to period.