Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2010
or
[ ] 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: 1-8266
________________________________________________________
DATARAM CORPORATION
_____________________________________________________________________________
(Exact name of registrant as specified in its charter)
New Jersey 22-1831409
_____________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 7528, Princeton, NJ 08543
_____________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(609) 799-0071
_____________________________________________________________________________
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
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. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T 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 or a non-accelerated filer. See definitions of
"accelerated filer and large accelerated filer" in Rule 12b of the Exchange
Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Common Stock
($1.00 par value): As of December 10, 2010, there were 8,928,309 shares
outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Dataram Corporation and Subsidiaries
Consolidated Balance Sheets
October 31, 2010 and April 30, 2010
October 31, 2010 April 30, 2010
(Unaudited) (Note 1)
Assets
Current Assets:
Cash and cash equivalents $ 614,363 $ 2,507,456
Accounts receivable, less allowance
for doubtful accounts and sales returns
of $250,000 at October 31, 2010 and at
April 30, 2010 4,866,872 5,343,957
Inventories 5,295,379 6,872,265
Other current assets 252,042 86,684
__________ __________
Total current assets 11,028,656 14,810,362
Property and equipment, at cost:
Machinery and equipment 12,329,876 12,300,657
Leasehold improvements 2,234,752 2,234,752
__________ __________
14,564,628 14,535,409
Less: accumulated depreciation
and amortization 13,733,664 13,418,328
__________ __________
Net property and equipment 830,964 1,117,081
Other assets 86,062 104,686
Intangible assets, net of accumulated
amortization 652,530 866,958
Goodwill 1,123,775 753,755
__________ __________
$ 13,721,987 $ 17,652,842
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Note payable-revolving credit line $ 2,532,614 $ 0
Accounts payable 1,350,605 3,522,704
Accrued liabilities 1,086,932 1,737,830
Note payable to related party 0 1,000,000
__________ __________
Total current liabilities 4,970,151 6,260,534
Stockholders' Equity:
Common stock, par value $1.00 per share.
Authorized 54,000,000 shares; issued and
outstanding 8,918,309 at October 31, 2010
and April 30, 2010 8,918,309 8,918,309
Additional paid-in capital 8,322,427 8,009,262
Retained deficit (8,488,900) (5,535,263)
__________ __________
Total stockholders' equity 8,751,836 11,392,308
__________ __________
$ 13,721,987 $ 17,652,842
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended October 31, 2010 and 2009
(Unaudited)
2010 2009
Three Months Six Months Three Months Six Months
Revenues $ 10,948,853 $ 23,692,749 $ 10,673,217 $ 19,863,238
Costs and expenses:
Cost of sales 8,536,054 18,156,559 7,936,731 14,591,635
Engineering 238,440 513,002 259,077 512,265
Research and development 865,250 1,759,599 1,621,385 2,495,462
Selling, general and administrative 2,973,315 6,056,939 3,502,357 6,550,019
__________ __________ __________ __________
12,613,059 26,486,099 13,319,550 24,149,381
Loss from operations (1,664,206) (2,793,350) (2,646,333) (4,286,143)
Other income (expense):
Interest income (expense), net (62,185) (78,643) (3,289) 6,861
Currency gain (loss) 11,396 (84,629) (18,741) 4,930
Other income (expense), net 0 2,985 10,412 10,412
__________ __________ __________ __________
Total other income (expense) (50,789) (160,287) (11,618) 22,203
Loss before income taxes (1,714,995) (2,953,637) (2,657,951) (4,263,940)
Income tax benefit 0 0 (1,042,000) (1,670,000)
__________ __________ __________ __________
Net loss $ (1,714,995) $ (2,953,637) $(1,615,951) $ (2,593,940)
========== ========== ========== ==========
Net loss per share of common stock
Basic $ (.19) $ (.33) $ (.18) $ (.29)
========== ========== ========== ==========
Diluted $ (.19) $ (.33) $ (.18) $ (.29)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended October 31, 2010 and 2009
(Unaudited)
2010 2009
Cash flows from operating activities:
Net loss $(2,953,637) $(2,593,940)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 529,764 603,608
Bad debt expense (recovery) 15,960 (22,230)
Stock-based compensation expense 313,165 380,195
Gain on sale of property and equipment (2,472) (10,412)
Deferred income tax benefit 0 (1,690,087)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 461,125 (1,665,040)
Decrease (increase) in inventories 1,576,886 (3,386,504)
Increase in other current assets (165,358) (87,223)
Decrease in other assets 18,624 17,728
Increase (decrease) in accounts payable (2,172,099) 1,111,101
Decrease in accrued liabilities (650,898) (64,795)
__________ __________
Net cash used in operating activities (3,028,940) (7,407,599)
___________ __________
Cash flows from investing activities:
Acquisition of business (370,020) (161,524)
Additions to property and equipment (36,732) (481,149)
Proceeds from sale of property and equipment 9,985 10,412
___________ __________
Net cash used in investing activities (396,767) (632,261)
___________ __________
Cash flows from financing activities:
Net proceeds from borrowings under
revolving credit line 2,532,614 0
Payment of note payable to related party (1,000,000) 0
___________ __________
Net cash provided by financing activities 1,532,614 0
Net decrease in cash and
cash equivalents (1,893,093) (8,039,860)
Cash and cash equivalents at
beginning of period 2,507,456 12,525,008
__________ __________
Cash and cash equivalents at
end of period $ 614,363 $ 4,485,148
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 62,185 $ 4,508
========== ==========
Income taxes $ 0 $ 20,087
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2010 and 2009
(Unaudited)
(1) Basis of Presentation
The information for the three and six months ended October 31, 2010 and 2009
is unaudited, but includes all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are necessary to state
fairly the financial information set forth therein in accordance with
accounting principles generally accepted in the United States of America.
The interim results are not necessarily indicative of results to be expected
for the full fiscal year. These financial statements should be read in
conjunction with the audited financial statements for the year ended
April 30, 2010 included in the Company's 2010 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The April 30, 2010
balance sheet has been derived from these statements.
The consolidated financial statements for the three and six months ended
October 31, 2010 and 2009 have been prepared in conformity with accounting
principles generally accepted in the United States of America and include
the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
As discussed in Notes 4 and 9, the Company entered into an accounts
receivable financing agreement and an inventory consignment and purchase
agreement to address short-term liquidity needs. Based on the cash flows
expected to be provided from these agreements along with the cash flows
projected to result from the Company's operations, management has concluded
that the Company's short-term liquidity needs have been satisfied. In its
fiscal second quarter ended October 31, 2010, the Company's cash flows from
operating activities did not materially meet its projections. Should
that event reoccur in the short-term, it is management's conclusion that
the Company will require additional funding to meet its short-term liquidity
needs. There can be no assurance, however, that such financing will be
sufficient for the Company's purposes or that additional sources of
financing will be available if needed. In order to satisfy long-term
liquidity needs, the Company will need to generate profitable operations
and positive cash flows.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Income tax expense (benefit)
The Company's consolidated statements of operations for the three and six
months ended October 31, 2010 include income tax expense (benefit) of nil.
The three and six month periods ended October 31, 2009 included $1,042,000
and $1,670,000 respectively, of income tax benefit. The Company utilizes the
asset and liability method of accounting for income taxes in accordance with
the provisions of the Expenses - Income Taxes Topic of the FASB ASC. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. A valuation allowance
is provided when the Company determines that it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
Company considers certain tax planning strategies in its assessment as to
the recoverability of its tax assets. In each reporting period, the Company
assesses, based on the weight of all evidence, both positive and negative,
whether a valuation allowance on its deferred tax assets is warranted.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that the tax
rate changes. As of April 30, 2010 the Company had Federal and State net
operating loss (NOL) carry-forwards of approximately $11.5 million and
$9.7 million, respectively. These can be used to offset future taxable
income and expire between 2023 and 2030 for Federal tax purposes and 2016
and 2030 for state tax purposes. The Company's NOL carry-forwards are a
component of its deferred tax assets which are reported net of a full
valuation allowance in the Company's consolidated financial statements at
October 31, 2010 and at April 30, 2010.
Net loss per share
Net loss per share is presented in accordance with the Presentation -
Earnings Per Share Topic of the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC). Basic net earnings (loss) per share
is computed by dividing the net earnings (loss) by the weighted average
number of shares of common stock issued and outstanding during the period.
The calculation of diluted loss per share for the three and six months ended
October 31, 2010 and 2009 includes only the weighted average number of
shares of common stock outstanding. The denominator excludes the dilutive
effect of stock options outstanding as their effect would be anti-dilutive.
The following presents a reconciliation of the numerator and denominator
used in computing basic and diluted net loss per share for the three and six
month periods ended October 31, 2010 and 2009:
Three Months ended October 31, 2010
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
-net loss and weighted
average common shares
outstanding $(1,714,995) 8,918,309 $ (.19)
Effect of dilutive securities
-stock options - - -
________ _________ ______
Diluted net loss per share
-net loss, weighted
average common shares
outstanding and effect of
stock options $(1,714,995) 8,918,309 $ (.19)
======== ========= ======
Three Months ended October 31, 2009
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
-net loss and weighted
average common shares
outstanding $(1,615,951) 8,869,184 $ (.18)
Effect of dilutive securities
-stock options - - -
________ _________ ______
Diluted net loss per share
-net loss, weighted
average common shares
outstanding and effect of
stock options $(1,615,951) 8,869,184 $ (.18)
======== ========= ======
Diluted net loss per common share for the three month periods ending October
31, 2010 and 2009 do not include the effect of options to purchase 1,981,700
and 2,061,425 shares respectively, of common stock because they are
anti-dilutive.
Six Months ended October 31, 2010
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
-net loss and weighted
average common shares
outstanding $(2,953,637) 8,918,309 $ (.33)
Effect of dilutive securities
-stock options - - -
_______ _________ ______
Diluted net loss per share
-net loss, weighted
average common shares
outstanding and effect of
stock options $(2,953,637) 8,918,309 $ (.33)
========= ========= ======
Six Months ended October 31, 2009
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
-net loss and weighted
average common shares
outstanding $(2,593,940) 8,869,184 $ (.29)
Effect of dilutive securities
-stock options - - -
_______ _________ ______
Diluted net loss per share
-net loss, weighted
average common shares
outstanding and effect of
stock options $(2,593,940) 8,869,184 $ (.29)
======== ========= ======
Diluted net loss per common share for the six month periods ending October
31, 2010 and 2009 do not include the effect of options to purchase 1,981,700
and 2,061,425 shares respectively, of common stock because they are
anti-dilutive.
Common Stock Repurchases
On December 4, 2002, the Company's Board of Directors authorized a stock
repurchase plan pursuant to which the Company was authorized to repurchase a
total of 500,000 shares of its common stock. During the three and six months
ended October 31, 2010 and 2009, the Company did not repurchase any shares
of its common stock. As of October 31, 2010, 172,196 shares remain available
for repurchase under the plan. This repurchase program does not have an
expiration date.
Stock Option Expense
a. Stock-Based Compensation
The Company has a 1992 incentive and non-statutory stock option plan for the
purpose of permitting certain key employees to acquire equity in the Company
and to promote the growth and profitability of the Company by attracting and
retaining key employees. In general, the plan allowed granting of up to
2,850,000 shares, adjusted for stock splits, of the Company's common stock
at an option price to be no less than the fair market value of the stock on
the date such options are granted. Under option agreements granted under the
plan, the holder of the option may purchase 20% of the common stock with
respect to which the option has been granted on or after the first
anniversary of the date of the grant and an additional 20% of such shares on
or after each of the four succeeding anniversary dates. No further options
may be granted under this plan.
The Company also has a 2001 incentive and non-statutory stock option plan
for the purpose of permitting certain key employees to acquire equity in the
Company and to promote the growth and profitability of the Company by
attracting and retaining key employees. In general, the plan allows granting
of up to 1,800,000 shares of the Company's common stock at an option price
to be no less than the fair market value of the Company's common stock on
the date such options are granted. Options granted under the plan vest
ratably on the annual anniversary date of the grants. Vesting periods for
options currently granted under the plan range from one to five years.
The Company also grants nonqualified stock options to certain new key
employees of the Company as a component of the Company's offer of
employment. These options are granted to promote the growth and
profitability of the Company by attracting key employees. The options
granted to these new employees are exercisable at a price representing the
fair value at the date of grant and expire five years after date of grant.
Options granted vest ratably on the annual anniversary date of the grants.
Vesting periods for options currently granted range from one to two years.
The Company periodically grants nonqualified stock options to non-employee
directors of the Company. These options are granted for the purpose of
retaining the services of directors who are not employees of the Company and
to provide additional incentive for such directors to work to further the
best interests of the Company and its shareholders. The options granted to
these non-employee directors are exercisable at a price representing the
fair value at the date of grant, and expire either five or ten years after
date of grant. Vesting periods for options currently granted range from one
to two years.
On September 23, 2010, the Company granted Mr. Sheerr, who is employed by
the Company as the general manager of the acquired MMB business unit
described in Note 3 and is an executive officer of the Company, nonqualified
stock options to purchase 100,000 shares of the Company's common stock
pursuant to his employment agreement. The options granted are exercisable at
a price representing the fair value at the date of grant and expire five
years after date of grant. The options vest in one year.
New shares of the Company's common stock are issued upon exercise of stock
options.
As required by the Compensation - Stock Compensation Topic of FASB ASC, the
accounting for transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity
instruments are accounted for using a fair value-based method with a
recognition of an expense for compensation cost related to share-based
payment arrangements, including stock options and employee stock purchase
plans.
Our consolidated statements of operations for the three and six month
periods ended October 31, 2010 include approximately $155,000 and $313,000
of stock-based compensation expense, respectively. Fiscal 2010's three and
six month periods ended October 31, 2009 include approximately $225,000 and
$380,000 of stock-based compensation expense, respectively. These stock
option grants have been classified as equity instruments, and as such, a
corresponding increase has been reflected in additional paid-in capital in
the accompanying consolidated balance sheets. The fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes
option pricing model.
A summary of option activity for the six months ended October 31, 2010 is as
follows:
Weighted average Weighted average Aggregate
exercise price remaining contractual intrinsic
Shares life (1) value(2)
__________ ________________ _____________________ __________
Balance
April 30,
2010 1,946,800 $3.25 6.38 $ 175,000
Granted (3) 139,000 $1.76 - -
Exercised - - - -
Expired (154,100) $6.93 - -
Balance
October 31,
2010 1,931,700 $2.88 6.33 $ 243,440
Exercisable
October 31,
2010 1,277,700 $3.11 5.46 $ 148,600
Expected to vest
October 31,
2010 1,835,000 $2.88 6.33 -
(1) This amount represents the weighted average remaining contractual
life of stock options in years.
(2) This amount represents the difference between the exercise price
and $2.44, the closing price of Dataram common stock on October 29,
2010 as reported on the NASDAQ Stock Market, for all in-the-money
options outstanding and all the in-the-money shares exercisable.
(3) The weighted average fair value of options granted in the six month
period ended October 31, 2010 was $1.07 per option.
Total cash received from the exercise of options in the first six months
of fiscal 2011 ended October 31, 2010 was nil. As of October 31, 2010,
there was approximately $861,000 of total unrecognized compensation
costs related to stock options. These costs are expected to be
recognized over a weighted average period of approximately eighteen
months.
b. Other Stock Options
On June 30, 2008, the Company granted options to purchase 50,000 shares of
the Company's common stock to a privately held company in exchange for
certain patents and other intellectual property. The options granted are
exercisable at a price of $2.60 per share which was the fair value at the
date of grant, were 100% exercisable on the date of grant and expire ten
years after the date of grant.
(3) Acquisition
On March 31, 2009, the Company acquired certain assets of Micro Memory Bank,
Inc. (MMB), a privately held corporation. MMB is a manufacturer of legacy to
advanced solutions in laptop, desktop and server memory products. The
acquisition expands the Company's memory product offerings and routes to
market. The Company purchased the assets from MMB for total consideration of
approximately $2,253,000 of which approximately $912,000 was paid in cash.
The Company also assumed certain accounts payable totaling approximately
$190,000 and certain accrued liabilities totaling approximately $122,000.
Under the terms of the agreement with MMB, the remaining portion of the
purchase price is contingently payable based upon the performance of the
new Dataram business unit to be operated as a result of the acquisition
(the Unit) and consists of a percentage, averaging 65%, payable quarterly,
over the subsequent four years from acquisition date of earnings before
interest, taxes, depreciation and amortization of the MMB business unit. For
the three and six month period ended October 31, 2010, this amount totaled
approximately $103,000 and $370,000 respectively. The net assets acquired by
the Company were recorded at their respective fair values under the purchase
method of accounting. The results of operations of MMB for the period from
the acquisition date, March 31, 2009, through October 31, 2010 have been
included in the consolidated results of operations of the Company.
The total consideration of the acquisition has been allocated to the fair
value of the assets of MMB as follows:
Accounts receivable $ 478,000
Machinery and equipment 200,000
Deposits 16,000
Trade names 733,000
Customer relationships 758,000
Non-compete agreement 68,000
-----------
Gross assets acquired 2,253,000
Liabilities assumed 312,000
Net assets acquired $ 1,941,000
===========
The Company estimates that it has no significant residual value related to
its intangible assets. Acquired intangibles generally are amortized on a
straight-line basis over weighted average lives. Intangible assets
amortization expense for the three and six months periods ended October 31,
2010 totaled approximately $107,000 and $214,000, respectively. Intangible
assets amortization expense for the three and six months periods ended
October 31, 2009 totaled approximately $164,000 and $328,000, respectively.
Intangible asset amortization is included in selling, general and
administrative expense. The components of finite-lived intangible assets
acquired are as follows:
Gross Carrying Amount
Weighted
Average
Life October 31, 2010 April 30, 2010
________ _____________ _____________
Trade names 5 Years $ 733,000 $ 733,000
Customer relationships 2 Years 758,000 758,000
Non-compete agreement 4 Years 68,000 68,000
_____________ _____________
Total gross carrying amount $ 1,559,000 $ 1,559,000
Less accumulated amortization expense 906,000 692,000
_____________ _____________
Net intangible assets $ 653,000 $ 867,000
============= =============
The following table outlines the estimated future amortization expense
related to intangible assets:
Year ending April 30:
2011 $ 407,000
2012 164,000
2013 162,000
2014 134,000
__________
$ 867,000
===========
(4) Related Party Transactions
During the first six months of fiscal 2011, the Company purchased
inventories for resale totaling approximately $616,000 from Sheerr Memory,
LLC (Sheerr Memory). During the first six months of fiscal 2010, the Company
purchased inventories for resale totaling approximately $3,355,000 from
Sheerr Memory. Sheerr Memory's owner ("Mr. Sheerr") is employed by the
Company as the general manager of the acquired MMB business unit described
in Note 3 and is an executive officer of the Company. When the Company
acquired certain assets of MMB, it did not acquire any of its inventories.
However, the Company informally agreed to purchase such inventory on an as
needed basis, provided that the offering price was a fair market value
price. The inventory acquired was purchased subsequent to the acquisition
of MMB at varying times and consisted primarily of raw materials and
finished goods used to produce products sold by the MMB business unit.
Approximately $142,000 and $400,000, respectively, of accounts payable in
the Company's consolidated balance sheets as of October 31, 2010 and April
30, 2010 is payable to Sheerr Memory. Sheerr Memory offers the Company trade
terms of net 30 days and all invoices are settled in the normal course of
business. No interest is paid. The Company has made further purchases from
Sheerr Memory subsequent to October 31, 2010 and management anticipates that
the Company will continue to do so, although the Company has no obligation
to do so.
On February 24, 2010, the Company entered into a Note and Security Agreement
with Mr. Sheerr. Under the agreement, the Company borrowed the principal sum
of $1,000,000 for a period of six months, which the Company could extend for
an additional three months without penalty. The loan bore interest at the
rate of 5.25%. Interest was payable monthly, and the entire principal amount
was payable in the event of the employee's termination of employment by the
Company. The loan was secured by a security interest in all machinery,
equipment and inventory of Dataram at its Montgomeryville, PA location. The
loan was paid in full on August 13, 2010.
On July 27, 2010, the Company entered into an agreement with Sheerr Memory
to consign a formula based amount of up to $3,000,000 of certain inventory
into the Company's manufacturing facilities. The agreement has a two-year
term and the Company is obligated to pay monthly a fee equal to 0.833% of
the average daily balance of the purchase cost of the consigned products
held by Sheerr Memory under the agreement. The Company is obligated to
purchase any consigned products acquired by Sheerr Memory under the
agreement within ninety days of the acquisition date of the product. The
Company and Sheerr Memory must jointly agree to the products to be held in
consignment under the agreement. As of October 31, 2010 and during the three
and six months periods then ended, no products were held by Sheerr Memory
under the agreement.
(5) Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash and money market
accounts.
(6) Accounts Receivable
Accounts receivable consists of the following categories:
October 31, 2010 April 30, 2010
________________ ______________
Trade receivables $ 4,937,000 $ 5,000,000
VAT receivable 176,000 594,000
Other 4,000 0
Allowance for doubtful accounts
and sales returns (250,000) (250,000)
________________ ______________
$ 4,867,000 $ 5,344,000
================ ==============
(7) Inventories
Inventories are valued at the lower of cost or market, with costs determined
by the first-in, first-out method. Inventories at October 31, 2010 and April
30, 2010 consist of the following categories:
October 31, 2010 April 30, 2010
________________ ______________
Raw materials $ 3,229,000 $ 3,919,000
Work in process 45,000 32,000
Finished goods 2,021,000 2,921,000
________________ ______________
$ 5,295,000 $ 6,872,000
================ ==============
(8) Intangible Assets and Goodwill
Intangible assets with determinable lives, other than customer relationships
are amortized on a straight-line basis over their estimated period of
benefit, ranging from four to five years. Customer relationships are
amortized over a two-year period at a rate of 65% of the gross value
acquired in the first year subsequent to their acquisition and 35% of the
gross value acquired in the second year. We evaluate the recoverability of
intangible assets periodically and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that
impairment exists. All of our intangible assets with definitive lives are
subject to amortization. No impairments of intangible assets have been
identified during any of the periods presented. Goodwill is tested for
impairment on an annual basis and between annual tests if indicators of
potential impairment exist, using a fair-value-based approach. The date of
our annual impairment test is March 1.
(9) Notes Payable
On July 27, 2010, the Company entered into a credit facility with a bank,
which provides for up to a $5,000,000 revolving credit line. Advances under
the facility are limited to 80% of eligible receivables, as defined in the
agreement. The agreement does not have a fixed term. The bank may demand
immediate repayment of all loans at any time, provided that if the Company
is not in default under the agreement, it has ninety days to repay the
amounts demanded. The agreement provides for Prime Rate loans at an interest
rate equal to the Prime Rate plus two percent, subject to a minimum interest
rate of five and one quarter percent. The Company is required to pay a
monthly maintenance fee equal to six-tenths of one percent (0.6%) of the
monthly average principal balance of any borrowings under the facility in
the prior month. The agreement contains certain restrictive covenants,
specifically a minimum tangible net worth covenant and certain other
covenants, as defined in the agreement.
On February 24, 2010, the Company entered into a Note and Security Agreement
with Mr. Sheerr. Under the agreement, the Company borrowed the principal sum
of $1,000,000 for a period of six months, which the Company could extend for
an additional three months without penalty. The interest rate on the loan
was 5.25%, payable monthly. The loan was paid in full on August 13, 2010.
(10) Financial Information by Geographic Location
The Company operates in one business segment and develops, manufactures and
markets a variety of memory systems for use with network servers and
workstations which are manufactured by various companies. Revenues for the
three and six months ended October 31, 2010 and 2009 by geographic region
are as follows:
Three months ended Six months ended
October 31, 2010 October 31, 2010
________________ ________________
United States $ 8,604,000 $ 19,290,000
Europe 1,340,000 2,482,000
Other (principally Asia Pacific Region) 1,005,000 1,921,000
________________ ________________
Consolidated $ 10,949,000 $ 23,693,000
================ ================
Three months ended Six months ended
October 31, 2009 October 31, 2009
________________ ________________
United States $ 9,035,000 $ 16,280,000
Europe 919,000 2,376,000
Other (principally Asia Pacific Region 719,000 1,207,000
________________ ________________
Consolidated $ 10,673,000 $ 19,863,000
================ ================
Long-lived assets consist of property and equipment and finite intangible
assets. Long-lived assets and total assets by geographic region as of
October 31, 2010 are as follows:
October 31, 2010
Long-lived assets Total assets
_________________ ______________
United States $ 2,607,000 $ 13,677,000
Europe 0 34,000
Other 0 11,000
_________________ ______________
Consolidated $ 2,607,000 $ 13,722,000
================= ==============
(11) Accounting Guidance
Recently Adopted Accounting Guidance
There are no new pronouncements which affect the Company.
(12) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company maintains its cash and cash equivalents in
financial institutions and brokerage accounts. To the extent that such
deposits exceed the maximum insurance levels, they are uninsured. In regard
to trade receivables, the Company performs ongoing evaluations of its
customers' financial condition as well as general economic conditions and,
generally, requires no collateral from its customers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and section 21E of
the Securities and Exchange Act of 1934, as amended. The information
provided in this interim report may include forward-looking statements
relating to future events, such as the development of new products, pricing
and availability of raw materials or the future financial performance of the
Company. Actual results may differ from such projections and are subject to
certain risks including, without limitation, risks arising from: changes in
the price of memory chips, changes in the demand for memory systems for
workstations and servers, increased competition in the memory systems
industry, delays in developing and commercializing new products and other
factors described in the Company's most recent Annual Report on Form 10-K
filed with the Securities and Exchange Commission which can be reviewed at
http://www.sec.gov.
Executive Overview
Dataram is a developer, manufacturer and marketer of large capacity memory
products primarily used in high performance network servers and
workstations. The Company provides customized memory solutions for original
equipment manufacturers (OEMs) and compatible memory for leading brands
including Dell, HP, IBM and Sun Microsystems. The Company also manufactures
a line of memory products for Intel and AMD motherboard based servers. The
Company is also developing a line of high performance storage caching
products.
The Company's memory products are sold worldwide to OEMs, distributors,
value-added resellers and end-users. The Company has two manufacturing
facilities in the United States with sales offices in the United States,
Europe and Japan.
The Company is an independent memory manufacturer specializing in high
capacity memory and competes with several other large independent memory
manufacturers as well as the OEMs mentioned above. The primary raw material
used in producing memory boards is dynamic random access memory (DRAM)
chips. The purchase cost of DRAMs is the largest single component of the
total cost of a finished memory board. Consequently, average selling prices
for computer memory boards are significantly dependent on the pricing and
availability of DRAM chips.
On March 31, 2009, the Company acquired certain assets of Micro Memory Bank,
Inc. (MMB), a privately held corporation. MMB is a manufacturer of legacy to
advanced solutions in laptop, desktop and server memory products. The
acquisition expanded the Company's memory product offerings and routes to
market. The results of operations of MMB for the period from the acquisition
date through October 31, 2010 have been included in the consolidated results
of operations of the Company.
Liquidity and Capital Resources
As of October 31, 2010, cash and cash equivalents amounted to approximately
$614,000 and working capital amounted to approximately $6,059,000,
reflecting a current ratio of 2.2. This compares to cash and cash
equivalents of approximately $2,507,000 and working capital of approximately
$8,550,000, reflecting a current ratio of 2.4 as of April 30, 2010.
During the first six months of fiscal 2011, net cash used in operating
activities totaled approximately $3,029,000. Net loss in the period was
approximately $2,954,000. Accounts payable decreased by approximately
$2,172,000, mainly the result of decreased inventories of approximately
$1,577,000. Accrued expense decreased by approximately $651,000, which was
primarily the result of the payment of an accrued contingently payable
acquisition price for MMB. Depreciation and amortization of approximately
$530,000 was recorded in fiscal 2011's first six months. Trade receivables
decreased by approximately $461,000. Non-cash stock-based compensation
expense of approximately $313,000 was also recorded.
Net cash used in investing activities totaled approximately $397,000 for the
six months ended October 31, 2010 and consisted primarily of a provision of
approximately $370,000 for the MMB acquisition more fully described in
described in Note 3 to the Consolidated Financial Statements.
Net cash provided by financing activities totaled approximately $1,533,000
for the six months ended October 31, 2010 and consisted of borrowings under
a revolving credit facility, described below, totaling $2,533,000 reduced by
the payment of a note payable to a related party totaling $1,000,000.
On July 27, 2010, the Company entered into an agreement with a financial
institution for secured debt financing of up to $5,000,000. Also, on
July 27, 2010, the Company entered into an agreement with a vendor, which
is wholly owned by the employee and executive officer referred to above, to
consign a formula-based amount of up to $3,000,000 of certain inventory into
our manufacturing facilities.
Based on the cash flows expected to be provided from these agreements along
with the cash flows projected to result from the Company's operations,
management has concluded that the Company's short-term liquidity needs have
been satisfied. In its fiscal second quarter ended October 31, 2010, the
Company's cash flows from operating activities did not materially meet
its projections. Should that event reoccur in the short-term, it is
management's conclusion that the Company will require additional funding to
meet its short-term liquidity needs. There can be no assurance, however,
that such financing will be sufficient for the Company's purposes or that
additional sources of financing will be available if needed. In order to
satisfy long-term liquidity needs, the Company will need to generate
profitable operations and positive cash flows.
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of April 30, 2010
are as follows:
Operating leases
Year ending April 30: ________________
2011 $ 387,000
2012 34,000
______________
Total minimum lease payments $ 421,000
==============
The Company has no other material commitments.
Results of Operations
Revenues for the three month period ended October 31, 2010 were $10,949,000
compared to revenues of $10,673,000 for the comparable prior year period.
Revenues for the first six months of the current fiscal year were
$23,693,000 compared to revenues of $19,863,000 for the comparable prior
year period. The revenue increase was primarily the result of the Company's
implementation of its revamped sales and marketing strategy having a
positive effect on demand for its products coupled with an increase in
overall demand for IT infrastructure.
Revenues for the three and six months ended October 31, 2010 and 2009 by
geographic region are as follows:
Three months ended Six months ended
October 31, 2010 October 31, 2010
________________ ________________
United States $ 8,604,000 $ 19,290,000
Europe 1,340,000 2,482,000
Other (principally Asia Pacific Region) 1,005,000 1,921,000
________________ ________________
Consolidated $ 10,949,000 $ 23,693,000
================ ================
Three months ended Six months ended
October 31, 2009 October 31, 2009
________________ ________________
United States $ 9,035,000 $ 16,280,000
Europe 919,000 2,376,000
Other (principally Asia Pacific Region) 719,000 1,207,000
________________ ________________
Consolidated $ 10,673,000 $ 19,863,000
================ ================
Cost of sales for the second quarter and first six months of fiscal 2011
were 78% and 77% of revenues, respectively versus 74% and 73% for the same
respective prior year periods. Cost of sales for the second quarter of
fiscal 2011 were at the high end of what management considers a normal
range. This was primarily a function of a reduction on average selling
prices resulting from of a demand/supply imbalance in the memory industry
that occurred in the second quarter. Fluctuations in cost of sales as a
percentage of revenues in any given quarter are not unusual and can result
from many factors, some of which are a rapid change in the price of DRAMs,
or a change in product mix possibly resulting from a large order or series
of orders for a particular product or a change in customer mix. Cost of
sales in the second quarter and six months were $8.5 million and $18.2
million respectively, compared to $7.9 million and $14.6 million in the
prior year comparable periods.
Engineering expense in fiscal 2011's second quarter and six months was
$238,000 and $513,000, respectively, versus $259,000 and $512,000 for the
same respective prior year periods.
Research and development expense in fiscal 2011's second quarter and six
months was $865,000 and $1,760,000, respectively, versus $1,621,000 and
$2,495,000 in the same prior year periods. In the first quarter of the
prior fiscal year, the Company implemented a strategy to introduce new and
complementary products into its offerings portfolio. The Company is
currently focusing on the development of a line of high performance storage
caching products ("XcelaSAN"). XcelaSAN is a unique intelligent Storage Area
Network (SAN) optimization solution that delivers substantive application
performance improvement to applications such as Oracle, SQL and VMware.
XcelaSAN augments existing storage systems by transparently applying
intelligent caching algorithms that serve the most active block-level data
from high-speed storage, creating an intelligent, virtual solid state SAN.
As part of that strategy, in January 2009, the Company entered into a
software purchase and license agreement with another company whereby the
Company acquired the exclusive right to purchase specified software for a
price of $900,000 plus a contingent payment of $100,000. Fiscal 2010's
research and development expense includes $600,000 of expense related to
the Agreement, of which $300,000 was expensed in the first fiscal quarter
and $300,000 was expensed in the second fiscal quarter. The Company owns
the software. The software and the storage products, which incorporate the
software, are currently under development. We expect to make further
investments in this area.
Selling, general and administrative (S,G&A) expense in fiscal 2011's second
quarter and six months decreased by approximately $529,000 and $493,000
respectively, from the comparable prior year periods. The reduction in this
year's second quarter is the result of reduced compensation related expenses
of approximately $106,000. Stock option expense recorded as a component of
S,G&A expense was approximately $121,000 in the current fiscal year's
second quarter compared to $225,000 in the same prior year period.
Additionally, marketing expense for our traditional memory business were
approximately $94,000 less than the prior year second quarter.
The Company recorded second quarter marketing and sales expense related to
our new storage products of approximately $164,000 versus $260,000 in the
comparable prior year periods. The prior year second quarter expense
included cost for the recruitment of Sales and Sales Engineers personnel.
Other income (expense), net for the second quarter and six months totaled
$51,000 and $160,000 of expense, respectively, for fiscal 2011, and
expense of $12,000 and $22,000, of income for the same respective periods in
fiscal 2010. Other expense in fiscal 2010's second quarter consisted
primarily of interest expense of $62,000 and $11,000 of foreign currency
transaction gains, primarily as a result of the EURO strengthening relative
to the US dollar. Six month other expense of $160,000 consisted of $79,000
of interest expense and $85,000 of foreign currency transaction losses,
primarily as a result of the EURO weakening relative to the US dollar. Other
expense in fiscal 2010's second quarter consisted primarily of $19,000 of
foreign currency transaction losses, primarily as a result of the EURO
weakening relative to the US dollar. There was also approximately $10,000 of
other income recorded related to a gain on an asset disposal. Six month
other income of $22,000 consisted primarily of $7,000 of net interest income
and $5,000 of foreign currency transaction gains, primarily as a result of
the EURO strengthening relative to the US dollar, and the aforementioned
gain on asset disposal.
Income tax benefit for the second quarter and six months of 2011 was nil
versus a benefit of $1,042,000 and $1,670,000, respectively, for the same
prior year periods. The Company utilizes the asset and liability method of
accounting for income taxes in accordance with the provisions of the
Expenses - Income Taxes Topic of the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC)(Codification). Under the
asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. A valuation allowance
is provided when the Company determines that it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
Company considers certain tax planning strategies in its assessment as to
the recoverability of its tax assets. In each reporting period, the Company
assesses, based on the weight of all evidence, both positive and negative,
whether a valuation allowance on its deferred tax assets is warranted. Based
on the assessment conducted in the Company's reporting period ended
January 31, 2010, the Company concluded that such an allowance was
warranted, and accordingly recorded a valuation allowance of approximately
$5.8 million in that reporting period. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those
temporary differences or tax attributes are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in earnings in the period that the tax rate changes.
As of April 30, 2010 the Company had Federal and State net operating loss
(NOL) carry-forwards of approximately $11.5 million and $9.7 million,
respectively. These can be used to offset future taxable income and expire
between 2023 and 2030 for Federal tax purposes and 2016 and 2030 for state
tax purposes. As a result, the Company does not expect to record any income
tax expense (benefit) in fiscal 2011. The Company's NOL carry-forwards are a
component of its deferred tax assets which are reported net of a full
valuation allowance in the Company's consolidated financial statements at
October 31, 2010 and at April 30, 2010.
Critical Accounting Policies
During December 2001, the Securities and Exchange Commission (SEC) published
a Commission Statement in the form of Financial Reporting Release No. 60
which encouraged that all registrants discuss their most "critical
accounting policies" in management's discussion and analysis of financial
condition and results of operations. The SEC has defined critical accounting
policies as those that are both important to the portrayal of a company's
financial condition and results, and that require management's most
difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
While the Company's significant accounting policies are summarized in Note 1
to the consolidated financial statements included in the Company's Form 10-K
for the fiscal year ended April 30, 2010, the Company believes the following
accounting policies to be critical:
Revenue Recognition - Revenue is recognized when title passes upon shipment
of goods to customers. The Company's revenue earning activities involve
delivering or producing goods. The following criteria are met before revenue
is recognized: persuasive evidence of an arrangement exists, shipment has
occurred, selling price is fixed or determinable and collection is
reasonably assured. The Company does experience a minimal level of sales
returns and allowances for which the Company accrues a reserve at the time
of sale in accordance with the Revenue Recognition -Right of Return Topic of
the FASB ASC. Estimated warranty costs are accrued by management upon
product shipment based on an estimate of future warranty claims.
Research and Development Expense - All research and development costs are
expensed as incurred, including Company-sponsored research and development
and costs of patents and other intellectual property that have no
alternative future use when acquired and in which we had an uncertainty in
receiving future economic benefits.
Income Taxes - The Company utilizes the asset and liability method of
accounting for income taxes in accordance with the provisions of the
Expenses - Income Taxes Topic of the FASB ASC. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. The Company considers certain tax planning strategies in its
assessment as to the recoverability of its tax assets. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in earnings in the period that the tax rate changes.
The Company recognizes, in its consolidated financial statements, the impact
of a tax position, if that position is more likely than not to be sustained
on audit, based on technical the merits of the position. There are no
material unrecognized tax positions in the consolidated financial statements.
Goodwill - Goodwill is tested for impairment on an annual basis and between
annual tests if indicators of potential impairment exist, using a
fair-value-based approach. The date of our annual impairment test is March 1.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, including deferred tax asset
valuation allowances and certain other reserves and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the consolidated financial statements in the
period they are determined to be necessary. Some of the more significant
estimates made by management include the allowance for doubtful accounts and
sales returns, the deferred tax asset valuation allowance and other
operating allowances and accruals. Actual results could differ from those
estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not invest in market risk sensitive instruments. At times,
the Company's cash equivalents consist of overnight deposits with banks and
money market accounts. The Company's rate of return on its investment
portfolio changes with short-term interest rates, although such changes
will not affect the value of its portfolio. The Company's objective in
connection with its investment strategy is to maintain the security of its
cash reserves without taking market risk with principal.
The Company purchases and sells primarily in U.S. dollars. The Company sells
in foreign currency (primarily Euros) to a limited number of customers and
as such incurs some foreign currency risk. At any given time, approximately
5 to 10 percent of the Company's accounts receivable are denominated in
currencies other than U.S. dollars. At present, the Company does not
purchase forward contracts as hedging instruments, but could do so as
circumstances warrant.
ITEM 4T. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the Company have
evaluated the effectiveness of our disclosure controls and procedures as
required by Exchange Act Rule 13a-15(b) as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in our internal control over
financial reporting during the quarter ended October 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Ring Technology v. Add-On Computer Peripherals, LLC
Civil Action No. 10-104 (E.D. TX)
In March of 2010 Ring Technology ("Ring") commenced a patent
infringement action in Texas against a number of manufacturers and
distributors of memory products, including Dataram, which utilize an
allegedly patented part. Ring also brought a separate action against
larger manufacturers. A complaint was filed by Ring, and Dataram filed
an answer contesting all of plaintiff's claims, as well as several
counterclaims.
The Company pursued a voluntary dismissal by Ring of its action against
Dataram. On October 7, 2010, a Court Order was issued granting a joint
motion to dismiss Ring's claims for relief against the Company and the
Company's counterclaims for relief against Ring.
Item 1A. RISK FACTORS.
No material changes from Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
No reportable event.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
No reportable event.
Item 5. OTHER INFORMATION.
No reportable event.
Item 6. EXHIBITS.
Exhibit No. Description
__________ ___________
31(a) Rule 13a-14(a) Certification of John H. Freeman.
31(b) Rule 13a-14(a) Certification of Mark E. Maddocks.
32(a) Section 1350 Certification of John H. Freeman (furnished not
filed).
32(b) Section 1350 Certification of Mark E. Maddocks (furnished not
filed).
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.
DATARAM CORPORATION
MARK E. MADDOCKS
Date: December 13, 2010 By: /s/ Mark E. Maddocks
______________________________
Mark E. Maddocks
Vice President, Finance
(Principal Financial Officer)
