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 July 31, 2009
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 September 10, 2009, there were 8,869,184 shares
outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Dataram Corporation and Subsidiaries
Consolidated Balance Sheets
July 31, 2009 and April 30, 2009
(Unaudited)
July 31, 2009 April 30, 2009
Assets
Current Assets:
Cash and cash equivalents $ 7,272,379 $ 12,525,008
Accounts receivable, less allowance
for doubtful accounts and sales returns
of $290,000 at July 31, 2009 and
April 30, 2009 5,069,590 3,381,271
Inventories 4,485,174 2,200,364
Deferred income taxes 303,099 300,099
Other current assets 254,320 126,074
__________ __________
Total current assets 17,384,562 18,532,816
Deferred income taxes 3,891,850 3,282,450
Property and equipment, at cost:
Machinery and equipment 11,853,875 11,761,056
Leasehold improvements 2,276,408 2,224,502
__________ __________
14,130,283 13,985,558
Less: accumulated depreciation
and amortization 13,004,740 12,886,072
__________ __________
Net property and equipment 1,125,543 1,099,486
Other assets 125,659 135,706
Intangible assets, net of accumulated
amortization 1,340,232 1,504,308
__________ __________
$ 23,867,846 $ 24,554,766
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,726,600 $ 1,385,311
Accrued liabilities 1,498,778 1,688,933
__________ __________
Total current liabilities 3,225,378 3,074,244
Accrued liabilities 381,000 381,000
__________ __________
Total liabilities 3,606,378 3,455,244
Stockholders' Equity:
Common stock, par value $1.00 per share.
Authorized 54,000,000 shares; issued and
outstanding 8,869,184 at July 31, 2009
and April 30, 2009 8,869,184 8,869,184
Additional paid-in capital 7,162,251 7,022,316
Retained earnings 4,230,033 5,208,022
__________ __________
Total stockholders' equity 20,261,468 21,099,522
__________ __________
$ 23,867,846 $ 24,554,766
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Operations
Three Months Ended July 31, 2009 and 2008
(Unaudited)
2009 2008
Revenues $ 9,190,021 $ 7,563,076
Costs and expenses:
Cost of sales 6,654,904 4,935,405
Engineering 253,188 331,856
Research and development 874,077 212,379
Selling, general and administrative 3,047,662 3,183,064
__________ __________
10,829,831 8,662,704
__________ __________
Loss from operations (1,639,810) (1,099,628)
Other income:
Interest income, net 10,150 110,698
Currency gain 23,671 285
Other expense 0 (1,912)
__________ __________
Total other income 33,821 109,071
__________ __________
Loss before income taxes (1,605,989) (990,557)
Income tax benefit (628,000) (385,000)
__________ __________
Net loss $ (977,989) $ (605,557)
========== ==========
Net loss per share of common stock
Basic $ (.11) $ (.07)
========== ==========
Diluted $ (.11) $ (.07)
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended July 31, 2009 and 2008
(Unaudited)
2009 2008
Cash flows from operating activities:
Net loss $ (977,989) $ (605,557)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 282,744 81,000
Bad debt expense (recovery) (27,605) 70,733
Stock-based compensation expense 155,535 125,693
Other stock option expense 0 121,300
Loss on sale of property and equipment 0 1,912
Deferred income tax benefit (628,000) (333,000)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,660,714) 187,339
Increase in inventories (2,284,810) (205,871)
Increase in other current assets (128,246) (259,013)
Decrease (increase) in other assets 10,047 (64,003)
Increase (decrease) in accounts payable 341,289 (313,015)
Increase (decrease) in accrued liabilities (190,155) 178,072
__________ __________
Net cash used in operating activities (5,107,904) (1,014,410)
___________ __________
Cash flows from investing activities:
Additions to property and equipment (144,725) (275,464)
Proceeds from sale of property and equipment 0 500
___________ __________
Net cash used in investing activities (144,725) (274,964)
___________ __________
Net decrease in cash and
cash equivalents (5,252,629) (1,289,374)
Cash and cash equivalents at
beginning of period 12,525,008 17,641,690
__________ __________
Cash and cash equivalents at
end of period $ 7,272,379 $16,352,316
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 0 $ 1,597
========== ==========
Income taxes $ 0 $ 0
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2009 and 2008
(Unaudited)
(1) Basis of Presentation
The information for the three months ended July 31, 2009 and 2008 is
unaudited, but includes all adjustments (consisting only 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, 2009 included in the Company's 2009 Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The April 30, 2009 balance
sheet has been derived from these statements.
(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.
Net Earnings (Loss) Per Share
Net earnings (loss) per share is presented in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". 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 quarters ended July 31, 2009 and July 31, 2008 includes only the
weighted average number 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 earnings (loss) per share for the
first quarter of fiscal 2010 and 2009:
Three Months ended July 31, 2009
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss, weighted
average common shares
outstanding $ (977,989) 8,869,184 $ (.11)
Effect of dilutive securities
- -stock options - - -
________ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $ (977,989) 8,869,184 $ (.11)
======== ========= ======
Three Months ended July 31, 2008
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss, weighted
average common shares
outstanding $ (605,557) 8,869,184 $ (.07)
Effect of dilutive securities
- -stock options - - -
________ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $ (605,557) 8,869,184 $ (.07)
======== ========= ======
Diluted net loss per share does not include the effect of all options to
purchase shares of common stock for the three months ended July 31, 2009
and 2008 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 months ended
July 31, 2009 and 2008, the Company did not repurchase any shares of its
common stock. As of July 31, 2009, 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. Currently, 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 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. Of each option, 100% are exercisable one year after the
date of grant.
New shares of the Company's common stock are issued upon exercise of stock
options.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123R). SFAS 123R addresses 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. SFAS 123R requires
that such transactions be accounted for using a fair value-based method.
SFAS 123R requires companies to recognize an expense for compensation cost
related to share-based payment arrangements, including stock options and
employee stock purchase plans. The Company implemented SFAS 123R effective
May 1, 2006.
As a result of adopting SFAS 123R, our consolidated statements of operations
for fiscal 2010's and 2009's first quarter ended July 31, 2009 and 2008
includes approximately $156,000 and $126,000 of stock-based
compensation expense, respectively. Stock-based compensation expense is
recognized in the selling, general and administrative expenses line item of
the accompanying consolidated statements of operations on a ratable basis
over the vesting periods. These stock option grants have been classified as
equity instruments, and as such, a corresponding increase, net of the
reversal of the previously recorded income tax benefit for options which
expired during the reporting period, has been reflected in additional
paid-in capital in the accompanying balance sheet. 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 under the plans for the three months ended
July 31, 2009is as follows:
Weighted average Weighted average Aggregate
exercise price remaining contractual intrinsic
Shares life value(1)
__________ ________________ _____________________ __________
Balance
April 30,
2009 1,257,675 $4.53 4.37 $ 4,000
Granted - - - -
Exercised - - - -
Expired (87,600) $5.36 - -
Balance
July 31,
2009 1,170,075 $4.47 4.27 $ 17,000
Exercisable
July 31,
2009 893,575 $5.08 3.07 $ 17,000
Expected to vest
July 31,
2009 1,156,075 $4.47 4.27 -
(1) This amount represents the difference between the exercise price
and $1.45, the closing price of Dataram common stock on July 31,
2009 as reported on the NASDAQ Stock Market, for all in-the-money
options outstanding and all the in-the-money shares exercisable.
Total cash received from the exercise of options in the quarter
ended July 31, 2009 was nil. As of July 31, 2009, there was
$382,000 of total unrecognized compensation costs related to stock
options. These costs are expected to be recognized over a weighted
average period of approximately one year. At July 31, 2009, an
aggregate of 880,827 shares were authorized for future grant under
the Company's stock option plans. There were no stock options
granted in fiscal 2010's first quarter ended July 31, 2009.
b. Other Stock Option Expense
During the three month period ended July 31, 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
representing the fair value at the date of grant, are 100% exercisable on
the date of grant and expire ten years after date of grant. The calculated
fair value of these options was approximately $121,000 and was determined
using the Black-Scholes option pricing model based upon the market price of
the underlying common stock as of the date of grant, reduced by the present
value of estimated future dividends, using an expected quarterly dividend
rate of zero, a calculated volatility factor of 110% and risk-free interest
rate of 4.0%. Such calculated fair value has been charged in its entirety
to the research and development expense line item in the accompanying
consolidated statement of operations for this grant as of July 31, 2008.
These stock option grants have been classified as equity instruments, and
as such, a corresponding increase of $121,000 has been reflected in
additional paid-in capital in the accompanying consolidated balance sheets.
(2) 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 next four years of earnings before interest, taxes, depreciation and
amortization of the Unit. At July 31, 2009, the estimated remaining purchase
price to be paid under the agreement is $1,016,000 and is recorded as an
accrued liability (of which, $381,000 has been classified as long-term) in
the Company's consolidated balance sheets. The net assets acquired by the
Company were recorded at their respective fair values under the purchase
method of accounting in accordance with the provisions of SFAS No. 141.
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 was approximately $164,000 for fiscal year 2010's
first quarter and nil for fiscal 2009's first quarter. Intangible asset
amortization is included in selling, general and administrative expense. The
components of finite-lived intangible assets acquired during fiscal year
2009 are as follows:
Gross Carrying Amount
Weighted
Average
Life July 31, 2009 April 30, 2009
________ _____________ _____________
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 219,000 55,000
_____________ _____________
Net intangible assets $ 1,340,000 $ 1,504,000
============= =============
The following table outlines the estimated future amortization expense
related to intangible assets:
Year ending April 30:
2010 $ 637,000
2011 407,000
2012 164,000
2013 162,000
2014 134,000
$ 1,504,000
===========
(3) Related Party Transactions
During the fiscal 2010's first quarter, the Company purchased inventories for
resale totaling approximately $1,667,000 from Sheer Memory, LLC (Sheer
Memory). Sheer Memory's owner is employed by the Company as the general
manager of the acquired MMB business unit described in Note 2. When the
Company acquired certain assets of MMB, it did not acquire any of its
inventory. 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 $477,000 of accounts payable in the Company's consolidated
balance sheet as of July 31, 2009 is payable to Sheer Memory. Sheer 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 Sheer Memory subsequent to July 31, 2009 and
management anticipates that the Company will continue to do so, although the
Company has no obligation to do so.
(4) Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash and money market
accounts.
(5) Accounts Receivable
Accounts receivable consists of the following categories:
July 31, 2009 April 30, 2009
________________ ______________
Trade receivables $ 5,105,000 $ 3,599,000
VAT receivable 252,000 72,000
Other 3,000 0
Allowance for doubtful accounts
and sales returns (290,000) (290,000)
________________ ______________
$ 5,070,000 $ 3,381,000
================ ==============
(6) Inventories
Inventories are valued at the lower of cost or market, with costs determined
by the first-in, first-out method. Inventories at July 31, 2009 and April
30, 2009 consist of the following categories:
July 31, 2009 April 30, 2009
________________ ______________
Raw materials $ 2,630,000 $ 1,344,000
Work in process 53,000 15,000
Finished goods 1,802,000 841,000
________________ ______________
$ 4,485,000 $ 2,200,000
================ ==============
(7) 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 months ended July 31, 2009 and 2008 by geographic region are as
follows:
Three months ended Three months ended
July 31, 2009 July 31, 2008
________________ ________________
United States $ 7,245,000 $ 5,574,000
Europe 1,457,000 1,447,000
Other (principally Asia Pacific Region) 488,000 542,000
________________ ________________
Consolidated $ 9,190,000 $ 7,563,000
================ ================
Long-lived assets consist of property and equipment and finite intangible
assets. Long-lived assets and total assets by geographic region as of
July 31, 2009 are as follows:
July 31, 2009
Long-lived assets Total assets
_________________ ______________
United States $ 2,466,000 $ 23,689,000
Europe 0 166,000
Other 0 13,000
_________________ ______________
Consolidated $ 2,466,000 $ 23,868,000
================= ==============
(8) Intangible Assets
Intangible assets are amortized using the straight-line method over their
estimated period of benefit, ranging from two to five years. Intangible
assets are tested for impairment whenever events or changes in circumstances
indicate their carrying value may not be recoverable. All of our intangible
assets are subject to amortization. No material impairments of intangible
assets have been identified during any of the periods presented.
(9) Significant New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
(SFAS 141R), which replaces SFAS 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization
of in-process research and development at fair value, and requires the
expensing of acquisition-related costs as incurred. SFAS No. 141R became
effective for us May 1, 2009 and will apply prospectively to business
combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51" (SFAS 160),
which changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent's equity, and
purchases or sales of equity interests that do not result in a change in
control will be accounted for as equity transactions. In addition, net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement and, upon a
loss of control, the interest sold, as well as any interest retained, will
be recorded at fair value with any gain or loss recognized in earnings.
SFAS 160 became effective for us May 1, 2009 and will apply prospectively,
except for the presentation and disclosure requirements, which will apply
retrospectively.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events"
(SFAS No. 165). SFAS 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The Company
has evaluated subsequent events and transactions for potential recognition
or disclosure in the consolidated financial statements through September 10,
2009.
The SEC's Office of the Chief Accountant published Staff Accounting Bulletin
(SAB) No. 112 (SAB 112). SAB 112 which was effective June 10, 2009 and
amends or rescinds portions of the interpretive guidance included in the
Staff Accounting Bulletin Series to make the relevant interpretive guidance
consistent with current authoritative accounting and auditing guidance and
SEC rules and regulations. Specifically, SAB 112 aims to bring existing
guidance into conformity with recent pronouncements by the FASB, including
SFAS 141R and SFAS No. 160. The adoption of SAB 112 has not had a material
impact the Company's consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification(TM) and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162" (SFAS 168). SFAS 168
defines the order in which accounting principles generally accepted in the
United States of America should be followed. SFAS 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of SFAS 168 is not expected to have a
material impact on our consolidated financial statements.
(10) 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's memory products are sold worldwide to OEMs, distributors,
value-added resellers and end-users. The Company has a manufacturing
facility in the United States with sales offices in the United States and
Europe.
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.
Liquidity and Capital Resources
The Company's cash and working capital position remain strong. As of July
31, 2009, cash and cash equivalents amounted to $7.3 million and working
capital amounted to $14.2 million, reflecting a current ratio of 5.4 to 1,
compared to cash and cash equivalents of $12.5 million, working capital of
$15.5 million and a current ratio of 6.0 to 1 as of April 30, 2009.
During the first fiscal quarter ended July 31, 2009, net cash used in
operating activities totaled approximately $5,108,000. Net loss in the
period was approximately $978,000. Inventories increased by approximately
$2,285,000. In the quarter ended July 31, 2009, the MMB business unit
described in Note 2 increased their inventory levels by approximately
$1.0 million to properly support normal sales levels. At April 30, 2009,
the MMB business unit inventory totaled approximately $170,000. Inventory
was maintained at an unsustainably low level during the first month
subsequent to the acquisition as part of the Company's transition and
integration plan. The balance of the inventories increase was primarily the
result of management's decision to purchase inventories at favorable pricing
levels. Accounts receivable increased by approximately $1,661,000,
primarily as a result of increased revenues. Deferred income taxes
increased by $628,000 and accrued liabilities decreased by approximately
$190,000. Cash used in operating activities was partially offset by an
increase in accounts payable of approximately $341,000. Depreciation and
amortization expense of approximately $283,000 and non-cash stock-based
expense of approximately $156,000 were also recorded.
Net cash used in investing activities totaled approximately $145,000 for
the quarter ended July 31, 2009. This was primarily the result of property
and equipment additions. These additions were for test equipment used in the
Company's manufacturing process.
On June 21, 2004, the Company entered into a credit facility with a
bank, which provided for up to a $5 million revolving credit line. The
Company was required to pay a fee equal to one-eighth of one percent per
annum on the unused commitment. There have been no borrowings against the
credit line. On February 23, 2009, the Company canceled this agreement.
Management believes that the Company's existing cash resources will be
sufficient to meet short-term liquidity needs. Management further believes
that its working capital is adequate to finance the Company's long-term
operating needs and future capital requirements.
Future minimum lease payments under noncancellable operating leases
(with initial or remaining lease terms in excess of one year) as of
April 30, 2009 are as follows:
Operating leases
Year ending April 30: ________________
2010 $ 533,000
2011 387,000
2012 34,000
Thereafter 0
______________
Total minimum lease payments $ 954,000
==============
The Company has no other material commitments.
Results of Operations
Revenues for the three month period ended July 31, 2009 were $9,190,000
compared to revenues of $7,563,000 for the comparable prior year period.
The recently acquired MMB business unit described in Note 2, generated
revenues of approximately $2,912,000 in 2010's fiscal first quarter and
nil in the comparable prior year period. In the fiscal period ended July
31, 2009, excluding the effect of the revenues generated by the MMB
acquisition, the Company's revenues declined by $1,285,000 when compared to
the prior comparable period. There has been a softening in demand due to
the weakening economy. Many customers have curtailed or temporarily
suspended their capital spending while they adapt their business plans to
the current environment.
Revenues for the three months ended July 31, 2009 and 2008 by geographic
region are as follows:
Three months ended Three months ended
July 31, 2009 July 31, 2008
________________ ________________
United States $ 7,245,000 $ 5,574,000
Europe 1,457,000 1,447,000
Other (principally Asia Pacific Region) 488,000 542,000
________________ ________________
Consolidated $ 9,190,000 $ 7,563,000
================ ================
Cost of sales for the first quarter of fiscal 2010 and 2009 were 72% and 65%
of revenues, respectively. The recently acquired MMB business unit's cost of
sales were 72% in fiscal 2010's first quarter. Also contributing to the
increase in percentage was the fact that in the quarter ended July 31, 2009,
two large orders were shipped to one customer where the bidding for the
orders was extremely competitive. 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 first quarter of fiscal 2010 was $6.7 million compared to
$4.9 million in the prior year comparable period.
Engineering expense in fiscal 2010's first quarter totaled $253,000, versus
$332,000 for the same prior year period.
Research and development expense in fiscal 2010's first quarter were
$874,000 versus $212,000 in the same prior year period. 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 certain high performance storage
products. As part of that strategy, in January 2009, the Company entered
into a software purchase and license agreement with another company whereby
the Company has the exclusive right to purchase specified software for a
price of $900,000 plus a contingent payment of $100,000. Fiscal 2010's first
quarter research and development expense includes $300,000 of expense
related to a payment for the software purchase and license. The software and
the storage product, which incorporates the software, is currently under
development and is not deemed saleable at the present time. Should the
Company elect to continue with the development project, the Company must
make the final $300,000 payment, at which point the Company will own the
software. We expect to make further investments in this area.
Selling, general and administrative (S,G&A) expense in the first fiscal
quarter ended July 31, 2010 decreased by approximately $135,000 from the
comparable prior year period. The acquired MMB business unit's S,G&A expense
recorded in fiscal 2010's first quarter was approximately $602,000 versus
nil in the comparable prior year period. The prior fiscal year's first
quarter expense included a charge of approximately $716,000 related to a
retirement agreement entered into with the Company's former chief executive
officer. Stock-based compensation expense is recorded as a component of
S,G&A expense and totaled approximately $156,000 and $126,000, respectively,
for the first quarter of fiscal 2010 and 2009.
Other income, net for the first quarter of fiscal 2010 totaled $34,000,
versus $109,000 for the same prior year period. Other income in fiscal
2010's first quarter consisted primarily of $10,000 of interest income and
approximately $24,000 of foreign currency transaction gains, primarily as a
result of the EURO strengthening relative to the US dollar. Fiscal 2009's
first quarter other income, net consisted of approximately $111,000 of
net interest income offset by approximately a $2,000 loss on disposal of
assets.
Income tax benefit for the first quarter of fiscal 2010 and 2009 was
$628,000 and $385,000, respectively. The Company's effective tax rate for
financial reporting purposes in fiscal 2010 is approximately 39.0%. The
Company has Federal and State net operating loss (NOL) carry-forwards of
approximately $5.6 million and $4.0 million, respectively. These can be used
to offset future taxable income and expire between 2023 and 2029 for Federal
tax purposes and 2016 and 2029 for state tax purposes.
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, 2009, 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 SFAS No. 48, "Revenue
Recognition When Right of Return Exists". Estimated warranty costs are
accrued by management upon product shipment based on an estimate of
future warranty claims.
Stock Option Expense - In December 2004, SFAS No. 123 (revised 2004),
"Share-Based Payment"("SFAS 123(R)") was issued. SFAS 123(R) revises
SFAS 123 and supersedes APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). SFAS 123, as originally issued in 1995, established
as preferable a fair value-based method of accounting for share-based
payment transactions with employees. However, SFAS 123 as amended
permitted entities the option of continuing to apply the intrinsic value
method under APB 25 that the Company had been using, as long as the
footnotes to the financial statements disclosed what net income would have
been had the preferable fair value-based method been used. SFAS 123(R)
requires that the compensation cost relating to all share-based payment
transactions, including employee stock options, be recognized in the
historical financial statements. That cost is measured based on the fair
value of the equity or liability instrument issued and amortized over the
related service period. The Company adopted the guidance in SFAS 123(R)
effective May 1, 2006. As such, the accompanying consolidated statement of
operations for the fiscal 2010 and fiscal 2009 first quarter ending July 31
includes approximately $156,000 and $126,000 of stock option expense,
respectively, in operating expenses related to the fair value of options
granted to employees and directors under the Company's stock-based
compensation plans which is being amortized over the service period in the
financial statements, as required by SFAS 123(R). These awards have been
classified as equity instruments, and as such, a corresponding increase of
approximately $156,000 has been reflected in additional paid-in capital in
the accompanying consolidated balance sheet as of July 31, 2009. The fair
value of each stock option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
Expected life is based on the Company's historical experience of option
exercises relative to option contractual lives; Expected volatility is based
on the historical volatility of the Company's share price; Expected dividend
yield assumes the current dividend rate remains unchanged; Risk free
interest rate approximates United States government debt rates at the
time of option grants.
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 SFAS No.
109, "Accounting for Income Taxes" (SFAS No. 109). Under the asset and
liability method of SFAS No. 109, 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. Under SFAS No. 109, 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.
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. The
Company's investments consist of overnight deposits with banks and
commercial paper, which matures within ninety days. 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 July 31, 2009 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.
None.
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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
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: September 10, 2009 By: _____________________________
Mark E. Maddocks
Vice President, Finance
(Principal Financial Officer)