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, 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 September 10, 2010, there were 8,918,309 shares
outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Dataram Corporation and Subsidiaries
Consolidated Balance Sheets
July 31, 2010 and April 30, 2010
(Unaudited)
July 31, 2010 April 30, 2010
Assets
Current Assets:
Cash and cash equivalents $ 786,099 $ 2,507,456
Accounts receivable, less allowance
for doubtful accounts and sales returns
of $250,000 at July 31, 2010 and
April 30, 2010 5,495,074 5,343,957
Inventories 5,747,621 6,872,265
Other current assets 209,296 86,684
__________ __________
Total current assets 12,238,090 14,810,362
Property and equipment, at cost:
Machinery and equipment 12,298,570 12,300,657
Leasehold improvements 2,234,752 2,234,752
__________ __________
14,533,322 14,535,409
Less: accumulated depreciation
and amortization 13,590,996 13,418,328
__________ __________
Net property and equipment 942,326 1,117,081
Other assets 99,506 104,686
Intangible assets, net of accumulated
amortization 759,744 866,958
Goodwill 1,020,547 753,755
__________ __________
$ 15,060,213 $ 17,652,842
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,014,658 $ 3,522,704
Accrued liabilities 1,734,081 1,737,830
Note payable to related party 1,000,000 1,000,000
__________ __________
Total current liabilities 4,748,739 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 July 31, 2010
and April 30, 2009 8,918,309 8,918,309
Additional paid-in capital 8,167,070 8,009,262
Retained deficit (6,773,905) (5,535,263)
__________ __________
Total stockholders' equity 10,311,474 11,392,308
__________ __________
$ 15,060,213 $ 17,652,842
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Operations
Three Months Ended July 31, 2010 and 2009
(Unaudited)
2010 2009
Revenues $ 12,743,896 $ 9,190,021
Costs and expenses:
Cost of sales 9,620,505 6,654,904
Engineering 274,562 253,188
Research and development 894,349 874,077
Selling, general and administrative 3,083,624 3,047,662
__________ __________
13,873,040 10,829,831
__________ __________
Loss from operations (1,129,144) (1,639,810)
Other income (expense):
Interest income (expense), net (16,458) 10,150
Currency gain (loss) (96,025) 23,671
Other income (expense), net 2,985 0
` __________ __________
Total other income (expense) (109,498) 33,821
__________ __________
Loss before income taxes (1,238,642) (1,605,989)
Income tax benefit 0 (628,000)
__________ __________
Net loss $ (1,238,642) $ (977,989)
========== ==========
Net loss per share of common stock
Basic $ (.14) $ (.11)
========== ==========
Diluted $ (.14) $ (.11)
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended July 31, 2010 and 2009
(Unaudited)
2010 2009
Cash flows from operating activities:
Net loss $(1,238,642) $ (977,989)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 279,882 282,744
Bad debt expense (recovery) 8,850 (27,605)
Stock-based compensation expense 157,808 155,535
Gain on sale of property and equipment (2,472) 0
Deferred income tax benefit 0 (628,000)
Changes in assets and liabilities
Increase in accounts receivable (159,967) (1,660,714)
Decrease (increase) in inventories 1,124,644 (2,284,810)
Increase in other current assets (122,612) (128,246)
Decrease in other assets 5,180 10,047
Increase (decrease) in accounts payable (1,508,046) 341,289
Decrease in accrued liabilities (3,749) (190,155)
__________ __________
Net cash used in operating activities (1,459,124) (5,107,904)
___________ __________
Cash flows from investing activities:
Acquisition of business (266,792) 0
Additions to property and equipment (5,426) (144,725)
Proceeds from sale of property and equipment 9,985 0
___________ __________
Net cash used in investing activities (262,233) (144,725)
___________ __________
Net decrease in cash and
cash equivalents (1,721,357) (5,252,629)
Cash and cash equivalents at
beginning of period 2,507,456 12,525,008
__________ __________
Cash and cash equivalents at
end of period $ 786,099 $ 7,272,379
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 16,458 $ 0
========== ==========
Income taxes $ 0 $ 0
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2010 and 2009
(Unaudited)
(1) Basis of Presentation
The information for the three months ended July 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 months ended July 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 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 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 months
ended July 31, 2010 and 2009 include approximately nil and $628,000,
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. The Company has 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 July 31, 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 months ended
July 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 fiscal 2011 and
2010:
Three Months ended July 31, 2010
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss and weighted
average common shares
outstanding $(1,238,642) 8,918,309 $ (.14)
Effect of dilutive securities
- -stock options - - -
________ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $(1,238,642) 8,918,309 $ (.14)
======== ========= ======
Three Months ended July 31, 2009
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss and 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)
======== ========= ======
Diluted net loss per common share does not include the effect of options to
purchase 2,018,000 shares of common stock for the three month period ended
July 31, 2010 because they are anti-dilutive.
Diluted net loss per common share does not include the effect of options to
purchase 1,220,075 shares of common stock for the three month period ended
July 31, 2009 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, 2010 and 2009, the Company did not repurchase any shares of its
common stock. As of July 31, 2010, 172,196 shares remain available for
repurchase under the plan. This repurchase program does not have an
expiration date.
Stock Options
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. 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.
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 fiscal 2011's and 2010's first
fiscal quarters include approximately $158,000 and $156,000 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 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, 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) 34,000 $1.75 - -
Exercised 0 - - -
Expired (12,000) $24.25 - -
Balance
July 31,
2010 1,968,800 $3.13 6.27 $ 67,000
Exercisable
July 31,
2010 894,800 $4.51 3.80 $ 61,000
Expected to vest
July 31,
2010 1,870,000 $3.14 6.28 -
(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 $1.83, the closing price of Dataram common stock on July 30, 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 three
month period ended July 31, 2010 was $0.78 per option.
Total cash received from the exercise of options in the first three
months of fiscal 2011 ended July 31, 2010 was nil. As of July 31, 2010,
there was approximately $931,000 of total unrecognized compensation
costs related to stock options. These costs are expected to be
recognized over a weighted average period of approximately nineteen
months. At July 31, 2010, an aggregate of 2,927 shares were authorized
for future grant under the Company's stock option plans.
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 month period ended July 31, 2010, this amount
totaled approximately $267,000. 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 July 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. Other than customer relationships, acquired
intangible assets are amortized on a straight-line basis over their weighted
average lives. 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.
Intangible assets amortization expense for fiscal year 2011's and 2010's
first quarter ended July 31, 2010 was approximately $107,000 and $164,000,
respectively. 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, 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 799,000 692,000
_____________ _____________
Net intangible assets $ 760,000 $ 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 fiscal 2011's and fiscal 2010's first quarter, the Company purchased
inventories for resale totaling approximately $372,000 and $1,667,000,
respectively from Sheerr Memory, LLC (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 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 $233,000 and $477,000, respectively,
of accounts payable in the Company's consolidated balance sheets as of
July 31, 2010 and 2009 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 July 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 can extend for
an additional three months without penalty. The loan bears interest at the
rate of 5.25%. Interest is payable monthly, and the entire principal amount
is payable in the event of the employee's termination of employment by the
Company. The loan is 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. As of July 31, 2010 and during
the fiscal quarter 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:
July 31, 2010 April 30, 2010
________________ ______________
Trade receivables $ 5,541,000 $ 5,000,000
VAT receivable 199,000 594,000
Other 5,000 0
Allowance for doubtful accounts
and sales returns (250,000) (250,000)
________________ ______________
$ 5,495,000 $ 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 July 31, 2010 and
April 30, 2010 consist of the following categories:
July 31, 2010 April 30, 2010
________________ ______________
Raw materials $ 3,312,000 $ 3,919,000
Work in process 57,000 32,000
Finished goods 2,379,000 2,921,000
________________ ______________
$ 5,748,000 $ 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 material 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) Financing Agreements
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 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. During
the quarter ended July 31, 2010 there were no borrowings under 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 can extend for
an additional three months without penalty. The loan bears interest at the
rate of 5.25%. Interest is payable monthly, and the entire principal amount
is payable in the event of the employee's termination of employment by the
Company. The loan is 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.
(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 months ended July 31, 2010 and 2009 by geographic region are as
follows:
Three months ended Three months ended
July 31, 2010 July 31, 2009
________________ ________________
United States $ 10,686,000 $ 7,245,000
Europe 1,142,000 1,457,000
Other (principally Asia Pacific Region) 916,000 488,000
________________ ________________
Consolidated $ 12,744,000 $ 9,190,000
================ ================
Long-lived assets consist of property and equipment and finite life
intangible assets. Long-lived assets and total assets by geographic region
as of July 31, 2010 are as follows:
July 31, 2010
Long-lived assets Total assets
_________________ ______________
United States $ 2,723,000 $ 15,004,000
Europe 0 49,000
Other 0 7,000
_________________ ______________
Consolidated $ 2,723,000 $ 15,060,000
================= ==============
(11) Accounting Guidance
Recently Adopted Accounting Guidance
In June 2009, the FASB issued authoritative guidance on the consolidation
of variable interest entities, which became effective for us on May 1, 2010.
The new guidance requires revised evaluations of whether entities represent
variable interest entities, ongoing assessments of control over such
entities, and additional disclosures for variable interests. Adoption of the
new guidance did not have a material impact on our financial statements.
In October 2009, the FASB issued authoritative guidance on revenue
recognition that became effective for us on May 1, 2010, with earlier
adoption permitted. Under the new guidance on arrangements that include
software elements, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be
within the scope of the software revenue recognition guidance, and
software-enabled products will now be subject to other relevant revenue
recognition guidance. Additionally, the FASB issued authoritative guidance
on revenue arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the new guidance,
when vendor specific objective evidence or third party evidence for
deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance
includes new disclosure requirements on how the application of the relative
selling price method affects the timing and amount of revenue recognition.
Adoption of the new guidance did not have a material impact on our financial
statements.
In January 2010, the FASB issued guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements.
The guidance requires new disclosures on the transfers of assets and
liabilities between Level 1 (quoted prices in active market for identical
assets or liabilities) and Level 2 (significant other observable inputs) of
the fair value measurement hierarchy, including the reasons and the timing
of the transfers. Additionally, the guidance requires a roll forward of
activities on purchases, sales, issuance, and settlements of the assets and
liabilities measured using significant unobservable inputs (Level 3 fair
value measurements). The guidance became effective for us with the reporting
period beginning February 1, 2010, except for the disclosure on the roll
forward activities for Level 3 fair value measurements, which will become
effective for us with the reporting period beginning May 1, 2011. Other than
requiring additional disclosures, adoption of this new guidance did not have
a material impact on our financial statements.
(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 July 31, 2010 have been included in the consolidated results of
operations of the Company.
Liquidity and Capital Resources
As of July 31, 2010, cash and cash equivalents amounted to approximately
$786,000 and working capital amounted to approximately $7,489,000,
reflecting a current ratio of 2.6 to 1, compared to cash and cash
equivalents of approximately $2,507,000, working capital of approximately
$8,550,000 and a current ratio of 2.4 to 1 as of April 30, 2010.
During the first three months of fiscal 2011, net cash used in operating
activities totaled approximately $1,459,000. Net loss in the period was
approximately $1,239,000. Accounts payable decreased by approximately
$1,508,000, mainly the result of decreased inventories of approximately
$1,125,000. Depreciation and amortization of approximately $280,000 was
recorded in fiscal 2011's first quarter. Non-cash stock-based compensation
expense of approximately $158,000 was also recorded. Cash used by the
increase in trade receivables and other current assets amounted to
approximately $160,000 and $123,000 respectively.
Net cash used in investing activities totaled approximately $262,000 for
the three months ended July 31, 2010 and consisted primarily of a payment of
approximately $267,000 for the acquisition of a business more fully
described in described in Note 3 to the Consolidated Financial Statements.
On February 24, 2010, the Company entered into a Note and Security Agreement
with an employee who is an executive officer of the Company. Under the
agreement, the Company borrowed the principal sum of $1,000,000 for a period
of six months, which the Company can extend for an additional three months
without penalty. The loan bears interest at the rate of 5.25%. Interest is
payable monthly, and the entire principal amount is payable in the event of
the employee's termination of employment by the Company. The loan is
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 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. Management believes that the Company's cash
flows generated from operations together with cash generated through these
agreements will be sufficient to meet the Company's short-term liquidity
needs. Management also believes that 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 July 31, 2010 were $12,744,000
compared to revenues of $9,190,000 for the comparable prior year period. The
Company's revenues increased by approximately 39% in the fiscal quarter
ended July 31, 2010 versus the comparable prior year period. This 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 as the
economy continued to gradually recover from the financial crises.
Revenues for the three months ended July 31, 2010 and 2009 by geographic
region are as follows:
Three months ended Three months ended
July 31, 2010 July 31, 2009
________________ ________________
United States $ 10,686,000 $ 7,245,000
Europe 1,142,000 1,457,000
Other (principally Asia Pacific Region) 916,000 488,000
________________ ________________
Consolidated $ 12,744,000 $ 9,190,000
================ ================
Cost of sales for the first quarter of fiscal 2011 and 2010 were 75% and 72%
of revenues, respectively. Fluctuations in cost of sales as a percentage of
revenues 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 2011
was $9.6 million compared to $6.7 million in the prior year comparable
period.
Engineering expense in fiscal 2011's first quarter totaled $275,000, versus
$253,000 for the same prior year period. Engineering expense in the fiscal
2011's first quarter included approximately $13,000 of stock based
compensation expense compared to nil in the comparable prior year period.
Research and development expense in fiscal 2011's first quarter were
$894,000 versus $874,000 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 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. 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 2011's first quarter
were $3,084,000 versus $ $3,048,000 in the same prior year period. These
expenses for the first fiscal quarter ended July 31, 2011 were approximately
$36,000 higher than in the comparable prior year period.
Other income (expense), net for the first quarter of fiscal 2011 totaled
expense of $109,000, versus $34,000 income for the same prior year period.
Other expense in fiscal 2011's first quarter consisted of $96,000 of foreign
currency transaction losses, primarily as a result of the EURO weakening
relative to the US dollar, and $16,000 of interest expense. Other income in
fiscal 2010's first quarter consisted 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.
Income tax benefit for the first quarter of 2011 was nil versus a benefit
of $628,000 for the same prior year period. 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. The Company has 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
July 31, 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.
Our consolidated statements of operations for fiscal 2011's and 2010's first
quarter include approximately $158,000 and $156,000 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 has been
reflected in additional paid-in capital in the accompanying consolidated
balance sheets.
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 July 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)
Ring Technology ("Ring") has 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 has also
brought a separate action against larger manufacturers. A complaint was
filed by Ring, and Dataram has filed an answer contesting all of plaintiff's
claims. No discovery has yet been undertaken.
The Company has been in discussions with Ring and several of the
defendant memory vendors. The Company is also pursuing a voluntary
dismissal by Ring of its action against Dataram, as well as advising the
Company's vendors of their contractual obligation to indemnify Dataram. If
the case continues against Dataram, it is management's intent to contest the
matter vigorously.
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: September 13, 2010 By: /s/ Mark D. Maddocks
__________________________
Mark E. Maddocks
Vice President, Finance
(Principal Financial Officer)