Notes to Condensed Consolidated Financial
Statements
July 31, 2016 and 2015
(Unaudited)
Note 1: Basis of Presentation and Summary
of Significant Accounting Policies
Organization and Nature of Business
Dataram Corporation (“Dataram”
or the “Company”) is an independent manufacturer and reseller of memory products and provider of performance solutions.
The Company provides customized memory solutions for original equipment manufacturers (OEMs) and compatible memory for leading
brands including Cisco, Dell, Fujitsu, HP, IBM, Lenovo and Oracle as well as a line of memory products for Intel and AMD motherboard
based servers. Dataram manufactures its memory in-house to meet three key criteria - quality, compatibility, and selection
- and tests its memory for performance and OEM compatibility as part of the production process. The Company has memory designed
for over 50,000 systems and with products that range from energy-efficient DDR4 modules to legacy SDR offerings. The Company
is a CMTL Premier Participant and ISO 9001 (2008 Certified). Its products are fully compliant with JEDEC Specifications.
Dataram’s customers include a global
network of distributors, resellers, retailers, OEM customers and end users.
Dataram competes with several large independent
memory manufacturers and OEMs. 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 Going Concern
The Company's condensed
consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and have been prepared assuming that the Company will continue
as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
For the fiscal year ended April 30, 2016, the Company incurred losses of approximately $1,221,000. The Company also incurred losses
of approximately $927,000 in fiscal 2017’s first quarter ended July 31, 2016.
If current and projected
revenue growth does not meet estimates, the Company may need to raise additional capital through debt and/or equity transactions
and further reduce certain overhead costs. The Company may require up to $1,000,000 of additional working capital over the next
twelve months to support operations. The Company cannot provide assurance that it will obtain any required financing or such financing
will be available to it on favorable terms.
Based on the above,
there is substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts
of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
Basis of Presentation
The condensed consolidated financial statements
have been prepared in accordance with GAAP for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X
of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and
footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain
all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as
of July 31, 2016 and the results of operations and cash flows for the periods presented. The results of operations for the three
months ended July 31, 2016 are not necessarily indicative of the operating results for the full fiscal year or for any future period.
These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended April 30, 2016. The Company’s accounting policies are described in the Notes
to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended April 30, 2016, and updated, as necessary,
in this Quarterly Report on Form 10-Q.
On July 6, 2016, the Company filed a certificate
of amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada in order to effectuate a reverse
stock split of the Company’s issued and outstanding common stock, par value $0.001 per share on a one (1) for three (3) basis,
effective on July 8, 2016. The accompanying condensed consolidated financial statements and notes thereto give retrospective effect
of the reverse stock split for all periods presented.
Use of Estimates
The preparation of financial statements in
conformity with GAAP 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 allowance for
doubtful accounts and sales returns, reserve for inventory obsolescence, deferred income tax asset and related valuation allowance,
fair value of certain financial instruments and other operating allowances and accruals. Actual results could differ from those
estimates.
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. Estimated warranty costs
are accrued by management upon product shipment based on an estimate of future warranty claims. Such amounts were not
material for the three months ended July 31, 2016 and 2015.
Net Loss per Share
Basic net loss per share is computed by dividing
the net loss available to common stock holders 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, 2016 and 2015 includes only the
weighted average number of shares of common stock outstanding. The denominator excludes the dilutive effect of common shares issuable
upon exercise or conversion of stock options, warrants, convertible notes and Series A and Series B preferred shares as their effect
would be anti-dilutive.
Anti-dilutive securities consisted of the following
at July 31:
|
|
2016
|
|
|
2015
|
|
Common stock equivalent of convertible notes
|
|
|
—
|
|
|
|
100,000
|
|
Common stock equivalent of convertible notes – related parties
|
|
|
9,070
|
|
|
|
9,070
|
|
Series A preferred shares
|
|
|
—
|
|
|
|
522,167
|
|
Series B preferred shares
|
|
|
344,480
|
|
|
|
—
|
|
Warrants
|
|
|
133,667
|
|
|
|
1,119,425
|
|
Stock options
|
|
|
2,778
|
|
|
|
99,582
|
|
Total
|
|
|
489,995
|
|
|
|
1,850,244
|
|
Recently Issued Accounting Pronouncements
On August 26,
2016, the FASB issued Accounting Standards Update (ASU) 2016-15, Classification of Certain Cash Receipts and Cash Payments, seeking
to eliminate diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement
of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including both
business entities and not-for-profit entities that are required to present a statement of cash flows under FASB Accounting Standards
Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. The Company is currently evaluating the impact of this accounting standard on its
condensed consolidated financial statements.
Note 2: Related Party Transactions
During the three month periods ended July 31,
2016 and 2015, the Company purchased inventories for resale totaling approximately $19,000 and $125,000, respectively, from Sheerr
Memory, LLC (“Sheerr Memory”). Sheerr Memory’s owner (“Mr. Sheerr”) is employed by the Company as
an advisor. Approximately $19,000 and $11,000 of accounts payable in the Company’s condensed consolidated balance sheets
as of July 31, 2016 and April 30, 2016, respectively, 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 not made further
purchases from Sheerr Memory subsequent to July 31, 2016. Management anticipates that the Company will make additional purchases,
although the Company has no obligation to do so.
During the three month periods ended July 31,
2016 and 2015, the Company purchased inventories for resale totaling approximately $420,000, and $408,000 respectively, from Keystone
Memory Group (“Keystone Memory”). Keystone Memory’s owner is a relative of Mr. Sheerr. Approximately $117,000
and $190,000 of accounts payable in the Company’s condensed consolidated balance sheets as of July 31, 2016 and April 30,
2016 is payable to Keystone Memory. Keystone Memory offers the Company trade terms of net due and all invoices are settled in the
normal course of business. No interest is paid. The Company has made approximately $81,000 in purchases from Keystone Memory subsequent
to July 31, 2016 and management anticipates that the Company will continue to do so, although the Company has no obligation to
do so.
On October 31, 2013, the Company entered into
an agreement with Mr. Sheerr to leaseback the equipment and furniture that was sold to Mr. Sheerr on October 31, 2013 for $500,000.
The lease is for a term of 60 months and the Company is obligated to pay approximately $7,500 per month for the term of the lease.
The Company has an option to extend the lease for an additional two year period. The transactions described have been accounted
for as a sale-leaseback transaction. Accordingly, the Company recognized a gain on the sale of assets of approximately $103,000,
which is the amount of the gain on sale in excess of present value of the future lease payments and will recognize the remaining
deferred gain of approximately $358,000 in proportion to the related gross rental charged to expense over the term of the lease,
60 months. The current portion of $72,000 deferred gain was reflected in accrued liabilities and the long-term portion of approximately
$96,000 is reflected in other liabilities – long-term in the condensed consolidated balance sheet as of July 31, 2016. As
of April 30, 2016, the current portion of $72,000 deferred gain is reflected in accrued liabilities and the long-term portion of
approximately $107,000 is reflected in other liabilities – long-term in the consolidated balance sheet as of April 30, 2016.
Note 3: Note Payable – Revolving Credit
Line
The Company’s financing agreement (the
“Financing Agreement”) with Rosenthal & Rosenthal, Inc. provides for a revolving loan with a maximum borrowing
capacity of $3,500,000. The Financing Agreement matures on November 30, 2016 unless such Financing Agreement is either earlier
terminated or renewed. The amount outstanding under the Financing Agreement bears interest at a rate of the Prime Rate (as defined
in the Financing Agreement) plus 3.25% (the “Effective Rate”) or on Over-advances (as defined in the Financing Agreement),
if any, at a rate of the Effective Rate plus 3%. The Financing Agreement contains other financial and restrictive covenants, including,
among others, covenants limiting the Company’s ability to incur indebtedness, guarantee obligations, sell assets, make loans,
enter into mergers and acquisition transactions and declare or make dividends. The Company requested and received a waiver of compliance
with respect to certain provisions of the Financing Agreement in connection with certain Bridge Notes issued in July 2014. Borrowings
under the Financing Agreement are collateralized by substantially all the assets of the Company. The Financing Agreement provides
for advances against eligible accounts receivable and inventory balances based on prescribed formulas of raw materials and finished
goods. There was approximately $137,000 of additional availability as of July 31, 2016.
Note 4: Stockholder’s Equity
Series B preferred shares
During the quarter ended July 31, 2016, the
holders of Series B Preferred Stock converted 279,887 Series B Preferred shares into 1,865,913 shares of common stock. The converted
value for each Series B Preferred Share is approximately $12.20 or $3,414,621 and resulted in an offsetting increase to Additional
Paid in Capital in the July 31, 2016 consolidated balance sheet. As of July 31, 2016, there were 51,672 shares of Series B Preferred
Stock outstanding convertible into approximately 344,480 shares of common stock.
Bonus Shares
Bonus Shares - Bonus Shares are an award to
an eligible person of shares for services to be rendered or for past services already rendered to the Company. The Board will determine
the number of shares to be awarded to the eligible individual, in accordance with any restrictions thereon. These restrictions
may be based upon completion of a specified number of years of service with the Company or upon satisfaction of performance goals
based on performance factors. Payment for the Bonus Shares may be made in the form of cash, whole shares, or a combination thereof,
based on the fair market value of the shares on the date of payment, as determined in the sole discretion of the Board.
Between May 1, 2016 and July 29, 2016 the Company
awarded 188,333 restricted shares of the Company’s common stock to employees, executive officers and directors. The Company’s
condensed consolidated statements of operations for the three months ended July 31, 2016 include approximately $429,000 of stock-based
compensation expense. These stock 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.
Warrants
At July 31, 2016 the Company had 133,667 warrants
outstanding with exercise prices between $7.50 and $10.50. A summary of warrant activity for the three months ended July 31, 2016
is as follows:
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
life years
|
|
|
Aggregate
intrinsic
value (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 1, 2016
|
|
|
207,625
|
|
|
$
|
19.74
|
|
|
|
1.24
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
(73,958
|
)
|
|
$
|
40.68
|
|
|
|
|
|
|
|
|
|
Balance July 31, 2016
|
|
|
133,667
|
|
|
$
|
8.15
|
|
|
|
2.32
|
|
|
|
—
|
|
|
(1)
|
This amount represents the difference between the conversion price and $1.80, the closing price
of Dataram common stock on July 29, 2016 as reported on the NASDAQ Stock Market, for all in-the-money warrants outstanding.
|
Note 5: Commitments and Contingencies
Leases
Future minimum lease payments under non-cancelable
operating leases (with initial or remaining lease terms in excess of one year) as of July 31, 2016 are as follows:
|
|
Non-Related
|
|
|
Related
|
|
|
|
|
|
|
Party
|
|
|
Party
|
|
|
Total
|
|
Year ending April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
115,000
|
|
|
|
67,000
|
|
|
|
182,000
|
|
2018
|
|
|
84,000
|
|
|
|
90,000
|
|
|
|
174,000
|
|
2019
|
|
|
85,000
|
|
|
|
45,000
|
|
|
|
130,000
|
|
2020
|
|
|
86,000
|
|
|
|
—
|
|
|
|
86,000
|
|
Total
|
|
$
|
370,000
|
|
|
$
|
202,000
|
|
|
$
|
572,000
|
|
Legal Proceedings
Effective as of the close of business on December
17, 2014, the Company terminated its agreement with MPP Associates, Inc., pursuant to which Marc P. Palker had been providing CFO
services to the Company. On April 8, 2015, MPP Associates, Inc. and Mr. Palker filed a complaint, MPP Associates, Inc. and
Marc Palker v. Dataram Corporation, Jon Isaac, David Moylan, Michael Markulec and Richard Butler, in the Superior Court of the
State of New Jersey, Essex County, Docket No. ESX-L-002413-15.
Effective as of the close of business on January
22, 2015, the Company terminated the employment agreement with John H. Freeman, its former Chief Executive Officer. On April 9,
2015, Mr. Freeman filed a complaint, John Freeman v. Dataram Corporation, David A. Moylan, Jon Isaac, and John Does 1-5, in the
Superior Court of the State of New Jersey, Essex County, Docket No. ESX-L-002471-15.
Similarly,
on April 10, 2015, the Company filed an action against Mr. Freeman, Mr. Palker and MPP Associates, Inc., as Dataram Corporation
v. John Freeman, Marc Palker and MPP Associates, Inc., in the Superior Court of the State of New Jersey, Mercer County, Docket
No. ESX-L-000886-15.
The aforementioned
three State Court actions described have been consolidated in Essex County.
On March
9, 2015, Marc Palker filed a complaint against the Company with the U.S. Department of Labor, Occupational Safety and Health Administration,
alleging a violation of the Sarbanes-Oxley Act of 2002.
On June 26,
2015, Alethea Douglas, a former employee, filed a complaint against the Company with the U.S. Equal Employment Opportunity Commission,
alleging a claim for age discrimination in connection with the termination of her employment effective May 20, 2015.
A range of
loss, if any, on the aforementioned matters cannot be estimated at this point in time.
Note 6: Financial Information by Geographic
Location
The Company currently operates in one business
segment that 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, 2016 and 2015 by geographic region are as follows:
|
|
Three months
ended
July 31,
2016
|
|
|
Three months
ended
July 31,
2015
|
|
United States
|
|
$
|
3,262,000
|
|
|
$
|
6,113,000
|
|
Europe
|
|
|
1,143,000
|
|
|
|
1,116,000
|
|
Other (principally Asia Pacific Region)
|
|
|
510,000
|
|
|
|
109,000
|
|
Consolidated
|
|
$
|
4,915,000
|
|
|
$
|
7,338,000
|
|
Note 7: Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains its cash
in financial institutions. To the extent that such deposits exceed the maximum insurance levels, they are uninsured. The Company
performs ongoing evaluations of its customers’ financial condition, as well as general economic conditions and, generally,
requires no collateral from its customers. At July 31, 2016 amounts due from three customers totaled approximately 16%, 13% and
10%, of accounts receivable. At April 30, 2016, amounts due from one customer totaled approximately 15%.
In the fiscal quarter ended July 31, 2016 the
Company had sales to one customer that totaled 27%. For the comparable prior year period ended July 31, 2015 we had sales to four
customers that were over 10% of revenues. Two customers were approximately 13% each, the third customer was approximately 14% and
the fourth customer was approximately 16% of revenues.
Note 8: Entry into a Material Definitive
Agreement
On June 13, 2016, the Company entered into
an Agreement and Plan of Merger with its wholly owned subsidiary, Dataram Acquisition Sub, Inc., a Nevada corporation, U.S. Gold
Corp., a Nevada corporation and exploration stage company that owns certain mining leases and other mineral rights comprising the
Copper King gold and copper development project located in the Silver Crown Ming District of southeast Wyoming and Copper King,
LLC, a principal stockholder of U.S. Gold Corp. The closing of the merger is subject to conditions as defined in the agreement.
Pursuant to the terms and conditions of the
Merger Agreement, at the closing of the Merger, U.S. Gold’s common stock, Series A Preferred Stock and Series
B Preferred Stock will be converted into the right to receive shares of the Company’s Common Stock or, at the election of
any U.S. Gold stockholder, shares of the Company’s newly designated 0% Series C Convertible Preferred Stock, par value $0.001
per share, which are convertible into shares of Common Stock. The Merger Consideration shall be allocated as defined in the agreement.
On July 6, 2016, the Company filed a certificate
of amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada in order to effectuate a reverse
split of the Company’s issued and outstanding common stock on a 1 for 3 basis, which was effective with the State of Nevada
on July 8, 2016 and with The NASDQ Stock Market at the open of trading on July 11, 2016. All share and per share amounts are reflective
of the reverse split.
On July 29, 2016, the Company, Acquisition
Sub, U.S. Gold and Copper King, amended and restated the Merger Agreement in order to reflect the reverse split of the Company’s
issued and outstanding common stock and to adjust certain aspects of the merger consideration and management consideration as defined
in the amended merger agreement.
Note 9: Subsequent event
On August 3, 2016, the Company entered into
separate securities purchase agreements with accredited investors for the issuance and sale of the Company’s newly designated
0% Series D Convertible Preferred Stock (“Preferred Shares”) which are convertible into shares of the Company’s
common stock, par value $0.001 per share and such sale and issuance. The Series D Preferred Shares are governed by a Certificate
of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock. Each Series D Preferred Share was sold
at a per share purchase price of $136.00 and converts into 100 shares of Common Stock, subject to adjustment for dividends and
stock splits. On August 5, 2016, the Company closed the private placement and sold 3,699 Series D Preferred Shares convertible
into an aggregate of 369,900 shares of common stock with gross proceeds to the Company of $503,000.
On August 31, 2016, the Company terminated
the employment of David Sheerr. Mr. Sheerr as owner of Sheerr Memory was a related party, (See note 2). The agreements with Sheer
Memory and Keystone Memory have not been affected by the change of Mr. Sheerr employment status.