UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended January 31, 2012
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____________ to _____________
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Commission file number:
1-8266
DATARAM CORPORATION
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(Exact name of registrant as specified in its charter)
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New Jersey
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22-1831409
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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P.O. Box 7528, Princeton, NJ
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08543
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(Address of principal executive offices)
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(Zip Code)
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(609) 799-0071
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report)
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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). [X ] 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 ($1.00 par value): As of March
16, 2012,
there were
10,703,309
shares outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Dataram Corporation and Subsidiaries
Consolidated Balance Sheets
January 31, 2012 and April 30, 2011
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January 31,
2012
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April 30,
2011
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(Unaudited)
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(Note 1)
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Assets
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Current Assets:
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Cash and cash equivalents
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$
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738,526
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$
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345,105
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Accounts receivable, less allowance for doubtful accounts and sales returns of
$225,000 at January 31, 2012 and April 30, 2011
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2,763,156
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4,630,240
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Inventories
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3,323,691
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5,461,791
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Other current assets
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96,287
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127,279
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Total current assets
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6,921,660
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10,564,415
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Property and equipment, at cost:
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Machinery and equipment
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11,967,550
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11,930,806
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Leasehold improvements
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607,868
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1,238,923
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12,575,418
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13,169,729
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Less: accumulated depreciation and amortization
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11,792,218
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12,207,476
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Net property and equipment
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783,200
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962,253
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Other assets
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81,986
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111,136
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Intangible assets, net of accumulated amortization
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337,469
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1,940,338
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Goodwill
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1,453,034
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1,241,981
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$
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9,577,349
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$
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14,820,123
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Liabilities and Stockholders' Equity
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Current liabilities:
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Note payable-revolving credit line
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$
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1,470,838
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$
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2,153,889
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Accounts payable
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705,823
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2,944,928
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Accrued liabilities
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858,573
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840,146
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Due to related party - current portion
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233,333
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1,500,000
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Total current liabilities
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3,268,567
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7,438,963
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Due to related party - long term
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1,766,667
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-
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Total Liabilities
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5,035,234
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7,438,963
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Stockholders' Equity:
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Common stock, par value $1.00 per share
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Authorized 54,000,000 shares; issued and outstanding 10,703,309 at January 31, 2012 and 8,928,309 at April 30, 2011
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10,703,309
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8,928,309
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Additional paid-in capital
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10,223,127
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8,621,729
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Accumulated deficit
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(16,384,321
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)
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(10,168,878
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)
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Total stockholders' equity
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4,542,115
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7,381,160
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$
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9,577,349
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$
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14,820,123
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See accompanying notes to consolidated financial
statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended January
31,
(Unaudited)
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2012
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2011
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Three Months
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Nine Months
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Three Months
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Nine Months
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Revenues
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$
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8,420,135
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$
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29,095,949
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$
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11,873,417
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$
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35,566,166
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Costs and expenses:
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Cost of sales
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6,749,616
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22,010,316
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8,970,185
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27,126,744
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Engineering
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181,142
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560,505
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250,362
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763,364
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Research and development
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-
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-
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134,257
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1,893,856
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Selling, general and administrative
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3,149,333
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9,978,428
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3,173,348
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9,230,287
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Impairment of capitalized software
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2,387,241
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2,387,241
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-
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-
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12,467,332
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34,936,490
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12,528,152
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39,014,251
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Loss from operations
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(4,047,197
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)
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(5,840,541
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)
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(654,735
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)
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(3,448,085
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)
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Other income (expense):
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Interest expense, net
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(100,077
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)
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(298,294
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)
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(104,876
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)
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(183,519
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)
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Currency gain (loss)
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(30,456
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)
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(71,727
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)
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(54,011
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)
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(138,640
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)
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Other income (expense), net
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-
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-
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(20,000
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)
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(17,015
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)
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Total other expense, net
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(130,533
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)
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(370,021
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)
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(178,887
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)
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(339,174
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)
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Loss before income taxes
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(4,177,730
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)
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(6,210,562
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)
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(833,622
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)
|
|
|
(3,787,259
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)
|
|
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|
|
|
|
|
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|
|
|
|
|
|
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Income tax expense
|
|
|
4,881
|
|
|
|
4,881
|
|
|
|
5,116
|
|
|
|
5,116
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Net loss
|
|
$
|
(4,182,611
|
)
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|
$
|
(6,215,443
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)
|
|
$
|
(838,738
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)
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|
$
|
(3,792,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
|
|
$
|
(.39
|
)
|
|
$
|
(.59
|
)
|
|
$
|
(.09
|
)
|
|
$
|
(.43
|
)
|
Diluted
|
|
$
|
(.39
|
)
|
|
$
|
(.59
|
)
|
|
$
|
(.09
|
)
|
|
$
|
(.43
|
)
|
See accompanying notes to consolidated financial
statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended January 31,
(Unaudited)
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,215,443
|
)
|
|
$
|
(3,792,375
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
525,699
|
|
|
|
779,646
|
|
Bad debt expense (recovery)
|
|
|
17,885
|
|
|
|
(4,444
|
)
|
Stock-based compensation expense
|
|
|
378,523
|
|
|
|
461,416
|
|
Gain on sale of property and equipment
|
|
|
-
|
|
|
|
(2,472
|
)
|
Impairment of software development costs
|
|
|
2,387,241
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
1,849,199
|
|
|
|
1,775,567
|
|
Decrease in inventories
|
|
|
2,138,100
|
|
|
|
1,763,709
|
|
Decrease (increase) in other current assets
|
|
|
30,992
|
|
|
|
(241,241
|
)
|
Decrease in other assets
|
|
|
29,150
|
|
|
|
21,624
|
|
Decrease in accounts payable
|
|
|
(2,239,106
|
)
|
|
|
(1,324,099
|
)
|
Increase (decrease) in accrued liabilities
|
|
|
18,427
|
|
|
|
(1,033,312
|
)
|
Net cash used in operating activities
|
|
|
(1,079,333
|
)
|
|
|
(1,595,981
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of business
|
|
|
(211,053
|
)
|
|
|
(432,074
|
)
|
Additions to property and equipment
|
|
|
(223,948
|
)
|
|
|
(135,210
|
)
|
Software development cost
|
|
|
(907,069
|
)
|
|
|
(768,024
|
)
|
Proceeds from sale of property and equipment
|
|
|
-
|
|
|
|
9,985
|
|
Net cash used in investing activities
|
|
|
(1,342,070
|
)
|
|
|
(1,325,323
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds (payments) of borrowings under revolving credit line
|
|
|
(683,051
|
)
|
|
|
1,366,934
|
|
Net proceeds (payments) of note payable to related party
|
|
|
500,000
|
|
|
|
(500,000
|
)
|
Net proceeds from sale of common shares under stock option plan
|
|
|
-
|
|
|
|
12,800
|
|
Net proceeds from sale of common stock
|
|
|
2,997,875
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
2,814,824
|
|
|
|
879,734
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
393,421
|
|
|
|
(2,041,570
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
345,105
|
|
|
|
2,507,456
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
738,526
|
|
|
$
|
465,886
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Borrowings from and repayments to related party
|
|
$
|
1,500,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
277,212
|
|
|
$
|
179,273
|
|
Income taxes
|
|
$
|
4,881
|
|
|
$
|
5,116
|
|
See accompanying notes to consolidated financial
statements.
Dataram Corporation and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2012 and 2011
(Unaudited)
(1) Basis of Presentation
The information for the three and nine months
ended January 31, 2012 and 2011 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, 2011 included in the Company’s 2011 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. The April 30, 2011 balance sheet has been derived from these statements.
The consolidated financial statements for the
three and nine months ended January 31, 2012 and 2011 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 Note 9, the Company entered
into financing agreements to address short-term liquidity needs. Also, as discussed in Note 10, on May 11, 2011, the Company
entered into a securities purchase agreement with certain investors and received approximately $2,998,000 in net proceeds in connection
with the agreement on May 17, 2011. On March 9, 2012, the Company received an offer to sell a portfolio of patents.
If this sale is consummated, the net proceeds will allow the Company to reduce debt and acquire inventory on a more programmed
basis. However, there can be no assurance that the Company will consummate this transaction which is still subject to final documentation
and closing. Based on the cash provided by the securities purchase agreement and the cash flows expected to be provided from the
sale of the patents 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. There can be no assurance, however, that in the
short-term, realized revenues will be in line with the Company’s projections. Actual results may differ from such projections
and are subject to certain risks including, without limitation, risks arising from: an adverse change in general economic conditions,
changes in the price of memory chips, changes in the demand for memory systems for workstations and servers, changes in the demand
for storage caching subsystems, increased competition in the memory systems and storage industries and other factors described
in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission
.
Management
continues to evaluate the Company’s liquidity needs and expense structure and adjust its business plan as necessary.
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
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
income tax asset valuation allowance and other operating allowances and accruals. Actual results could differ from those estimates.
Engineering and Research and Development
Research and development costs are expensed
as incurred. Development costs of a computer software product to be sold, leased, or otherwise marketed are subject to capitalization
beginning when a product’s technological feasibility has been established and ending when a product is available for general
release to customers. Technological feasibility of a computer software product is established when all planning, designing, coding
and testing activities that are necessary to establish that the product can be produced to meet its design specifications including
functions, features and technical performance requirements are completed. The Company has been developing computer software for
its XcelaSAN storage caching product line. On November 4, 2010, the Company determined that technological feasibility of the product
was established, and development costs totaling approximately $2,387,000 were capitalized. During fiscal 2012’s third quarter
ended January 31, 2012 the Company continued to market the XcelaSAN product. During the third quarter of fiscal 2012 the XcelaSAN
product was available for general release and generated approximately $8,000 of revenue. The Company has determined based on
the
estimated future net realizable value for the expected periods of benefit that the carrying value of capitalized software development
cost are impaired. In order to properly market the XcelaSAN product to potential users, the Company would require substantial resources
which are not readily available to the Company. This lack of resources further impairs the future net realizable value of the capitalized
asset. As such, all previously capitalized software development costs in the amount of approximately $ 2,387,000 were expensed
in the quarter ended January 31, 2012.
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 income 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 income 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 income 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
income 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 merits of the position. There are no material unrecognized tax positions
in the financial statements. As of January 31, 2012 the Company had Federal and State net operating loss (NOL) carry-forwards of
approximately $17.1 million and $15.1 million, respectively. These can be used to offset future taxable income and expire between
2023 and 2031 for Federal tax purposes and 2016 and 2031 for state tax purposes. The Company’s NOL carry-forwards are a component
of its deferred income tax assets which are reported net of a full valuation allowance in the Company’s consolidated financial
statements at January 31, 2012 and at April 30, 2011
.
Net loss per share
Basic net loss per share is computed by dividing
the net loss by the weighted average number of shares of common stock issued and outstanding during the period. The calculation
of diluted loss per share for the three and nine months ended January 31, 2012 and 2011 includes only the weighted average number
of shares of common stock outstanding. The denominator excludes the dilutive effect of stock options and warrants outstanding as
their effect would be anti-dilutive.
The following presents a reconciliation
of the numerator and denominator used in computing basic and diluted net loss per share for the three and nine month periods ended
January 31, 2012 and 2011:
|
|
Three Months ended January 31, 2012
|
|
|
|
Net Loss
|
|
|
Shares
|
|
|
Per share
|
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share – net loss and weighted average common shares outstanding
|
|
$
|
(4,182,611
|
)
|
|
|
10,703,309
|
|
|
$
|
(.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Effect of dilutive securities – warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share – net loss, weighted average common
shares outstanding and effect of stock options and warrants
|
|
$
|
(4,182,611
|
)
|
|
|
10,703,309
|
|
|
$
|
(.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended January 31, 2011
|
|
|
|
Net Loss
|
|
|
Shares
|
|
|
Per share
|
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share – net loss and weighted average common shares outstanding
|
|
$
|
(838,738
|
)
|
|
|
8,928,309
|
|
|
$
|
(.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share – net loss, weighted average common shares outstanding and effect of stock options
|
|
$
|
(838,738
|
)
|
|
|
8,928,309
|
|
|
$
|
(.09
|
)
|
|
|
Nine Months ended January 31, 2012
|
|
|
|
Net Loss
|
|
|
Shares
|
|
|
Per share
|
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share – net loss and weighted average common shares outstanding
|
|
$
|
(6,215,443
|
)
|
|
|
10,600,410
|
|
|
$
|
(.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Effect of dilutive securities – warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share – net loss, weighted average common shares outstanding and effect of stock options and warrants
|
|
$
|
(6,215,443
|
)
|
|
|
10,600,410
|
|
|
$
|
(.59
|
)
|
|
|
|
|
|
|
Nine Months ended January 31, 2011
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Per share
|
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share – net loss and weighted average common shares outstanding
|
|
$
|
(3,792,375
|
)
|
|
|
8,921,642
|
|
|
$
|
(.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share – net loss, weighted average common shares outstanding and effect of stock options
|
|
$
|
(3,792,375
|
)
|
|
|
8,921,642
|
|
|
$
|
(.43
|
)
|
Diluted net loss per common share for the
three and nine month periods ended January 31, 2012 and 2011 do not include the effect of options to purchase 1,986,300 and 1,971,700
shares, respectively, of common stock because they are anti-dilutive. Diluted net loss per common share for the three and nine
month periods ended January 31, 2012 and 2011 do not include the effect of warrants to purchase 1,331,250 and nil shares, respectively,
of common stock because they are anti-dilutive
.
Common Stock Repurchases
On December 4, 2002, the Company’s Board
of Directors authorized a stock repurchase plan pursuant to which the Company was authorized to repurchase a total of 500,000 shares
of its common stock. During the three and nine months ended January 31, 2012 and 2011, the Company did not repurchase any shares
of its common stock. As of January 31, 2012, 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 2001 incentive and non-statutory
stock option plan for the purpose of permitting certain key employees to acquire equity in the Company and to promote the growth
and profitability of the Company by attracting and retaining key employees. In general, the plan allows granting of up to 1,800,000
shares of the Company’s common stock at an option price to be no less than the fair market value of the Company’s common
stock on the date such options are granted. Options granted under the plan vest ratably on the annual anniversary date of the grants.
Vesting periods for options currently granted under the plan range from one to five years. No further options may be granted under
this plan.
The Company also has a 2011 incentive and non-statutory
stock option plan for the purpose of permitting certain key employees and consultants to acquire equity in the Company and to promote
the growth and profitability of the Company by attracting and retaining key employees. No executive officer or director of the
Company is eligible to receive options under the 2011 plan. In general, the plan allows granting of up to 200,000 shares of the
Company’s common stock at an option price to be no less than the fair market value of the Company’s common stock on
the date such options are granted. Options granted under the plan vest ratably on the annual anniversary date of the grants. Vesting
periods for options currently granted under the plan range from one to five years.
The Company also grants nonqualified stock
options to certain new key employees of the Company as a component of the Company’s offer of employment. These options are
granted to promote the growth and profitability of the Company by attracting key employees. The options granted to these new employees
are exercisable at a price representing the fair value at the date of grant and expire five years after date of grant. Options
granted vest ratably on the annual anniversary date of the grants. Vesting periods for options currently granted range from one
to two years.
The Company periodically grants nonqualified
stock options to non-employee directors of the Company. These options are granted for the purpose of retaining the services of
directors who are not employees of the Company and to provide additional incentive for such directors to work to further the best
interests of the Company and its shareholders. The options granted to these non-employee directors are exercisable at a price representing
the fair value at the date of grant and expire either five or ten years after date of grant. Vesting periods for options currently
granted range from one to two years.
On September 23, 2010, the Company granted
Mr. Sheerr, who is employed by the Company as the General Manager of the acquired MMB business unit described in Note 3 and is
an executive officer of the Company, nonqualified stock options to purchase 100,000 shares of the Company’s common stock
pursuant to his employment agreement. On September 22, 2011 the Company granted Mr. Sheerr additional nonqualified stock options
to purchase 100,000 shares of the Company’s common stock, also pursuant to his employment agreement. The options granted
are exercisable at a price representing the fair value at the date of grant and expire five years after date of grant. The options
vest in one year.
New shares of the Company's common stock are
issued upon exercise of stock options.
As required by the Compensation - Stock Compensation
Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the accounting for transactions
in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity
instruments are accounted for using a fair value-based method with a recognition of an expense for compensation cost related to
share-based payment arrangements, including stock options and employee stock purchase plans.
Our consolidated statements of operations for
the three and nine month periods ended January 31, 2012 include approximately $95,000 and $379,000 of stock-based compensation
expense, respectively. Fiscal 2011’s three and nine month periods ended January 31, 2011 include approximately $148,000 and
$461,000 of stock-based compensation expense, respectively. These stock option grants have been classified as equity instruments,
and as such, a corresponding increase has been reflected in additional paid-in capital in the accompanying consolidated balance
sheets. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model.
A summary of option activity for the nine months
ended January 31, 2012 is as follows:
|
|
Shares
|
|
|
Weighted average
exercise
price
|
|
|
Weighted
average
remaining
contractual
life (1)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance April 30, 2011
|
|
|
1,849,200
|
|
|
$
|
2.88
|
|
|
|
5.91
|
|
|
$
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
288,000
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(200,900
|
)
|
|
$
|
5.46
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2012
|
|
|
1,936,300
|
|
|
$
|
2.34
|
|
|
|
5.60
|
|
|
|
-
|
|
Exercisable January 31, 2012
|
|
|
1,040,300
|
|
|
$
|
2.64
|
|
|
|
5.16
|
|
|
|
|
|
Expected to vest January 31, 2012
|
|
|
1,839,000
|
|
|
$
|
2.34
|
|
|
|
5.60
|
|
|
|
|
|
|
(1)
|
This amount represents the weighted average remaining contractual life of stock options in years.
|
As of January 31, 2012, there was approximately
$318,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted
average period of approximately eleven months.
b. Other Stock Options
On June 30, 2008, the Company granted options
to purchase 50,000 shares of the Company’s common stock to a privately held company in exchange for certain patents and other
intellectual property. The options granted are exercisable at a price of $2.60 per share which was the fair value at the date of
grant, were 100% exercisable on the date of grant and expire ten years after the date of grant.
(3) Acquisition
On March 31, 2009, the Company acquired certain
assets of Micro Memory Bank, Inc. (“MMB”), a privately held corporation. MMB is a manufacturer of legacy to advanced
solutions in laptop, desktop and server memory products. The acquisition expands the Company’s memory product offerings and
routes to market. The Company purchased the assets from MMB for total consideration of approximately $2,253,000, of which approximately
$912,000 was paid in cash. The Company also assumed certain accounts payable totaling approximately $190,000 and certain accrued
liabilities totaling approximately $122,000. Under the terms of the agreement with MMB, the remaining portion of the purchase price
is contingently payable based upon the performance of the new Dataram business unit to be operated as a result of the acquisition
(the “Unit”) and consists of a percentage, averaging 65%, payable quarterly, over the subsequent four years from acquisition
date of earnings before interest, taxes, depreciation and amortization of the MMB business Unit. For the three and nine month period
ended January 31, 2012, this amount totaled approximately nil and $211,000, respectively. The net assets acquired by the Company
were recorded at their respective fair values under the purchase method of accounting. The results of operations of MMB for the
period from the acquisition date, March 31, 2009, through January 31, 2012 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
|
|
(4) Related Party Transactions
During the nine month periods ending January
31, 2012 and 2011, the Company purchased inventories for resale totaling approximately $3,628,000 and $1,232,000, 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 4 and is an executive officer of the Company.
When the Company acquired certain assets of MMB, it did not acquire any of its inventories. However, the Company informally agreed
to purchase such inventory on an as needed basis, provided that the offering price was a fair market value price. The inventory
acquired was purchased subsequent to the acquisition of MMB at varying times and consisted primarily of raw materials and finished
goods used to produce products sold by the MMB business Unit. Approximately nil and $1,131,000, respectively, of accounts payable
in the Company’s consolidated balance sheets as of January 31, 2012 and April 30, 2011 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 January 31, 2012 and management anticipates that
the Company will continue to do so, although the Company has no obligation to do so.
On February 24, 2010, the Company entered into
a Note and Security Agreement with Mr. Sheerr. Under the agreement, the Company borrowed the principal sum of $1,000,000 for a
period of six months, which the Company could extend for an additional three months without penalty. The loan bore interest at
the rate of 5.25%. Interest was payable monthly, and the entire principal amount was payable in the event of the employee’s
termination of employment by the Company. The loan was secured by a security interest in all machinery, equipment and inventory
of Dataram at its Montgomeryville, PA location. The loan was paid in full on August 13, 2010.
On July 27, 2010, the Company entered into
an agreement with Sheerr Memory to consign a formula-based amount of up to $3,000,000 of certain inventory into the Company’s
manufacturing facilities. The agreement was amended on December 5, 2011. The amendment changed the term of the agreement from twenty
four months to twenty nine months. The Company is obligated to pay monthly a
fee equal to 0.833% of
the average daily balance of the purchase cost of the consigned products held by Sheerr Memory under the agreement.
The
Company is obligated to purchase any consigned products acquired by Sheerr Memory under the agreement within ninety days of the
acquisition date of the product. The Company and Sheerr Memory must jointly agree to the
products to be held in consignment under the agreement. On December 14, 2011, the Company repaid the loan in full. No further financing
is available to the Company under this agreement.
On December 14, 2011, the Company entered into
a new Note and Security Agreement with Mr. Sheerr. The agreement provides for secured financing of up to $2,000,000. The Company
is obligated to pay monthly, interest equal
to 10% per annum calculated on a 360 day year of the outstanding
loan balance.
Principal is payable in sixty equal monthly installments, beginning on July 15, 2012. The Company may prepay
any or all sums due under this agreement at any time without penalty. On closing, the Company borrowed $1,500,000 under the agreement
and repaid in full the $1,500,000 due under the previously described agreement that the Company entered into with Sheerr Memory
on July 27, 2010. As of January 31, 2012 the Company has borrowed the full $2,000,000 under this agreement. Interest payable to
Mr. Sheerr on January 31, 2012 was $16,660.
(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:
|
|
January 31,
2012
|
|
|
April 30,
2011
|
|
Trade receivables
|
|
$
|
2,830,000
|
|
|
$
|
4,643,000
|
|
VAT receivable
|
|
|
158,000
|
|
|
|
212,000
|
|
Allowance for doubtful accounts and sales returns
|
|
|
(225,000
|
)
|
|
|
(225,000
|
)
|
|
|
$
|
2,763,000
|
|
|
$
|
4,630,000
|
|
(7) Inventories
Inventories are valued at the lower of cost
or market, with costs determined by the first-in, first-out method. Inventories at January 31, 2012 and April 30, 2011 consist
of the following categories:
|
|
January 31,
2012
|
|
|
April 30,
2011
|
|
Raw materials
|
|
$
|
1,992,000
|
|
|
$
|
3,229,000
|
|
Work in process
|
|
|
40,000
|
|
|
|
36,000
|
|
Finished goods
|
|
|
1,292,000
|
|
|
|
2,197,000
|
|
|
|
$
|
3,324,000
|
|
|
$
|
5,462,000
|
|
(8) Intangible Assets and Goodwill
Intangible assets with determinable lives,
other than customer relationships and software development costs 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. 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.
The Company estimates that it has no significant
residual value related to its intangible assets. Acquired intangibles generally are amortized on a straight-line basis over weighted
average lives. Intangible assets amortization expense for the three and nine months ended January 31, 2012 totaled approximately
$41,000 and $123,000, respectively. Intangible assets amortization expense for the three and nine months ended January 31, 2011
totaled approximately $107,000 and $322,000, respectively. Intangible asset amortization is included in selling, general and administrative
expense. The components of finite-lived intangible assets acquired are as follows:
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
January 31,
|
|
|
April 30,
|
|
|
|
Life
|
|
|
2012
|
|
|
2011
|
|
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
|
|
Software development costs (a)
|
|
|
|
|
|
|
0
|
|
|
|
1,480,000
|
|
Total gross carrying amount
|
|
|
|
|
|
|
1,559,000
|
|
|
|
3,039,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization expense
|
|
|
|
|
|
|
1,222,000
|
|
|
|
1,099,000
|
|
Net intangible assets
|
|
|
|
|
|
$
|
337,000
|
|
|
$
|
1,940,000
|
|
The following table outlines the estimated
future amortization expense related to intangible assets:
Year ending April 30:
|
|
|
|
|
2012
|
|
$
|
164,000
|
|
2013
|
|
|
162,000
|
|
2014
|
|
|
134,000
|
|
|
|
$
|
460,000
|
|
(a)
XcelaSAN capitalized costs were
determined to be impaired during fiscal 2012’s third quarter ended January 31, 2012 and approximately $ 2,387,000 was expensed
in the current quarter.
(9) Financing Agreements
On February 24, 2010, the Company entered into
a Note and Security Agreement with Mr. Sheerr. Under the agreement, the Company borrowed the principal sum of $1,000,000 for a
period of six months, which the Company could extend for an additional three months without penalty. The interest rate on the loan
was 5.25%, payable monthly. The loan was paid in full on August 13, 2010. No further financing is available to the Company under
this agreement.
On July 27, 2010, the Company entered into
a secured credit facility with a bank, which provides for up to a $5,000,000 revolving credit line. Advances under the facility
are limited to 80% of eligible receivables, as defined in the agreement. The agreement does not have a fixed term. The bank may
demand immediate repayment of all loans at any time, provided that if the Company is not in default under the agreement it has
ninety days to repay the amounts demanded. The agreement provides for Prime Rate loans at an interest rate equal to the Prime Rate
plus two percent, subject to a minimum interest rate of five and one quarter percent. The Company is required to pay a monthly
maintenance fee equal to six-tenths of one percent (0.6%) of the monthly average principal balance of any borrowings under the
facility in the prior month. The agreement contains certain restrictive covenants, specifically a minimum tangible net worth covenant
and certain other covenants, as defined in the agreement. At January 31, 2012, the Company was in default of the Tangible Net Worth
covenant. As a result, the bank has issued a waiver of this default. On March 2, 2012, the Company entered into an amendment of
the July 27, 2010 secured credit facility which reduced the amount available under the credit facility to $3,500,000 and redefined
the Tangible Net Worth covenant reducing it to a minimum of $2,000,000. At January 31, 2012, the Company had approximately $13,000
of additional financing available to it under the terms of the agreement.
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 was amended on December 5, 2011. The amendment changed the term of the agreement from twenty
four months to twenty nine months. 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. On December
14, 2011, the Company repaid the loan in full. No further financing is available to the Company under this agreement.
On December 14, 2011, the Company entered into
a Note and Security Agreement with Mr. Sheerr, an employee and executive officer of the Company. The agreement provides for secured
financing of up to $2,000,000. The Company is obligated to pay monthly, interest equal
to 10% per annum
calculated on a 360 day year of the outstanding loan balance.
Principal is payable in sixty equal monthly installments,
beginning on July 15, 2012. The Company may prepay any or all sums due under this agreement at any time without penalty. On closing,
the Company borrowed $1,500,000 under the agreement and repaid in full the $1,500,000 due under the previously described agreement
that the Company entered into with Sheerr Memory on July 27, 2010. As of January 31, 2012 the Company has borrowed the full $2,000,000
under this agreement. Principal amounts due under this obligation are $33,333 per month beginning on July 15, 2012. For the next
fiscal period following January 31, 2012 the principal amount due under this obligation is $233,333. In each of four fiscal periods
from February 1, 2013 thru January 31, 2017 the principal amounts due under this obligation are $400,000. In the fiscal period
from February 1, 2017 thru June 30, 2017 the principal amount due on this obligation is $166,667.
(10) Securities Purchase Agreement
On May 11, 2011, the Company and certain investors
entered into a securities purchase agreement in connection with a registered direct offering, pursuant to which the Company agreed
to sell an aggregate of 1,775,000 shares of its common stock and warrants to purchase a total of 1,331,250 shares of its common
stock to such investors for aggregate net proceeds, after deducting fees to the Placement Agent and other estimated offering expenses
payable by the Company, of approximately $2,998,000. The common stock and warrants were sold in fixed combinations, with each combination
consisting of one share of common stock and 0.75 of one warrant, with each whole warrant exercisable for one share of common stock.
The purchase price was $1.88 per fixed combination. The warrants will become exercisable six months and one day following the closing
date of the Offering and will remain exercisable for five years thereafter at an exercise price of $2.26 per share. The exercise
price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar
recapitalization transactions. The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates
would beneficially own more than 4.99% of the Company’s common stock. After the one year anniversary of the initial exercise
date of the warrants, the Company will have the right to call the warrants for cancellation for $.001 per share in the event that
the volume weighted average price of the Company’s common stock for 20 consecutive trading days exceeds $4.52. On May 17,
2011, this transaction closed. The Company’s Statement of Stockholder’s Equity for the nine month period ended January
31, 2012 is as follows:
|
|
Number of
Common
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
(Accumulated Deficit)
|
|
|
Total
Stockholders’ Equity
|
|
Balance at April 30, 2011
|
|
|
8,928,309
|
|
|
$
|
8,928,309
|
|
|
$
|
8,621,729
|
|
|
$
|
(10,168,878
|
)
|
|
$
|
7,381,160
|
|
Issuance of shares under
Registered Direct Offering
|
|
|
1,775,000
|
|
|
|
1,775,000
|
|
|
|
1,222,875
|
|
|
|
|
|
|
|
2,997,875
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,215,443
|
)
|
|
|
(6,215,443
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
378,523
|
|
|
|
|
|
|
|
378,523
|
|
Balance at January 31, 2012
|
|
|
10,703,309
|
|
|
$
|
10,703,309
|
|
|
$
|
10,223,127
|
|
|
$
|
(16,384,321
|
)
|
|
$
|
4,542,115
|
|
(11) 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 and six months ended January 31, 2012 and 2011 by geographic region
are as follows:
|
|
Three months
ended
January 31,
2012
|
|
|
Nine months
ended
January 31,
2012
|
|
United States
|
|
$
|
6,092,000
|
|
|
$
|
23,358,000
|
|
Europe
|
|
|
1,463,000
|
|
|
|
3,886,000
|
|
Other (principally Asia Pacific Region)
|
|
|
865,000
|
|
|
|
1,852,000
|
|
Consolidated
|
|
$
|
8,420,000
|
|
|
$
|
29,096,000
|
|
|
|
Three months
ended
January 31,
2011
|
|
|
Nine months
ended
January 31,
2011
|
|
United States
|
|
$
|
9,337,000
|
|
|
$
|
28,626,000
|
|
Europe
|
|
|
1,648,000
|
|
|
|
4,130,000
|
|
Other (principally Asia Pacific Region)
|
|
|
888,000
|
|
|
|
2,810,000
|
|
Consolidated
|
|
$
|
11,873,000
|
|
|
$
|
35,566,000
|
|
Long-lived assets consist of property and equipment
and intangible assets. Long-lived assets and total assets by geographic region as of January 31, 2012 are as follows:
|
|
January 31, 2012
|
|
|
|
Long-lived assets
|
|
|
Total assets
|
|
United States
|
|
$
|
2,656,000
|
|
|
$
|
9,546,000
|
|
Europe
|
|
|
0
|
|
|
|
22,000
|
|
Other
|
|
|
0
|
|
|
|
9,000
|
|
Consolidated
|
|
$
|
2,656,000
|
|
|
$
|
9,577,000
|
|
(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.
(13) Subsequent Events
In connection with the consolidation of
the Company’s manufacturing facilities the Company’s lease expired in Ivyland, PA. The landlord has filed suit
against the Company claiming damages related to restoring the demised premises to its original condition and unpaid rent. The
Company believes the amounts claimed for the restoration of the demised premises is without merit and plans to defend its
position aggressively. The Company believes that any amounts paid in this matter will not have a material effect on the
Company’s financial condition.
On March 2, 2012, the Company amended its secured
credit facility with its bank which reduced the credit available under the facility from $5,000,000 to $3,500,000 and redefined
the Tangible Net Worth covenant. Based on the Company’s twelve month projections, the reduction in credit facility will not
affect the Company’s ability to borrow the maximum amount allowed based on the advance formula. At January 31, 2012, the
Company was in default of the Tangible Net Worth covenant which has been waived by the bank.
On March 9, 2012, the Company received an
offer to sell a portfolio of patents. If this sale is consummated, the net proceeds will allow the Company to reduce
debt and acquire inventory on a more programmed basis. However, there can be no assurance that the Company will consummate
this transaction which is still subject to final documentation and closing.
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 continuing to market a line of high performance storage caching products.
The Company’s 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, 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.
Liquidity and Capital Resources
As of January 31, 2012, cash and cash equivalents
amounted to approximately $739,000 and working capital amounted to approximately $3,653,000, reflecting a current ratio of 2.1.
This compares to cash and cash equivalents of approximately $345,000 and working capital of approximately $3,125,000, reflecting
a current ratio of 1.4 as of April 30, 2011.
During the nine month period ended January
31, 2012, net cash used in operating activities totaled approximately $1,079,000. Net loss in the period totaled approximately
$6,215,000 and included approximately $2,387,000 of recognized impairment of capitalized software development cost, stock-based
compensation expense of approximately $379,000 and depreciation and amortization expense of approximately $526,000. Accounts payable
decreased by approximately $2,239,000. Inventories decreased by approximately $2,138,000. Other current assets decreased by approximately
$30,000. Trade receivables decreased by approximately $1,849,000, and accrued liabilities increased by approximately $18,000.
Net cash used in investing activities totaled
approximately $1,342,000 for the nine month period ended January 31, 2012 and consisted primarily of capitalized software development
costs of approximately $907,000,
fixed asset additions of approximately $224,000 and $211,000 for the
acquisition of a business more fully described in Note 3 to the Consolidated Financial Statements.
Net cash provided by financing activities totaled
approximately $2,814,000 for the nine month period ended January 31, 2012 and consisted of proceeds from a sale of common shares,
described in Note 10
to the Consolidated Financial Statements
, totaling approximately $2,998,000.
The Company borrowed $2,000,000 from David Sheerr, and used $1,500,000 to pay in full the amount due “Sheerr Memory”.
The Company also reduced the amount due on the revolving credit facility, more fully described in Note 10 to the Consolidated Financial
Statements totaling approximately $683,000.
On July 27, 2010, the Company entered into
an agreement with a financial institution for formula-based secured debt financing of up to $5,000,000. On March 2, 2012, the agreement
was amended to reduce the amount available under the credit facility to $3,500,000 which, according to the Company’s projections,
will be sufficient to allow for maximum borrowing under the formula. The amount of financing available to the Company under the
agreement varies with the level of the Company’s eligible accounts receivable. At January 31, 2012 the Company had approximately
$13,000 of additional financing available to it under the terms of the agreement. The company is currently in negotiations to amend
this agreement to better suit the Company’s current needs. In addition, the Company continues to seek additional sources
of financing to be able to meet the current needs of its customers and acquire additional inventory to increase margins by avoiding
the spot market for available memory.
Also, on July 27, 2010, the Company entered
into an agreement with a vendor
(“
Sheerr Memory
”),
which is wholly-owned by an employee and executive
officer of the Company, to consign a formula-based amount of up to $3,000,000 of certain inventory into the Company’s manufacturing
facilities.
As of April 30, 2011, the Company has received financing totaling $1,500,000 under this
agreement, of which $1,000,000 was used to repay in full a Note payable to the employee arising from an agreement entered into
with the employee in February, 2010 and which expired in August, 2010. On December 14, 2011, the Company repaid the loan in full.
No further financing is available to the Company under this agreement.
On May 11, 2011, the Company and certain investors
entered into a securities purchase agreement pursuant to which the Company agreed to
sell an
aggregate of 1,775,000 shares of its common stock and warrants to purchase a total of 1,331,250 shares of its common stock to such
investors. The aggregate net proceeds of such offering and sale, after deducting fees to the Placement Agent and other estimated
offering expenses payable by the Company, was approximately $2,998,000. The transaction closed on May 17, 2011.
On December 14, 2011, the Company entered into
a new Note and Security Agreement with Mr. Sheerr. The agreement provides for secured financing of up to $2,000,000. The Company
is obligated to pay monthly, interest equal
to 10% per annum calculated on a 360 day year of the outstanding
loan balance.
Principal is payable in sixty equal monthly installments, beginning on July 15, 2012. The Company may prepay
any or all sums due under this agreement at any time without penalty. On closing, the Company borrowed $1,500,000 under the agreement
and repaid in full the $1,500,000 due under the previously described agreement that the Company entered into with Sheerr Memory
on July 27, 2010. On January 31, 2012 the Company has borrowed the full $2,000,000 available under this agreement. Principal amounts
due under this obligation are $33,333 per month beginning on July 15, 2012. For the next fiscal period following January 31, 2012
the principal amount due under this obligation is $233,333. In each of four fiscal periods from February 1, 2013 thru January 31,
2017 the principal amounts due under this obligation are $400,000. In the fiscal period from February 1, 2017 thru June 30, 2017
the principal amount due on this obligation is $166,667.
The Company is currently
seeking additional financing from lenders who have the ability to increase advance rates on domestic receivables, lend on
foreign receivables and advance funds against future credit card sales. In addition, the Company received an offer to
sell a portfolio of patents. If this sale is consummated, the net proceeds will allow the Company to reduce debt and acquire
inventory on a more programmed basis. There can be no assurance that the Company will consummate such transactions.
In addition, there can be no assurance that in the short-term, realized revenues will be in line with the
Company’s projections. Actual results may differ from such projections and are subject to certain risks including,
without limitation, risks arising from: an adverse change in general economic conditions, changes in the price of memory
chips, changes in the demand for memory systems for workstations and servers, changes in the demand for storage caching
subsystems, increased competition in the memory systems and storage industries and other risk factors described in the
Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission
.
Future minimum lease payments under non-cancellable
operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2011 are as follows:
Year ending April 30
|
|
|
|
|
2012
|
|
$
|
272,000
|
|
2013
|
|
|
352,000
|
|
2014
|
|
|
365,000
|
|
2015
|
|
|
374,000
|
|
2016
|
|
|
368,000
|
|
Thereafter
|
|
|
147,000
|
|
Total minimum lease payments
|
|
$
|
1,878,000
|
|
There have been no material changes in the
Company’s operating leases since April 30, 2011. The Company has no other material commitments.
Results of Operations
Revenues for
the three month period ended January 31, 2012 were approximately $8,420,000 compared to revenues of approximately $11,873,000 for
the comparable prior year period. Revenues for the first nine months of the current fiscal year were approximately $29,096,000
compared to revenues of approximately $35,566,000 for the comparable prior year period.
The decrease in revenues from the prior year was primarily a result of a decrease in average
selling prices attributable to a decline in the price of DRAM chips, the primary raw material used in the Company’s products.
The average purchase price of DRAM chips that the Company uses in its products declined by approximately 35% year over year.
Revenues for the three and nine months ended
January 31, 2012 and 2011 by geographic region are as follows:
|
|
Three months
ended
January 31,
2012
|
|
|
Nine months
ended
January 31,
2012
|
|
United States
|
|
$
|
6,092,000
|
|
|
$
|
23,358,000
|
|
Europe
|
|
|
1,463,000
|
|
|
|
3,886,000
|
|
Other (principally Asia Pacific Region)
|
|
|
865,000
|
|
|
|
1,852,000
|
|
Consolidated
|
|
$
|
8,420,000
|
|
|
$
|
29,096,000
|
|
|
|
Three months
ended
January 31,
2011
|
|
|
Nine months
ended
January 31,
2011
|
|
United States
|
|
$
|
9,337,000
|
|
|
$
|
28,626,000
|
|
Europe
|
|
|
1,648,000
|
|
|
|
4,130,000
|
|
Other (principally Asia Pacific Region)
|
|
|
888,000
|
|
|
|
2,810,000
|
|
Consolidated
|
|
$
|
11,873,000
|
|
|
$
|
35,566,000
|
|
Cost of sales for the third quarter and first
nine months of fiscal 2012 was approximately $6,750,000 and $22,010,000, respectively versus approximately $8,970,000 and $27,127,000,
respectively in the prior year comparable periods. Cost of sales as a percentage of revenues for the third quarter and first nine
months of fiscal 2012 were 80% and 76% of revenues, respectively versus 76% for the same respective prior year periods. The increase
in cost of sales as a percentage of revenues in the current third quarter period was primarily the result of the Company’s
efforts to reduce inventory levels. During the third quarter the Company decided to acquire the majority of raw materials from
the spot market, resulting in reduced inventory levels at January 31, 2012 and a higher raw material cost as a percentage of revenues
for the quarter ended January 31, 2012. The Company also established an inventory reserve of approximately $273,000 for inventory
related to our XcelaSAN product line.
Engineering expense in fiscal 2012's third
quarter and nine months was approximately $181,000 and $561,000, respectively, versus approximately $250,000 and $763,000 for the
same respective prior year periods. The reduction of engineering expense is primarily the result of a reduction in the number of
employees.
Research and development expense in fiscal
2012’s third quarter and nine months was nil versus approximately $134,000 and $1,894,000, respectively, in the same prior
year periods.
The Company
capitalized approximately $907,000 of XcelaSAN development cost in
the first six months of the current fiscal year. The Company capitalized approximately $1,480,000, of XcelaSAN research and development
costs in the prior fiscal year. Research and development expense includes payroll, employee benefits, stock-based compensation
expense, and other headcount-related expenses associated with product development. Research and development expense also includes
third-party development and programming costs. During fiscal 2012’s third quarter ended January 31, 2012 the Company continued
to market the XcelaSAN product.
Selling, general and administrative (S,G&A)
expense in fiscal 2012’s third quarter and nine months totaled approximately $3,149,000 and $9,978,000, respectively versus
approximately $3,173,000 and $9,230,000 for the same prior year periods. The increase in fiscal 2012 expense is primarily the result
of approximately $1,614,000 increased selling and marketing expenses related to the Company’s XcelaSAN product line in the
first six months of the current fiscal year.
During the third quarter of fiscal 2012 the
XcelaSAN product was available for general release and generated approximately $8,000 of revenue, which was significantly lower
than expected.
The Company
capitalized approximately $907,000 of XcelaSAN development cost in
the first six months of the current fiscal year. The Company capitalized approximately $1,480,000 of XcelaSAN research and development
costs in the prior fiscal year. The company has determined based on
the estimated future net realizable
value for the expected periods of benefit that the carrying value of capitalized software development cost are impaired. As such,
approximately $2,387,000 of capitalized software development cost was written down to zero.
Other income (expense), net for the third quarter
and nine months totaled approximately $131,000 and $370,000 of expense, respectively, for fiscal 2012, and expense of approximately
$179,000 and $339,000, for the same respective periods in fiscal 2011. Other expense in fiscal 2012’s third quarter consisted
primarily of interest expense of approximately $100,000 and $30,000 of foreign currency transaction losses, primarily as a result
of the EURO weakening relative to the US dollar. Nine month other expense of approximately $370,000 consisted of $298,000 of interest
expense and $71,000 of foreign currency transaction losses, primarily as a result of the EURO weakening relative to the US dollar.
Other expense in fiscal 2011’s third quarter consisted primarily of interest expense of approximately $105,000 and $54,000
of foreign currency transaction losses, primarily as a result of the EURO weakening relative to the US dollar. Nine month other
expense of approximately $339,000 consisted primarily of $184,000 of interest expense and $139,000 of foreign currency transaction
losses, primarily as a result of the EURO weakening relative to the US dollar.
Income tax expense for the third quarter and
nine months of fiscal 2012 and 2011 were approximately $5,000 and consisted of state minimum tax payments.
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). Under the asset and liability
method, deferred income 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 income
tax assets will not be realized. The Company considers certain tax planning strategies in its assessment as to the recoverability
of its deferred income 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 income 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 income tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that
the tax rate changes. As of April 30, 2011 the Company had Federal and State net operating loss (NOL) carry-forwards of approximately
$17.1 million and $15.1 million, respectively. These can be used to offset future taxable income and expire between 2023 and 2031
for Federal tax purposes and 2016 and 2031 for state tax purposes. The Company’s NOL carry-forwards are a component of its
deferred income tax assets which are reported net of a full valuation allowance in the Company’s consolidated financial statements
at January 31, 2012 and at April 30, 2011.
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, 2011, 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. Estimated warranty costs are accrued
by management upon product shipment based on an estimate of future warranty
claims.
Research and Development Expense - 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. Development costs of a computer software product to be sold, leased, or otherwise marketed are subject to capitalization
beginning when a product’s technological feasibility has been established and ending when a product is available for general
release to customers. Technological feasibility of a computer software product is established when all planning, designing, coding
and testing activities that are necessary to establish that the product can be produced to meet its design specifications (including
functions, features and technical performance requirements) are completed. The Company had been developing computer software for
its XcelaSAN storage caching product line. On November 4, 2010, the Company determined that technological feasibility of the product
was established, and development costs subsequent to that date have been capitalized. Prior to November 4, 2010, the Company expensed
all development costs related to this product line. In the third quarter of fiscal 2012 when the product was made available for
general release to customers, we discontinued capitalizing development costs.
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 income 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 income 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 income 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 income 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 merits of the position. There are no material unrecognized tax positions in the 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 income 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
income 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 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 January 31, 2012 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
In
connection with the consolidation of the Company’s manufacturing facilities the Company’s lease expired in Ivyland,
PA. The landlord has filed suit against the Company claiming damages related to restoring the demised premises to its original
condition and unpaid rent. The Company believes the amounts claimed for the restoration of the demised premises is without merit
and plans to defend its position aggressively. The Company believes than any amounts paid in this matter will not have a material
effect on the Company”s financial condition.
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
.
Form
8-K filed March 2, 2012 to report amendment of Loan and Security Agreement.
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 Marc P. Palker.
|
|
|
32(a)
|
Section 1350 Certification of John H. Freeman (furnished not filed).
|
|
|
32(b)
|
Section 1350 Certification of Marc P. Palker (furnished not filed).
|
|
|
101.INS
|
XBRL Instance Document.
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
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
|
|
|
|
Date: March 16, 2012
|
By:
|
/s/ Marc P. Palker
|
|
|
Marc P. Palker
|
|
|
(Chief Financial Officer)
|
|
|
|
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