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- Quarterly Report (10-Q)

Date : 03/16/2012 @ 4:12PM
Source : Edgar (US Regulatory)
Stock : Dataram Corp. (MM) (DRAM)
Quote : 2.45  -0.1 (-3.92%) @ 8:10PM
Dataram share price Chart

- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended January 31, 2012
   
  or
   
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from _____________ to _____________

 

Commission file number: 1-8266

 

 

DATARAM CORPORATION
(Exact name of registrant as specified in its charter)
   
New Jersey 22-1831409
(State or other jurisdiction of (I.R.S.  Employer Identification No.)
incorporation or organization)  
   
P.O. Box 7528, Princeton, NJ 08543
(Address of principal executive offices) (Zip Code)
 
(609) 799-0071
(Registrant's telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [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

 

    January 31,
2012
    April 30,
2011
 
    (Unaudited)     (Note 1)  
Assets                
Current Assets:                
Cash and cash equivalents   $ 738,526     $ 345,105  
Accounts receivable, less allowance for doubtful accounts and sales returns of
$225,000 at January 31, 2012 and April 30, 2011
    2,763,156       4,630,240  
Inventories     3,323,691       5,461,791  
Other current assets     96,287       127,279  
Total current assets     6,921,660       10,564,415  
                 
Property and equipment, at cost:                
Machinery and equipment     11,967,550       11,930,806  
Leasehold improvements     607,868       1,238,923  
      12,575,418       13,169,729  
Less: accumulated depreciation and amortization     11,792,218       12,207,476  
Net property and equipment     783,200       962,253  
Other assets     81,986       111,136  
Intangible assets, net of accumulated amortization     337,469       1,940,338  
Goodwill     1,453,034       1,241,981  
    $ 9,577,349     $ 14,820,123  
                 
Liabilities and Stockholders' Equity                
Current liabilities:                
Note payable-revolving credit line   $ 1,470,838     $ 2,153,889  
Accounts payable     705,823       2,944,928  
Accrued liabilities     858,573       840,146  
Due to related party - current portion     233,333       1,500,000  
Total current liabilities     3,268,567       7,438,963  
                 
  Due to related party - long term      1,766,667        -  
                 
       Total Liabilities     5,035,234       7,438,963  
                 
Stockholders' Equity:                
Common stock, par value $1.00 per share                
Authorized 54,000,000 shares; issued and outstanding 10,703,309 at January 31, 2012 and 8,928,309 at April 30, 2011     10,703,309       8,928,309  
Additional paid-in capital     10,223,127       8,621,729  
Accumulated deficit     (16,384,321 )     (10,168,878 )
                 
Total stockholders' equity     4,542,115       7,381,160  
    $ 9,577,349     $ 14,820,123  

 

See accompanying notes to consolidated financial statements.

1
 

Dataram Corporation and Subsidiaries

Consolidated Statements of Operations

Three and Nine Months Ended January 31,

(Unaudited)

 

    2012     2011  
    Three Months     Nine Months     Three Months     Nine Months  
                         
Revenues   $ 8,420,135     $ 29,095,949     $ 11,873,417     $ 35,566,166  
                                 
Costs and expenses:                                
Cost of sales     6,749,616       22,010,316       8,970,185       27,126,744  
Engineering     181,142       560,505       250,362       763,364  
Research and development     -       -       134,257       1,893,856  
Selling, general and administrative     3,149,333       9,978,428       3,173,348       9,230,287  
Impairment of capitalized software     2,387,241       2,387,241       -       -  
      12,467,332       34,936,490       12,528,152       39,014,251  
                                 
Loss from operations     (4,047,197 )     (5,840,541 )     (654,735 )     (3,448,085 )
                                 
Other income (expense):                                
Interest expense, net     (100,077 )     (298,294 )     (104,876 )     (183,519 )
Currency gain (loss)     (30,456 )     (71,727 )     (54,011 )     (138,640 )
Other income (expense), net     -       -       (20,000 )     (17,015 )
Total other expense, net     (130,533 )     (370,021 )     (178,887 )     (339,174 )
                                 
Loss before income taxes     (4,177,730 )     (6,210,562 )     (833,622 )     (3,787,259 )
                                 
Income tax expense     4,881       4,881       5,116       5,116  
Net loss   $ (4,182,611 )   $ (6,215,443 )   $ (838,738 )   $ (3,792,375 )
                                 
Net loss per share of common stock                                
Basic   $ (.39 )   $ (.59 )   $ (.09 )   $ (.43 )
Diluted   $ (.39 )   $ (.59 )   $ (.09 )   $ (.43 )

 

See accompanying notes to consolidated financial statements.

2
 

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:                
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.

3
 

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.

4
 

 

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.

 

5
 

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 )

 

6
 

 

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.

7
 

 

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.

8
 

 

(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.

9
 

 

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  

 

10
 

 

(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.

11
 

 

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:

12
 

 

    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  

 

13
 

 

(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.

 

14
 

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.

15
 

 

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 .

16
 

 

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  

 

17
 

 

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.

18
 

 

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.

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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.

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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

 

21
 

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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