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U.S. GOLD CORP. - Quarter Report: 2013 July (Form 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 July 31, 2013
   
  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 September 16, 2013, there were 1,754,662 shares outstanding.

 

 
 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Dataram Corporation and Subsidiaries

Consolidated Balance Sheets

July 31, 2013 and April 30, 2013

 

   July 31,
2013
  April 30,
2013
   (Unaudited)  (Note 1)
Assets          
Current assets:          
Cash and cash equivalents  $107,826   $324,235 
Accounts receivable, less allowance for doubtful accounts and sales returns of $200,000 at July 31, 2013 and April 30, 2013   3,209,632    2,884,653 
Inventories   2,722,163    2,903,054 
Note receivable, less allowance of $275,000 at July 31, 2013 and $0 at April 30, 2013   —      275,000 
Other current assets   141,323    81,283 
Total current assets   6,180,944    6,468,225 
           
Property and equipment, at cost:          
Machinery and equipment   11,732,970    11,732,970 
Leasehold improvements   607,867    607,867 
    12,340,837    12,340,837 
Less: accumulated depreciation and amortization   11,967,197    11,916,197 
Net property and equipment   373,640    424,640 
           
Other assets   55,742    55,742 
Intangible assets, net of accumulated amortization   92,066    132,966 
Goodwill   1,083,555    1,083,555 
   $7,785,947   $8,165,128 
Liabilities and Stockholders' Equity          
Current liabilities:          
Note payable-revolving credit line  $2,342,300   $1,876,128 
Accounts payable   1,198,599    947,552 
Accrued liabilities   548,796    684,509 
Due to related party – current portion   400,000    400,000 
Total current liabilities   4,489,695    3,908,189 
           
  Due to related party – long term   1,166,667    1,266,667 
           
        Total liabilities   5,656,362    5,174,856 
           
Stockholders' equity:          
Common stock, par value $1.00 per share.          
Authorized 54,000,000 shares; issued and outstanding 1,754,662 at July 31, 2013 and April 30, 2013   1,754,662    1,754,662 
Additional paid-in capital   19,308,874    19,287,931 
Accumulated deficit   (18,933,951)   (18,052,321)
Total stockholders' equity   2,129,585    2,990,272 
   $7,785,947   $8,165,128 

 

See accompanying notes to consolidated financial statements.

1
 

Dataram Corporation and Subsidiaries

Consolidated Statements of Operations

Three Months Ended July 31, 2013 and 2012

(Unaudited)

 

    
   2013  2012
       
Revenues  $7,366,730   $7,998,485 
           
Costs and expenses:          
Cost of sales   5,805,044    6,304,447 
Engineering   319,327    206,108 
Selling, general and administrative   2,039,733    2,354,217 
    8,164,104    8,864,772 
           
Loss from operations   (797,374)   (866,287)
           
Other income (expense):          
Interest expense, net   (84,417)   (71,382)
Currency gain (loss)   161    (38,048)
Total other expense, net   (84,256)   (109,430)
           
Loss before income taxes   (881,630)   (975,717)
           
Income tax expense   —      —   
Net loss  $(881,630)  $(975,717)
           
Net loss per share of common stock          
Basic  $(.50)  $(.55)
Diluted  $(.50)  $(.55)

 

See accompanying notes to consolidated financial statements.

2
 

Dataram Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended July 31, 2013 and 2012

(Unaudited)

 

   2013  2012
Cash flows from operating activities:          
Net loss  $(881,630)  $(975,717)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   91,900    100,900 
Bad debt expense   275,110    3,296 
Stock-based compensation expense   20,943    99,451 
Changes in assets and liabilities:          
Increase in accounts receivable   (325,089)   (413,617)
Decrease (increase) in inventories   180,891    (869,249)
Increase in other current assets   (60,040)   (384,933)
Increase in other assets   —      (26,617)
Increase in accounts payable   251,047    154,817 
Decrease in accrued liabilities   (135,713)   (119,903)
Net cash used in operating activities   (582,581)   (2,431,572)
           
Cash flows from investing activities:          
Issuance of note receivable   —      (375,000)
Net cash used in investing activities   —      (375,000)
           
Cash flows from financing activities:          
     Net borrowings under revolving credit line   466,172    830,397 
     Payments under related party note payable   (100,000)   (33,333)
     Purchase of treasury stock   —      (142,262)
Net cash provided by financing activities   366,172    654,802 
           
Net decrease in cash and cash equivalents   (216,409)   (2,151,770)
           
Cash and cash equivalents at beginning of period   324,235    3,274,741 
           
Cash and cash equivalents at end of period  $107,826   $1,122,971 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest  $88,974   $71,114 
Income taxes  $—     $—   

 

See accompanying notes to consolidated financial statements.

3
 

Dataram Corporation and Subsidiaries

Notes to Consolidated Financial Statements

July 31, 2013 and 2012

(Unaudited)

 

(1) Description of Business and Significant Accounting Policies

 

Dataram Corporation (“the Company”) 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. Additionally, the Company manufactures a line of memory products for Intel and AMD motherboard based servers. The Company has developed and currently markets a line of high-performance storage caching products.

 

The Company’s memory products are sold worldwide to OEMs, distributors, value-added resellers and end-users. The Company has one leased 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 Basis of Presentation

 

The information for the three months ended July 31, 2013 and 2012 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, 2013 included in the Company’s 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The April 30, 2013 balance sheet has been derived from these statements

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. For the fiscal years; ended April 30, 2013, 2012, and 2011, the Company incurred losses in the amounts of approximately $4,625,000, $3,259,000 and $ 4,634,000, respectively.

 

As discussed in Note 9, the Company entered into financing agreements to address short-term liquidity needs. The Company is in default of the net worth covenant at July 31, 2013. Also, as discussed in Note 10, on May 11, 2011, the Company entered into a securities purchase agreement with certain investors. Management believes that the aggregate $3,500,000 available under this facility combined with current projected losses will not be sufficient to meet its current obligations and the Company will need to raise capital through borrowings or sales of equity securities. There can be no assurance that the Company will be able to obtain additional borrowings or complete a sale of equity securities.

 

Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. Our future is dependent upon our ability to obtain financing, raise capital through the sales of equity and or debt securities and upon future profitable operations. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating.

4
 

If current and projected revenue growth does not meet estimates, the Company may continue to choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, the Company does not have any commitments or assurances for additional capital, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence. Management projects the Company currently has sufficient cash and borrowing availability to last into fiscal 2014’s second quarter. The Company intends to raise additional capital through bank financing and the sale of equity and/or debt securities in the current fiscal year second quarter, which should provide sufficient cash and borrowing availability into fiscal 2014’s fourth quarter.

 

Plan of Operation

 

The Company has been experiencing losses due to the decline and instability of DRAM prices and the historical investment in XcelaSAN. It is uncertain how long the current level of DRAM pricing will continue, or whether or when prices will rise in the near future. Until such time that the Company can raise prices, it will continue to seek alternative methods of generating profits and cash flow. For example, the Company continues to pursue product diversification, either by development or as a contract manufacturer. Additionally, the Company will continue to identify joint ventures, strategic partnerships and business combination opportunities. There can be no assurance that any of these initiatives will mature to profitability and positive cash flow, or even occur. During fiscal 2013, the Company signed three agreements with AMD for the sale of AMD branded products. The products fall into three categories, RAMDisk software; consumer memory for the gaming and entertainment industries and server memory for AMD and other servers. The Company hopes to expand these three product offerings and offer them for sale through e-tailers such as Newegg, Tiger Direct, Fry’s, NCIX, Ebay and others. Currently the Company is selling Radeon RAMDisk, Radeon Memory and Radeon Server Memory through Newegg and is negotiating with other e-tailers to sell products through their web sites. In addition, we intend to raise additional capital through bank financing and the sale of equity and/or debt securities in the current fiscal year. Although there can be no assurances that this will occur, if successful the proceeds could be sufficient to fund the company in expanding its consumer memory outlets and the development of software to complement RAMDisk in other areas of caching.

 

Stock Split

 

On January 31, 2013, the Company filed a proxy statement with the Securities and Exchange Commission for the purpose of calling a special meeting of its stockholders. The Board of Directors asked the stockholders to approve the Board’s action in effecting a reverse split of its Common Stock at a ratio of no less than 1 for 3 and no greater than 1 for 6. The meeting was held at the Company’s offices on March 13, 2013. The stockholders approved the action and immediately following the meeting, the Board of Directors voted to affect a reverse split of its common stock at the ratio of 1 for 6. The split shares were effective with the opening of trading on March 15, 2013. Relevant financial data has been adjusted in this report to reflect the 1 for 6 reverse stock-split.

 

Principles of Consolidation

 

The consolidated financial statements 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 in consolidation.

5
 

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 collectability of note receivable, 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, 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.

 

Advertising

 

Advertising is expensed as incurred and amounted to approximately $45,000 in fiscal 2014’s first quarter compared to approximately $25,000 in the comparable prior year period.

 

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 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 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 July 31, 2013, the Company had Federal and state net operating loss (“NOL”) carry-forwards of approximately $23,500,000 and $21,800,000, respectively. These can be used to offset future taxable income and expire between 2023 and 2033 for Federal tax purposes and 2016 and 2033 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 July 31, 2013 and April 30, 2013.

 

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 months ended July 31, 2013 and 2012 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.

6
 

The following presents a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share for the three month periods ended July 31, 2013 and 2012. The July 31, 2012 amounts shown have been adjusted to reflect the reverse 1-for-6 stock split effective March 18, 2013.

 

   Three Months ended July 31, 2013
   Loss  Shares  Per share
   (numerator)  (denominator)  amount
          
Basic net loss per share – net loss and weighted average common shares outstanding  $(881,630)   1,754,662   $(.50)
                
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  $(881,630)   1,754,662   $(.50)

 

   Three Months ended July 31, 2012
   Loss  Shares  Per share
   (numerator)  (denominator)  amount
          
Basic net loss per share – net loss and weighted average common shares outstanding  $(975,717)   1,783,884   $(.55)
                
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  $(975,717)   1,783,884   $(.55)

 

Diluted net loss per common share for the three month periods ended July 31, 2013 and 2012 do not include the effect of options to purchase 319,908 and 315,983 shares, respectively, of common stock because they are anti-dilutive. Diluted net loss per common share for the three month periods ended July 31, 2013 and 2012 do not include the effect of warrants to purchase 221,875 of common stock because they are anti-dilutive.

 

Common Stock Repurchases

 

On December 4, 2002, the Company announced an open market repurchase plan providing for the repurchase of up to 83,333 shares of the Company’s common stock. On April 10, 2012, the Company announced the additional authorization to repurchase up to 138,000 shares of the Company’s common stock which at that time made the total available for purchase of up to 166,667 shares. The Company did not purchase shares in fiscal 2014’s first quarter ended July 31, 2013. In fiscal 2013’s first quarter ended July 31, 2012, the Company repurchased 22,944 shares for a total cost of $142,262. The 22,944 shares purchased were cancelled in fiscal 2013. As of July 31, 2013, the total number of shares authorized for purchase under the program is 136,408 shares.

 

7
 

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 300,000 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 33,333 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. There have been 25,000 shares granted under this plan.

 

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 Micro Memory Bank, Inc. (“MMB”) business unit described in Note 2 and is an executive officer of the Company, nonqualified stock options to purchase 16,667 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 16,667 shares of the Company’s common stock, pursuant to his employment agreement. On July 19, 2012, the Company granted Mr. Sheerr additional nonqualified stock options to purchase 16,667 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 vested 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 FASB, 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 months ended July 31, 2013 and July 31, 2012 include approximately $21,000 and $99,000 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.

8
 

A summary of option activity for the three months ended July 31, 2013 is as follows:

 

    Shares   Weighted average
exercise
price
  Weighted
average
remaining
contractual
life (1)
  Aggregate
intrinsic
value (2)
                 
Balance April 30, 2013   311,575   $12.40   4.77   $ 15,750
                 
Granted   0      
Exercised   0      
Expired   0      
Balance July 31, 2013   311,575   $12.40   4.77   $ 15,750
Exercisable July 31, 2013   275,658   $13.53   4.39  
Expected to vest July 31, 2013   296,000   $12.40   4.77  

 

 

(1)This amount represents the weighted average remaining contractual life of stock options in years.

 

(2)This amount represents the difference between the exercise price and $3.07, the closing price of Dataram common stock on July 31, 2013 as reported on the NASDAQ Stock Market, for all in-the-money options outstanding and all the in-the-money shares exercisable.

 

As of July 31, 2013, there was approximately $40,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of approximately five months.

 

b. Other Stock Options

 

On June 30, 2008, the Company granted options to purchase 8,333 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 $15.60 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.

 

(2) Acquisition

 

On March 31, 2009, the Company acquired certain assets of Micro Memory Bank, Inc. (“MMB”), a privately held corporation. MMB is a manufacturer of legacy to advanced solutions in laptop, desktop and server memory products. Under the terms of the agreement with MMB, the remaining portion of the purchase price was contingently payable based upon the performance of the new Company business unit to be operated as a result of the acquisition (”MMB business unit”) and consisted 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. The purchase price agreement expired March 31, 2013. The net assets acquired by the Company were recorded at their respective fair values under the purchase method of accounting. The results of operations of MMB for the period from the acquisition date, March 31, 2009, through July 31, 2013 have been included in the consolidated results of operations of the Company.

9
 

(3) Related Party Transactions

 

During the three month periods ending July 31, 2013 and 2012, the Company purchased inventories for resale totaling approximately $858,000 and $1,225,000, respectively, from Sheerr Memory, LLC (“Sheerr Memory”). Sheerr Memory’s owner (“Mr. Sheerr”) is employed by the Company as the general manager of the acquired MMB business unit described in Note 3 and is an executive officer of the Company. When the Company acquired certain assets of MMB, it did not acquire any of its 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 $597,000 and $438,000 of accounts payable in the Company’s consolidated balance sheets as of July 31, 2013 and 2012, respectively, is payable to Sheerr Memory. Sheerr Memory offers the Company trade terms of net 30 days and all invoices are settled in the normal course of business. No interest is paid. The Company has made further purchases from Sheerr Memory subsequent to July 31, 2013 and management anticipates that the Company will continue to do so, although the Company has no obligation to do so.

 

On December 14, 2011, the Company entered into a Note and Security Agreement with Mr. Sheerr. The Note 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 Note at any time without penalty. At closing, the Company borrowed $1,500,000 under the Note and repaid in full the $1,500,000 due under a previous Note with Mr. Sheerr. The Company has borrowed the full $2,000,000 available under the Note agreement. Principal amounts due under the Note are $33,333 per month which began on July 15, 2012. For the fiscal year ending April 30, 2013, the principal amount due under the Note was $333,333. In each of four fiscal periods from May 1, 2013 through April 30, 2017, the principal amounts due under this obligation are $400,000. In the fiscal period from May 1, 2017 through June 30, 2017, the principal amount due on this obligation is $66,667. Until fully paid, the Note is subordinated to the Company’s existing senior lender and Mr. Sheerr must approve any change in the Company’s existing senior lender. This provision may limit the Company’s ability to raise additional capital from such financing. Interest payable to Mr. Sheerr on July 31, 2013 was $13,490. Interest expense recorded for Mr. Sheerr in the first quarter of fiscal 2014 was $40,889. Interest expense recorded for Sheerr Memory in the first quarter of fiscal 2013 was $50,824. Interest payable to Sheerr Memory at July 31, 2012 was $16,935.

 

(4) Cash and Cash Equivalents

 

Cash and cash equivalents consist of unrestricted cash and money market accounts.

 

(5) Accounts Receivable

 

Accounts receivable consists of the following categories:

 

   July 31,
2013
  April 30,
2013
Trade receivables  $3,306,164   $2,961,838 
VAT receivable   103,468    122,815 
Allowance for doubtful accounts and sales returns   (200,000)   (200,000)
   $3,209,632   $2,884,653 

 

10
 

(6) Inventories

 

Inventories are valued at the lower of cost or market, with costs determined by the first-in, first-out method. Inventories at July 31, 2013 and April 30, 2013 consist of the following categories:

 

   July 31,
2013
  April 30,
2013
Raw materials  $1,573,732   $1,425,386 
Work in process   63,475    88,603 
Finished goods   1,084,956    1,389,065 
   $2,722,163   $2,903,054 

 

(7) Note Receivable

 

On July 30, 2012, a Convertible Senior Promissory Note was executed by and between Shoreline Memory, Inc. (“Shoreline”) and the Company whereby the Company could lend up to $1,500,000 to Shoreline in exchange for interest payments at prime plus 3.0% and the right to convert the amount outstanding into Common Stock of Shoreline on or before its maturity date. Each time the Company advanced money under the note, the Company was granted 1% of the outstanding Common Stock of Shoreline for every $100,000 advanced up to a maximum of 15%. This was in addition to the 15% allowable under the conversion of the note and the warrant to acquire 30% of Shoreline Common Stock. The conversion is at the rate of 1% of the outstanding Common Stock for each $100,000 converted up to a maximum of 15%. This note had a maturity date of three years and at such time Shoreline would have had to repay the note or the Company would of had to convert the note into Common Stock. The note was secured by all the assets of Shoreline and Shoreline Capital Management Ltd. (“Shoreline Capital”) as guarantor. Also executed with the note was a warrant to purchase 30% of the outstanding Common Stock of Shoreline at the time of exercise and the warrant expires sixty days after the third anniversary of the closing of the transaction. The warrant prescribed a formula to determine the price per share at the time of exercise. If all the amounts under the note were advanced and converted and the full warrant was exercised, the Company would have owned 60% of the outstanding Common Stock of Shoreline. The note was executed simultaneously with a Master Services Agreement which details the parameters under which the Company and Shoreline would have fulfilled orders from Shoreline’s primary customer. On July 31, 2012, the Company advanced $375,000 under the note and an additional $375,000 on August 1, 2012. The purpose of the loan was to fund startup expenses and to prepay initial orders. On February 19, 2013, the Company received $50,000 from Shoreline and, on February 22, 2013, the Company received an additional $200,000 from Shoreline as a partial repayment of their loan. On March 27, 2013, the Company reached an agreement to terminate its relationship with Shoreline, at closing, the Company received an additional $225,000 as a partial repayment of the loan in connection with the termination of all agreements with Shoreline. The promissory note bears interest at the rate of 6% and is guaranteed by Shoreline Memory, Inc., Shoreline Capital Management Ltd and Trevor Folk. All agreements with Shoreline have been terminated with the exception of the amended and restated promissory note. The remaining $275,000 was scheduled to be repaid in accordance with the amended and restated promissory note on July 31, 2013. Shoreline Memory has defaulted on the note. Under the terms of the note, the interest rate has increased to ten percent and Shoreline, Shoreline Capital Management Ltd. and Trevor Folk are responsible for the cost of litigation and collection. The defaulted note is in litigation. The note is guaranteed by Shoreline Capital Management Ltd. and Trevor Folk. The Company will exercise its rights to collect from the three parties. The Company has fully reserved the $275,000 balance on the amended and restated promissory note.

11
 

(8) Goodwill and Intangible Assets

 

Goodwill:

 

On March 31, 2009, the Company acquired the assets of MMB for cash plus contingent consideration. The excess of consideration paid over the net assets acquired is recorded as goodwill. We were obligated under the Asset Purchase Agreement to make contingent payments based on the earnings of MMB through March 31, 2013.

 

No impairments of intangible assets have been identified during any of the periods presented. Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. The date of our annual impairment test is approximately March 1.

 

Intangible Assets:

 

Intangible assets with determinable lives, other than customer relationships and research and development are amortized on a straight-line basis over their estimated period of benefit, ranging from four to five years. Research and development and customer relationships are amortized over a two-year period at a rate of 65% of the gross value acquired in the first year subsequent to their acquisition and 35% of the gross value acquired in the second year. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets with definitive lives are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented.

 

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 months ended July 31, 2013 and 2012 totaled approximately $41,000 in each period. Intangible asset amortization is included in selling, general and administrative expense. The components of finite-lived intangible assets acquired are as follows:

 

 

   Weighted      
   Average  July 31,  April 30,
   Life  2013  2013
Trade names   5 Years   $733,000   $733,000 
Customer relationships   2 Years    758,000    758,000 
Non-compete agreement   4 Years    68,000    68,000 
Total gross carrying amount        1,559,000    1,559,000 
                
Less accumulated amortization expense        1,466,934    1,426,034 
Net intangible assets       $92,066   $132,966 

 

 

The following table outlines the estimated future amortization expense related to intangible assets:

 

Year ending April 30:  
2014 $     132,966

 

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(9) Financing Agreements

 

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. Borrowings are secured by substantially all assets. 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 formulas provided for in the agreement. On May 17, 2012, the agreement was amended and restated. The amended and restated documents reduced the interest rate to prime plus 6%, subject to a minimum of 9.25% and also not less than $8,000 per month. The loan facility allows borrowing of 90% of eligible domestic receivables. In addition, the loan facility allows borrowing of 90% of eligible foreign receivables to a maximum of $500,000 and 25% of eligible inventory to a maximum of 20% of the amount available on receivables. The total credit line remains at $3,500,000 and the Tangible Net Worth covenant is $2,000,000, measured quarterly. The Company agreed to pay an exit fee if it terminates the agreement more than 30 days prior to the one year anniversary of the amended and restated agreement. The amount of financing available to the Company under the agreement varies with the Company’s eligible accounts receivable and inventory. On December 18, 2012, the agreement was amended in exchange for a fee of $7,500 to reduce the Tangible Net Worth covenant to $1,300,000. However, if the Tangible Net Worth falls below $2,000,000, the amount available to borrow on inventory will be capped at $250,000 reduced from $500,000. At July 31, 2013 the Company’s Tangible Net Worth was approximately $757,000. The Company is not in compliance with the Tangible Net Worth covenant therefore the inventory borrowing availability was reduced to $250,000 and the loan is now callable. Management believes that the aggregate $3,500,000 available under this facility combined with current projected losses will not be sufficient to meet its current obligations and the Company will need to raise capital through borrowings or sales of equity securities. There can be no assurance that the Company will be able to obtain additional borrowings or complete a sale of equity securities. The Company is in default of the net worth covenant at July 31, 2013. The Company’s net worth at July 31, 2013 is approximately $757,000. At July 31, 2013, the Company had approximately $7,000 of additional financing available to it under the terms of the agreement.

 

On December 14, 2011, the Company entered into a Note and Security Agreement with Mr. Sheerr who is a related party. 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 a previous agreement with Mr. Sheerr. The Company has borrowed the full $2,000,000 available under this agreement. Principal amounts due under this obligation are $33,333 per month which began on July 15, 2012. For the fiscal year ending April 30, 2013, the principal amount due under this obligation is $333,333. In each of four fiscal periods from May 1, 2013 through April 30, 2017, the principal amounts due under this obligation are $400,000. In the fiscal period from May 1, 2017 through June 30, 2017, the principal amount due on this obligation is $66,667. Until fully paid, this note is subordinated to the Company’s senior lender and Mr. Sheerr must approve any change in the Company’s senior lender. This provision creates an additional risk factor to the Company and its ability to raise additional capital from financing. (See “Item 1A Risk Factors”) Interest payable to Mr. Sheerr on July 31, 2013 was $13,490. Interest expense recorded for Mr. Sheerr in the first quarter of fiscal 2014 was $40,889. Interest expense recorded for Sheerr Memory in the first quarter of fiscal 2013 was $50,824. Interest payable to Sheerr Memory at July 31, 2012 was $16,935.

 

13
 

(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 295,833 shares of its Common Stock and warrants to purchase a total of 221,875 shares of its Common Stock to such investors for aggregate net proceeds, after deducting fees to the Placement Agent and other 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 $11.28 per fixed combination. The warrants became 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 $13.56 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 has the right to call the warrants for cancellation for $.006 per share in the event that the volume weighted average price of the Company’s Common Stock for 20 consecutive trading days exceeds $27.12.

 

(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 months ended July 31, 2013 and 2012 by geographic region are as follows:

 

   Three months
ended
July 31,
2013
  Three months
ended
July 31,
2012
United States  $6,182,801   $5,975,204 
Europe   870,627    1,321,922 
Other (principally Asia Pacific Region)   313,302    701,359 
Consolidated  $7,366,730   $7,998,485 

 

(12) Recently Adopted Accounting Guidance

 

There are no new pronouncements which affect the Company.

 

(13) Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, trade receivables and note receivable. 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.

 

 

14
 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Business section and other parts of this Quarterly Report on Form 10Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A described in the Company’s most recent Annual Report on Form 10-K under the heading “Risk Factors filed with the Securities and Exchange Commission which can be reviewed at http://www.sec.gov. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Executive Overview

 

Dataram Corporation (“the Company”) 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. Additionally, the Company manufactures a line of memory products for Intel and AMD motherboard based servers. The Company has developed and currently markets a line of high-performance storage caching products.

 

The Company’s memory products are sold worldwide to OEMs, distributors, value-added resellers and end-users. The Company has one leased 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.

 

In fiscal 2009, the Company acquired certain assets of Micro Memory Bank, Inc. ("MMB"), a privately held corporation. MMB is a manufacturer of legacy to advanced solutions in laptop, desktop and server memory products. The acquisition expanded the Company's memory product offerings and routes to market. Its products include memory upgrades for IBM, Sun Microsystems, HP and Compaq Computer Corporation (“Compaq”) computer systems. MMB also markets and sells new and refurbished factory original memory upgrades manufactured by IBM, Sun Microsystems, HP and Compaq as well as factory original modules manufactured by Micron Technology, Inc. (“Micron”), SK Hynix Inc. (“Hynix”), Samsung, Elpida Memory, Inc. (“Elpida”) and Nanya Technology Corporation (“Nanya”), and purchases excess memory inventory from other parties as well.

 

In fiscal 2013, the Company signed numerous agreements to produce products branded as AMD. These products included the Company’s software product RAMDisk, and consumer memory for use in the online gaming and entertainment industries and server memory.

15
 

The Company was incorporated in New Jersey in 1967 and made its initial public offering in 1968. Its common stock, $1 par value (the "Common Stock") was listed for trading on the American Stock Exchange in 1981. In 2000 the Company changed its listing to the NASDAQ National Market (now the NASDAQ Stock Market) where its stock trades under the symbol "DRAM." The Company's principal executive office is located at 777 Alexander Park, Princeton, New Jersey 08540, its telephone number is (609) 799-0071, its fax is (609) 799-6734 and its website is located at http://www.dataram.com. Proxy Statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments thereto, are available on the Company’s website free of charge.

 

Liquidity and Capital Resources

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. For the fiscal years ended April 30, 2013, 2012 and 2011, the Company incurred losses in the amounts of approximately $4,625,000, $3,259,000 and $ 4,634,000, respectively.

 

Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. Our future is dependent upon our ability to obtain financing, raise capital through the sales of equity and or debt securities and upon future profitable operations. In the first quarter of fiscal year 2014, the Company eliminated approximately $900,000 of expenses on an annual basis. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

As of July 31, 2013, cash and cash equivalents amounted to approximately $108,000 and working capital amounted to approximately $1,691,000, reflecting a current ratio of 1.4 to 1. This compares to cash and cash equivalents of approximately $324,000 and working capital of approximately $2,560,000, reflecting a current ratio of 1.7 to 1 as of April 30, 2013.

 

During the three month period ended July 31, 2013, net cash used in operating activities totaled approximately $583,000. Net loss in the period totaled approximately $882,000 and included a reserve of note receivable of $275,000. Stock-based compensation expense of approximately $21,000 was recorded and depreciation and amortization expense of approximately $92,000. Inventories decreased by approximately $181,000. Trade receivable increased by approximately $325,000, the increase was primarily the result of a large shipment at the end of quarter. Accounts payable increased $251,000 as a result of the procurement of material for the aforementioned large shipment. Accrued liabilities decreased by approximately $136,000, and other current assets increased by approximately $60,000.

 

Net cash provided by financing activities totaled approximately $366,000 for the three month period ended July 31, 2013 and consisted primarily of proceeds from borrowings under a revolving credit facility of approximately $466,000, more fully described in Note 10 to the consolidated financial statements. The Company also made principal payments of $100,000 to Mr. Scheerr under the Note and Security agreement, more fully described in Note 4 to the Consolidated Financial Statements.

16
 

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. Borrowings are secured by substantially all assets. 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 formulas provided for in the agreement. On May 17, 2012, the agreement was amended and restated. The amended and restated documents reduced the interest rate to prime plus 6%, subject to a minimum of 9.25% and also not less than $8,000 per month. The loan facility allows borrowing of 90% of eligible domestic receivables. In addition, the loan facility allows borrowing of 90% of eligible foreign receivables to a maximum of $500,000 and 25% of eligible inventory to a maximum of 20% of the amount available on receivables. The total credit line remains at $3,500,000 and the Tangible Net Worth covenant is $2,000,000, measured quarterly. The Company agreed to pay an exit fee if it terminates the agreement more than 30 days prior to the one year anniversary of the amended and restated agreement. The amount of financing available to the Company under the agreement varies with the Company’s eligible accounts receivable and inventory. On December 18, 2012, the agreement was amended in exchange for a fee of $7,500 to reduce the Tangible Net Worth covenant to $1,300,000. However, if the Tangible Net Worth falls below $2,000,000, the amount available to borrow on inventory will be capped at $250,000 reduced from $500,000. At July 31, 2013 the Company’s Tangible Net Worth was approximately $757,000. The Company is not in compliance with the Tangible Net Worth covenant therefore the inventory borrowing availability was reduced to $250,000 and the loan is now callable. Management believes that the aggregate $3,500,000 available under this facility combined with current projected losses will not be sufficient to meet its current obligations and the Company will need to raise capital through borrowings or sales of equity securities. There can be no assurance that the Company will be able to obtain additional borrowings or complete a sale of equity securities. At July 31, 2013, the Company had approximately $7,000 of additional financing available to it under the terms of the agreement.

 

On December 14, 2011, the Company entered into a Note and Security Agreement with Mr. Sheerr who is a related party. 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 a previous agreement with Mr. Sheerr. The Company has borrowed the full $2,000,000 available under this agreement. Principal amounts due under this obligation are $33,333 per month which began on July 15, 2012. For the fiscal year ending April 30, 2013, the principal amount due under this obligation was $333,333. In each of four fiscal periods from May 1, 2013 through April 30, 2017, the principal amounts due under this obligation are $400,000. Until fully paid, this note is subordinated to the Company’s senior lender and Mr. Sheerr must approve any change in the Company’s senior lender. In the fiscal period from May 1, 2017 through June 30, 2017, the principal amount due on this obligation is $66,667. Interest payable to Mr. Sheerr on July 31, 2013 was $13,490. Interest expense recorded for Mr. Sheerr in the first quarter of fiscal 2014 was $40,889. Interest expense recorded for Sheerr Memory in the first quarter of fiscal 2013 was $50,824. Interest payable to Sheerr Memory at July 31, 2012 was $16,935.

 

On July 30, 2012, a Convertible Senior Promissory Note was executed by and between Shoreline and the Company whereby the Company could lend up to $1,500,000 to Shoreline in exchange for interest payments at prime plus 3.0% and the right to convert the amount outstanding into Common Stock of Shoreline on or before its maturity date. Each time the Company advanced money under the note, the Company was granted 1% of the outstanding Common Stock of Shoreline for every $100,000 advanced up to a maximum of 15%. This was in addition to the 15% allowable under the conversion of the note and the warrant to acquire 30% of Shoreline Common Stock. The conversion is at the rate of 1% of the outstanding Common Stock for each $100,000 converted up to a maximum of 15%. This note had a maturity date of three years and at such time Shoreline would have had to repay the note or the Company would of had to convert the note into Common Stock. The note was secured by all the assets of Shoreline and Shoreline Capital Management Ltd. (“Shoreline Capital”) as guarantor. Also executed with the note was a warrant to purchase 30% of the outstanding Common Stock of Shoreline at the time of exercise and the warrant expires sixty days after the third anniversary of the closing of

17
 

the transaction. The warrant prescribed a formula to determine the price per share at the time of exercise. If all the amounts under the note were advanced and converted and the full warrant is exercised, the Company would have owned 60% of the outstanding Common Stock of Shoreline. The note was executed simultaneously with a Master Services Agreement which details the parameters under which the Company and Shoreline would have fulfilled orders from Shoreline’s primary customer. On July 31, 2012, the Company advanced $375,000 under the note and an additional $375,000 on August 1, 2012. The purpose of the loan was to fund startup expenses and to prepay initial orders. On February 19, 2013, the Company received $50,000 from Shoreline and, on February 22, 2013, the Company received an additional $200,000 from Shoreline as a partial repayment of their loan. The Company reached an agreement to terminate its relationship with Shoreline. At closing, the Company received an additional $225,000 as a partial repayment of the loan in connection with the termination of all agreements with Shoreline. The promissory note bears interest at the rate of 6% and is guaranteed by Shoreline Memory, Inc., Shoreline Capital Management Ltd and Trevor Folk. All agreements with Shoreline Memory, Inc. have been terminated with the exception of the amended and restated promissory note. The remaining $275,000 was scheduled to be repaid in accordance with the amended and restated promissory note on July 31, 2013. Shoreline Memory has defaulted on the note. Under the terms of the note, the interest rate has increased to 10% and Shoreline, Shoreline Capital Management Ltd. and Trevor Folk are responsible for the cost of litigation and collection. The defaulted note is in litigation. The note is guaranteed by Shoreline Capital Management Ltd. and Trevor Folk. The Company will exercise its rights to collect from the three parties. The Company has fully reserved the $275,000 balance on the amended and restated promissory note.

 

Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2013 are as follows:

 

Year ending April 30   
       2014   $295,000 
       2015    301,000 
       2016    293,000 
       2017    68,000 
       Thereafter    —   
       Total minimum lease payments   $957,000 

 

The Company has no other material commitments.

 

Results of Operations

 

Revenues for the three month period ended July 31, 2013 were approximately $7,367,000 compared to revenues of $7,998,000 for the comparable prior year period. The decrease in revenues from the prior year’s first quarter was the result of a decrease in average selling prices of approximately 31%, attributable to a decline in the price of DRAM chips, the primary raw material used in the Company’s products. The decline in average selling price was partially offset by an increase in volume of approximately 11%.

 

Cost of sales for the three month period ended July 31, 2013 was $5,805,000 versus $6,304,000 in the prior year comparable period. Cost of sales as a percentage of revenues for the fiscal quarters ended July 31, 2013 and 2012 were 79%. Fluctuations in cost of sales as a percentage of revenues are not unusual and can result from many factors, some of which are a rapid change in the price of DRAMs, or a change in product mix possibly resulting from a large order or series of orders for a particular product or a change in customer mix. The Company eliminated approximately $283,000 of annualized expense in the fiscal 2014’s first quarter, which resulted in a charge of approximately $53,000.

 

Engineering expense in fiscal 2014's first quarter was $319,000 versus $206,000 for the same respective prior year period. The Company has recorded approximately $129,000 of cost related to the maintenance and development of our RamDisk product in fiscal 2014’s first quarter. In the prior year these cost were reflected in SG&A expense. The Company also eliminated approximately $94,000 of annualized expense in the fiscal 2014’s first quarter, which resulted in a charge of approximately $27,000.

18
 

Selling, general and administrative expense in fiscal 2014’s first quarter totaled $2,040,000 versus $2,354,000 in the same prior year period, a decrease of approximately $314,000. The decrease in this year’s first quarter expense would have been $619,000, however the Company recorded non- recurring charges of $275,000 for the reserve on the note receivable default and also approximately $30,000 severance cost. As a result of the cost reductions the Company has eliminated approximately $518,000 of annualized expense.

 

Other income (expense), net for the first quarter of fiscal 2014 totaled expense of $84,000 versus $109,000 of expense for the same prior year period. Other expense in fiscal 2014’s first quarter consisted primarily of interest expense of $84,000. Prior year three month other expense totaled $109,000 and consisted of $71,000 of interest expense and $38,000 of foreign currency transaction losses, primarily as a result of the EURO weakening relative to the US dollar.

 

Income tax expense for the first quarter of fiscal 2014 and 2013 were zero. 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 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 July 31, 2013, the Company had Federal and state net operating loss (“NOL”) carry-forwards of approximately $23,500,000 and $21,800,000, respectively. These can be used to offset future taxable income and expire between 2023 and 2033 for Federal tax purposes and 2016 and 2033 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 July 31, 2013 and April 30, 2013.

 

Net loss for the first quarter of fiscal 2014 was approximately $882,000, which compares to a loss of approximately $976,000 in the first quarter of fiscal 2013. Fiscal 2014 first quarter net loss includes non-recurring charges of $275,000 for the reserve on the defaulted Shoreline Memory note receivable, and approximately $110,000 for severance cost related to the cost reductions that were initiated during the first quarter. These cost reductions should result in approximately $900,000 in annualized savings. Net loss in fiscal 2014’s first quarter would have been approximately $497,000 without the non-recurring charges.

 

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 of notes to consolidated financial statements included in this Annual Report, management believes the following accounting policies to be critical:

19
 

Revenue Recognition - Revenue is recognized when title passes upon shipment of goods to customers. The Company’s revenue earning activities involve delivering or producing goods. The following criteria are met before revenue is recognized: persuasive evidence of an arrangement exists, shipment has occurred, selling price is fixed or determinable and collection is reasonably assured. The Company does experience a minimal level of sales returns and allowances for which the Company accrues a reserve at the time of sale in accordance with the Revenue Recognition – Right of Return Topic of the FASB ASC. Estimated warranty costs are accrued by management upon product shipment based on an estimate of future warranty claims.

 

Research and Development - 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.

 

Long-Lived Assets -Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less cost to sell, and no longer depreciated. The Company considers various valuation factors, principally undiscounted cash flows, to assess the fair values of long-lived assets.

 

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. The Company has reviewed goodwill for impairment at July 31, 2013. After this review management has concluded that there is no additional impairment of goodwill.

 

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.

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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 25% 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 4. CONTROLS AND PROCEDURES

 

The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended July 31, 2013 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

 

The landlord for the property previously leased by the Company in Ivyland, Pennsylvania filed suit against the Company, which vacated the property at the expiration of its lease, for the Company’s alleged failure to restore the property to its original condition. The landlord is currently in possession of a security deposit in the amount of $52,000. The Company denies its liability for the restoration of the property and believes that the outcome cannot be determined at this time. After consulting with legal counsel, management estimates that any amounts ultimately due by the Company will not have a material impact on the Company’s financial condition.

 

On July 30, 2013, the District Court Judge issued an order against the Company in favor of the landlord Ivyland Ventures, LLC. Based on the language of the lease agreement, the Court, without making any factual findings on the extent of the Company’s liability, ruled that the Company is required to remove and restore the premises to condition that existed as of January 11, 2006 or pay the cost of removal and restoration of improvements made during its entire occupation. Our legal counsel has filed a motion for reconsideration of the Court’s July 30th Order seeking to overturn the Court’s decision. No ruling has been made on the motion for reconsideration. A teleconference was held on August 7, 2013 between the parties and the presiding judge. At the conference, dates were set for discovery and the trial was put on the calendar for September, 2014.

 

The landlord currently holds $52,000 in a security deposit and has not submitted to the Company any listing or document proof of any damage suffered by the landlord. It is anticipated that this may or may not be presented, subject to examination, during the discovery phase of the case. Therefore, at this time there is no amount that is known or estimable to substantiate any additional liability above the $52,000 already recorded.

 

In connection with Shoreline’s default in remitting the $275,000 payment, with interest, in accordance with the terms of the amended and restated promissory note, the Company will commence an action in the United States District Court for the District of New Jersey, against Shoreline, as the debtor, and Trevor Folk and Shoreline Capital Management Ltd, as guarantors.  The action will also seek reimbursement of all costs, fees and expenses of the litigation as provided for in the note in the event of such a default.

 

Item 1A. Risk Factors.

 

Additional Risk Factors

 

There have been no material changes to the Risk Factors in Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2013, other than the following:

 

We may have limited ability to refinance our existing senior indebtedness

 

The Company’s subordinated Note and Security Agreement with David Sheerr, an executive officer of the Company and the prior owner of our MMB business unit, provides Mr. Sheerr with the right to approve any change in our existing senior lender.  In the event Mr. Sheerr does not approve a change in our existing lender, if requested, the Company may be unable to refinance its existing senior indebtedness and raise additional capital that such a refinancing could provide.  The current balance under the Sheerr Note is $1,533,334. “See Note 4- Related Party Transactions.”

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

No reportable event.

 

Item 3. Defaults upon Senior Securities.

 

No reportable event.

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Item 4. MINE SAFETY DISCLOSURES

 

No reportable event.

 

 

Item 5. Other Information.

 

No reportable event.

 

 

Item 6. Exhibits.

 

Exhibit No Description
   
9(a) Asset Purchase Agreement dated March 20, 2009, by and among Dataram Corporation, Micro Memory Bank, Inc.
   
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

 

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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: September 16, 2013 By: /s/ MARC  P. PALKER
    Marc P. Palker
    Chief Financial Officer
     

 

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