Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
 12 Months Ended
Apr. 30, 2014
Accounting Policies [Abstract]  
Liquidity and Basis of Presentation

Liquidity and Basis of Presentation

 

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, 2014, 2013 and 2012, the Company incurred losses in the amounts of approximately $2,609,000, $4,625,000 and $3,259,000, respectively. Net cash used in operating activities totaled approximately $1,554,000, $3,882,000 and $1,218,000 for the fiscal years ended April 30, 2014, 2013 and 2012, 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. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating. The Company continues to seek out opportunities to trim overhead expenses to meet revenues.

 

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.
Principles of Consolidation

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.
Cash and Cash Equivalents

Cash and Cash Equivalents

 

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

Accounts Receivable

 

Accounts receivable consist of the following:

 

    April 30,
2014		     April 30,
2013		  
Trade receivables   $ 3,758,000     $ 2,962,000  
VAT receivable     125,000       123,000  
Allowance for doubtful accounts and sales returns     (220,000 )     (200,000 )
    $ 3,663,000     $ 2,885,000  
Inventories

Inventories

 

Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or market, with cost determined by the first-in, first-out method.
Property and Equipment

Property and Equipment

 

Property and equipment is recorded at cost. Depreciation is computed on the straight-line basis. Depreciation and amortization rates are based on the estimated useful lives, which range from two to five years for machinery and equipment and five to six years for leasehold improvements. When property or equipment is retired or otherwise disposed of, related costs and accumulated depreciation and amortization are removed from the accounts. Depreciation and amortization expense related to property and equipment for the fiscal years ended April 30, 2014, 2013 and 2012 totaled $167,000, $279,000 and $496,000, respectively.

 

Repair and maintenance costs are charged to operations as incurred.
Long-Lived Assets

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 by 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.
Goodwill

Goodwill:

 

Goodwill – The carrying value of goodwill is not amortized, but is tested annually as of March 31 as well as whenever events or changes in circumstances indicate that the carrying amount may not be recoverable using a two-step process. Based on a combination of factors that occurred in the fourth quarter of fiscal 2013, including the operating results of the MMB business unit, management concluded that a goodwill impairment triggering event had occurred. Accordingly, the Company performed a testing of the carrying value of $1,519,000 of goodwill for MMB using a discounted cash flow model to estimate the fair value of the reporting unit. After this testing, management concluded that the carrying value of the MMB business unit exceeded the fair value of this reporting unit. The implied fair value of the goodwill of the MMB business unit was calculated by allocating the fair values of substantially all of its individual assets, liabilities and identified intangible assets as if MMB business unit had been acquired in a business combination. As a result, the Company recorded a non-cash goodwill impairment charge of $438,000 in fiscal year ended April 30, 2013. As of April 30, 2014, management has concluded that no additional impairment of goodwill is required.

 

The following table outlines the changes in goodwill for the year ended April 30, 2014:

 

    2014     2013  
Opening balance May 1   $ 1,083,000     $ 1,453,000  
Contingent purchase price     —         68,000  
Impairment charge     —         (438,000 )
Goodwill balance April 30   $ 1,083,000     $ 1,083,000  
Intangible Assets

Intangible Assets:

 

Intangible assets with determinable lives, other than customer relationships, are amortized on a straight-line basis over their estimated period of benefit, ranging from four to five years. Customer relationships are amortized over a two-year period at a rate of 65% of the gross value acquired in the first year subsequent to their acquisition and 35% of the gross value acquired in the second year. The Company evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

 

All of the Company’s intangible assets with definitive lives are subject to amortization. During the third quarter of the fiscal year ended April 30, 2012, the XcelaSAN product was available for general release and generated approximately $8,000 of revenue, which was significantly lower than expected. The Company determined in the fiscal year ended April 30, 2012’s third quarter based on the estimated future net realizable value for the expected periods of benefit that the carrying value of capitalized software development cost was impaired. As such, approximately $2,387,000 of capitalized software development cost was written down to zero.

 

The Company estimates that it has no significant residual value related to its intangible assets. Intangible assets amortization expense was $133,000 for fiscal year ended April 30, 2014, $164,000 for the fiscal year ended April 30, 2013 and $164,000 for the fiscal year ended April 30, 2012. As of April 30, 2014, the components of finite-lived intangible assets acquired are as follows:

 

    Gross     Weighted           Net  
    Carrying     Average     Accumulated     Carrying  
    Amount     Life     Amortization     Amount  
Customer relationships   $ 758,000       2 Years     $ 758,000     $    0  
Trade names     733,000       5 Years       733,000       0  
Non-compete agreement     68,000       4 Years       68,000       0  
    $ 1,559,000             $ 1,559,000     $ 0  

 

As of April 30, 2013, the components of finite-lived intangible assets acquired were as follows:

 

    Gross     Weighted           Net  
    Carrying     Average     Accumulated     Carrying  
    Amount     Life     Amortization     Amount  
Customer relationships   $ 758,000       2 Years     $ 758,000     $ 0  
Trade names     733,000       5 Years       600,000       133,000  
Non-compete agreement     68,000       4 Years       68,000       0  
    $ 1,559,000             $ 1,426,000     $ 133,000  

 
Fair Value of Financial Instruments

Fair Value of Financial Instruments:

 

Fair value measurements and disclosures establish a hierarchy that prioritizes fair value measurements based on the type of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of hierarchy are described below:

 

• Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
• Level 2: Inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly-quoted intervals.
• Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.

 

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.

 

The following table sets forth the assets and liabilities measured at fair value on a nonrecurring basis, by input level, in the consolidated balance sheets at April 30, 2014:

 

    Quoted                       Total  
    Prices in                       Reduction  
    Active Markets for     Significant Other     Significant           in Fair value  
Balance Sheet   Identical Assets or     Observable Inputs     Unobservable     April 30, 2014     Recorded as of  
Location   Liabilities (Level 1)     (Level 2)     Inputs (Level 3)     Total     April 30, 2014  
Assets:                                        
Goodwill   $ —      $ —      $ 1,083,000     $ 1,083,000     $ (438,000 )

Revenue Recognition

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.
Engineering and Research and Development

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 of 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 year ended April 30, 2012 when the product was made available for general release to customers, the Company discontinued capitalizing development costs.

 

During the third quarter of the fiscal year ended April 30, 2012, the XcelaSAN product was available for general release and generated approximately $8,000 of revenue, which was significantly lower than expected. The Company determined in the fiscal year ended April 30, 2012’s third quarter based on the estimated future net realizable value for the expected periods of benefit that the carrying value of capitalized software development cost was impaired. As such, approximately $2,387,000 of capitalized software development cost was written down to zero.
Advertising

Advertising

 

Advertising is expensed as incurred and amounted to $139,000, $77,000 and $223,000 in the fiscal years ended April 30, 2014, 2013 and 2012, respectively.
Income taxes

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 the technical merits of the position. There are no material unrecognized tax positions in the financial statements.
Concentrations of Credit Risk

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts 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. The Company performs ongoing evaluations of its customers’ financial condition, as well as general economic conditions and, generally, requires no collateral from its customers. At April 30, 2014 and 2013, amounts due from one customer totaled approximately 30% and 19%, respectively, of accounts receivable.

 

In fiscal years ended April 30, 2014, 2013 and 2012, the Company had sales to one customer that accounted for approximately 15%, 9% and 11%, respectively, of revenues.
Net Income (Loss) Per Share

Net Income (Loss) Per Share

 

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated in a manner consistent with basic net income (loss) per share except that the weighted average number of common shares outstanding also includes the dilutive effect of stock options outstanding (using the treasury stock method).

 

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

 

    Year ended April 30, 2014  
    Loss     Shares     Per share  
    (numerator)     (denominator)     amount  
Basic net loss per share-net loss and weighted average common shares outstanding   $ (2,609,000 )     1,999,856     $ (1.30 )
Effect of dilutive securities-stock options     —         —         —    
Diluted net loss per share -net loss weighted average common shares outstanding and effect of stock options   $ (2,609,000 )     1,999,856     $ (1.30 )

 

      Year ended April 30, 2013  
      Loss       Shares       Per share  
      (numerator)       (denominator)       amount  
Basic net loss per share-net loss and weighted average common shares outstanding   $ (4,625,000 )     1,776,796     $ (2.60 )
Effect of dilutive securities-stock options     —         —         —    
Diluted net loss per share-net loss weighted average common shares outstanding
and effect of stock options		   $ (4,625,000 )     1,776,796     $ (2.60 )

 

      Year ended April 30, 2012  
      Loss       Shares       Per share  
      (numerator)       (denominator)       amount  
Basic net loss per share-net loss and weighted average common shares outstanding   $ (3,259,000 )     1,770,952     $ (1.84 )
Effect of dilutive securities-stock options     —         —         —    
Diluted net loss per share-net loss, weighted average common shares outstanding
and effect of stock options		   $ (3,259,000 )     1,770,952     $ (1.84 )

 

Diluted net loss per common share does not include the effect of options to purchase 272,580, 319,908 and 299,317 shares of Common Stock for the years ended April 30, 2014, 2013 and 2012, respectively, because they are anti-dilutive. Diluted net loss per common share for the years ended April 30, 2014, 2013 and 2012 also does not include the effect of warrants to purchase 485,775, 221,875 and 221,875 shares, respectively, because they are anti-dilutive.
Product Warranty

Product Warranty

 

The majority of the Company’s products are intended for single use; therefore, the Company requires limited product warranty accruals. The Company accrues estimated product warranty cost at the time of sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. 

 

    Balance     Charges to           Balance  
    Beginning     Costs and           End  
    of Year     Expenses     Deductions     of Year  
                         
Year Ended April 30, 2014   $ 69,000     $ 9,000     $ (9,000 )   $ 69,000  
                                 
Year Ended April 30, 2013   $ 79,000     $ 14,000     $ (24,000 )   $ 69,000  
                                 
Year Ended April 30, 2012   $ 79,000     $ 6,000     $ (6,000 )   $ 79,000  
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.