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 October 31, 2009
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).
[ ] 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 December 11, 2009, there were 8,885,434 shares
outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Dataram Corporation and Subsidiaries
Consolidated Balance Sheets
October 31, 2009 and April 30, 2009
(Unaudited)
October 31, 2009 April 30, 2009
Assets Current Assets:
Cash and cash equivalents $ 4,485,148 $ 12,525,008
Accounts receivable, less allowance
for doubtful accounts and sales returns
of $290,000 at October 31, 2009 and
April 30, 2009 5,068,541 3,381,271
Inventories 5,586,868 2,200,364
Deferred income taxes 511,099 300,099
Other current assets 213,297 126,074
__________ __________
Total current assets 15,864,953 18,532,816
Deferred income taxes 4,729,737 3,282,450
Property and equipment, at cost:
Machinery and equipment 12,218,440 11,761,056
Leasehold improvements 2,224,502 2,224,502
__________ __________
14,442,942 13,985,558
Less: accumulated depreciation
and amortization 13,137,763 12,886,072
__________ __________
Net property and equipment 1,305,179 1,099,486
Other assets 117,978 135,706
Intangible assets, net of accumulated
amortization 1,176,156 1,504,308
__________ __________
$ 23,194,003 $ 24,554,766
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,496,412 $ 1,385,311
Accrued liabilities 1,624,138 1,688,933
__________ __________
Total current liabilities 4,120,550 3,074,244
Accrued liabilities 219,476 381,000
__________ __________
Total liabilities 4,340,026 3,455,244
Stockholders' Equity:
Common stock, par value $1.00 per share.
Authorized 54,000,000 shares; issued and
outstanding 8,869,184 at October 31, 2009
and April 30, 2009 8,869,184 8,869,184
Additional paid-in capital 7,370,711 7,022,316
Retained earnings 2,614,082 5,208,022
__________ __________
Total stockholders' equity 18,853,977 21,099,522
__________ __________
$ 23,194,003 $ 24,554,766
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended October 31, 2009 and 2008
(Unaudited)
2009 2008
2nd Quarter Six Months 2nd Quarter Six Months
Revenues $ 10,673,217 $ 19,863,238 $ 7,059,080 $ 14,622,156
Costs and expenses:
Cost of sales 7,936,731 14,591,635 4,660,188 9,595,593
Engineering 259,077 512,265 302,357 634,213
Research and development 1,621,385 2,495,462 253,971 466,350
Selling, general and administrative 3,502,357 6,550,019 2,500,068 5,683,132
__________ __________ __________ __________
13,319,550 24,149,381 7,716,584 16,379,288
Loss from operations (2,646,333) (4,286,143) (657,504) (1,757,132)
Other income
Interest income (expense), net (3,289) 6,861 79,310 190,008
Currency gain (loss) (18,741) 4,930 (62,917) (62,632)
Other income (expense), net 10,412 10,412 0 (1,912)
__________ __________ __________ __________
Total other income (expense) (11,618) 22,203 16,393 125,464
Loss before income taxes (2,657,951) (4,263,940) (641,111) (1,631,668)
Income tax benefit (1,042,000) (1,670,000) (248,000) (633,000)
__________ __________ __________ __________
Net loss $ (1,615,951) $ (2,593,940) $ (393,111) $ (998,668)
========== ========== ========== ==========
Net loss per share of common stock
Basic $ (.18) $ (.29) $ (.04) $ (.11)
========== ========== ========== ==========
Diluted $ (.18) $ (.29) $ (.04) $ (.11)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
..
Dataram Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended October 31, 2009 and 2008
(Unaudited)
2009 2008
Cash flows from operating activities:
Net loss $(2,593,940) $(998,668)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 603,608 167,000
Bad debt expense (recovery) (22,230) 157,027
Stock-based compensation expense 380,195 255,574
Other stock option expense 0 121,300
(Gain) loss on sale of property and equipment (10,412) 1,912
Deferred income tax benefit (1,690,087) (532,000)
Changes in assets and liabilities
(net of effect of acquisition of business):
(Increase) decrease in accounts receivable (1,665,040) 380,286
(Increase) decrease in inventories (3,386,504) 7,082
Increase in other current assets (87,223) (274,105)
Decrease (increase) in other assets 17,728 (56,322)
Increase (decrease) in accounts payable 1,111,101 (504,076)
Decrease in accrued liabilities (64,795) (5,551)
__________ __________
Net cash used in operating activities (7,407,599) (1,280,541)
___________ __________
Cash flows from investing activities:
Acquisition of business (161,524) 0
Additions to property and equipment (481,149) (340,750)
Proceeds from sale of property and equipment 10,412 500
___________ __________
Net cash used in investing activities 632,261 (340,250)
___________ __________
Net decrease in cash and
cash equivalents (8,039,860) (1,620,791)
Cash and cash equivalents at
beginning of period 12,525,008 17,641,690
__________ __________
Cash and cash equivalents at
end of period $ 4,485,148 $ 16,020,899
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,508 $ 3,194
========== ==========
Income taxes $ 20,087 $ 0
========== ==========
See accompanying notes to consolidated financial statements.
Dataram Corporation and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2009 and 2008
(Unaudited)
(1) Basis of Presentation
The information for the three and six months ended October 31, 2009 and 2008
is unaudited, but includes all adjustments (consisting only 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, 2009 included in the Company's 2009 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The April 30, 2009
balance sheet has been derived from these statements.
(2) Summary of Significant Accounting Policies
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 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. Actual results could
differ from those estimates.
Net loss per share
Net loss per share is presented in accordance with the Presentation -
Earnings Per Share Topic of the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC). Basic net earnings (loss) per share
is computed by dividing the net earnings (loss) by the weighted average
number of shares of common stock issued and outstanding during the period.
The calculation of diluted loss per share for the three and six months ended
October 31, 2009 and October 31, 2008 includes only the weighted average
number of shares of common stock outstanding. The denominator excludes the
dilutive effect of stock options outstanding as their effect would be
anti-dilutive.
The following presents a reconciliation of the numerator and denominator
used in computing basic and diluted net loss per share for fiscal 2009
and 2008:
Three Months ended October 31, 2009
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss and weighted
average common shares
outstanding $(1,615,951) 8,869,184 $ (.18)
Effect of dilutive securities
- -stock options - - -
________ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $(1,615,951) 8,869,184 $ (.18)
======== ========= ======
Three Months ended October 31, 2008
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss and weighted
average common shares
outstanding $ (393,111) 8,869,184 $ (.04)
Effect of dilutive securities
- -stock options - - -
________ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $ (393,111) 8,869,184 $ (.04)
======== ========= ======
Diluted net loss per share does not include the effect of all options to
purchase shares of common stock for the three months ended October 31,
2009 and 2008 because they are anti-dilutive.
Six Months ended October 31, 2009
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss and weighted
average common shares
outstanding $(2,593,940) 8,869,184 $ (.29)
Effect of dilutive securities
- -stock options - - -
_______ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $(2,593,940) 8,869,184 $ (.29)
========= ========= ======
Six Months ended October 31, 2008
Loss Shares Per share
(numerator) (denominator) amount
_________ ___________ _________
Basic net loss per share
- -net loss and weighted
average common shares
outstanding $ (998,668) 8,869,184 $ (.11)
Effect of dilutive securities
- -stock options - - -
_______ _________ ______
Diluted net loss per share
- -net loss, weighted
average common shares
outstanding and effect of
stock options $ (998,668) 8,869,184 $ (.11)
======== ========= ======
Diluted net loss per share does not include the effect of all options to
purchase shares of common stock for the six months ended October 31, 2009
and 2008 because they are anti-dilutive.
Common Stock Repurchases
On December 4, 2002, the Company's Board of Directors authorized a stock
repurchase plan pursuant to which the Company was authorized to repurchase a
total of 500,000 shares of its common stock. During the three and six months
ended October 31, 2009 and 2008, the Company did not repurchase any shares
of its common stock. As of October 31, 2009, 172,196 shares remain available
for repurchase under the plan. This repurchase program does not have an
expiration date.
Stock Option Expense
a. Stock-Based Compensation
The Company has a 1992 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 allowed granting of up to
2,850,000 shares, adjusted for stock splits, of the Company's common stock
at an option price to be no less than the fair market value of the stock on
the date such options are granted. Under option agreements granted under the
plan, the holder of the option may purchase 20% of the common stock with
respect to which the option has been granted on or after the first
anniversary of the date of the grant and an additional 20% of such shares
on or after each of the four succeeding anniversary dates. No further
options may be granted under this plan.
The Company also has a 2001 incentive and non-statutory stock option plan
for the purpose of permitting certain key employees to acquire equity in the
Company and to promote the growth and profitability of the Company by
attracting and retaining key employees. In general, the plan allows granting
of up to 1,800,000 shares of the Company's common stock at an option price
to be no less than the fair market value of the Company's common stock on
the date such options are granted. Currently, options granted under the plan
vest ratably on the annual anniversary date of the grants. Vesting periods
for options currently granted under the plan range from one to five years.
The Company 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. Of each option, 100% are exercisable one year after the date
of grant.
New shares of the Company's common stock are issued upon exercise of stock
options.
As required by the Compensation - Stock Compensation Topic of FASB ASC, the
accounting for transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity
instruments are accounted for using a fair value-based method with a
recognition of an expense for compensation cost related to share-based
payment arrangements, including stock options and employee stock purchase
plans.
Our consolidated statements of operations for fiscal 2010's first quarter
and six months ended October 31, 2009 include approximately $225,000 and
$380,000 of stock-based compensation expense, respectively. Fiscal 2009's
first quarter and six months ended October 31, 2008 include approximately
$130,000 and $377,000 of stock-based compensation expense, respectively.
Stock-based compensation expense is recognized in the selling, general and
administrative expenses line item of the accompanying consolidated
statements of operations on a ratable basis over the vesting periods.
These stock option grants have been classified as equity instruments, and
as such, a corresponding increase, net of the reversal of the previously
recorded income tax benefit for options which expired during the reporting
period, has been reflected in additional paid-in capital in the accompanying
balance sheet. The fair value of each stock option granted is estimated on
the date of grant using the Black-Scholes option pricing model.
A summary of option activity under the plans for the six months ended
October 31, 2009 is as follows:
Weighted average Weighted average Aggregate
exercise price remaining contractual intrinsic
Shares life value(1)
__________ ________________ _____________________ __________
Balance
April 30,
2009 1,257,675 $4.53 4.37 $ 4,000
Granted 1,019,500 $2.55 - -
Exerc - - - -
Expired (265,750) $5.58 - -
Balance
October 31,
2009 2,011,425 $3.39 6.85 $ 397,000
Exercisable
October 31,
2009 876,925 $4.39 4.10 $ 254,000
Expected to vest
October 31,
2009 1,911,000 $3.39 6.85 -
This amount represents the difference between the exercise price and $2.69,
the closing price of Dataram common stock on October 30, 2009 as reported on
the NASDAQ Stock Market, for all in-the-money options outstanding and all the
in-the-money shares exercisable.
Total cash received from the exercise of options in the first six months of
fiscal 2010 ended October 31, 2009 was nil. As of October 31, 2009, there
was approximately $2.3 million of total unrecognized compensation costs
related to stock options. These costs are expected to be recognized over a
weighted average period of approximately two years. At October 31, 2009, an
aggregate of 9,427 shares were authorized for future grant under the
Company's stock option plans.
b. Other Stock Option Expense
During the three month period ended July 31, 2008, the Company granted
options to purchase 50,000 shares of the Company's common stock to a
privately held company in exchange for certain patents and other
intellectual property. The options granted are exercisable at a price
representing the fair value at the date of grant, are 100% exercisable on
the date of grant and expire ten years after date of grant. The calculated
fair value of these options was approximately $121,000 and was determined
using the Black-Scholes option pricing model based upon the market price of
the underlying common stock as of the date of grant, reduced by the present
value of estimated future dividends, using an expected quarterly dividend
rate of zero, a calculated volatility factor of 110% and risk-free interest
rate of 4.0%. Such calculated fair value has been charged in its entirety to
the research and development expense line item in the accompanying
consolidated statement of operations for this for the six months ended
October 31, 2008. These stock option grants have been classified as equity
instruments, and as such, a corresponding increase of $121,000 has been
reflected in additional paid-in capital in the accompanying consolidated
balance sheets.
(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. The
acquisition expands the Company's memory product offerings and routes to
market. The Company purchased the assets from MMB for total consideration of
approximately $2,253,000 of which approximately $912,000 was paid in cash.
The Company also assumed certain accounts payable totaling approximately
$190,000 and certain accrued liabilities totaling approximately $122,000.
Under the terms of the agreement with MMB, the remaining portion of the
purchase price is contingently payable based upon the performance of the
new Dataram business unit to be operated as a result of the acquisition
(the Unit) and consists of a percentage, averaging 65%, payable quarterly,
over the next four years of earnings before interest, taxes, depreciation
and amortization of the Unit. In August, 2009, the Company paid
approximately $162,000 of the contingently payable purchase price. At
October 31, 2009, the estimated remaining purchase price to be paid under
the agreement is $855,000 and is recorded as an accrued liability (of which
approximately $219,000 has been classified as long-term) in the Company's
consolidated balance sheet. The net assets acquired by the Company were
recorded at their respective fair values under the purchase method of
accounting in accordance with the provisions of the Business Combinations
Topic of the FASB ASC.
The total consideration of the acquisition has been allocated to the fair
value of the assets of MMB as follows:
Accounts receivable $ 478,000
Machinery and equipment 200,000
Deposits 16,000
Trade names 733,000
Customer relationships 758,000
Non-compete agreement 68,000
-----------
Gross assets acquired 2,253,000
Liabilities assumed 312,000
----------
Net assets acquired $ 1,941,000
===========
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 fiscal year 2010's first quarter and six months
ended October 31, 2010 was approximately $164,000 and $328,000,
respectively. Intangible assets amortization expense in fiscal 2009's
first quarter and six months ending October 31, 2008 was nil. Intangible
asset amortization is included in selling, general and administrative
expense. The components of finite-lived intangible assets acquired during
fiscal year 2009 are as follows:
Gross Carrying Amount
Weighted
Average
Life October 31, 2009 April 30, 2009
________ _____________ _____________
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 383,000 55,000
_____________ _____________
Net intangible assets $ 1,176,000 $ 1,504,000
============= =============
The following table outlines the estimated future amortization expense
related to intangible assets:
Year ending April 30:
2010 $ 637,000
2011 407,000
2012 164,000
2013 162,000
2014 134,000
-----------
$ 1,504,000
===========
(3) Related Party Transactions
During the first six months of fiscal 2010, the Company purchased
inventories for resale totaling approximately $3,355,000 from Sheer
Memory, LLC (Sheer Memory). Sheer Memory's owner is employed by the
Company as the general manager of the acquired MMB business unit described
in Note 2. When the Company acquired certain assets of MMB, it did not
acquire any of its inventory. 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 $602,000 of accounts payable
in the Company's consolidated balance sheet as of October 31, 2009 is
payable to Sheer Memory. Sheer 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 Sheer
Memory subsequent to October 31, 2009 and management anticipates that the
Company will continue to do so, although the Company has no obligation to
do so.
(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:
October 31, 2009 April 30, 2009
________________ ______________
Trade receivables $ 5,018,000 $ 3,599,000
VAT receivable 335,000 72,000
Other 6,000 0
Allowance for doubtful accounts
and sales returns (290,000) (290,000)
________________ ______________
$ 5,069,000 $ 3,381,000
================ ==============
(6) Inventories
Inventories are valued at the lower of cost or market, with costs determined
by the first-in, first-out method. Inventories at October 31, 2009 and April
30, 2009 consist of the following categories:
October 31, 2009 April 30, 2009
________________ ______________
Raw materials $ 2,936,000 $ 1,344,000
Work in process 67,000 15,000
Finished goods 2,584,000 841,000
________________ ______________
$ 5,587,000 $ 2,200,000
================ ==============
(7) Financial Information by Geographic Location
The Company operates in one business segment and develops, manufactures and
markets a variety of memory systems for use with network servers and
workstations which are manufactured by various companies. Revenues for the
three and six months ended October 31, 2009 and 2008 by geographic region
are as follows:
Three months ended Six months ended
October 31, 2009 October 31, 2009
________________ ________________
United States $ 9,035,000 $ 16,280,000
Europe 919,000 2,376,000
Other (principally Asia Pacific Region) 719,000 1,207,000
________________ ________________
Consolidated $ 10,673,000 $ 19,863,000
================ ================
Three months ended Six months ended
October 31, 2008 October 31, 2008
________________ ________________
United States $ 5,581,000 $ 11,155,000
Europe 1,074,000 2,521,000
Other (principally Asia Pacific Region) 404,000 946,000
________________ ________________
Consolidated $ 7,059,000 $ 14,622,000
================ ================
Long-lived assets consist of property and equipment and finite intangible
assets. Long-lived assets and total assets by geographic region as of
October 31, 2009 are as follows:
October 31, 2009
Long-lived assets Total assets
_________________ ______________
United States $ 2,481,000 $ 23,057,000
Europe 0 119,000
Other 0 18,000
_________________ ______________
Consolidated $ 2,481,000 $ 23,194,000
================= ==============
(8) Intangible Assets
Intangible assets are amortized using the straight-line method over their
estimated period of benefit, ranging from two to five years. Intangible
assets are tested for impairment whenever events or changes in circumstances
indicate their carrying value may not be recoverable. All of our intangible
assets are subject to amortization. No material impairments of intangible
assets have been identified during any of the periods presented.
(9) Accounting Guidance
Recently Adopted Accounting Guidance
We have adopted the authoritative guidance issued by the FASB concerning
the FASB Accounting Standards Codification (ASC)(Codification) as the
source of authoritative accounting and reporting standards to be applied by
nongovernmental entities to financial statements that are presented in
conformity with generally accepted accounting principles (GAAP) in the
United States (the GAAP hierarchy). The FASB ASC is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of the FASB Codification did not have a material impact
on our consolidated financial statements. The GAAP references in the
accompanying consolidated financial statements reflect the FASB Codification.
On May 1, 2009, we adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements
that the acquisition method of accounting (previously referred to as the
purchase method of accounting) be used for all business combinations, but
requires a number of changes, including changes in the way assets and
liabilities are recognized and measured as a result of business
combinations. It also requires the capitalization of in-process research and
development at fair value and requires the expensing of acquisition-related
costs as incurred. We have not completed any business combinations since
May 1, 2009.
On May 1, 2009, we adopted the authoritative guidance issued that changes
the accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the
parent's equity, and purchases or sales of equity interests that do not
result in a change in control are to be accounted for as equity
transactions. In addition, net income attributable to a non-controlling
interest is to be included in net income and, upon a loss of control, the
interest sold, as well as any interest retained, is to be recorded at fair
value with any gain or loss recognized in net income. Adoption of the new
guidance did not have a material impact on our financial statements because
we do not have a noncontrolling interest in our consolidated financial
statements.
On May 1, 2009, we adopted the authoritative guidance on fair value
measurement for nonfinancial assets and liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). Adoption of the new guidance did not
have a material impact on our financial statements.
The Subsequent Events Topic of the FASB ASC, effective May 2009, established
general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or
are available to be issued. The Company has evaluated subsequent events and
transactions for potential recognition or disclosure in the consolidated
financial statements through December 14, 2009 and has determined that no
subsequent event or transaction meets the requirements for disclosure.
Recent Accounting Guidance Not Yet Adopted
In June 2009, the FASB issued authoritative guidance on the consolidation
of variable interest entities, which is effective for us beginning May 1,
2010. The new guidance requires revised evaluations of whether entities
represent variable interest entities, ongoing assessments of control over
such entities, and additional disclosures for variable interests. We believe
adoption of this new guidance will not have a material impact on our
financial statements.
In October 2009, the FASB issued authoritative guidance on revenue
recognition that will become effective for us beginning on May 1, 2010, with
earlier adoption permitted. Under the new guidance on arrangements that
include software elements, tangible products that have software components
that are essential to the functionality of the tangible product will no
longer be within the scope of the software revenue recognition guidance, and
software-enabled products will now be subject to other relevant revenue
recognition guidance. Additionally, the FASB issued authoritative guidance
on revenue arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the new guidance,
when vendor specific objective evidence or third party evidence for
deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance
includes new disclosure requirements on how the application of the relative
selling price method affects the timing and amount of revenue recognition.
e believe adoption of this new guidance will not have a material impact on our
financial statements.
(10) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company maintains its cash and cash equivalents in
financial institutions and brokerage accounts. To the extent that such
deposits exceed the maximum insurance levels, they are uninsured. In regard
to trade receivables, the Company performs ongoing evaluations of its
customers' financial condition, as well as general economic conditions and,
generally, requires no collateral from its customers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and section 21E of
the Securities and Exchange Act of 1934, as amended. The information
provided in this interim report may include forward-looking statements
relating to future events, such as the development of new products, pricing
and availability of raw materials or the future financial performance of the
Company. Actual results may differ from such projections and are subject to
certain risks including, without limitation, risks arising from: changes in
the price of memory chips, changes in the demand for memory systems for
workstations and servers, increased competition in the memory systems
industry, delays in developing and commercializing new products and other
factors described in the Company's most recent Annual Report on Form 10-K
filed with the Securities and Exchange Commission which can be reviewed at
http://www.sec.gov.
Executive Overview
Dataram is a developer, manufacturer and marketer of large capacity memory
products primarily used in high performance network servers and
workstations. The Company provides customized memory solutions for original
equipment manufacturers (OEMs) and compatible memory for leading brands
including Dell, HP, IBM and Sun Microsystems. The Company also manufactures
a line of memory products for Intel and AMD motherboard based servers.
The Company's memory products are sold worldwide to OEMs, distributors,
value-added resellers and end-users. The Company has a manufacturing
facility in the United States with sales offices in the United States and
Europe.
The Company is an independent memory manufacturer specializing in high
capacity memory and competes with several other large independent memory
manufacturers as well as the OEMs mentioned above. The primary raw material
used in producing memory boards is dynamic random access memory (DRAM)
chips. The purchase cost of DRAMs is the largest single component of the
total cost of a finished memory board. Consequently, average selling
prices for computer memory boards are significantly dependent on the
pricing and availability of DRAM chips.
Liquidity and Capital Resources
As of October 31, 2009, cash and cash equivalents amounted to $4.5 million
and working capital amounted to $11.7 million, reflecting a current ratio
of 3.9 to 1, compared to cash and cash equivalents of $12.5 million, working
capital of $15.5 million and a current ratio of 6.0 to 1 as of April 30,
2009.
During the first six months of fiscal 2010, net cash used in operating
activities totaled approximately $7,408,000. Net loss in the period was
approximately $2,594,000. Inventories increased by approximately $3,387,000.
In the first six months ended October 31, 2009, the MMB business unit
described in Note 2 increased their inventory levels by approximately
$1,900,000 to properly support normal sales levels. At April 30, 2009, the
MMB business unit inventory totaled approximately $170,000. Inventory was
maintained at an unsustainably low level during the first month subsequent
to the acquisition as part of the Company's transition and integration plan.
The balance of the inventories increase was primarily the result of
management's decision to purchase inventories at favorable pricing levels.
Accounts receivable increased by approximately $1,665,000, primarily as a
result of increased revenues. Deferred income taxes increased by
$1,690,000 and accrued liabilities decreased by approximately $65,000.
Cash used in operating activities was partially offset by an increase in
accounts payable of approximately $1,111,000. Depreciation and
amortization expense of approximately $604,000 and non-cash stock-based
expense of approximately $380,000 were also recorded.
Net cash used in investing activities totaled approximately $632,000 for
the six months ended October 31, 2009. This was primarily the result of net
property and equipment additions totaling approximately $470,000. These
additions were for test equipment used in the Company's computer memory
manufacturing process and storage test equipment. Additionally, a contingent
payment for an acquisition of a business, described in Note 2, totaling
approximately $162,000 was paid.
Management believes that the Company's existing cash resources will be
sufficient to meet short-term liquidity needs. Management further believes
that its working capital is adequate to finance the Company's long-term
operating needs and future capital requirements.
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of April 30, 2009
are as follows:
Operating leases
Year ending April 30: ________________
2010 $ 533,000
2011 387,000
2012 34,000
Thereafter 0
______________
Total minimum lease payments $ 954,000
==============
The Company has no other material commitments.
Results of Operations
Revenues for the three month period ended October 31, 2009 were $10,673,000
compared to revenues of $7,059,000 for the comparable prior year period. The
recently acquired MMB business unit described in Note 2 generated revenues
of approximately $3,587,000 in 2010's fiscal second quarter and nil in the
comparable prior year period. Revenues for the first six months of the
current fiscal year were $19,863,000 compared to revenues of $14,622,000 for
the comparable prior year period. The MMB business unit generated revenues
of approximately $6,499,000 in fiscal 2010's first six months and nil in the
comparable prior year period.
Revenues for the three and six months ended October 31, 2009 and 2008 by
geographic region are as follows:
Three months ended Six months ended
October 31, 2009 October 31, 2009
________________ ________________
United States $ 9,035,000 $ 16,280,000
Europe 919,000 2,376,000
Other (principally Asia Pacific Region) 719,000 1,207,000
________________ ________________
Consolidated $ 10,673,000 $ 19,863,000
================ ================
Three months ended Six months ended
October 31, 2008 October 31, 2008
________________ ________________
United States $ 5,581,000 $ 11,155,000
Europe 1,074,000 2,521,000
Other (principally Asia Pacific Region) 404,000 946,000
________________ ________________
Consolidated $ 7,059,000 $ 14,622,000
================ ================
Cost of sales for the second quarter and first six months of fiscal 2010
were 74% and 73% of revenues, respectively versus 66% for the same
respective prior year periods. The recently acquired MMB business unit's
cost of sales were 73% in fiscal 2010's first six months. Also contributing
to the increase in percentage was the fact that in the first six months ended
October 31, 2009, three large orders, totaling $2.1 million were shipped to
one customer where the bidding for the orders was extremely competitive.
Fluctuations in cost of sales as a percentage of revenues in any given
quarter 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. Cost of sales in the second quarter and six
months were $7.9 million and $14.6 million respectively, compared to $4.7
million and $9.6 million in the prior year comparable periods.
Engineering expense in fiscal 2010's second quarter and six months were
$259,000 and $512,000, respectively, versus $302,000 and $634,000 for the
same respective prior year periods.
Research and development expense in fiscal 2010's second quarter and six
months were $1,621,000 and $2,495,000, respectively, versus $254,000 and
$466,000 in the same prior year periods. In the first quarter of the prior
fiscal year, the Company implemented a strategy to introduce new and
complementary products into its offerings portfolio. The Company is
currently focusing on the development of certain high performance storage
products. As part of that strategy, in January 2009, the Company entered
into a software purchase and license agreement (Agreement) with another
company whereby the Company has the exclusive right to purchase specified
software for a price of $900,000 plus a contingent payment of $100,000.
Fiscal 2010's research and development expense includes $600,000 of expense
related to the Agreement, of which $300,000 was expensed in the first
fiscal quarter and $300,000 was expensed in the second fiscal quarter. The
Company now owns the software. The software and the storage product, which
incorporates the software, are currently under development and are not
deemed saleable at the present time. We expect to make further investments
in this area.
Selling, general and administrative (S,G&A) expense in fiscal 2010's second
quarter and six months increased by $1,002,000 and $867,000 respectively,
from the comparable prior year periods. The acquired MMB business unit's
S,G&A expense recorded in fiscal 2010's second quarter and six months was
approximately $572,000 and $1,180,000, respectively, versus nil in the
comparable prior year periods. The prior fiscal year's first quarter
expense included a charge of approximately $716,000 related to a retirement
agreement entered into with the Company's former chief executive officer.
Stock-based compensation expense is recorded as a component of S,G&A
expense and totaled approximately $225,000 and $380,000, respectively,
versus $130,000 and $256,000, respectively, for the comparable prior year
periods. The Company recorded second quarter and year to date marketing
and sales expense related to our new storage products of approximately
$260,000 and $358,000 respectively, versus nil in the comparable prior year
periods. These expenses are mainly related to the acquisition of sales and
sales engineers for the storage products.
Other income (expense), net for the second quarter and six months totaled
$12,000 of expense and $22,000 income, respectively, for fiscal 2010 and
income of $16,000 and $125,000, for the same respective periods in fiscal
2009. Other expense in fiscal 2010's second quarter consisted primarily of
$19,000 of foreign currency transaction losses, primarily as a result of the
EURO weakening relative to the US dollar. There was also approximately
$10,000 of other income recorded related to a gain on an asset disposal.
Six month other income of $22,000 consisted primarily of $7,000 of net
interest income and $5,000 of foreign currency transaction gains, primarily
as a result of the EURO strengthening relative to the US dollar, and the
aforementioned gain on asset disposal. Other income in fiscal 2009's second
quarter consisted primarily of $79,000 of net interest income received,
offset by $63,000 of foreign currency loss, primarily as a result of the
EURO weakening relative to the US dollar. Fiscal 2009's six months other
income consisted primarily of $188,000 of net interest income received and
$63,000 of foreign currency loss, primarily as a result of the EURO
weakening relative to the US dollar.
Income tax benefit for the second quarter and six months of fiscal 2010 was
a benefit of $1,042,000 and $1,670,000, respectively, versus benefit of
$248,000 and $633,000 for the same prior year periods. The Company's
effective tax rate for financial reporting purposes in fiscal 2010 is
approximately 39.2%. The Company has Federal and State net operating loss
(NOL) carry-forwards of approximately $5.6 million and $4.0 million,
respectively. These can be used to offset future taxable income and expire
between 2023 and 2029 for Federal tax purposes and 2016 and 2029 for state
tax purposes.
Critical Accounting Policies
During December 2001, the Securities and Exchange Commission (SEC) published
a Commission Statement in the form of Financial Reporting Release No. 60
which encouraged that all registrants discuss their most "critical
accounting policies" in management's discussion and analysis of financial
condition and results of operations. The SEC has defined critical accounting
policies as those that are both important to the portrayal of a company's
financial condition and results, and that require management's most
difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. While the Company's significant accounting policies are
summarized in Note 1 to the consolidated financial statements included
in the Company's Form 10-K for the fiscal year ended April 30, 2009, the
Company believes the following accounting policies to be critical:
Revenue Recognition - Revenue is recognized when title passes upon shipment
of goods to customers. The Company's revenue earning activities involve
delivering or producing goods. The following criteria are met before revenue
is recognized: persuasive evidence of an arrangement exists, shipment has
occurred, selling price is fixed or determinable and collection is
reasonably assured. The Company does experience a minimal level of sales
returns and allowances for which the Company accrues a reserve at the
time of sale 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.
Stock Option Expense - As required by the Compensation - Stock Compensation
Topic of FASB ASC, the accounting for transactions in which an entity
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
entity'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. The Company adopted the guidance in this FASB ASC effective May 1,
2006. The consolidated statements of operations for fiscal 2010's first
quarter and six months ended October 31, 2009 includes approximately
$225,000 and $380,000 of stock-based compensation expense, respectively.
Fiscal 2009's first quarter and six months ended October 31, 2008 includes
approximately $130,000 and $377,000 of stock-based compensation expense,
respectively. Stock-based compensation expense is recognized in the selling,
general and administrative expenses line item of the accompanying
consolidated statements of operations on a ratable basis over the vesting
periods. These stock option grants have been classified as equity
instruments and, as such, a corresponding increase, net of the reversal of
the previously recorded income tax benefit for options which expired
during the reporting period, has been reflected in additional paid-in
capital in the accompanying balance sheet. The fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: Expected life is
based on the Company's historical experience of option exercises relative
to option contractual lives; Expected volatility is based on the historical
volatility of the Company's share price; Expected dividend yield assumes the
current dividend rate remains unchanged; Risk free interest rate
approximates United States government debt rates at the time of option
grants.
Research and Development Expense - All 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.
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 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 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 tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that the tax rate changes.
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 tax asset valuation allowance and other
operating allowances and accruals. Actual results could differ from those
estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not invest in market risk sensitive instruments. The
Company's investments consist of overnight deposits with banks and
commercial paper, which matures within ninety days. The Company's rate of
return on its investment portfolio changes with short-term interest rates,
although such changes will not affect the value of its portfolio. The
Company's objective in connection with its investment strategy is to
maintain the security of its cash reserves without taking market risk with
principal.
The Company purchases and sells primarily in U.S. dollars. The Company sells
in foreign currency (primarily Euros) to a limited number of customers and
as such incurs some foreign currency risk. At any given time, approximately
5 to 10 percent of the Company's accounts receivable are denominated in
currencies other than U.S. dollars. At present, the Company does not
purchase forward contracts as hedging instruments, but could do so as
circumstances warrant.
ITEM 4T. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the Company have
evaluated the effectiveness of our disclosure controls and procedures as
required by Exchange Act Rule 13a-15(b) as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in our internal control
over financial reporting during the quarter ended October 31, 2009 that
have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None.
Item 1A. RISK FACTORS.
No material changes from Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
No reportable event.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
No reportable event.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
On September 24, 2009, Dataram held its Annual Meeting of
Shareholders. At that meeting, the Shareholders elected Directors for an
annual term and ratified the selection of the Company's Independent
Registered Public Accounting Firm. The results of that voting are as
follows:
1. Election of Directors. The votes were received as follows:
BROKERS'
FOR WITHHELD NONVOTES
John H. Freeman 7,659,610 623,237 0
Roger C. Cady 7,677,053 605,794 0
Thomas A. Majewski 7,503,655 779,192 0
Rose Ann Giordano 7,517,319 765,528 0
2. Ratification of Independent Registered Public Accounting Firm:
BROKERS'
FOR AGAINST ABSTAIN NONVOTES
8,072,165 60,764 140,918 0
Item 5. OTHER INFORMATION.
No reportable event.
Item 6. EXHIBITS.
Exhibit No. Description
__________ ___________
31(a) Rule 13a-14(a) Certification of John H. Freeman.
31(b) Rule 13a-14(a) Certification of Mark E. Maddocks.
32(a) Section 1350 Certification of John H. Freeman (furnished not
filed).
32(b) Section 1350 Certification of Mark E. Maddocks (furnished not
filed).
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
MARK E. MADDOCKS
Date: December 14, 2009 By: /s/ Mark E. Maddocks
____________________________
Mark E. Maddocks
Vice President, Finance
(Principal Financial Officer)