Quarterly report pursuant to Section 13 or 15(d)

Description of Business and Significant Accounting Policies (Policies)

Description of Business and Significant Accounting Policies (Policies)

3 Months Ended

Jan. 31, 2014

Liquidity and Basis of Presentation

The information for the three and nine months ended January 31, 2014 and 2013 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. For the nine months ended January 31, 2014 the Company has incurred losses of approximately $2,067,000 and used approximately $586,000 cash from operations.

As discussed in Note 9, the Company entered into financing agreements to address short-term liquidity needs. Also, as discussed in Note 10, on May 11, 2011 and September 18, 2013, the Company entered into securities purchase agreements with different investors. Management believes that the aggregate $3,500,000 available under its credit facility combined with current projected losses will not be sufficient to meet its current obligations and the Company will need to raise additional capital through borrowings or sales of equity securities. There can be no assurance that the Company will be able to obtain borrowings or complete a sale of additional equity securities at terms acceptable to the Company, or at all. The Company is considering calling a Special Meeting of its shareholders to approve the sale of securities above the 20% NASDAQ limitation as well as approval to issue preferred stock. If the Company is able to get shareholder approval, the ability to sell additional common shares, issue preferred shares and obtain financing from convertible debt instruments will be less constrictive. In addition, the Company is considering lowering the exercise price of its outstanding warrants to encourage the exercise of those warrants.

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 additional 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.

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 after considering proceeds received from the equity transaction described in Note 15 to last into the fiscal quarter ending October 31, 2014. The Company intends to raise additional capital through bank financing and additional sales of equity and/or debt securities in the current fiscal year. Specifically, the Company intends to sell the remaining shares available under its S-3 registration statement, which expires April 10, 2014, and provide incentives to warrant holders to exercise their warrants. In addition, the Company intends to negotiate an inventory line of credit that will provide sufficient cash to satisfy its debt to the related party resulting in reduced interest cost and provide $400,000 of working capital each year for the next two years. There can be no assurance that the Company will be successful in closing these transactions or raise sufficient cash to meet its obligations through fiscal 2014.

Plan of Operation

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 is working to expand sales of all three product offerings through expansion with current etailers and adding new etailers. Newegg was the first etailer and has been selling all three products online for months. Canada Computer is selling the consumer and RAMDisk product lines. Microcenter, Amazon NCIX, Memory Express and Tiger Direct all sell the consumer line of products. Discussions are progressing to add the server and RAMDisk product lines to all of their websites and with new etailers. In addition, we have raised capital through the sale of 350,000 shares of common stock resulting in net proceeds of approximately $700,000, sale of assets resulting in net proceeds of $500,000 and refinanced our line of credit resulting in higher borrowing capacities. The Company also is expanding its consumer memory outlets and the development of software to complement RAMDisk in other areas of caching.

Stock Split

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

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.

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 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

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

Advertising is expensed as incurred and amounted to approximately $25,000 and $115,000 in the three and nine months periods ended January 31, 2014, respectively verses approximately $33,000 and $100,000 in the comparable prior year periods.

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 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 January 31, 2014, 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 January 31, 2014 and April 30, 2013.

Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock issued and outstanding during the period. The calculation of diluted loss per share for the three and nine months ended January 31, 2014 and 2013 includes only the weighted average number of shares of common stock outstanding. The denominator excludes the dilutive effect of stock options and warrants outstanding as their effect would be anti-dilutive. The following presents a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share for the three and nine month periods ended January 31, 2014 and 2013. The January 31, 2013 three and nine month amounts shown have been adjusted to reflect the reverse 1-for-6 stock split effective March 18, 2013.

Net loss per share

Net Loss per Share

	Three Months ended January 31, 2014
	Loss			Shares		Per share
	(numerator)			(denominator)		amount

Basic net loss per share – net loss and weighted average common shares outstanding	$	(846,786	)		2,104,662	$	(.40	)

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	$	(846,786	)		2,104,662	$	(.40	)

	Three Months ended January 31, 2013
	Loss			Shares		Per share
	(numerator)			(denominator)		amount

Basic net loss per share – net loss and weighted average common shares outstanding	$	(781,663	)		1,782,925	$	(.44	)

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	$	(781,663	)		1,782,925	$	(.44	)

	Nine Months ended January 31, 2014
	Loss			Shares		Per share
	(numerator)			(denominator)		amount

Basic net loss per share – net loss and weighted average common shares outstanding	$	(2,066,608	)		1,919,517	$	(1.08	)

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	$	(2,066,608	)		1,919,517	$	(1.08	)

	Nine Months ended January 31, 2013
	Loss			Shares		Per share
	(numerator)			(denominator)		amount

Basic net loss per share – net loss and weighted average common shares outstanding	$	(3,005,137	)		1,784,898	$	(1.68	)

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	$	(3,005,137	)		1,784,898	$	(1.68	)

Diluted net loss per common share for the three and nine month periods ended January 31, 2014 and 2013 do not include the effect of options to purchase 287,746 and 294,908 shares, respectively, of common stock because they are anti-dilutive. Diluted net loss per common share for the three and nine month periods ended January 31, 2014 and 2013 do not include the effect of warrants to purchase 221,875 shares of common stock because they are anti-dilutive.

Common Stock Repurchases

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 a total of 166,667 shares available for purchase. The Company did not purchase shares in fiscal 2014’s nine months ended January 31, 2014. In fiscal 2013’s first quarter ended July 31, 2012, the Company repurchased 22,942 shares for a total cost of $142,262. The 22,942 shares purchased were cancelled in fiscal 2013. In fiscal 2012 the Company repurchased 7,315 shares at a total cost of $45,299. The 7,315 shares were cancelled in Fiscal 2012. As of January 31, 2014, the total number of shares authorized for purchase under the program is 136,408 shares.

Stock Option Expense

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 and nine month periods ended January 31, 2014 include approximately $5,000 and $43,000 of stock-based compensation expense, respectively. Fiscal 2013’s three and nine month periods ended January 31, 2013 include approximately $26,000 and $205,000 of stock-based compensation expense, respectively. These stock option grants have been classified as equity instruments and, as such, a corresponding increase has been reflected in additional paid-in capital in the accompanying consolidated balance sheets. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model.

A summary of option activity for the nine months ended January 31, 2014 is as follows:

	Shares			Weighted average exercise price		Weighted average remaining contractual life (1)		Aggregate intrinsic value

Balance April 30, 2013		311,575		$	12.40		5.02	$	—

Granted		—			—		—		—
Exercised		—			—		—		—
Expired		(32,164	)	$	14.37		—		—
Balance January 31, 2014		279,411		$	12.17		4.47		2,500
Exercisable January 31, 2014		254,411		$	13.13		4.01		—
Expected to vest January 31, 2014		265,000		$	12.17		4.47		2,500

(1)

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

As of January 31, 2014, there was approximately $24,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of approximately fifteen months.