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DRAM > SEC Filings for DRAM > Form 10-Q on 22-Mar-2013All Recent SEC Filings

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Form 10-Q for DATARAM CORP


22-Mar-2013

Quarterly Report


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 Corporation is a developer, manufacturer and marketer of large capacity memory products primarily used in high-performance network servers and workstations. The Company provides customized memory solutions for original equipment manufacturers ("OEMs") and compatible memory for leading brands including Dell, HP, IBM and Sun Microsystems. Additionally, the Company manufactures a line of memory products for Intel and AMD motherboard based servers. The Company has developed and currently markets a line of high-performance storage caching products.

The Company's memory products are sold worldwide to OEMs, distributors, value-added resellers and end-users. The Company has one leased manufacturing facility in the United States with sales offices in the United States, Europe and Japan.

The Company is an independent memory manufacturer specializing in high-capacity memory and competes with several other large independent memory manufacturers as well as the OEMs mentioned above. The primary raw material used in producing memory boards is dynamic random access memory ("DRAM") chips. The purchase cost of DRAMs is the largest single component of the total cost of a finished memory board. Consequently, average selling prices for computer memory boards are significantly dependent on the pricing and availability of DRAM chips.

The Company has entered into three agreements, one with Shoreline Memory Inc. ("Shoreline") and two with Advanced Micro Devices, Inc. ("AMD") for the purpose of expanding its customer base and product offerings. The Master Services Agreement with Shoreline provides for the Company to fulfill 50% of the orders Shoreline receives from its primary customer. In addition, Shoreline has the ability to borrow up to $1,500,000 from the Company pursuant to a Convertible Senior Promissory Note ("Note"). The Note bears interest at Prime plus 3.0% and is convertible by the Company into equity ownership of Shoreline (see Note 8). On February 19, 2013, the Company received $50,000 and on February 22, 2013 the Company received an additional $200,000 from Shoreline Memory, Inc. as a partial repayment of their loan. The Company has reached an agreement in principle to terminate its relationship with Shoreline. At closing, the Company will receive an additional $225,000 as a partial repayment of the loan in connection with the termination of all agreements with Shoreline. The remaining $275,000 will be repaid in accordance with the proposed amended and restated promissory note that will be due on July 31, 2013. The proposed promissory note bears interest at the rate of 6% and is guaranteed by Shoreline Memory, Inc., Shoreline Capital Management Ltd and Trevor Folk. All agreements with Shoreline Memory, Inc. will be terminated with the exception of the proposed amended and restated promissory note. As a result of the termination with Shoreline, the Company will look to expand its relationship with Advanced Micro Devices, Inc. One agreement with AMD provides for the Company to sell AMD licensed and branded versions of its RAMDisk software and the other is for the Company to develop and sell AMD server memory. Both of the AMD agreements result in an expansion of products the Company already has in the marketplace with the exception of server memory specifically for AMD servers. These opportunities not only provide for additional products to be sold into the marketplace but it also allows the Company to be included in AMD's marketing initiatives. In addition to the above, the Company has entered into a global services agreement with Maintech which provides for them to service the Company's customers on an as needed basis. The agreement also calls for the cross selling of each other's services and products. Management is unable to determine the amount of revenue to be generated in fiscal 2013 from these agreements. However, these agreements, as well as other similar agreements, should provide new revenue sources and expanded markets for the Company's products.

RAMDisk was acquired by Dataram in 2008. For the most part, the software was downloadable as freeware for personal use. Since the Company was able to track the number of downloads, it realized the popularity of the software and created a larger capacity version and commercial version for purchase. In fiscal 2012, approximately 2,580 were purchased for total revenue of $41,000. For the third quarter of fiscal 2013, ended January 31, 2013, approximately 1,712 were purchased for total revenue of approximately $35,000. For the quarter ended October 31, 2012 approximately 1,298 were purchased for total revenue of approximately $28,000 and for the quarter ended July 31, 2012, approximately 860 were purchased for total revenues of approximately $22,000. The Company believes that the AMD branding of the product will increase its visibility and potential for increased revenue despite the free versions which will remain available.

Liquidity and Capital Resources

As of January 31, 2013, cash and cash equivalents amounted to approximately $759,000 and working capital amounted to approximately $2,950,000, reflecting a current ratio of 1.9. This compares to cash and cash equivalents of approximately $3,275,000 and working capital of approximately $6,690,000, reflecting a current ratio of 4.0 as of April 30, 2012.

During the nine month period ended January 31, 2013, net cash used in operating activities totaled approximately $2,667,000. Net loss in the period totaled approximately $3,005,000 and included stock-based compensation expense of approximately $205,000 and depreciation and amortization expense of approximately $328,000. Trade receivables decrease by approximately $239,000. Accounts payable decreased by approximately $387,000. Accrued liabilities decreased by approximately $123,000.

Net cash used in investing activities totaled approximately $824,000 for the nine month period ended January 31, 2013 and was primarily the result of the issuance of a note receivable to Shoreline described in Note 8 to the consolidated financial statements.

Net cash provided by financing activities totaled approximately $976,000 for the nine month period ended January 31, 2013 and consisted primarily of proceeds from borrowings under a revolving credit facility of approximately $1,251,000, more fully described in Note 10 to the consolidated financial statements. The Company also purchased approximately $142,000 of treasury stock and made principal payments of approximately, $133,000 to Mr. Sheerr under the Note and Security agreement, more fully described in Note 4 to the Consolidated Financial Statements.

On July 27, 2010, the Company entered into an agreement with a financial institution for formula-based secured debt financing of up to $5,000,000. Borrowings are secured by substantially all assets. On March 2, 2012, the agreement was amended to reduce the amount available under the credit facility to $3,500,000 which, according to the Company's projections, will be sufficient to allow for maximum borrowing under the formulas provided for in the agreement. On May 17, 2012, the agreement was amended and restated. The amended and restated documents reduced the interest rate to prime plus 6%, subject to a minimum of 9.25% and also not less than $8,000 per month. The loan facility allows borrowing of 90% of eligible domestic receivables. In addition, the loan facility now allows borrowing of 90% of eligible foreign receivables to a maximum of $500,000 and 25% of eligible inventory to a maximum of 20% of the amount available on receivables. The total credit line remains at $3,500,000 and the tangible net worth covenant is $2,000,000, measured quarterly. The Company agreed to pay an exit fee if it terminates the agreement more than 30 days prior to the one year anniversary of the amended and restated agreement. On December 18, 2012, the Company executed Amendment No. 2 to the Amended and Restated Schedule to Loan and Security Agreement which reduced the Tangible Net Worth covenant to $1,300,000. However, at any time that the tangible net worth, as defined, falls below $2,000,000, the advances on inventory will be capped at $250,000 from $500,000. The amount of financing available to the Company under the agreement varies with the Company's eligible accounts receivable and inventory. At January 31, 2013, the Company had approximately $314,000 of additional financing available to it under the terms of the agreement.

On May 11, 2011, the Company and certain investors entered into a securities purchase agreement pursuant to which the Company agreed to sell an aggregate of 295,833 shares of its common stock and warrants to purchase a total of 221,875 shares of its common stock to such investors. The aggregate net proceeds of such offering and sale, after deducting fees to the Placement Agent and other offering expenses payable by the Company, was approximately $2,998,000. The transaction closed on May 17, 2011.

On December 14, 2011, the Company entered into a Note and Security Agreement with Mr. Sheerr. The agreement provides for secured financing of up to $2,000,000. The Company is obligated to pay monthly, interest equal to 10% per annum calculated on a 360 day year of the outstanding loan balance. Principal is payable in sixty equal monthly installments, beginning on July 15, 2012. The Company may prepay any or all sums due under this agreement at any time without penalty. On closing, the Company borrowed $1,500,000 under the agreement and repaid in full the $1,500,000 due under a previous agreement. The Company has borrowed the full $2,000,000 available under this agreement. Principal amounts due under this obligation are $33,333 per month which began on July 15, 2012. For the fiscal year ending April 30, 2013, the principal amount due under this obligation is $333,333. In each of four fiscal periods from May 1, 2013 through April 30, 2017, the principal amounts due under this obligation are $400,000. In the fiscal period from May 1, 2017 through June 30, 2017, the principal amount due on this obligation is $66,667. Interest expense recorded for the Note in the three and nine months ended January 31, 2013 was $45,991 and $145,370, respectively. Interest payable to Mr. Sheerr on January 31, 2013 was $15,213.

On July 30, 2012, a Convertible Senior Promissory Note was executed by and between Shoreline and the Company whereby the Company will lend up to $1,500,000 to Shoreline in exchange for interest payments at prime plus 3.0% and the right to convert the amount outstanding into common stock of Shoreline on or before its maturity date. Each time the Company advances money under the note, the Company is granted 1% of the common stock for every $100,000 advanced up to a maximum of 15%. This is in addition to the 15% allowable under the conversion of the note and the warrant to acquire 30% of Shoreline common stock. The conversion is at the rate of 1% of the outstanding common stock for each $100,000 converted up to a maximum of 15%. This note matures in three years and at that time Shoreline must repay the note or the Company must convert the note into common stock. The note is secured by all the assets of Shoreline and Shoreline Capital Management Ltd. ("Shoreline Capital") as guarantor. Also executed with the note was a warrant to purchase 30% of the outstanding common stock of Shoreline at the time of exercise and the warrant expires sixty days after the third anniversary. The warrant prescribes a formula to determine the price per share at the time of exercise. If all the amounts under the note are advanced and converted and the full warrant is exercised, the Company will own 60% of the outstanding common stock of Shoreline. The note was executed simultaneously with a Master Services Agreement which details the parameters under which the Company and Shoreline will fulfill orders from Shoreline's primary customer. On July 31, 2012, the Company advanced $375,000 under the note and an additional $375,000 on August 1, 2012. The purpose of the loan was to fund startup expenses and to prepay initial orders. The additional monies which may be borrowed are to continue to fund purchases for orders received. The note receivable is guaranteed by Shoreline Capital, which has the same ownership as Shoreline. The Company monitors the financial condition of Shoreline Capital on a quarterly basis and evaluates the collectability of the note receivable should the guarantee be needed to repay the loan.

Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of April 30, 2012 are as follows:

                   Year ending April 30
                     2013                             $   352,000
                     2014                                 365,000
                     2015                                 374,000
                     2016                                 368,000
                     2017                                 114,000
                     Thereafter                                -
                     Total minimum lease payments     $ 1,573,000

The Company has no other material commitments.

Results of Operations

Revenues for the three month period ended January 31, 2013 were $6,439,000 compared to revenues of $8,420,000 for the comparable prior year period. Revenues for the first nine months of the current fiscal year were $21,396,000 compared to revenues of $29,096,000 for the comparable prior year period. The decrease in revenues from the prior year's was primarily a result of a decrease in average selling prices attributable to a decline in the price of DRAM chips, the primary raw material used in the Company's products. The average purchase price of DRAM chips that the Company uses in its products declined by approximately 39% year over year.

Revenues for the three and nine months ended January 31, 2013 and 2012 by geographic region are as follows:

                                                  Three months     Nine months
                                                     ended            ended
                                                  January 31,      January 31,
                                                      2013             2013
       United States                             $  4,572,914     $ 16,553,265
       Europe                                       1,217,323        3,167,483
       Other (principally Asia Pacific Region)        648,724        1,675,721
       Consolidated                              $  6,438,961     $ 21,396,469




                                                  Three months     Nine months
                                                     ended            ended
                                                  January 31,      January 31,
                                                      2012             2012
       United States                             $  6,091,393     $ 23,357,207
       Europe                                       1,463,481        3,886,481
       Other (principally Asia Pacific Region)        865,261        1,852,261
       Consolidated                              $  8,420,135     $ 29,095,949

Cost of sales for the three and nine months ended January 31, 2013 were $4,929,000 and $17,005,000, respectively versus $6,750,000 and $22,010,000, respectively in the prior year comparable periods. Cost of sales as a percentage of revenues for the third quarter and first nine months of fiscal 2013 were 77% and 79% of revenues, respectively versus 80% and 76% for the same respective prior year periods. Fluctuations in cost of sales as a percentage of revenues are not unusual and can result from many factors, some of which are a rapid change in the price of DRAMs, or a change in product mix possibly resulting from a large order or series of orders for a particular product or a change in customer mix.

Engineering expense in the three and nine months ended January 31, 2013 were approximately $152,000 and $548,000, respectively, compared to $181,000 and $561,000 for the same respective prior year periods.

Research and development expense in fiscal 2013's and 2012's third quarter and nine months were nil. In fiscal 2012's first quarter and six month period ended October 31, 2011 the Company capitalized $274,000 and $907,000, respectively, of research and development costs related to the XcelaSAN product. During the third quarter of fiscal 2012, the XcelaSAN product was available for general release and generated approximately $8,000 of revenue, which was significantly lower than expected. The Company capitalized approximately $1,480,000 of XcelaSAN research and development costs in fiscal 2011. The Company determined in fiscal 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 off.

Selling, general and administrative (S,G&A) expense for the three and nine month period ended January 31, 2013 totaled $2,070,000 and $6,613,000, respectively, compared to $3,149,000 and $9,978,000 for the same prior year periods. The decrease in this year's third quarter and nine month expense of approximately $1,079,000 and $3,365,000, respectively, was primarily the result of decreased sales and marketing expense related to the Company's XcelaSAN product. The decrease in XcelaSAN S,G&A expense totaling approximately $279,000 in the third quarter and approximately $1,643,000 for nine months as compared to the prior fiscal year periods. The balance of the decrease in the current fiscal year's third quarter and nine months is the result of decreased selling and marketing expenses related to the Company's traditional memory business for employee related cost, from reduced head count.

Other income (expense), net for the three and nine month period ended January 31, 2013 totaled $70,000 and $235,000 of expense, respectively, compared to expense of $131,000 and $370,000 for the same prior year periods. Other expense in the three month period ended January 31, 2013 consisted primarily of interest expense of $82,000 offset by interest income of approximately $8,000. Approximately $4,000 of foreign currency transaction gains were recorded, primarily as a result of the EURO strengthening relative to the US dollar. For the nine month period ended January 31, 2013, other expenses, net of $235,000, consisted of $233,000 interest expense offset by approximately $17,000 of interest income. Additionally, approximately $19,000 of foreign currency transaction losses, primarily as a result of the EURO weakening relative to the US dollar were recorded. Other expense for the three month period ended January 31, 2012 consisted primarily of interest expense of $100,000 and $30,000 of foreign currency transaction losses, primarily as a result of the EURO weakening relative to the US dollar. For the nine month period ended January 31, 2012 other expenses, net of $370,000 consisted primarily of $298,000 of interest expense and $72,000 of foreign currency transaction losses, primarily as a result of the EURO weakening relative to the US dollar.

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, 2012, the Company believes the following accounting policies to be critical:

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

Research and Development - Research and development costs are expensed as incurred, including Company-sponsored research and development and costs of patents and other intellectual property that have no alternative future use when acquired and in which we had an uncertainty in receiving future economic benefits. Development costs of a computer software product to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. Technological feasibility of a computer software product is established when all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications (including functions, features and technical performance requirements) are completed.

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

Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of the "Expenses - Income Taxes" Topic of the FASB ASC. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company considers certain tax planning strategies in its assessment as to the recoverability of its tax assets. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. The Company recognizes, in its consolidated financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on technical merits of the position. There are no material unrecognized tax positions in the financial statements.

Goodwill - Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. The date of our annual impairment test is March 1.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including deferred income tax asset valuation allowances and certain other reserves and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Some of the more significant estimates made by management include the allowance for doubtful accounts and sales returns, the deferred income tax asset valuation allowance, the collectability of the note receivable and other operating allowances and accruals. Actual results could differ from those estimates.

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