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DATARAM CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) 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).
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.
14
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 second
quarter of fiscal 2013, ended October 31, 2012, approximately 1,298 were
purchased for total revenue of approximately $28,000. 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 October 31, 2012, cash and cash equivalents amounted to approximately
$741,000 and working capital amounted to approximately $3,763,000, reflecting a
current ratio of 2.0. 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 six month period ended October 31, 2012, net cash used in operating
activities totaled approximately $3,123,000. Net loss in the period totaled
approximately $2,223,000 and included stock-based compensation expense of
approximately $179,000 and depreciation and amortization expense of
approximately $214,000. Inventories increased by approximately $886,000. The
increase in inventories was a management decision to take advantage of favorable
buying opportunities. Accounts payable decreased by approximately $189,000.
Other current assets increased by approximately $74,000. Most of the increase in
other current assets was the result of accounts payable deposits to DRAM
manufactures required to secure raw material. Accrued liabilities decreased by
approximately $97,000 and trade receivable increased by approximately $61,000.
Net cash used in investing activities totaled approximately $753,000 for the six
month period ended October 31, 2012 and was primarily the result of the issuance
of a note receivable to Shoreline Memory described in Note 8 to the consolidated
financial statements.
Net cash provided by financing activities totaled approximately $1,343,000 for
the six month period ended October 31, 2012 and consisted primarily of proceeds
from borrowings under a revolving credit facility of approximately $1,618,000,
more fully described in Note 10 to the consolidated financial statements. The
Company also purchased approximately $142,000 of treasury stock and made
principal payment of $133,333 to Mr. Scheerr 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. The amount of
financing available to the Company under the agreement varies with the Company's
eligible accounts receivable and inventory. At October 31, 2012, the Company had
approximately $555,000 of additional financing available to it under the terms
of the agreement
15
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
1,775,000 shares of its common stock and warrants to purchase a total of
1,331,250 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 that the Company
entered into with Sheerr Memory on July 27, 2010. The Company has borrowed the
full $2,000,000 available under this agreement. Principal amounts due under this
obligation are $33,333 per month beginning on July 15, 2012. For the next fiscal
year following April 30, 2012, the principal amount due under this obligation is
$333,333. In each of four fiscal periods from May 1, 2013 thru April 30, 2017,
the principal amounts due under this obligation are $400,000. In the fiscal
period from May 1, 2017 thru June 30, 2017, the principal amount due on this
obligation is $66,667. Interest payable to Mr. Sheerr on October 31, 2012 was
$16,074.
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
16
The Company has no other material commitments.
Results of Operations
Revenues for the three month period ended October 31, 2012 were $6,959,000
compared to revenues of $10,406,000 for the comparable prior year period.
Revenues for the first six months of the current fiscal year were $14,958,000
compared to revenues of $20,676,000 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 42% year over year.
Revenues for the three and six months ended October 31, 2012 and 2011 by
geographic region are as follows:
Three months Six months
ended ended
October 31, October 31,
2012 2012
United States $ 6,005,147 $ 11,980,351
Europe 628,238 1,950,160
Other (principally Asia Pacific Region) 325,638 1,026,997
Consolidated $ 6,959,023 $ 14,957,508
Three months Six months
ended ended
October 31, October 31,
2011 2011
United States $ 8,570,416 $ 17,264,993
Europe 1,224,412 2,423,706
Other (principally Asia Pacific Region) 611,180 987,115
Consolidated $ 10,406,008 $ 20,675,814
Cost of sales for the three and six months ended October 31, 2012 were 5,772,000
and $12,076,000, respectively verses $7,885,000 and $15,260,000, respectively in
the prior year comparable periods. Cost of sales as a percentage of revenues for
the second quarter and first six months of fiscal 2013 were 83% and 81% of
revenues, respectively versus 76% and 74% for the same respective prior year
periods. The increase in cost of sales as a percentage of revenues in the
current fiscal year period was primarily the result of reduced average selling
prices. 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.
Additionally, in the second quarter of the current fiscal year the Company
recorded a $220,000 charge to record the write down of a discontinued product
inventory.
Engineering expense in the three and six months ended October 31, 2012 were
approximately $190,000 and $396,000, respectively, compared to $198,000 and
$379,000 for the same respective prior year periods.
Research and development expense in fiscal 2013's and 2012's second quarter and
six 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.
17
Selling, general and administrative (S,G&A) expense for the three and six month
period ended October 31, 2012 totaled $2,189,000 and $4,534,000, respectively,
compared to $3,376,000 and $6,829,000 for the same prior year periods. The
decrease in this year's second quarter and six month expense of approximately,
$1,187,000 and $2,295,000 respectively was the result of decreased sales and
marketing expense relate to the Company's XcelaSAN product. The decrease in
XcelaSAN S,G&A expense totaling approximately $785,000 in the second quarter and
approximately $1,364,000 for six months as compared to the prior fiscal year
periods. The balance of the decrease in the current fiscal year's second quarter
and six 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 six month period ended October 31,
2012 totaled $56,000 and $165,000 of expense, respectively, compared to expense
of $126,000 and $239,000, for the same prior year periods. Other expense in the
three month period ended October 31, 2012 consisted primarily of interest
expense of $80,000 offset by interest income of approximately $8,000.
Approximately, $16,000 of foreign currency transaction gains were recorded,
primarily as a result of the EURO strengthening relative to the US dollar. For
the six month period ended October 31, 2012 other expense of $165,000 consisted
of $151,000 interest expense offset by approximately $8,000 of interest income.
Additionally, approximately $22,000 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 October 31, 2011
consisted primarily of interest expense of $96,000 and $30,000 of foreign
currency transaction losses, primarily as a result of the EURO weakening
relative to the US dollar. For the six month period ended October 31, 2011
other expense of $239,000 consisted primarily of $198,000 of interest expense
and $41,000 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.
18
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 note receivable and other operating
allowances and accruals. Actual results could differ from those estimates.
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