Description of Business and Significant Accounting Policies

12 Months Ended

Apr. 30, 2014

Accounting Policies [Abstract]

Description of Business and Significant Accounting Policies

(1) Description of Business and Significant Accounting Policies

Dataram Corporation (“the Company”) 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.

Liquidity and Basis of Presentation

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. For the fiscal years ended April 30, 2014, 2013 and 2012, the Company incurred losses in the amounts of approximately $2,609,000, $4,625,000 and $3,259,000, respectively. Net cash used in operating activities totaled approximately $1,554,000, $3,882,000 and $1,218,000 for the fiscal years ended April 30, 2014, 2013 and 2012, respectively.

Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. Our future is dependent upon our ability to obtain financing, raise capital through the sales of equity and or debt securities and upon future profitable operations. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating. The Company continues to seek out opportunities to trim overhead expenses to meet revenues.

If current and projected revenue growth does not meet estimates, the Company may continue to choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, the Company does not have any commitments or assurances for additional capital, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence.

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

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents

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

Accounts Receivable

Accounts receivable consist of the following:

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

Inventories

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

Property and Equipment

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

Repair and maintenance costs are charged to operations as incurred.

Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less cost to sell, and no longer depreciated. The Company considers various valuation factors, principally undiscounted cash flows, to assess the fair values of long-lived assets.

Goodwill and Intangible Assets

Goodwill:

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

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

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

Intangible Assets:

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

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

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

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

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

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

Fair Value of Financial Instruments:

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

• Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

• Level 2: Inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly-quoted intervals.

• Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.

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

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

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

Revenue Recognition

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

Engineering and Research and Development

Research and development costs are expensed as incurred, including Company-sponsored research and development and costs of patents and other intellectual property that have no alternative future use when acquired and in which we had an uncertainty of receiving future economic benefits. Development costs of a computer software product to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Technological feasibility of a computer software product is established when all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications (including functions, features and technical performance requirements) are completed. The Company had been developing computer software for its XcelaSAN storage caching product line. On November 4, 2010, the Company determined that technological feasibility of the product was established, and development costs subsequent to that date have been capitalized. Prior to November 4, 2010, the Company expensed all development costs related to this product line. In the third quarter of fiscal year ended April 30, 2012 when the product was made available for general release to customers, the Company discontinued capitalizing development costs.

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

Advertising

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

Income Taxes

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

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents in financial institutions and brokerage accounts. To the extent that such deposits exceed the maximum insurance levels, they are uninsured. The Company performs ongoing evaluations of its customers’ financial condition, as well as general economic conditions and, generally, requires no collateral from its customers. At April 30, 2014 and 2013, amounts due from one customer totaled approximately 30% and 19%, respectively, of accounts receivable.

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

Net Income (Loss) Per Share

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

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

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

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

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

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

Product Warranty

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

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

Use of Estimates

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

Stock-Based Compensation

At April 30, 2014, the Company has stock-based employee and director compensation plans, which are described more fully in Note 6. New shares of the Company’s Common Stock are issued upon exercise of stock options.

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.

The Company’s consolidated statement of operations for fiscal year ended April 30, 2014 includes $43,000 of stock based compensation expense. Stock based compensation expense is recognized in the results 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 has been reflected in additional paid-in capital in the accompanying balance sheet as of April 30, 2014. In fiscal 2013 and fiscal 2012, stock-based compensation expense totaled $231,000 and $451,000, respectively. A corresponding increase is reflected in additional paid-in capital for these years. 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 fiscal year ended April 30, 2014 is as follows:

						Weighted
				Weighted		average		Aggregate
				average		remaining		intrinsic
	Shares			exercise price		contractual life		value(1)
Balance April 30, 2013		311,575		$	12.40		5.02	$	—
Granted		—		$	—		—		—
Exercised		—			—		—		—
Expired		(47,331	)	$	12.26		—		—
Balance April 30, 2014		264,244		$	12.42		4.46	$	6,250
Exercisable April 30, 2014		251,744		$	12.91		4.23	$	3,125
Expected to vest April 30, 2014		250,000		$	12.42		4.46	$	6,250

All amounts shown have adjusted to reflect the reverse 6-for-1 stock split effective March 18, 2013.

(1) These amounts represent the difference between the exercise price and the closing price of Dataram Common Stock as of the end of the reporting period, $2.69 on April 30, 2014 as reported on the NASDAQ Stock Market. There are 25,000 in-the-money options outstanding at April 30, 2014.

During fiscal 2014, 34,498 options completed vesting. As of April 30, 2014, there was approximately $14,000 of total unrecognized compensation expense related to stock options. This expense is expected to be recognized over a weighted average period of approximately six months. At April 30, 2014, 8,333 shares were authorized for future grant under the Company’s stock option plans.

The fair value of each stock option granted during the year is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	2014		2013		2012
Expected life (years)		—		3.0 to 5.75		3.0 to 3.3
Expected volatility		—		77%		77%
Expected dividend yield		—		—		—
Expected forfeiture rate		—		5.0%		5.0%
Risk-free interest rate		—		0.5% to 0.6%		0.5% to 0.6%
Weighted average fair value of options granted during the year		—	$	0.90	$	0.56

The expected life represents the period that the Company’s stock-based awards are expected to be outstanding and was calculated using the simplified method pursuant to SEC Staff Accounting Bulletin (SAB) Nos. 107 and 110. Expected volatility is based on the historical volatility of the Company’s Common Stock using the daily closing price of the Company’s Common Stock, pursuant to SAB 107. Expected dividend yield assumes the current dividend rate remains unchanged. Expected forfeiture rate is based on the Company’s historical experience. The risk-free interest rate is based on the rate of U.S Treasury zero-coupon issues with a remaining term equal to the expected life of the option grants.