Filing summary
Important identity and period discrepancy: The request identifies U.S. Gold Corp. and 2011 Q2, but the supplied Form 10-Q is for Dataram Corporation, covering the quarter and six months ended October 31, 2011 (fiscal 2012 second quarter). The summary below reflects the supplied filing, not U.S. Gold Corp.
Business context and reporting period
Dataram develops, manufactures and sells memory products for servers and workstations, and is developing its XcelaSAN storage-caching product line. The filing reports unaudited results for the three and six months ended October 31, 2011, compared with the same periods in 2010. The company says interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2011 | Six months ended Oct. 31, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $10.406 million | $20.676 million | $10.949 million / $23.693 million |
| Gross profit and margin | $2.521 million; 24.2% | $5.415 million; 26.2% | $2.413 million; 22.0% / $5.536 million; 23.4% |
| Operating loss | $1.053 million | $1.793 million | $1.664 million / $2.793 million |
| Net loss | $1.179 million | $2.033 million | $1.715 million / $2.954 million |
| Basic and diluted loss per share | $0.11 | $0.19 | $0.19 / $0.33 |
At October 31, 2011, cash was $544,000, working capital was approximately $3.403 million, and the current ratio was 1.6. Current liabilities totaled $5.993 million, including $1.732 million drawn on the revolving credit line and $1.500 million due to a related party. The bank facility had approximately $557,000 of additional availability; the company was in compliance with its covenants.
For the six months, operating cash use was $1.035 million, investing cash use was $1.342 million, and financing provided $2.576 million. Investing included $907,000 of capitalized software development, $224,000 of equipment additions and $211,000 related to an acquisition. Financing included approximately $2.998 million net proceeds from an equity offering, partly offset by $422,000 of revolving-credit repayments. The filing reports no income tax expense.
Changes versus the prior comparable period
- Revenue declined 5.0% for the quarter and 12.7% for the six-month period. Management attributed the decline primarily to lower average selling prices following a roughly 42% year-over-year fall in DRAM purchase prices.
- Cost of sales as a share of revenue improved to 76% for the quarter and 74% for the six months, from 78% and 77%, respectively. Management attributed the improvement partly to consolidating two manufacturing facilities into one, with anticipated fiscal-year manufacturing expense reductions of approximately $1.0 million.
- Quarterly and six-month net losses narrowed year over year. Research and development expense was nil in the 2011 periods versus $865,000 and $1.760 million in 2010; the company capitalized $274,000 and $907,000, respectively, of XcelaSAN development costs.
- Selling, general and administrative expense rose to $3.376 million for the quarter and $6.829 million for six months, with management citing higher XcelaSAN selling and marketing costs.
- Cash increased from $345,000 at April 30, 2011, while accounts payable and inventory decreased. Common shares outstanding rose from 8,928,309 to 10,703,309 following the May 2011 offering.
Outlook, risks and unusual items
Management said it expected cash from the equity offering, financing arrangements and operations to satisfy liquidity needs over the next 12 months, while cautioning that projected revenues may not be achieved. Management said long-term liquidity requires profitable operations and positive cash flows. XcelaSAN was still under development; management was pursuing both sales and alternative ways to monetize the investment.
Key stated risks include general economic conditions, DRAM pricing and availability, demand for memory and storage-caching products, competition, and delays in developing or commercializing new products. The company had no material changes to the risk factors in its latest Form 10-K and reported no reportable legal proceedings. It also disclosed foreign-currency exposure, primarily to the euro, without current hedging contracts.
Related-party arrangements warrant attention: the company purchased approximately $3.328 million of inventory from Sheerr Memory, owned by an employee and executive officer, during the six-month period. After quarter-end, on December 14, 2011, the company borrowed $1.5 million under a secured note from that executive and repaid the $1.5 million balance under the Sheerr Memory financing arrangement. The filing also describes contingent acquisition payments tied to the acquired MMB unit’s performance.
Most important facts to verify
- Confirm the issuer and reporting period: the supplied document is Dataram Corporation’s October 31, 2011 Form 10-Q, not a U.S. Gold Corp. filing.
- Review whether revenue and cash-flow projections were realized, especially the assumption of XcelaSAN sales contributing to liquidity.
- Assess the availability and terms of the bank revolver and related-party secured financing, including the post-quarter-end replacement borrowing.
- Track XcelaSAN commercialization, capitalized development costs and the timing of any resulting amortization.
- Evaluate the effects of DRAM price changes, competitive pressure and related-party inventory purchases on margins and liquidity.