U.S. GOLD CORP. quarterly report, Q1 FY2017

Filing identity and business context

Important filing mismatch: The supplied filing is a Form 10-Q for Dataram Corporation, not U.S. Gold Corp. It reports the three months ended July 31, 2016, and compares results with the three months ended July 31, 2015. The financial metrics below are Dataram’s and should not be attributed to U.S. Gold.

Dataram manufactured and resold memory products and performance solutions. During the quarter, it announced a proposed acquisition of exploration-stage U.S. Gold Corp., whose projects include Copper King in Wyoming and Keystone in Nevada. The transaction remained subject to closing conditions, shareholder approval and regulatory review; completion was not assured.

Financial performance and position

At July 31, 2016, cash was $149,000, current assets $3.251 million and current liabilities $2.233 million, yielding working capital of about $1.019 million. Total liabilities were $2.328 million and stockholders’ equity was $2.394 million. The revolving credit line balance was $1.049 million; $80,000 of related-party convertible notes was also outstanding. The company reported approximately $137,000 of additional borrowing availability. The credit facility had a $3.5 million maximum capacity and matured November 30, 2016, unless renewed or terminated earlier.

Cash increased by $92,000 during the quarter, to $149,000. Operating cash inflow included a $1.129 million reduction in receivables and a $429,000 noncash stock-compensation adjustment. Financing cash use was $727,000, mainly repayments on the revolving credit line. No capital expenditure figure is separately identified in the supplied cash-flow statement.

Material changes and unusual items

• Revenue fell 33% year over year. Management attributed the decline to average selling prices falling more than 35% and approximately $1.1 million less revenue after reducing resources devoted to a marginally profitable broker product line.
• Cost of sales declined, but increased from 81% to 85% of revenue. Management said it sought to protect market share amid falling selling prices; gross margin consequently contracted.
• Selling, general and administrative expense rose to $1.556 million from $1.404 million. It included $429,000 of stock-based compensation, versus $213,000 a year earlier.
• Series B preferred holders converted 279,887 preferred shares into 1,865,913 common shares, with a stated converted value of $3.415 million. A one-for-three reverse stock split became effective in July; reported share and per-share figures reflect the split.
• After quarter-end, Dataram sold Series D convertible preferred shares for gross proceeds of $503,000, convertible into 369,900 common shares. It also reported terminating an employee who was associated with a related-party supplier.

Outlook, risks and contingencies

Going concern: Management disclosed substantial doubt about Dataram’s ability to continue as a going concern. It reported a $1.221 million loss for the fiscal year ended April 30, 2016, followed by a $927,000 first-quarter loss. The company estimated it may need up to $1 million of additional working capital over the next 12 months. If revenue growth falls short, it may seek debt or equity financing and reduce overhead; financing availability and terms are uncertain.

No quantified operating guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year or future results. Other risks include DRAM cost and availability, customer and receivable concentration, foreign-currency exposure, and the proposed U.S. Gold transaction’s closing conditions. Several employment-related lawsuits and complaints were disclosed; the company said any potential loss could not be estimated. Future operating-lease payments totaled $572,000, including $202,000 to a related party.

Most important facts for investors to verify

• Confirm the intended issuer: this source is Dataram’s 10-Q, not a U.S. Gold Corp. filing.
• Check the status and final terms of the proposed U.S. Gold acquisition, including shareholder and regulatory approvals and consideration to be issued.
• Verify Dataram’s ability to fund operations, the availability of additional capital, and renewal or repayment of the credit facility due November 30, 2016.
• Assess whether revenue, selling prices and gross margins stabilized after the reported declines, and whether cost reductions improved results.
• Review the dilution implications of preferred-stock conversions, stock awards, warrants and the post-quarter Series D financing.
• Monitor developments in the disclosed legal matters and customer concentration; the filing does not quantify potential litigation losses.