U.S. GOLD CORP. annual report, FY2017

Business context and reporting period

Filing identity: Although the request identifies U.S. Gold Corp., the supplied Form 10-K is filed by Dataram Corporation for the fiscal year ended April 30, 2017. It reports Dataram’s memory business before its May 23, 2017 merger with U.S. Gold Corp. The merger was accounted for as a reverse merger, with U.S. Gold deemed the accounting acquirer; the filing therefore does not present a full year of U.S. Gold’s historical financial results.

Before the merger, Dataram manufactured and sold memory products and related services. After closing, the combined company described two businesses: junior gold exploration through U.S. Gold and the legacy memory business through Dataram Memory. U.S. Gold shareholders received shares representing approximately 91% of the combined company.

Financial performance and liquidity

Amounts below are for Dataram’s fiscal years ended April 30 and are in U.S. dollars; financial statement amounts are generally presented in thousands.

Revenue fell 31%. Management attributed the decline mainly to reduced sales resources for a marginally profitable broker product line, lowering revenue by about $3.3 million, and domestic weakness. Gross margin declined as the company lowered selling prices to defend market share. SG&A fell to $4.516 million from $5.767 million, reflecting broker-business and other cost reductions; engineering expense was $185,000 versus $191,000.

At April 30, 2017, cash was $155,000, current assets were $3.358 million, current liabilities were $2.774 million, and stockholders’ equity was $1.956 million. The revolving credit facility had $1.340 million outstanding and no remaining availability at year-end; the facility was secured by substantially all company assets. A $250,000 related-party convertible note from U.S. Gold was issued in April 2017, bears 9% interest, and was due six months after issuance. Management reported approximately $184,000 of borrowing availability on July 25, 2017. Operating cash use improved from FY2016, aided in part by lower receivables and inventory. Lease commitments totaled $517,000.

Material changes and unusual items

• On May 23, 2017, the merger closed. The filing says the transaction changed control and the majority of the board; historical post-merger reporting is to reflect U.S. Gold as accounting acquirer.
• A 1-for-4 reverse stock split became effective May 8, 2017; the filing also reflects a prior 1-for-3 split effective July 11, 2016.
• FY2017 included a $544,000 noncash Series D preferred-stock dividend, increasing the loss attributable to common shareholders to $2.459 million. FY2016 included a $190,000 gain from selling state net operating losses and a $22,000 debt-extinguishment gain.
• At April 30, 2017, memory-business backlog was $399,000, versus $274,000 a year earlier. Management expected it to ship mostly in the first quarter of FY2018, but orders could generally be canceled.
• After year-end, U.S. Gold completed a private placement of approximately $500,000 on July 4, 2017. The filing reports that 36,820 Series C preferred shares had converted into 3,682,000 common shares from May 1 through July 27, 2017.

Outlook, risks and contingencies

Management stated that cash held by Dataram and U.S. Gold was expected to sustain operations for the foreseeable future through one year and one day from the financial-statement issuance date. This was not a revenue or profitability forecast. The filing also states that the mining subsidiary lacked sufficient funds for its planned programs: management estimated up to $500,000 for the first year and up to $2 million for the second year of Keystone exploration and up to $500,000 annually for Copper King maintenance and development. Additional financing was uncertain and could dilute shareholders or impose debt obligations.

U.S. Gold is an exploration-stage company with no mining operations; discovery of economically recoverable deposits, permitting, financing, property-title validity, environmental compliance, gold prices, and availability of equipment and contractors are material risks. The memory business faces intense competition, DRAM price and supply volatility, customer concentration, and ongoing losses. Two customers represented approximately 29% and 11% of FY2017 revenue. Two consolidated lawsuits involving a former CEO remained pending, and the company said any potential loss could not be estimated. No cash dividends were expected in the foreseeable future.

The auditor issued an unmodified opinion on the financial statements. Management said disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.

Most important facts for investors to verify

• Confirm the reporting-entity and accounting implications of the reverse merger, including which company’s historical results are presented and how merger consideration and acquired assets and liabilities are ultimately valued.
• Review post-merger cash, debt, financing proceeds, available credit, and the assumptions supporting management’s stated liquidity runway; the filing’s year-end cash and borrowing availability were limited.
• Check the final share count, Series C conversions, escrowed shares, warrants, options, and any further financing for potential dilution; the filing contains complex merger consideration and preferred-stock disclosures.
• Assess the funding needs, permits, title status, exploration results, and environmental exposure of the Copper King and Keystone projects; the filing provides no assurance of mine development or profitability.
• Track memory-business revenue, margins, customer concentration, and whether the reported backlog converts to sales; the business had declining revenue and continuing losses.
• Monitor the two lawsuits and related-party arrangements; the filing states that potential litigation losses cannot currently be estimated.