The Marygold Companies, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2022, filed February 14, 2023. The filing is unaudited and compares results with the periods ended December 31, 2021. The company operates investment fund management, food products, security systems, beauty products, and developing financial technology businesses.
Business Context
- USCF Investments manages or advises exchange-traded products with approximately $3.7 billion of assets under management at December 31, 2022. Average AUM was approximately $3.8 billion versus $4.2 billion in the prior-year comparable periods.
- Marygold & Co. remained in the development stage, with commercial fintech services expected to launch during fiscal 2023.
- Marygold UK includes Tiger Financial and Asset Management, acquired June 20, 2022. Tiger had approximately £35 million of AUM at December 31, 2022.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2022 | Three Months Ended Dec. 31, 2021 | Six Months Ended Dec. 31, 2022 | Six Months Ended Dec. 31, 2021 |
|---|---|---|---|---|
| Net revenue | $8.77 million | $9.45 million | $17.70 million | $19.17 million |
| Gross profit | $6.54 million | $7.03 million | $13.44 million | $14.11 million |
| Gross margin | 74.6% | 74.4% | 75.9% | 73.6% |
| Operating income (loss) | $0.10 million | $1.33 million | $0.88 million | $(0.32) million |
| Operating margin | 1.1% | 14.0% | 5.0% | (1.7)% |
| Net income (loss) | $0.18 million | $1.02 million | $0.68 million | $(0.86) million |
| Basic/diluted EPS | $0.00 | $0.03 | $0.02 | $(0.02) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $1.02 million | $(1.45) million |
Revenue and Segment Performance
- Six-month revenue declined approximately 8%, primarily due to lower USCF fund-management revenue and declines in food and beauty products, partly offset by $258 thousand of Marygold UK revenue.
- USCF Investments revenue decreased 6% to $10.69 million for the six months, reflecting lower AUM.
- Food-products revenue declined 13% to $3.87 million for the six months. Management changed product mix toward higher-margin products in response to increased ingredient costs.
- Beauty-products revenue declined 21% to $1.59 million for the six months, with continued pressure from lower online selling prices and distribution-channel restructuring.
- Security-systems revenue decreased 3% to $1.29 million for the six months, while segment net income increased to $180 thousand from $141 thousand.
- Marygold UK contributed $258 thousand of revenue and $23 thousand of net income for the six months.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $14.58 million at December 31, 2022, compared with $12.92 million at June 30, 2022. Cash, cash equivalents and restricted cash totaled $14.99 million.
- Working capital was approximately $22 million. Current assets were $26.17 million and current liabilities were $4.20 million.
- Operating activities provided $1.02 million of cash during the six months, compared with $1.45 million used in the prior-year period.
- Investing activities provided $65 thousand, including $1.0 million of investment-sale proceeds, offset by $634 thousand paid toward Tiger purchase consideration and $267 thousand of investment purchases.
- Capital expenditures were $35 thousand. Financing activities used $13 thousand, primarily for debt and finance-lease repayments.
- Third-party debt was approximately $0.4 million, principally a Brigadier mortgage with approximately $341 thousand outstanding and maturity on June 30, 2024. The parent company had no debt.
- Operating lease liabilities totaled $1.25 million; the company also had a $126 thousand solar-energy finance lease liability.
- Total assets were $35.22 million and total liabilities were $5.46 million at December 31, 2022.
Material Changes Versus the Prior Comparable Period
- Quarterly net income fell 82% to $182 thousand, primarily because of lower revenue and approximately $0.7 million of higher operating expenses, including fintech-development spending.
- Six-month net income improved from an $858 thousand loss to $679 thousand of income, largely because the prior-year period included a $2.5 million SEC/CFTC settlement expense.
- Six-month operating income improved to $877 thousand from a $321 thousand operating loss, despite lower revenue.
- Corporate headquarters and Marygold generated a six-month net loss of approximately $3.25 million, including approximately $1.4 million of Marygold fintech-development expenses.
- The company issued 277,037 restricted stock awards and 50,000 stock options during the six months ended December 31, 2022.
Guidance, Outlook and Management Commentary
- Management expects Original Sprout’s transition toward traditional retail and online channels to support future revenue growth, although initial launch and marketing costs may continue.
- Management expects moderate growth from Brigadier and improved efficiency, product offerings and market share at Gourmet Foods and Printstock.
- USCF Investments plans to develop additional fund products. Subsequent to quarter-end, the USCF Sustainable Battery Metals Strategy Fund launched and USCF Advisers purchased $2.5 million of shares.
- Management expects Marygold’s fintech services to launch during fiscal 2023 and intends to expand the model into the U.K. through Marygold UK and Tiger.
- As of December 31, 2022, Marygold had approximately $1.5 million of future service-provider commitments, including approximately $700 thousand due in fiscal 2023.
Risks, Contingencies and Unusual Items
- USCF and USO remain defendants in securities and derivative litigation related to 2020 oil-market conditions. No accrual has been recorded because the timing, outcome and potential losses cannot reasonably be estimated; an adverse outcome could materially affect financial condition, results and cash flows.
- The SEC and CFTC settlement was resolved in the prior year for aggregate civil penalties of $2.5 million and remains a significant comparability item.
- Revenue concentration is material: USCF’s USO fund represented 47% of fund-management revenue for both the quarter and six months. Gourmet Foods and Brigadier also depend on major customers and contractual relationships.
- Marygold’s fintech platform previously experienced fraudulent account activity involving approximately 80 accounts and approximately $103 thousand of misappropriated funds. The application was removed from app stores during remediation and remains under development.
- Operations are exposed to AUM volatility, commodity and financial-market conditions, foreign exchange movements, ingredient and supply costs, customer concentration, regulatory requirements, COVID-19 effects and geopolitical disruption.
- The company had approximately $0.3 million of unrecognized tax benefits at December 31, 2022.
Important Facts for Investors to Verify
- Whether declining AUM and fund-management revenue continue to pressure consolidated results.
- The timing, costs, adoption and regulatory status of the Marygold fintech launch.
- The outcome and potential financial exposure from the pending USO-related litigation.
- Whether Original Sprout’s distribution restructuring and Gourmet Foods’ pricing and product-mix changes improve revenue and margins.
- The company’s customer and related-party concentration, particularly USCF fund revenue and receivables.
- Actual cash requirements for Tiger purchase consideration, fintech vendor commitments, leases and ongoing acquisitions.