Marygold Companies, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 30, 2023, the Company’s fiscal first quarter, and compares results with the three months ended September 30, 2022. Marygold operates through subsidiaries in investment fund management, food products, security systems, beauty products, and financial technology and advisory services in the United States, New Zealand, Canada, and the United Kingdom.
Marygold & Co. completed development of its U.S. fintech application in June 2023 and began commercial onboarding and marketing efforts during the quarter. The Company reported as a smaller reporting company and stated that its disclosure controls were effective.
Key financial metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net revenue | $8.24 million | $8.92 million | Down $0.69 million |
| Gross profit | $6.20 million | $6.90 million | Down $0.70 million |
| Gross margin | 75.3% | 77.3% | Down approximately 2.0 points |
| Operating income (loss) | $(1.04) million | $0.78 million | Decrease of $1.81 million |
| Income (loss) before taxes | $(0.80) million | $0.72 million | Decreased $1.53 million |
| Net income (loss) | $(0.50) million | $0.50 million | Decrease of approximately $1.0 million |
| Basic and diluted EPS | $(0.01) | $0.01 | Unfavorable change |
| Net cash from operating activities | $0.29 million | $0.88 million | Down $0.59 million |
Revenue consisted primarily of fund management fees of $5.05 million, food products of $1.73 million, beauty products of $0.77 million, security systems of $0.55 million, and financial services of $0.13 million. Fund management revenue represented approximately 61% of consolidated revenue and was earned from related-party funds.
At September 30, 2023, cash and cash equivalents were $6.99 million, restricted cash was $0.41 million, short-term investments were $13.26 million, and working capital was approximately $22.4 million. Total assets were $35.47 million and total liabilities were $5.59 million.
Debt was limited relative to liquidity. Property and equipment loans totaled approximately $0.43 million, including approximately $0.33 million owed by Brigadier and approximately $0.10 million related to a New Zealand solar-energy finance lease. Operating lease liabilities totaled $0.71 million. A $0.60 million deferred purchase consideration payment related to the Tiger acquisition was due December 31, 2023, subject to possible downward adjustment.
Cash, cash equivalents, and restricted cash declined by $1.19 million during the quarter. Operating activities provided $0.29 million, investing activities used $1.54 million, and financing activities used $0.004 million. Investing cash flows included $9.34 million of investment purchases and $7.83 million of investment-sale proceeds.
Material changes versus the prior comparable period
- Consolidated revenue decreased 7.7%, primarily because average assets under management declined to approximately $3.5 billion from $3.9 billion, reducing USCF management-fee revenue by approximately $0.37 million.
- Food-product revenue declined approximately $0.21 million, with management citing higher shipping costs and unfavorable foreign-currency translation. Food gross margin declined to approximately 24% from 32%.
- Security-system revenue declined approximately $0.08 million, primarily due to currency translation, and gross margin declined to approximately 55% from 61%.
- Beauty-product revenue was broadly flat, but the segment’s operating loss increased to approximately $0.32 million from $0.02 million. Higher marketing costs, distribution changes, and a new product launch contributed to the deterioration.
- Marygold U.S. fintech revenue was only $401, while segment expenses were approximately $1.45 million, producing a loss of approximately $1.45 million. Expenses increased approximately $0.81 million year over year.
- Total operating expenses increased to $7.23 million from $6.12 million. The increase was primarily associated with fintech development and launch costs, higher marketing expense, and stock-based compensation.
- Other income was $0.23 million compared with other expense of $0.05 million in the prior-year quarter, largely reflecting interest and dividend income and investment gains.
- The Company recorded a $0.30 million income-tax benefit compared with a $0.23 million tax provision in the prior-year quarter.
- Comprehensive loss was $0.59 million, including a $0.09 million foreign-currency translation loss, compared with comprehensive income of $0.18 million in the prior-year quarter.
Guidance, outlook, risks, contingencies, and unusual items
Management expects continued investment in Marygold & Co. and intends to expand the fintech offering in the United States and, through Marygold UK and Tiger, potentially in the United Kingdom. Management expects Original Sprout to incur short-term losses while it rebuilds domestic distribution channels and launches marketing initiatives, but expects improved sales and profitability in the coming fiscal year. Management also expects moderate growth at Brigadier, improved efficiency at Gourmet Foods, and continued development of new USCF fund products.
The Company stated that it expects to have sufficient capital for general and administrative expenses and its stated objectives over the next fiscal year, assuming subsidiaries perform as projected. However, the fintech business had approximately $1.5 million of future service-provider commitments as of September 30, 2023, including approximately $1.1 million due during the remainder of fiscal 2024.
USCF’s business is dependent on assets under management, fund performance, market conditions, and regulatory compliance. Approximately 61% of quarterly consolidated revenue came from USCF-related fund management fees, creating significant concentration and exposure to commodity-market volatility.
USCF and USO remain defendants in securities and derivative litigation related to 2020 disclosures and market conditions. The Company has recorded no accrual because it cannot reasonably estimate the timing, outcome, or potential loss. An adverse outcome could materially affect financial condition, results of operations, and cash flows. The Optimum Strategies action was dismissed in March 2023, with no appeal filed.
In 2021, USCF and USO resolved SEC and CFTC matters involving cease-and-desist orders and aggregate civil monetary penalties of $2.5 million, paid through permitted offsets. The filing also identifies risks from foreign-currency movements, customer and fund concentration, ingredient and packaging availability, economic and geopolitical disruption, regulatory changes, and the ability to attract customers to the fintech application.
The Company adopted the expected-credit-loss standard during the quarter without a material change in the recognition of receivable losses. No goodwill, intangible-asset, or long-lived-asset impairment was recorded.
Important facts for investors to verify
- Whether Marygold & Co. can convert its post-launch investment and marketing spending into meaningful recurring revenue and positive operating cash flow.
- Current and expected assets under management at USCF and the resulting effect on the Company’s largest revenue stream.
- The status and potential financial exposure of the pending USO-related class and derivative actions, for which no loss estimate or accrual has been recorded.
- The funding requirements and payment schedule for the $1.5 million of fintech vendor commitments and the $0.60 million deferred Tiger purchase payment.
- Whether Original Sprout’s distribution changes and marketing campaign improve revenue, gross margin, and operating results.
- The composition, liquidity, and market-value volatility of the $13.26 million investment portfolio, including related-party fund holdings.
- The effect of foreign-currency movements on New Zealand, Canadian, and U.K. operations and reported consolidated results.
- The impact of stock-based awards, including 490,881 outstanding options, 709,560 nonvested restricted shares, and approximately $1.34 million of remaining stock-based compensation expense.