Business Context and Reporting Period
Concierge Technologies, Inc. (identified in the request as Marygold Companies, Inc.) filed this unaudited Form 10-Q for the quarter and six-month period ended December 31, 2015. The company operated through Kahnalytics, Inc., which sold mobile video recording devices and pursued related software development, and Gourmet Foods, Ltd., a New Zealand producer and distributor of meat pies and bakery products.
Gourmet Foods was acquired effective August 1, 2015 and contributed approximately five months of results during the six-month period. The company also completed the divestiture of Wireless Village, doing business as Janus Cam, on May 7, 2015.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2015 | Six Months Ended December 31, 2015 |
|---|---|---|
| Net revenue | $993,064 | $1,728,623 |
| Cost of revenue | $680,083 | $1,248,184 |
| Gross profit | $312,981 | $480,439 |
| Approximate gross margin | 31.5% | 27.8% |
| Operating loss | $(8,240) | $(82,701) |
| Net loss | $(17,690) | $(90,734) |
| Comprehensive income/(loss) | $52,157 | $(107,091) |
| Basic and diluted loss per share | $(0.00) | $(0.00) |
- Gourmet Foods generated approximately $1.61 million of six-month revenue, $476,837 of gross profit and $28,243 of net income after taxes based on the segment disclosure.
- For the quarter, Gourmet Foods generated $996,564 of revenue, $313,219 of operating income before general and administrative expenses and $29,951 of net income.
- Six-month cash flow from operating activities was $274,890, compared with $111,191 in the prior-year period. Continuing operations generated $274,890, versus using $56,733 in the prior-year period.
- Investing activities used $1,630,387, including $1,519,802 for the Gourmet Foods acquisition and $110,585 for equipment.
- Cash and cash equivalents declined from $1,970,062 at June 30, 2015 to $586,888 at December 31, 2015.
- Current assets were $1,050,819 and current liabilities were $593,453, producing reported working capital of approximately $457,366.
- Total assets were $2,534,120, including $1,201,429 of net property and equipment and $268,431 of goodwill. Stockholders’ equity was $1,940,667.
- Debt consisted primarily of $8,500 in related-party notes, $8,500 in other notes payable, and $576,453 of accounts payable and accrued expenses. Two related-party notes totaling $8,500 were past due.
Material Changes Versus Prior Comparable Period
- Revenue increased from zero in the prior-year quarter and six-month period to $993,064 and $1,728,623, respectively, primarily because Gourmet Foods was acquired during the current fiscal year. The filing does not provide a comparable prior-year consolidated revenue base for the acquired business.
- The six-month net loss improved to $90,734 from $190,780, while the quarterly net loss improved to $17,690 from $29,147.
- Operating loss increased to $82,701 for the six-month period from $47,480, reflecting general and administrative expenses of $563,141 and transaction-related and post-acquisition audit costs.
- Prior-year results included substantial other expenses related to convertible debt and derivative accounting. Current-period other income was $3,614, compared with other expense of $124,127 in the prior-year period.
- The company’s asset base changed materially following the Gourmet Foods acquisition, with property and equipment, goodwill, inventory and New Zealand operating assets added to the consolidated balance sheet.
- Kahnalytics generated $117,700 of six-month revenue but ceased hardware sales during the quarter as management redirected resources toward data compilation, Internet-based applications and device integration.
- A one-for-ten reverse stock split became effective December 15, 2015. The authorized share count was unchanged; reported historical share and per-share data were presented on a reverse-split basis.
Guidance, Outlook, Risks and Unusual Items
- Management expected Gourmet Foods to be profitable for the fiscal year and planned to improve results through production automation, sales expansion and improved operating efficiency.
- Management intended to develop a Kahnalytics software project that it believed could produce a significant recurring revenue stream, although no launch date, revenue target or profitability guidance was provided.
- Management stated that available capital and expected subsidiary operations were sufficient to fund general and administrative expenses for the coming fiscal year, but the financial statements disclosed substantial doubt-related risks arising from the accumulated deficit and historical losses.
- The accumulated deficit was $6,440,305 at December 31, 2015. Management identified risks involving timely payments to vendors and suppliers, continued Kahnalytics research and development, achieving profitable operations at Gourmet Foods and foreign-currency fluctuations.
- Gourmet Foods had operating lease commitments totaling approximately $179,153 through fiscal 2019 and provided security arrangements for its facilities.
- The company accrued a $135,000 judgment related to Brookside Investments, although the filing states that the judgment had lapsed and a new court action would be required for legal remedies.
- On January 27, 2016, the board approved a $450,000 unsecured convertible promissory note with an entity affiliated with CEO Nicholas Gerber. The note bears 4% interest, converts at the holder’s option at $0.10 per share after 180 days, and matures five years after issuance.
- Foreign-currency translation produced a $16,357 loss for the six-month period and a $69,847 gain for the quarter, recorded in other comprehensive income or loss.
- The company reported no legal proceedings, unregistered equity sales or defaults upon senior securities during the period. Management concluded that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Verify the current corporate name, ticker and capital structure following the reverse stock split and any subsequent corporate transactions.
- Verify whether Gourmet Foods achieved the expected profitability and whether the acquisition generated sustainable cash flow.
- Verify the company’s post-period liquidity, including use of the $450,000 related-party convertible note and any additional financing or dilution.
- Assess the going-concern disclosure, accumulated deficit, declining cash balance and ability to fund operations without additional capital.
- Review the terms and potential dilution associated with the convertible note, outstanding preferred stock and other equity instruments.
- Evaluate exposure to New Zealand-dollar exchange-rate movements, lease obligations, accrued liabilities and the $135,000 judgment accrual.
- Confirm whether Kahnalytics’ shift from hardware sales to software and data services produced recurring revenue as anticipated.