Marygold Companies, Inc. — Form 10-Q Summary
Filing identity: The provided filing is for Concierge Technologies, Inc., the company’s reported legal name at the time, rather than Marygold Companies, Inc. The report covers the three months ended September 30, 2016, filed November 18, 2016. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Reporting Period
The company operated through three wholly owned subsidiaries: Kahnalytics, a U.S. vehicle-video and data-streaming business; Gourmet Foods, a New Zealand manufacturer and distributor of meat pies and bakery products; and Brigadier Security Systems, a Canadian security-alarm installation and monitoring business. Brigadier was acquired on June 2, 2016, so the current period includes its operations but the prior-year comparison does not.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2016 | Comparable 2015 Period |
|---|---|---|
| Net revenue | $2.095 million | $0.722 million |
| Gross profit | $0.969 million | $0.164 million |
| Gross margin | 46.2% | 22.7% |
| Operating loss | $(0.065) million | $(0.074) million |
| Operating margin | (3.1%) | (10.3%) |
| Loss before taxes | $(0.073) million | $(0.073) million |
| Income tax provision | $0.043 million | None |
| Net loss | $(0.116) million | $(0.073) million |
| Comprehensive loss | $(0.126) million | $(0.159) million |
| Net cash provided by operating activities | $0.007 million | $0.121 million |
Revenue increased approximately 190%, primarily from the inclusion of Brigadier and a full quarter of Gourmet Foods. Gourmet Foods generated $1.206 million of revenue and a 32.2% gross margin. Brigadier generated approximately $0.825 million of revenue and a 71.7% gross margin, producing $0.115 million of net income. Kahnalytics generated approximately $0.065 million of revenue and incurred a $0.017 million net loss.
General and administrative expense increased to $1.033 million from $0.238 million, reflecting the larger consolidated operations, acquisition-related costs, audit costs, depreciation and amortization. Depreciation and amortization totaled approximately $0.100 million. The reported net loss also included a $0.043 million income tax provision, $0.013 million of interest expense, and an $0.008 million loss on disposal of equipment.
Cash Flow, Liquidity, Debt and Capitalization
- Cash and cash equivalents were $0.992 million at September 30, 2016, down from $1.060 million at June 30, 2016.
- Current assets were $2.263 million and current liabilities were $2.828 million, resulting in a current ratio of approximately 0.80x and negative working capital of approximately $0.564 million.
- Operating activities provided only $7,015 of cash. Investing activities used $40,357, primarily for equipment, and financing activities used $5,000 for repayment of a related-party loan.
- Current debt included $1.300 million of convertible promissory notes payable to related parties, $0.304 million of other related-party notes, $0.009 million of notes payable, and $0.214 million of purchase consideration payable related to Brigadier.
- The related-party convertible notes generally bear interest at 4%, increase to 8% upon default, mature five years from issuance, are unsecured, and are convertible into common stock at prices ranging from $0.10 to $0.13 per share.
- Stockholders’ equity was $1.810 million, compared with $1.936 million at June 30, 2016. The accumulated deficit was $6.548 million.
- There were 67,953,870 common shares and 3,754,355 Series B preferred shares outstanding at September 30, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $1.374 million, but the comparison is not fully comparable because Brigadier was not owned in 2015 and Gourmet Foods contributed only two months of revenue in the 2015 comparative period.
- Gross margin improved substantially, driven by the acquired food and security businesses.
- Operating loss narrowed by $9,876 despite a significant increase in general and administrative expense.
- Net loss worsened by $43,250 because of the income tax provision, interest expense, and higher non-operating costs.
- Comprehensive loss improved because foreign-currency translation loss declined to $9,738 from $86,204.
- Cash flow from operations declined sharply from $121,420 to $7,015.
- The company’s original Kahnalytics hardware model was replaced with a subscription and data-plan model. Management reported limited initial subscription revenue and continued losses in that segment.
Guidance, Outlook, Risks and Unusual Items
Management expected Gourmet Foods and Brigadier to be profitable during the fiscal year and believed that subsidiary growth, improved Kahnalytics recurring revenue, additional acquisitions and possible licensing arrangements could support future operations. No quantified revenue, earnings or cash-flow guidance was provided.
The financial statements include a going-concern discussion. Management cited the accumulated deficit, historical losses, limited liquidity, the need to maintain vendor relationships, continued product development, competition, obtain financing and improve subsidiary profitability. Management stated that planned actions, including working-capital management, acquisitions and a subsequent $200,000 debt issuance, were expected to support operations for the next 12 months; however, the filing states that asset recoverability depends on continued operations, financing and successful future performance.
- Customer concentration is material: two Brigadier customers represented 51% of consolidated revenue and approximately 35% of accounts receivable. A major Gourmet Foods grocery customer represented approximately 20% of revenue, and a gasoline-station consortium represented approximately 41%.
- The company depends on key licensing, monitoring and sales-channel relationships, including Kahnalytics’ software platform and Brigadier’s third-party alarm-monitoring arrangement.
- Uninsured cash deposits totaled approximately $0.840 million across U.S., Canadian and foreign accounts.
- Lease commitments totaled approximately $0.332 million for Gourmet Foods and $0.118 million for Brigadier. A $135,000 judgment was accrued even though the filing states the judgment had lapsed and would require a new legal action to enforce.
- The company entered into a conditional agreement to acquire approximately 97% of Wainwright Holdings, an affiliate of the CEO and existing shareholders. Closing was subject to conditions including a fairness opinion, and the filing stated there was no assurance the transaction would close.
- After the quarter, the company paid the $214,035 Brigadier purchase-price adjustment and issued a $200,000 unsecured promissory note to Wainwright Holdings at 4% interest, increasing to 8% upon default.
- The filing states that disclosure controls and procedures were effective and that no significant changes in internal control over financial reporting occurred during the period.
Important Facts for Investors to Verify
- Confirm the issuer’s corporate name and corporate actions because the supplied filing identifies the registrant as Concierge Technologies, Inc., while the request identifies Marygold Companies, Inc.
- Review the subsequent closing status, consideration and accounting treatment of the proposed Wainwright Holdings transaction, including its related-party implications.
- Assess the company’s ability to fund operations given negative working capital, minimal operating cash generation, substantial related-party debt and the going-concern disclosure.
- Separate organic performance from acquisition-driven growth and account for the non-comparable 2015 periods.
- Verify customer concentration, accounts-receivable collectability, key monitoring and software agreements, and uninsured cash exposure.
- Evaluate whether Brigadier and Gourmet Foods can sustain profitability and whether Kahnalytics’ subscription model can generate recurring positive cash flow.