Business Context and Reporting Period
Concierge Technologies, Inc. (the filing entity identified in the supplied document) filed this unaudited Form 10-Q for the three and six months ended December 31, 2018, its fiscal second quarter. The company operated through four primary subsidiaries: Wainwright investment fund management, Gourmet Foods in New Zealand, Brigadier security systems in Canada, and Original Sprout beauty products in the United States. The filing identifies the registrant as a smaller reporting company and states that it was not a shell company.
Financial Results and Position
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $6.70 million | $7.37 million | $13.86 million | $14.59 million |
| Gross profit | $4.94 million | $5.90 million | $10.28 million | $11.87 million |
| Gross margin | 73.9% | 80.1% | 74.2% | 81.4% |
| Operating income | $64 thousand | $675 thousand | $631 thousand | $2.06 million |
| Net income | $63 thousand | $(22) thousand | $349 thousand | $850 thousand |
| Operating cash flow | Not separately presented | Not separately presented | $607 thousand | $1.24 million |
Cash and cash equivalents were $7.78 million at December 31, 2018, compared with $7.52 million at June 30, 2018. Total assets were $22.66 million and total liabilities were $5.40 million. Current assets were $16.60 million versus current liabilities of $4.52 million. Investments totaled $3.06 million, and inventory was $1.22 million.
Total debt was approximately $0.70 million, consisting primarily of $603.5 thousand of related-party notes and approximately $96.1 thousand of Brigadier equipment loans. The company also reported $1.16 million of purchase consideration payable related to the Original Sprout acquisition at December 31, 2018; this amount was paid on January 4, 2019. Cash, cash equivalents and restricted cash increased by $259 thousand during the six months, after $607 thousand of operating cash flow, $221 thousand of investing cash outflow, $97 thousand of financing cash outflow, and $31 thousand of unfavorable foreign exchange effects.
Material Changes Versus the Prior Comparable Period
- Six-month revenue declined 5.0%, while operating income declined approximately 69% and net income declined approximately 59%.
- Second-quarter revenue declined 9.1%; operating income fell approximately 90%, although net income improved from a $22 thousand loss to $63 thousand of income.
- Wainwright revenue declined 18.4% in the quarter and 18.4% for the six months, primarily because average assets under management declined 23% in both periods.
- Original Sprout generated $897 thousand of second-quarter revenue and $1.80 million for the six months, compared with no meaningful prior-year comparable operations because the asset acquisition occurred in December 2017.
- Security alarm revenue declined 40.3% for the quarter and 21.0% for the six months. Management attributed the lower reported gross margin partly to ASC 606-related reclassification of certain costs from selling expenses to cost of revenue.
- Beauty products and other revenue increased from $88 thousand to $897 thousand in the quarter and from $111 thousand to $1.80 million for the six months, reflecting the Original Sprout business.
- The company adopted ASC 606 and ASU 2016-01 on July 1, 2018. Management stated that ASC 606 did not materially affect consolidated results; ASU 2016-01 moved unrealized investment gains and losses into earnings and reclassified $280 thousand from accumulated other comprehensive income to retained earnings.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantified financial guidance. Its stated plan was to invest resources in Original Sprout, pursue moderate Brigadier growth, improve Gourmet Foods efficiency and distribution, develop new Wainwright fund products, and continue seeking acquisitions of profitable, mature businesses.
- Wainwright is exposed to changes in fund assets under management, redemptions, fund performance, fee rates, regulatory requirements, and concentration in several funds. The company liquidated three funds in September 2018 and recorded a $180 thousand one-time charge related to the liquidations.
- Revenue concentration is significant. A single Brigadier customer represented approximately 53% of quarterly Brigadier revenue and 55% for the six-month period. Gourmet Foods also depends on several major grocery and convenience-store customers.
- Related-party fund management revenue was $3.94 million in the quarter and $8.16 million for the six months. Related-party accounts receivable were $1.23 million at December 31, 2018.
- Investments had $436 thousand of gross unrealized losses at December 31, 2018, and the company recognized a $314 thousand unrealized investment loss during the six-month period.
- Future minimum lease commitments totaled $1.33 million. The company also had approximately $0.3 million of unrecognized tax benefits, which could affect the effective tax rate if recognized.
- The company reported no material litigation, no defaults upon senior securities, and no significant changes in internal control over financial reporting. It did not provide a separate risk-factor discussion because it qualified as a smaller reporting company.
- Series B preferred stock totaled 436,951 shares and is convertible under specified conditions into 8.74 million common shares; it carries voting power equivalent to 20 common shares per preferred share.
Important Facts for Investors to Verify
- Confirm the applicable issuer name and corporate history, since the supplied filing is for Concierge Technologies, Inc., while the request metadata identifies Marygold Companies, Inc.
- Verify the sustainability of Wainwright revenue and profitability given the 23% decline in average assets under management and related-party revenue concentration.
- Assess Original Sprout’s revenue growth, margins, customer concentration, and dependence on a single packaging supplier.
- Reconcile the reported $7.8 million cash balance with the January 2019 $1.16 million Original Sprout purchase payment and ongoing liquidity requirements.
- Review the valuation and volatility of the company’s $3.06 million investment portfolio, including the reported unrealized losses.
- Evaluate customer concentration at Brigadier and Gourmet Foods and the potential effect of customer loss or reduced purchasing.
- Consider dilution and voting control associated with the Series B preferred stock and its potential 8.74 million common-share conversion.