Marygold Companies, Inc. quarterly report, Q3 FY2017

Marygold Companies, Inc. (formerly Concierge Technologies, Inc.) — Form 10-Q Summary

Reporting period: The filing is a quarterly report for the three and nine months ended March 31, 2017, filed May 17, 2017. The request metadata identifies “2016 Q3,” but the filing’s stated period is fiscal 2017 third quarter.

Business Context

The company operated through four principal segments: U.S. investment fund management through Wainwright Holdings, New Zealand food manufacturing and distribution through Gourmet Foods, Canadian security alarm installation and monitoring through Brigadier, and U.S. vehicle data-streaming services through Kahnalytics.

Wainwright was acquired on December 9, 2016 in a common-control transaction accounted for as if it had occurred at the beginning of the comparative period. The acquisition involved the issuance of 818,799,976 common shares and 9,354,119 Series B preferred shares, convertible into approximately 187.1 million common shares.

Financial Performance and Position

Metric	Three Months Ended March 31		Nine Months Ended March 31
	2017	2016	2017	2016
Net revenue	$7.49 million	$7.12 million	$24.43 million	$19.79 million
Gross profit	$6.45 million	$6.43 million	$21.20 million	$17.85 million
Operating income	$1.10 million	$2.39 million	$5.08 million	$6.03 million
Net income	$1.04 million	$1.57 million	$3.37 million	$3.86 million
Comprehensive income	$1.10 million	$1.59 million	$3.29 million	$3.86 million

Nine-month revenue increased approximately 23.4%, principally from the inclusion of Brigadier and higher Wainwright revenue. Third-quarter revenue increased approximately 5.3%.
Gross margin was approximately 86.1% for the third quarter and 86.8% for the nine-month period, compared with approximately 90.4% and 90.2%, respectively, in the prior comparable periods.
Operating margin declined to approximately 14.7% for the quarter and 20.8% for the nine-month period, from approximately 33.5% and 30.5%, respectively.
Net income declined approximately 33.6% for the quarter and 12.8% for the nine-month period. Management attributed the decline primarily to higher general and administrative costs, acquisition and transaction expenses, new fund launch costs, increased headcount and marketing spending.
Wainwright generated $18.48 million of nine-month revenue, up from $17.09 million. Average assets under management increased 2.3% to $4.603 billion for the nine-month period, but declined 14.2% year over year to $4.293 billion in the quarter.
Brigadier contributed $2.31 million of nine-month revenue and $272,469 of net income. Its reported nine-month gross margin was approximately 73%.
Gourmet Foods generated $3.52 million of nine-month revenue and $1,263 of net income. Its reported nine-month operating margin was approximately 5.7%, compared with approximately 10% for the eight-month prior-year comparison period.

Cash Flow, Liquidity and Debt

Cash and cash equivalents were $5.82 million at March 31, 2017, compared with $5.45 million at June 30, 2016. Restricted cash was $14,028.
Nine-month net cash provided by operating activities was $4.10 million, compared with $5.50 million in the prior-year period.
Investing activities used $3.72 million, including $3.34 million for investments, $222,477 for equipment and $214,035 related to the Brigadier acquisition adjustment.
Financing activities provided $85,574, primarily from an equipment loan, partially offset by repayment of a related-party loan.
Total liabilities were $4.34 million, including $600,000 of long-term related-party notes and $91,814 of long-term notes. Current liabilities were $3.65 million.
Current assets were $14.50 million versus current liabilities of $3.65 million. The balance sheet included $1.87 million of related-party accounts receivable and $1.23 million of expense waivers payable to related parties.
Management stated that available cash resources were expected to fund general and administrative expenses and planned acquisitions without further equity dilution or debt, assuming subsidiaries perform as projected.

Material Changes and Unusual Items

The Wainwright common-control acquisition materially expanded the company’s revenue base and investment-management operations, but also resulted in substantial equity issuance and related-party balances.
Investments increased to $3.32 million from approximately $1,000 at June 30, 2016, primarily reflecting Wainwright investments in exchange-traded funds.
Prepaid income taxes increased to $991,476, and other current assets increased to $1.39 million, including a $941,853 tax receivable.
Deferred tax assets declined to $245,620 from $1.02 million following a partial release of the valuation allowance. The nine-month tax provision was $1.71 million versus $2.18 million in the prior-year period.
Kahnalytics changed from selling camera hardware to offering a subscription-based fleet management platform. Nine-month revenue was approximately $116,573, substantially unchanged from the prior period, and the segment reported a $32,601 net loss.
The company reported a $135,000 accrued judgment related to an old Brookside Investments matter, although management stated the judgment had lapsed and a new court action would be required.
The company reported no material legal proceedings, no defaults upon senior securities and no significant changes in internal control over financial reporting.

Outlook, Risks and Contingencies

Management expected Wainwright, Gourmet Foods and Brigadier to remain profitable during the fiscal year and continued to pursue acquisitions of profitable companies.
Results are sensitive to Wainwright assets under management, fund performance and fund launches; the filing specifically noted that quarterly AUM declined substantially year over year.
Revenue and receivables are concentrated among major customers and funds. The two largest Brigadier customers represented approximately 50% of nine-month revenue, while major Gourmet Foods customers and distribution groups represented significant portions of sales and receivables.
Brigadier depends on a contractual relationship with a third-party alarm monitoring company. Termination could require the company to find another monitoring provider or develop its own capability.
Kahnalytics depends on an exclusive software license, a foreign-based licensor and dealer resellers to expand subscriptions.
Cash deposits exceeded insurance limits, including approximately $1.60 million uninsured in the United States corporate account, $2.66 million at Wainwright, approximately $441,974 in Canada and approximately $407,117 in New Zealand-related accounts.
The company had operating lease commitments of approximately $553,702 across Gourmet Foods, Brigadier and Wainwright based on disclosed minimum payments.
Management’s liquidity outlook depends on continued subsidiary profitability, successful integration of acquisitions, foreign-currency stability and the availability of cash for future acquisitions.

Key Facts for Investors to Verify

Reconcile the common-control accounting and pro forma inclusion of Wainwright with the substantial issuance of common and preferred shares.
Monitor Wainwright AUM, particularly the effect of changes in USO and other major funds on fee revenue and margins.
Assess whether higher corporate, acquisition, fund-launch, employee and marketing expenses normalize or continue to pressure operating margins.
Evaluate concentration risks involving Wainwright fund receivables, Brigadier customers and Gourmet Foods retail and distribution channels.
Verify the collectability and timing of the $941,853 tax receivable and the treatment of deferred tax assets and valuation allowances.
Review related-party receivables, expense-waiver payables and the $600,000 of related-party long-term notes.
Confirm the status and enforceability of the $135,000 accrued judgment and other lease, monitoring-contract and licensing obligations.
Consider the implications of the company’s very large common-share count and Series B preferred stock conversion rights for dilution and control.