Business context and reporting period
This Form 10-Q is for Derycz Scientific, Inc. and subsidiaries for the quarter and six months ended December 31, 2012 (fiscal Q2 and first half). The filing describes information-logistics, document delivery, reprint and printing services through U.S. operations and TAAG in France. The registrant named in the filing is Derycz Scientific, Inc.; the request metadata names Research Solutions, Inc.
Financial performance and position
| Metric | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Revenue | $13.98 million | $23.52 million |
| Gross profit / margin | $2.76 million / 19.7% | $4.92 million / 20.9% |
| Operating income | $209,086 | $188,562 |
| Net income | $178,319 | $124,286 |
| Operating cash flow | Not separately presented for the quarter | $1.10 million |
First-half cash used in investing was $45,453 and cash used in financing was $1.20 million; cash declined $252,693 to $2.90 million. Operating cash flow benefited substantially from a $3.68 million increase in accounts payable and accrued expenses, while receivables rose $2.77 million.
At December 31, current assets were $13.54 million and current liabilities $14.57 million, a working-capital deficit of $1.03 million. Total liabilities were $15.18 million against assets of $15.07 million; stockholders’ deficiency was $110,214. Debt and lease obligations included $100,000 outstanding on the revolving credit line, $78,641 in notes payable, and $1.19 million in capital lease obligations. The $4 million SVB facility matures October 31, 2013; approximately $3.7 million was unused, the stated rate was 6.5%, and the company reported covenant compliance.
Changes versus prior comparable periods
- Quarterly revenue rose 15.7% year over year; first-half revenue rose 7.2%. U.S. revenue grew 28.9% for the quarter and 18.3% for the half, while TAAG revenue fell 22.2% and 21.2%, respectively.
- Gross margin improved from 14.7% to 19.7% for the quarter and from 14.8% to 20.9% for the half, principally reflecting lower U.S. production costs and publisher payments.
- The company moved from a prior-year net loss of $1.78 million for the quarter and $3.47 million for the half to net income of $178,319 and $124,286, respectively. Lower operating expenses also contributed.
- First-half operating cash flow decreased from $1.80 million to $1.10 million. Cash declined despite positive operating cash flow, as the company repaid $900,000 on its line of credit and paid capital leases.
Outlook, risks and unusual items
- Management expected U.S. revenue to continue increasing during fiscal 2013 and believed U.S. resources and cash flow could support U.S. operations for 12 months, while cautioning that results were not assured.
- Management said TAAG’s cash resources and cash flow might not sustain its operations for the next 12 months. TAAG reported a first-half operating loss of $270,253, a $1.94 million working-capital deficiency and approximately $700,000 of delinquent payroll and VAT taxes. SVB financing for TAAG was limited to $50,000, and no additional financing was in place.
- TAAG management was replaced and a professional accounting-services firm engaged as part of an improvement effort. A TAAG liquidation could eliminate a significant share or all of its revenue; the parent guaranteed TAAG’s property lease.
- In February 2013, the company filed a French lawsuit against former TAAG owners and managers seeking approximately $600,000 in damages; the outcome was uncertain.
- Customer concentration is notable: Customer A represented 34% of receivables at December 31, 2012 and 16% of first-half revenue. The company also disclosed foreign-currency exposure and no currency hedging.
- The company acquired a customer list for 182,244 shares valued at approximately $200,000, plus a potential earnout of up to 6.5% of related revenue over two years.
Important facts for investors to verify
- Confirm the registrant’s identity and relationship to Research Solutions, Inc., given the difference between the request metadata and the filing’s stated company name.
- Track TAAG’s cash needs, delinquent taxes, operating performance and ability to continue operating, including the parent’s lease guarantee exposure.
- Assess whether reported operating cash flow is sustainable given the large increase in accounts payable and accrued expenses and the increase in receivables.
- Review the SVB facility’s October 2013 maturity, covenants and availability, and the company’s ability to meet obligations with negative working capital.
- Monitor customer concentration, U.S. growth and TAAG revenue trends, and the outcome of the French litigation.