Business context and reporting period
This unaudited Form 10-Q is for the quarter ended March 31, 2012, and covers the third quarter and first nine months of fiscal 2012. The filing identifies the registrant as Derycz Scientific, Inc.; the request metadata names Research Solutions, Inc. Derycz provided content re-use, rights-management, printing, and logistics services through U.S. operations and TAAG in France. Pools Press merged into Reprints Desk on January 1, 2012.
Financial performance and position
| Metric | Three months ended March 31, 2012 | Nine months ended March 31, 2012 |
|---|---|---|
| Revenue | $9.99 million | $31.94 million |
| Gross profit / margin | $2.24 million / 22.5% | $5.49 million / 17.2% |
| Operating loss | $2.44 million | $5.79 million |
| Net loss | $2.13 million; $0.12 per share | $5.60 million; $0.33 per share |
| Cash from operating activities | Not stated for the quarter | $1.35 million |
- Revenue increased 30.9% for the quarter and 44.1% year to date versus the prior-year periods, largely reflecting TAAG, whose results were not included in the comparable prior-year figures. U.S. revenue was down 1.0% for the quarter but up 7.3% year to date.
- Gross margin improved versus prior-year reported results, including a rise from 8.7% to 22.5% in the quarter. The filing attributes U.S. margin improvement in part to lower production costs and an amended publisher agreement; nine-month U.S. gross margin was nearly unchanged at 9.0% versus 9.2%.
- Cash was $3.25 million at March 31, 2012. Current assets were $11.63 million and current liabilities $11.98 million, or negative working capital of approximately $349,000. Stockholders’ equity fell to $405,000 from $5.82 million at June 30, 2011.
- Debt and financing obligations included $1.35 million outstanding on the SVB line of credit, $1.33 million in capital lease obligations, $125,000 in notes payable, and $323,000 due to a factor. The $4.0 million SVB revolver matures October 31, 2013; approximately $1.42 million was available at quarter-end.
- Nine-month operating cash generation followed a $5.60 million net loss and was substantially supported by increases in accounts payable, noncash impairment and depreciation charges, and a reduction in prepaid royalties. Investing activities used $250,000 and financing activities used $797,000.
Material changes, outlook, and risks
- The company recorded $1.60 million of TAAG-related impairment charges, including goodwill and acquired intangible assets, and a separate $688,000 impairment of U.S. intellectual-property-license assets. It also eliminated a $359,000 estimated TAAG earnout liability and recorded a $350,000 tax benefit related to the acquisition’s deferred tax liability.
- TAAG generated $8.64 million of nine-month revenue but a $2.25 million operating loss. Its revenue had recently declined, which management attributed to disappointing sales efforts and economic uncertainty in Europe. Management replaced local management and retained a financial consultant, but gave no assurance of improvement.
- Management said U.S. cash resources and operating cash flow were expected to support U.S. operations for the next 12 months, without assurance. It warned that TAAG’s resources and cash flow might not be sufficient for the next 12 months; the SVB facility limits funding for TAAG to $50,000, and no separate financing was in place. TAAG insolvency could result in lost revenue, although management said French creditor exposure was limited to TAAG’s assets.
- A publisher agreement amendment replaced fixed royalties with royalties of 85% of related revenue, subject to annual minimum thresholds and a $500,000 cap on any shortfall. The publisher may terminate the agreement during a specified window in 2012. Management expected the 2012 minimum threshold to be met and forecast improving U.S. gross margin from the amendment and cost reductions; higher-margin products could provide further improvement.
- SVB waived a failure to meet a minimum tangible-net-worth covenant for the period ended December 31, 2011 and revised 2012 covenant terms and interest pricing. The company reported compliance with applicable line-of-credit covenants at March 31, 2012. The filing reports no off-balance-sheet arrangements.
- The company has euro-denominated operations and cash and does not hedge currency exposure. Management reported effective disclosure controls but excluded TAAG from its evaluation; TAAG represented approximately 30% of consolidated assets, 27% of revenue, and 43% of operating loss for the nine months.
Most important facts to verify
- Confirm the registrant’s identity and relationship to Research Solutions, Inc., since the filing itself is for Derycz Scientific, Inc.
- Track TAAG’s revenue, losses, liquidity, financing needs, and the results of management’s turnaround actions.
- Assess the sustainability of operating cash flow, particularly the reliance on higher accounts payable and other working-capital movements despite substantial net losses.
- Verify compliance with SVB covenants, available borrowing capacity, and the effect of the revised interest terms.
- Monitor the publisher agreement’s minimum payment requirements, potential shortfall, and termination window, as well as any further impairment or liquidity effects.