Research Solutions, Inc. (filed as Derycz Scientific, Inc.) — Form 10-Q
Reporting period: Three months ended September 30, 2012, the company’s fiscal first quarter. The filing identifies the registrant as Derycz Scientific, Inc.; the company-name difference from the request metadata should be verified.
Business context
The company provides research-information logistics, including delivery of scientific articles, reprints and eprints, and printing and publisher services. It reports U.S. operations and TAAG, its French subsidiary, as operating segments.
Financial performance
| Metric | Quarter ended Sep. 30, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $9.542 million | $9.861 million | Down 3.2% |
| Gross profit / margin | $2.157 million / 22.6% | $1.472 million / 14.9% | Margin up 7.7 percentage points |
| Operating loss | $20,524 | $1.641 million | Improved |
| Net loss | $54,033 | $1.692 million | Improved by $1.638 million |
| Operating cash flow | $41,748 | $821,602 | Lower |
U.S. revenue rose 4.4% to $7.103 million, while TAAG revenue declined 20.2% to $2.439 million. U.S. operations reported net income of $42,943; TAAG reported a net loss of $96,976. Lower production costs and publisher payments improved gross margin. Operating expenses fell 30.1%, including lower SG&A and depreciation and amortization. The filing reports basic and diluted loss per share as $0.00 for 2012, compared with a $0.10 loss per share in 2011; the 2012 figure appears rounded.
Cash, liquidity and debt
- Cash and cash equivalents were $2.175 million at September 30, down $976,000 from June 30, 2012.
- Current assets were $8.765 million and current liabilities $9.975 million, leaving a $1.210 million working-capital deficit. Stockholders’ deficiency was $474,072.
- The company had a $4.0 million revolving credit facility maturing October 31, 2013. $250,000 was outstanding, approximately $1.825 million of availability was reported, and the rate was 6.5%. The company said it was in compliance with covenants at quarter-end.
- Other reported obligations included $1.320 million in current and long-term capital leases, $98,364 in notes payable, and $197,086 due to a French factor. French factoring arrangements are with recourse.
- Cash from operations was positive, but financing activities used $951,000, primarily reflecting $750,000 of line-of-credit repayments and $133,000 of lease payments. Investing activities used $19,000.
Outlook, risks and notable items
- Management expected U.S. revenue to continue increasing in fiscal 2013 and believed U.S. resources and cash flow could support current U.S. operations for 12 months; it cautioned that results were not assured. No numerical earnings or revenue guidance was provided.
- Management said TAAG’s resources and cash flow might not support its operations for 12 months. TAAG had a $1.653 million working-capital deficit and approximately $800,000 in delinquent payroll and VAT taxes; SVB financing for TAAG was limited to $50,000, with no additional financing in place.
- TAAG’s revenue had declined amid disappointing sales efforts and European financial uncertainty. Management had replaced local executive and accounting management, but gave no assurance the turnaround would succeed. A TAAG liquidation could eliminate some or all of its revenue; the parent guaranteed TAAG’s property lease.
- The company disclosed foreign-currency exposure, primarily from TAAG, and said it did not hedge currency risk. Two vendors represented 15% and 11% of quarterly content costs.
- After quarter-end, the company granted options covering 53,898 shares and acquired a customer list for 182,244 shares valued at approximately $200,000, plus an earnout of up to 6.5% of related revenue over two years.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant identity and reporting-period designation, given the request’s Research Solutions, Inc. name and the filing’s Derycz Scientific, Inc. name.
- Assess whether TAAG can address its delinquent taxes, working-capital shortfall and financing needs, and the potential parent exposure under its property-lease guarantee.
- Review cash conversion and working-capital movements, including the decline in operating cash flow and the substantial reduction in accounts payable and accrued expenses.
- Confirm the company’s liquidity runway, covenant requirements and available credit under the SVB facility as it approaches its October 2013 maturity.
- Evaluate the sustainability of the improved gross margin and lower operating expenses, and the effect of the post-quarter customer-list acquisition and earnout.