Research Solutions, Inc. (filed as Derycz Scientific, Inc.) — Form 10-Q summary
Reporting period: Quarter and six months ended December 31, 2011. The filing identifies the registrant as Derycz Scientific, Inc.; it does not explain the Research Solutions, Inc. name in the request metadata. Figures are unaudited.
Business context
The company provides article and content-reuse rights management, reprint and ePrint distribution, commercial printing, and publisher services in the United States and France. It acquired French printing and logistics company TAAG on March 31, 2011; TAAG results are included from April 1, 2011, so prior-year comparisons exclude TAAG. Reprints Desk and Pools Press merged on January 1, 2012.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $12.09 million | $8.51 million | $21.95 million | $14.53 million |
| Gross profit | $1.78 million | $0.57 million | $3.25 million | $1.39 million |
| Gross margin | 14.7% | 6.7% | 14.8% | 9.5% |
| Operating loss | $(1.70) million | $(1.27) million | $(3.35) million | $(1.66) million |
| Net loss | $(1.78) million | $(1.30) million | $(3.47) million | $(1.71) million |
| Basic and diluted loss per share | $(0.10) | $(0.09) | $(0.20) | $(0.13) |
- For the quarter, revenue increased 42.0%; for the six-month period, it rose 51.1%. US revenue grew 5.2% and 8.5%, respectively; the additional consolidated revenue largely reflects TAAG, absent from the prior-year periods.
- Operating expenses were $3.48 million for the quarter and $6.60 million for six months, up 89.3% and 116.4%. Depreciation and amortization increased substantially following the TAAG acquisition. Six-month interest expense rose to $123,013 from $48,658.
- Cash from operations was $1.80 million for six months, compared with $2.17 million used in the prior-year period. The 2011 inflow was supported principally by a $3.49 million increase in accounts payable and accrued expenses and a $786,449 decrease in prepaid royalties, despite the net loss.
Financial position and liquidity
- At December 31, 2011, cash and equivalents were $3.34 million, current assets $12.19 million, and current liabilities $12.23 million. Management reported negative working capital of $40,907. Total assets were $16.67 million and stockholders’ equity was $2.50 million.
- Accounts payable and accrued expenses increased to $10.54 million from $7.05 million at June 30, 2011. The accumulated deficit was $11.12 million.
- The $4.0 million Silicon Valley Bank revolving facility had $774,464 outstanding at December 31, 2011, at a stated rate of 6%; approximately $1.516 million of availability was reported. The facility matures October 31, 2013, is secured by company and subsidiary assets other than TAAG’s, and carries financial and performance covenants.
- Other reported obligations included current and long-term capital leases totaling about $1.46 million, notes payable totaling about $121,000, $312,441 due to a French factor, and a $359,338 estimated TAAG earnout liability. The filing also reports a $1.05 million royalty payable for a publisher agreement.
- Investing activities used $205,747 and financing activities used $1.26 million during the six months. Cash increased by $473,401, to $3.34 million.
Material changes, outlook, and risks
- US gross margin was pressured by certain publisher guaranteed payment contracts: for the six months, the company recorded about $1.15 million of related revenue against $2.83 million of costs. A January 10, 2012 amendment replaced fixed royalty payments under one agreement with percentage-of-revenue payments, subject to minimum thresholds and a capped shortfall. The publisher may terminate after June 16 and before December 17, 2012. Management expected this amendment and late-quarter expense reductions to improve US margins and reduce US operating losses beginning in the next quarter; these are expectations, not guaranteed outcomes.
- Management expected US revenue to continue increasing and TAAG revenue to remain stable in fiscal 2012, while noting that persistent European financial uncertainty could reduce TAAG revenue. It expected lower US SG&A from expense-reduction measures, and depreciation and amortization and interest expense to remain near current levels.
- Management said available cash and expected operating cash flow should sustain current operations for the next 12 months, and anticipated improved operating cash flow in the next quarter. It cautioned that improved operations were not assured.
- The company was out of compliance with one SVB covenant at December 31, 2011. SVB subsequently waived the violation and modified the covenant for future periods; the amendment increased the facility’s interest rate by 0.50% in consideration for the waiver.
- Customer and supplier concentration is material: one customer represented 20% of receivables and 21% of quarterly revenue; two vendors represented 31% of quarterly content costs. The company also holds euro-denominated cash and has euro exposure through TAAG, with no currency hedging.
- Management reported no goodwill or intangible-asset impairment indicators. Legal proceedings were reported as none. Management concluded disclosure controls were effective, but excluded TAAG from its evaluation; TAAG represented about 39% of total assets and 28% of six-month revenue.
Important facts for investors to verify
- Whether the amended publisher contract and planned cost cuts delivered the projected margin improvement, and whether the publisher exercised its termination right.
- Whether operating cash generation is sustainable: the six-month cash inflow depended heavily on higher payables and lower prepaid royalties while the company recorded a $3.47 million net loss.
- Current liquidity, remaining availability and covenant compliance under the SVB facility, including the effect of the rate increase and modified covenants.
- The amount and timing of publisher royalty payments, TAAG earnout payments, and capital-lease and factoring obligations.
- Customer and content-vendor concentration, European exposure, and any foreign-exchange effects; also review TAAG’s controls because it was excluded from management’s controls evaluation.