Business Context and Reporting Period
Company: Trey Resources, Inc. (Ticker: TYRIA)
Reporting Period: Quarter ended March 31, 2011
Business Overview: An information technology company and value-added reseller of Sage Software (MAS 90/200/500, ERP X3) and publisher of proprietary EDI software ("MAPADOC"). The company operates primarily through its subsidiary, SWK Technologies, Inc., focusing on business software and IT consulting. The company is a smaller reporting company traded on the OTCBB.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $2,761,445 | $1,828,722 |
| Gross Profit | $1,202,054 | $613,111 |
| Gross Margin | 43.5% | 33.5% |
| Operating Income | $234,887 | ($195,285) |
| Net Income | $465,653 | $401,990 |
| Net Income Attributable to Trey Resources | $439,639 | $423,295 |
| Cash from Operations | $761,065 | $112,169 |
| Cash and Equivalents (End of Period) | $686,968 | $373,611 |
| Total Current Liabilities | $6,464,011 | $6,133,472 |
| Working Capital Deficit | ($4,931,363) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 51% to $2.76 million, driven by strong marketing, competitive pricing, and a shift in sales mix toward higher-margin consulting services.
- Profitability: The company turned an operating loss of $195,285 in Q1 2010 into an operating profit of $234,887 in Q1 2011. Gross margin improved from 33.5% to 43.5%.
- Non-Operating Items: Net income was significantly boosted by a $262,788 gain on the revaluation of derivative liabilities, compared to a $630,083 gain in the prior year. This volatility is tied to the fair value of embedded conversion features in debt instruments.
- Liquidity: Cash and cash equivalents increased by $582,624 during the quarter, primarily due to strong operating cash flow ($761,065) offset by debt repayments ($205,000 to YA Global).
Outlook, Risks, and Contingencies
- Going Concern: Management has raised substantial doubt about the company's ability to continue as a going concern. Current liabilities exceed current assets by approximately $4.9 million. Continued operations depend on raising capital or generating positive cash flows.
- Debt Restructuring (Subsequent Event): On April 11, 2011, the company secured $550,000 in new loans to pay off approximately $1.99 million in obligations to YA Global. This transaction is expected to result in a gain from debt extinguishment in Q2 2011.
- Corporate Actions (Subsequent Event): On May 17, 2011, the company filed for a 1-for-1,811 reverse stock split, a name change to "SilverSun Technologies, Inc.," and a reduction in authorized shares. These actions are subject to regulatory approval.
- Internal Controls: Management identified material weaknesses in internal controls, including a lack of accounting personnel with GAAP knowledge, insufficient written policies, and a lack of segregation of duties (one person performing all accounting duties).
- Related Party Transactions: Significant liabilities exist due to related parties, including $1.32 million owed to the CEO (Mark Meller) for unpaid salary and expenses.
Investor Verification Checklist
- Debt Extinguishment Gain: Verify the accounting treatment and magnitude of the expected gain from the April 2011 debt restructuring with YA Global.
- Going Concern Status: Assess the company's ability to meet the $10,000 monthly payments on the amended YA Global debentures and the new $550,000 loan obligations.
- Derivative Liability Volatility: Review the sensitivity of the $966,057 derivative liability to stock price fluctuations, as this significantly impacts reported net income.
- Reverse Stock Split Approval: Confirm the regulatory approval status of the name change and reverse stock split to understand the impact on share count and liquidity.
- Related Party Payables: Evaluate the likelihood of the $1.32 million owed to the CEO being converted to equity or repaid, given the company's cash constraints.