Research Solutions, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014, with FY2013 comparatives. The filing is an annual report, not a standalone fourth-quarter report; it does not provide a clear Q4-only financial result.
Business context
Research Solutions provides electronic access to scientific, technical and medical content, copyright-compliant article delivery, reprints and ePrints through its Article Galaxy platform and related services. At June 30, 2014, it also operated TAAG, a French printing and logistics business. The financial statements consolidate TAAG for FY2014.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $36.55 million | $45.50 million |
| Gross profit / gross margin | $8.35 million / 22.8% | $9.55 million / 21.0% |
| Operating income (loss) | $(1.78) million | $0.36 million |
| Net income (loss) | $(1.87) million | $0.19 million |
| Basic and diluted EPS | $(0.11) | $0.01 |
| Operating cash flow | $0.31 million | $(0.10) million |
| Adjusted EBITDA (non-GAAP) | $(0.92) million | $1.12 million |
Cash and cash equivalents were $2.08 million at June 30, 2014, versus $1.70 million a year earlier. Working capital was deficient by $1.35 million and stockholders’ equity was deficient by $0.42 million. Operating cash flow benefited substantially from a $1.18 million increase in accounts payable. Investing cash flow was $(0.10) million; financing cash flow was $0.26 million, including $0.84 million from warrant exercises.
There were no borrowings under the Silicon Valley Bank revolving line at year-end. The facility was the lesser of $4.0 million or 80% of eligible receivables; approximately $2.19 million was unused. Capital lease obligations totaled $0.44 million, including current obligations of $0.32 million. The line is secured by substantially all company and subsidiary assets other than TAAG’s assets, and includes financial covenants.
Changes versus FY2013
- Revenue fell 19.7%. Article Galaxy revenue rose 11.3% to $18.67 million, while Reprints and ePrints revenue dropped 46.7% to $9.81 million, largely reflecting unusually large one-time FY2013 orders and termination of a historically nonperforming publisher agreement.
- TAAG revenue declined 21.7% to $8.07 million, due primarily to reduced orders and customer losses.
- Gross margin improved to 22.8% from 21.0%, but gross profit fell 12.6% as revenue contracted. Operating expenses increased 10.2%, including higher North American selling, general and administrative expenses, contributing to the swing from operating income to loss.
- North American operations recorded a $1.08 million net loss, compared with a $0.07 million loss in FY2013; TAAG recorded a $0.78 million net loss, versus $0.26 million income.
Outlook, material events and risks
- TAAG insolvency and deconsolidation: The board approved a plan to sell TAAG or pursue insolvency in August 2014. On September 15, 2014, a French commercial court-appointed administrator took control; TAAG ceased to be a subsidiary and its printing and logistics services ceased. Management expected an approximately $1.0 million gain on deconsolidation, a subsequent event rather than FY2014 earnings. Future comparative statements are to present TAAG as discontinued operations.
- TAAG generated 22.1% of FY2014 revenue. Pro forma FY2014 revenue excluding TAAG was $28.48 million, with a $1.04 million loss from continuing operations. The filing says the loss of TAAG revenue will significantly reduce reported revenue.
- Management said post-deconsolidation cash resources and expected North American operating cash flow should support current operations for the next 12 months, while cautioning that positive cash flow is not assured. The company reported recurring losses, a working-capital deficit and reliance historically on financing to meet cash needs.
- Before deconsolidation, TAAG had an approximately $2.12 million working-capital deficit, a $0.74 million operating loss, and about $0.60 million of delinquent payroll and VAT taxes. The filing describes a tax repayment plan. The company also guaranteed approximately $50,000 of TAAG lease obligations and said payment might be required following divestiture.
- Revenue and supply are concentrated: the two largest customers accounted for 18% of FY2014 revenue, and the three largest content suppliers accounted for 45% of content costs. Publisher agreements are non-exclusive.
- Other cited risks include competition and free content alternatives, copyright and other legal claims, technology outages or security breaches, foreign-exchange exposure without hedging, financing needs, and possible future covenant breaches. The company had previously failed its tangible-net-worth covenant in December 2011 and July 2013; waivers and resets were agreed.
- The auditor issued an unqualified opinion on the FY2014 and FY2013 financial statements. Management reported effective disclosure controls and internal control over financial reporting as of June 30, 2014; the auditor did not express an opinion on internal controls.
Important facts for investors to verify
- Whether North American operations achieve the forecast positive operating cash flow and maintain adequate liquidity after TAAG’s removal.
- The final accounting, timing and cash consequences of TAAG’s insolvency, deconsolidation gain, discontinued operations, lease guarantee and any remaining obligations.
- Whether Article Galaxy growth can offset the loss of TAAG revenue and continued weakness or volatility in reprints and ePrints.
- Customer retention and publisher access, especially given customer and content-supplier concentration.
- Compliance with SVB covenants, actual revolver availability and the effect of secured debt and lease commitments.
- Potential share dilution: 3.04 million options, warrants and other rights were reported outstanding at June 30, 2014, in addition to shares available for future grants.