Research Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2013; comparisons are to the same periods in 2012. The company, formerly Derycz Scientific, Inc., changed its name in March 2013. It provides scientific-content access, reprint/eprint, printing, and related services through U.S. operations and TAAG in France.
Key financial results
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2013 (2012) | $10.65 million ($9.99 million), up 6.6% | $34.17 million ($31.94 million), up 7.0% |
| Gross profit; gross margin | $2.26 million; 21.2% (22.5%) | $7.17 million; 21.0% (17.2%) |
| Operating loss | $469,000 ($2.44 million) | $280,000 ($5.79 million) |
| Net loss | $475,000 ($2.13 million); $0.03 per share ($0.12) | $351,000 ($5.60 million); $0.02 per share ($0.33) |
| Operating cash flow | Not presented for the quarter | Negative $149,000 (positive $1.35 million) |
At March 31, cash was $1.50 million, down from $3.15 million at June 30, 2012. Current assets were $7.99 million versus current liabilities of $9.20 million, a $1.21 million working-capital deficit. Total liabilities were $9.71 million; stockholders’ deficiency was $383,000. The $4.0 million SVB revolver had no balance outstanding, approximately $1.93 million of stated availability, and a 6.5% interest rate; it matures October 31, 2013. Capital lease obligations totaled approximately $992,000 and notes payable approximately $76,000, current and long-term combined.
Changes and notable items
- Nine-month U.S. revenue rose 13.8%, while TAAG revenue declined 11.5%; in the quarter, both U.S. and TAAG revenue increased. Management attributed U.S. growth to more orders from existing customers and new customers.
- Nine-month gross margin improved to 21.0% from 17.2%, chiefly reflecting lower cost of revenue relative to sales. Quarterly gross margin declined to 21.2% from 22.5%, with U.S. cost of revenue as a percentage of sales higher.
- Lower operating expenses drove a substantially smaller net loss year over year. The prior-year comparison included TAAG acquisition and intellectual-property impairment charges; the current period recorded a $233,000 facility-sublease loss.
- Cash declined by $1.65 million, reflecting, among other items, $1.0 million in revolver repayment, $461,000 in capital-lease payments, and a $1.55 million decrease in accounts payable and accrued expenses.
- A March settlement with TAAG’s former seller provided for return of company shares, waiver of future acquisition-related payments, and payments toward a landlord guarantee. The company recorded the returned shares as treasury stock and placed €100,000 in escrow.
Outlook, risks and contingencies
Management expected U.S. operations and available cash flows to support current U.S. operations for the next 12 months, but gave no quantified revenue or earnings guidance. It stated that cash resources and cash flow from TAAG might not sustain that business for 12 months. TAAG had a $1.91 million working-capital deficit, a $235,000 operating loss for the nine months, and approximately $600,000 in delinquent payroll and VAT taxes. SVB financing limits funding to TAAG to $50,000, and no additional TAAG financing was in place. Management had replaced TAAG’s executive and accounting management, but cautioned that improvement was not assured. A TAAG liquidation could eliminate a significant portion or all of its revenue; the company’s stated exposure included a $50,000 landlord guarantee.
The company relied historically on financing to fund operations and cautioned that future losses or negative cash flow could impair its ability to operate and expand. It also identified foreign-exchange exposure, did not hedge currency risk, and disclosed customer and content-supplier revenue/cost concentrations. The SVB facility is secured by company and subsidiary assets other than TAAG, and the company reported covenant compliance at March 31, 2013.
Investor verification points
- Confirm subsequent liquidity, operating cash generation, and the status or renewal of the SVB line, which matured October 31, 2013.
- Track TAAG’s tax arrears, working-capital position, financing needs, turnaround progress, and any consequences of the settlement or possible liquidation.
- Assess whether U.S. revenue growth can offset margin pressure and whether the improved nine-month gross margin is sustainable.
- Review the facility-sublease liability and settlement terms, including escrow and obligations related to the landlord guarantee.
- Check potential dilution: the filing reports 1.68 million options and 2.38 million warrants outstanding, excluded from diluted loss per share as anti-dilutive.
- Reconcile certain inconsistent expense figures in the MD&A tables with the financial statements and notes before relying on detailed expense breakdowns.