Research Solutions, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2013, compared with fiscal 2012. Although the request metadata says “2012 Q4,” this filing reports annual results for fiscal 2013; it does not provide standalone fourth-quarter financial results.
Business context
The company provides research, marketing, printing and logistics services related to scientific, technical and medical content. Its operations include North American Reprints Desk and TAAG, its printing subsidiary in France. It changed its name from Derycz Scientific, Inc. to Research Solutions, Inc. in March 2013.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $45.50 million | $42.82 million |
| Gross profit / margin | $9.55 million / 21.0% | $8.04 million / 18.8% |
| Operating income (loss) | $363,685 | ($6.65 million) |
| Net income (loss) | $191,922 | ($6.53 million) |
| Adjusted EBITDA (non-GAAP) | $1.12 million | ($2.41 million) |
| Cash from operating activities | ($95,838) | $1.97 million |
Revenue rose 6.3%. North American revenue grew 13.3% to $35.20 million, while TAAG revenue declined 12.3% to $10.30 million. Gross margin improved by 2.2 percentage points. Net income was $0.01 per basic and diluted share, versus a loss of $0.38 per share in fiscal 2012.
Cash and cash equivalents were $1.70 million at year-end, down from $3.15 million. Current assets were $7.68 million and current liabilities $8.11 million, a working-capital deficit of approximately $423,000. Total liabilities were $8.61 million; stockholders’ equity was $314,180, compared with a $434,564 deficiency a year earlier.
The company had no balance outstanding on its $4 million Silicon Valley Bank revolving line at June 30, 2013, and reported approximately $2 million of unused availability. The facility matured October 31, 2013. Capital lease obligations totaled approximately $715,000 and notes payable approximately $66,000. Financing cash outflow was $1.79 million, primarily from line-of-credit and capital-lease repayments.
Material changes and unusual items
- Operating expenses fell 37.5%, partly because fiscal 2012 included substantial impairment charges and higher depreciation and amortization. Fiscal 2013 included a $233,015 loss provision for the Northbrook facility sublease.
- A $476,904 gain on sale of fixed assets, primarily TAAG printing equipment, materially benefited fiscal 2013 results.
- North American gross profit increased 58.7%, reflecting higher revenue and lower cost of revenue as a share of sales. TAAG gross profit declined 10.4% as revenue fell.
- In March 2013, the TAAG seller agreed to return 336,921 company shares and waive future acquisition payments under a settlement; the shares were retired. The settlement also addressed landlord-guarantee obligations.
- Pools Press printing operations were discontinued in June 2013. The company remained responsible for the facility lease and recorded the sublease-related loss.
- The company contributed a $1.01 million receivable from TAAG to TAAG’s capital. It also acquired a customer list for shares valued at approximately $200,000, with a potential revenue-based earnout.
Outlook, risks and contingencies
Management expected North American cash resources and operating cash flow to support operations for the next 12 months, but gave no quantified revenue or earnings guidance. Management said TAAG’s cash and operating cash flow might not be sufficient for the next 12 months. TAAG had an approximately $1.2 million working-capital deficiency and about $420,000 of delinquent payroll and VAT taxes at year-end. The company said it was working to improve TAAG’s performance, but provided no assurance of success; a TAAG liquidation could result in substantial or total loss of its revenue contribution.
The company was negotiating renewal of its SVB line. Subsequent to year-end, it failed a July 2013 minimum tangible net worth covenant; SVB waived and reset the covenant on September 18, 2013 through facility maturity. Management stated that non-renewal was not expected to materially affect North American operations or liquidity.
Other material risks include the company’s history of losses and negative cash flow, customer and publisher concentration, dependence on key personnel, competition and copyright piracy, technology or security disruption, foreign currency and European operating risks, debt covenant and financing dependence, and thin trading and potential dilution from outstanding equity awards. The company had an accumulated deficit of $13.99 million. It reported ordinary-course legal proceedings that management did not expect to have a material financial effect. The financial statements received an unqualified audit opinion; the auditor did not provide an opinion on internal-control effectiveness. Management assessed disclosure controls and internal controls over financial reporting as effective at June 30, 2013, and described remediation measures at TAAG following a prior material weakness.
Most important facts for investors to verify
- Whether the SVB facility was renewed or refinanced at its October 31, 2013 maturity, and the effects of its covenant terms and collateral.
- TAAG’s subsequent liquidity, payment of delinquent taxes, operating results and need for additional funding.
- Whether operating cash flow turns positive, given the fiscal 2013 operating cash outflow and decline in cash.
- How much fiscal 2013 profitability depended on the $476,904 equipment-sale gain and the sustainability of the improved gross margin.
- The continuation of North American growth, customer concentration and exposure to major content vendors and publishers.
- Potential lease costs and recoveries from the Northbrook sublease, and the remaining equipment-lease and other debt obligations.
- Potential dilution from outstanding options and warrants; the filing reported 2.38 million warrants outstanding and 1.69 million options outstanding at June 30, 2013.