Business context and reporting period
Research Solutions, Inc. filed this unaudited Form 10-Q for the quarter and six months ended December 31, 2013 (fiscal Q2 2014). The company provides scientific, technical and medical content delivery, reprint/ePrint, and printing and logistics services through North American operations and TAAG in France.
Financial performance and position
- Quarter revenue: $9.62 million, down 31.2% from $13.98 million a year earlier. Gross profit was $2.22 million (23.1% margin), versus $2.76 million (19.7%). Operating loss was $422,000; net loss was $447,000, or $0.03 per share, compared with net income of $178,000, or $0.01 per share.
- Six-month revenue: $18.20 million, down 22.6%. Gross profit was $4.23 million (23.2% margin), versus $4.92 million (20.9%). Operating loss was $545,000 and net loss was $590,000, or $0.03 per share; the prior-year period had operating income of $195,000 and net income of $124,000.
- Revenue mix: For the six months, Article Galaxy revenue increased 11.6% to $8.72 million. Reprints and ePrints fell 51.3% to $5.28 million, and TAAG revenue fell 13.9% to $4.20 million.
- Cash flow: Six-month operating cash use was $124,000, compared with $1.10 million provided a year earlier. Investing used $36,000; financing provided $629,000, including $838,000 from warrant exercises. Cash rose to $2.07 million from $1.70 million at June 30, 2013.
- Liquidity and obligations: Current assets were $9.09 million and current liabilities $9.39 million, a working-capital deficit of about $299,000. Total liabilities were $9.67 million and stockholders’ equity $689,000. The company had no SVB line borrowings and reported about $2.3 million of unused availability. Current and long-term capital lease obligations totaled about $600,000; notes payable totaled about $47,000 current, with none long term.
- Margins and expenses: Consolidated gross margin improved year over year, while revenue contraction drove lower gross profit. Six-month operating expenses were $4.77 million, up 1.1%; North American SG&A rose, primarily from professional fees, while TAAG expenses declined.
Material changes versus the prior comparable period
The principal revenue decline was in reprints/ePrints: management attributed it mainly to unusually large one-time customer orders in the prior-year quarter and termination of a historically nonperforming publisher distribution agreement in December 2012. Article Galaxy growth, attributed to new customers, partly offset the decline. TAAG sales also weakened. The company moved from prior-year profits to losses, and operating cash flow turned negative. Gross margin improved, while cash was supported in part by warrant exercise proceeds and an increase in accounts payable.
Outlook, commentary and risks
- Management said North American cash resources and expected operating cash flow should support current operations for the next 12 months, but provided no assurance that positive operating cash flow would continue.
- Management warned TAAG’s resources and expected cash flow may not support operations for the next 12 months. TAAG had an approximately $1.63 million working-capital deficit, about $325,000 of delinquent payroll and VAT taxes, and no additional financing in place. TAAG funding under the SVB facility was capped at $279,333 and its funding period expired March 31, 2014. A TAAG liquidation could eliminate a significant portion or all of its revenue; the company’s stated landlord guarantee exposure was $50,000.
- The company reported a $14.58 million accumulated deficit and stated it may continue to incur losses and may never sustain profitability. It had previously failed the SVB tangible-net-worth covenant in December 2011 and July 2013; amendments reset the minimum, and the company reported compliance as of December 31, 2013.
- Customer A represented 23% of trade receivables at December 31, 2013 and 16% of six-month revenue. A vendor represented 21% of six-month costs. TAAG factoring arrangements are with recourse. The company does not hedge foreign-currency exposure.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $210,000 for the quarter and $123,000 for the six months, compared with income of $422,000 and $643,000, respectively. Management cautioned that it is not a substitute for GAAP results or operating cash flow.
Important facts for investors to verify
- Whether North American operations generate the positive cash flow management expected, and whether the working-capital deficit grows.
- TAAG’s ability to address its tax arrears, funding gap and March 31, 2014 financing expiry, and the effect of any restructuring or liquidation.
- Whether Article Galaxy growth can offset continued weakness or volatility in reprints/ePrints and TAAG sales.
- Customer and publisher concentration, receivable collectability, and any further covenant amendments or changes to credit availability.
- The timing and cash impact of prepaid royalties, accounts payable, and other working-capital movements underlying reported operating cash flow.