Research Solutions, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2013 Q3,” but the filing is for the quarter ended March 31, 2014, the company’s fiscal third quarter, and reports comparative results for the three and nine months ended March 31, 2013. Financial statements are unaudited.
Business context and reporting period
Research Solutions provides scientific, technical and medical content delivery, reprints/ePrints, and printing and logistics services. North American operations include Reprints Desk and Reprints Desk Latin America; France operations consist of TAAG. Article Galaxy is its electronic article-delivery platform.
Financial results and liquidity
- Quarter revenue: $8.64 million, down 18.8% year over year. Gross profit was $2.06 million (23.8% margin), versus $2.26 million (21.2%) a year earlier. Operating loss was $652,247; net loss was $676,333, or $0.04 per share. Adjusted EBITDA was negative $442,484, versus positive $66,226.
- Nine-month revenue: $26.84 million, down 21.4%. Gross profit was $6.28 million (23.4% margin), versus $7.17 million (21.0%). Operating loss was $1.20 million; net loss was $1.27 million, or $0.07 per share. Adjusted EBITDA was negative $565,410, versus positive $709,009.
- Cash flow, nine months: Operating activities used $314,912, investing used $75,288, and financing provided $428,090. Cash decreased $51,467 to $1.65 million. Financing included $838,000 from warrant exercises.
- Balance sheet at March 31, 2014: Current assets were $8.18 million and current liabilities $8.88 million, a working-capital deficit of about $700,000. Total liabilities were $9.08 million and stockholders’ equity was only $95,041; accumulated deficit was $15.26 million.
- Debt and credit: No borrowings were outstanding under the SVB revolving line; approximately $2.12 million was unused. The line matures October 31, 2015, bears 6.5% interest at period-end, and is secured by company and subsidiary assets other than TAAG’s. Capital lease obligations totaled $518,979; current notes payable were $34,945. TAAG also had $63,245 due to a factor.
Material changes versus prior comparable periods
- Article Galaxy revenue rose 10.5% for the quarter and 11.2% for nine months, which management attributed mainly to new customers.
- Reprints and ePrints revenue fell 45.9% for the quarter and 50.0% year to date. Management cited unusually large customer orders in the prior-year period and termination of a historically nonperforming publisher distribution agreement.
- TAAG revenue declined 33.1% for the quarter and 20.9% year to date, primarily attributed to disappointing sales efforts. Its quarterly operating loss was $206,063; its nine-month operating loss was $208,331.
- North American gross margin improved, while TAAG’s quarterly gross margin fell to 35.6% from 39.6%, which management attributed to greater production expenses. Consolidated gross margin improved year over year in both reported periods.
- Quarterly net loss widened by $200,899; nine-month net loss widened by $914,688. North American SG&A increased, mainly due to professional-service fees.
Outlook, risks and unusual items
- Management believed current resources and expected cash flow could sustain North American operations for the next 12 months, but gave no assurance. It did not provide quantified revenue or earnings guidance.
- Management warned that TAAG’s resources and expected cash flow might not sustain its operations for the next 12 months. TAAG had an approximately $1.68 million working-capital deficit and about $700,000 of delinquent payroll and VAT taxes. French authorities agreed to repayment in 24 monthly installments of about $35,000 beginning February 2014. No additional TAAG financing was in place.
- TAAG funding is restricted under the SVB arrangement. If TAAG liquidates, the company says it could lose a significant portion or all of TAAG revenue; parent exposure to French creditors is generally limited to TAAG assets, except for a $50,000 landlord guarantee.
- The company reported historical losses and negative operating cash flow, and stated it may not achieve or sustain profitability. It had previously failed the SVB tangible-net-worth covenant in December 2011 and July 2013; the covenant was amended on both occasions. It reported compliance as of March 31, 2014.
- Subsequent to quarter-end, stockholders authorized the board to implement a discretionary 1-for-2 to 1-for-8 reverse split before December 31, 2014, principally to seek compliance with Nasdaq listing requirements. No exact ratio or implementation date was set.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether North American cash generation meets management’s 12-month expectation amid continuing consolidated losses and negative operating cash flow.
- TAAG’s progress on tax repayments, operating performance, liquidity, and any need for financing or restructuring.
- Drivers and durability of the sharp decline in reprints/ePrints and TAAG revenue, alongside Article Galaxy growth.
- Compliance with SVB covenants and the availability and terms of the unused credit facility.
- Whether and when the board implements the authorized reverse split and whether it addresses Nasdaq listing requirements.
- The dilution implications of outstanding options and warrants; the filing reports 1,885,437 options and 904,998 warrants outstanding at March 31, 2014.