Research Solutions, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the three months ended September 30, 2013, the first quarter of the company’s fiscal year ending June 30, 2014. Research Solutions provides scientific, technical and medical content delivery, reprints/ePrints, and printing and logistics services. North American operations include the Article Galaxy platform; printing and logistics are operated by TAAG in France.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $8.58 million | $9.54 million |
| Gross profit / gross margin | $2.00 million / 23.4% | $2.16 million / 22.6% |
| Operating loss | $123,404 | $13,645 |
| Net loss | $142,947 | $54,033 |
| Adjusted EBITDA (non-GAAP) | $87,061 | $221,250 |
| Cash from operating activities | $177,384 | $41,748 |
| Cash and cash equivalents at quarter-end | $1.80 million | $2.18 million at Sep. 30, 2012 |
Gross margin improved year over year, but lower revenue and operating expenses that declined only modestly contributed to a larger operating and net loss. Operating cash flow was positive, supported in part by lower receivables and noncash depreciation and amortization. Investing activities used $4,176; financing activities used $7,652. The company reported a $14.14 million accumulated deficit and only $227,373 of stockholders’ equity.
Current assets were $7.50 million against current liabilities of $8.00 million, a working-capital deficit of approximately $503,000 and a current ratio of about 0.94. The company had no borrowings on its Silicon Valley Bank revolving line; approximately $1.84 million of availability was unused. The facility provides for the lesser of $4 million or 80% of eligible receivables, and its stated interest rate was 6.5%. Capital lease obligations totaled approximately $666,000; current notes payable were $57,473. TAAG also used factoring arrangements.
Material changes and management commentary
- Revenue fell 10.1%. Article Galaxy revenue rose 12.4% to $4.47 million, primarily on new customers, while Reprints and ePrints declined 31.3% to $2.15 million, primarily due to lower orders from existing customers.
- North American revenue declined 6.8%; TAAG revenue declined 19.6% to $1.96 million, which management attributed to disappointing sales efforts and financial uncertainty in Europe.
- Gross margin increased to 23.4% from 22.6%. Management cited lower production costs and publisher payments for Article Galaxy and lower TAAG production costs; Reprints and ePrints costs rose as a percentage of revenue.
- Management believes North American cash resources and operating cash flow should support current operations for the next twelve months, but gives no assurance. It says TAAG’s resources may not be sufficient for the same period.
Risks, contingencies and subsequent events
- TAAG had approximately $1.34 million of working-capital deficiency, a $34,243 operating loss for the quarter, and approximately $325,000 of delinquent payroll and VAT taxes. The company stated that no additional financing was in place for TAAG beyond funding subject to limits and warrant exercise. TAAG liquidation could eliminate some or all of its revenue; the parent’s stated exposure to French creditors is limited to TAAG assets except for a $50,000 landlord guarantee.
- The company has historically incurred losses and says it may not achieve or sustain profitability. It does not hedge foreign-currency exposure; translation losses for the quarter were $36,974.
- One customer represented 12% of quarterly revenue; one vendor represented 18%, and three others represented 14%, 12% and 12%. Customer and vendor concentration may expose the company to disruption or bargaining risk.
- On October 31, 2013, the company amended its SVB facility, extending maturity to October 31, 2015 and updating covenants. In November, warrants were exercised for approximately 400,000 shares at $2 per share, expected to provide approximately $800,000.
- No formal revenue or earnings guidance was provided. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash flow: the cash flow statement reports operating cash flow of $177,384, while one MD&A passage says $117,384. Confirm the correct amount.
- TAAG’s near-term funding, tax arrears, working-capital shortfall, and the conditions and limits on any available support.
- Whether the November warrant exercise proceeds were received, and the resulting share count and dilution.
- Revenue trends in Reprints and ePrints and TAAG, and whether Article Galaxy growth can offset those declines.
- Availability under the receivables-based credit facility, covenant compliance, and the costs and recourse terms of factoring arrangements.