Business context and reporting period
Research Solutions, Inc. filed this Form 10-K for the fiscal year ended June 30, 2018, with fiscal 2017 as the comparable period. The company provides SaaS research-intelligence platform subscriptions and transactional access to scientific, technical and medical content. The filing also reports unaudited quarterly results; the quarter ended June 30, 2018 is the company’s fiscal fourth quarter.
In June 2017, the company sold the intangible assets of its Reprints and ePrints business line. The continuing business results below exclude that business’s operating results; the company continued to recognize sale-related earn-out consideration.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $28.018 million | $25.747 million |
| Gross profit / margin | $7.349 million / 26.2% | $6.104 million / 23.7% |
| Operating loss | $(1.950) million | $(3.085) million |
| Loss from continuing operations | $(1.936) million | $(3.108) million |
| Net loss | $(1.679) million | $(2.294) million |
| Adjusted EBITDA (non-GAAP) | $(1.016) million | $(2.300) million |
| Cash used in operating activities | $(605,314) | $(436,842) |
| Cash and cash equivalents at year-end | $4.908 million | $5.774 million |
- Platform revenue increased 85.6% to $1.819 million; transaction revenue increased 5.8% to $26.199 million. Management attributed platform growth to additional deployments and customer expansion, and transaction growth primarily to new-customer orders.
- Total cost of revenue grew 5.2%, slower than revenue growth of 8.8%. Gross margin improved 2.5 percentage points. Operating expenses increased 1.2% to $9.299 million, including higher technology and product-development costs and stock-based compensation.
- Fiscal fourth-quarter revenue was $7.166 million and net loss was $85,210; loss from continuing operations was $136,426. The quarter included $51,216 of income related to discontinued operations/sale consideration.
- At June 30, 2018, working capital was $3.107 million, stockholders’ equity was $3.279 million and accumulated deficit was $19.555 million. Current assets were $9.580 million and current liabilities were $6.472 million.
- No borrowings were outstanding under the Silicon Valley Bank revolving line at year-end. The facility is the lesser of $2.5 million or 80% of eligible receivables, matures December 31, 2019, and had approximately $1.901 million of unused availability. The company reported covenant compliance.
- Reported liabilities included $328,299 of operating lease obligations, of which $119,786 was current. The company repurchased 120,900 shares for $152,739 during FY2018.
Material changes, outlook and risks
- Net loss narrowed year over year, principally as gross profit increased and the continuing-operations loss improved. FY2018 net loss also included $256,995 of gain from the Reprints and ePrints sale earn-out; FY2017 included $814,641 of discontinued-operations income and sale gain.
- The sale agreement provides $450,000 paid at closing plus earn-outs equal to 45% of gross margin over the 30 months after closing. FY2018 included $256,995 of contingent sale consideration recognized when deemed realizable.
- The filing gives no quantified revenue, earnings or cash-flow guidance. Management describes growth plans focused on platform development, customer expansion, new market verticals, channel relationships and potential acquisitions, while cautioning that future profitability is uncertain.
- Management warned of continued losses and negative operating cash flow, potential need for additional capital, technology and cybersecurity risks, competition and possible substitution by free or lower-cost content sources. Three largest content suppliers represented approximately 38% of content cost in FY2018, up from 35% in FY2017; no customer represented over 10% of revenue.
- The company does not hedge currency exposure and bears Mexican peso operating-cost exposure. It identified privacy and data-protection compliance, including GDPR, and ongoing PCI compliance as risks. Ordinary-course legal proceedings were not expected by management to materially affect the financial statements.
- The company expected adoption of the new customer-contract revenue standard effective July 1, 2018, using the modified retrospective approach, and did not expect a material impact. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
Important facts for investors to verify
- Whether platform subscription growth and gross-margin improvement continue, and whether operating losses and cash burn decline.
- Cash-flow drivers and working-capital movements, particularly receivables, prepaid royalties, and accounts payable and accrued expenses.
- Actual future earn-out receipts from the Reprints and ePrints asset sale and the basis for recognizing contingent consideration.
- Availability under the secured credit line, covenant headroom and the company’s financing needs if losses persist.
- Exposure to major content suppliers, potential content-cost changes, and dilution from outstanding options, warrants and equity awards.