Business context and reporting period
Research Solutions, Inc. filed this Form 10-K for the fiscal year ended June 30, 2017, with fiscal 2016 comparatives. The filing does not provide a standalone fiscal fourth-quarter summary; the period metadata “2016 Q4” does not match the annual reporting period. The company provides SaaS research-intelligence platform licenses and transactional delivery of scientific, technical and medical content.
On June 30, 2017, the company sold the intangible assets of its Reprints and ePrints business line, excluding billed receivables and related liabilities. The continuing business therefore reflects a significant portfolio change at year-end.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $25.75 million | $24.09 million |
| Gross profit / gross margin | $6.10 million / 23.7% | $5.63 million / 23.4% |
| Operating loss | $3.08 million | $1.29 million |
| Loss from continuing operations | $3.11 million | $1.36 million |
| Net loss | $2.29 million | $498,000 |
| Adjusted EBITDA, non-GAAP | $(2.30) million | $(477,000) |
| Cash from (used in) operating activities | $(437,000) | $185,000 |
| Cash and cash equivalents at year-end | $5.77 million | $6.08 million |
- Platforms revenue was $980,000, up 143.8%; Transactions revenue was $24.77 million, up 4.5%. Total revenue increased 6.9%.
- Cost of revenue rose 6.4%, leaving gross margin modestly higher at 23.7%. Platform and transaction gross margins declined individually, while the greater share of higher-margin platform revenue supported the consolidated margin.
- Operating expenses increased 32.8% to $9.19 million, including sales and marketing up 66.0% and general and administrative costs up 23.2%. Management attributed increases primarily to personnel and consulting costs. This expense growth outpaced gross-profit growth.
- Working capital was $4.11 million; current assets were $12.00 million and current liabilities were $7.89 million. Total liabilities were $8.22 million, including $439,000 of lease liabilities. The balance sheet reports no outstanding bank borrowings.
Material changes versus the prior period
- Net loss widened by $1.80 million, while loss from continuing operations more than doubled. The discontinued business contributed $814,000 of income, including a $241,000 gain on sale, compared with $866,000 of discontinued-operation income in FY2016.
- Cash declined $303,000. Operating cash use and share repurchases were partly offset by $435,000 of sale proceeds reported in investing activities.
- The company raised $4.78 million net from an equity offering in FY2016; there was no comparable equity issuance in FY2017. FY2017 share repurchases were $199,000.
- The discontinued Reprints and ePrints business generated $7.94 million of FY2017 revenue and $573,000 of income before the sale, compared with $10.27 million of revenue and $866,000 of income in FY2016.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management describes plans to grow platform subscriptions and develop platform “gadgets,” pursue cross-selling and new markets, and expand through channels or acquisitions; these are plans, not firm forecasts.
- Sale consideration includes $450,000 paid at closing plus earn-outs equal to 45% of gross margin over 30 months. The company records contingent consideration when deemed realizable. The filing reports a $241,000 sale gain after specified option-related compensation and legal costs.
- Liquidity risks include ongoing losses, negative operating cash flow, and dependence historically on equity financing. The Silicon Valley Bank revolving facility—up to the lesser of $4 million or 80% of eligible receivables—matures October 31, 2017; approximately $3.28 million was unused at year-end. It is secured by company assets and subject to financial covenants.
- The two largest content suppliers represented approximately 27% of content costs in FY2017. Other stated risks include copyright claims and piracy, competition and free information sources, technology or cybersecurity disruption, foreign-exchange exposure, and the ability to obtain additional capital.
- Management reported effective disclosure controls and internal control over financial reporting at June 30, 2017. The auditor issued an unqualified opinion on the financial statements but did not audit internal-control effectiveness. Management says ordinary-course legal proceedings are not expected to have a material financial-statement effect.
- The company reports no cash dividends and says the credit agreement prohibits them. Its shares trade on OTCQB, with penny-stock and potentially limited-liquidity risks disclosed.
Important facts for investors to verify
- Confirm the post-sale revenue, costs and cash-flow profile of the continuing platform business, given the sale closed on the last day of FY2017.
- Reconcile the stated $450,000 closing payment with the $435,000 sale proceeds reported in the cash-flow statement, and assess the earn-out’s realizability and timing.
- Review the cause and sustainability of the sharp rise in operating expenses and losses, and whether platform growth can improve margins and cash generation.
- Check renewal or replacement of the credit facility before its October 31, 2017 maturity, covenant compliance, and available borrowing capacity.
- Assess supplier concentration, receivables and prepaid royalties, and the potential dilution from outstanding options, warrants and equity awards.