Research Solutions, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended December 31, 2015 (the company’s fiscal 2016 second quarter). Research Solutions provides scientific, technical and medical content through its Article Galaxy platform and transactional reprint and ePrint services. Comparative results exclude former French subsidiary TAAG, which was deconsolidated in September 2014 and reported as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $9.315 million | $7.931 million | $17.342 million | $15.484 million |
| Gross profit (margin) | $1.596 million (17.1%) | $1.510 million (19.0%) | $3.151 million (18.2%) | $3.010 million (19.4%) |
| Operating loss | $(294,010) | $(87,979) | $(459,362) | $(86,577) |
| Net income (loss) | $(298,425) | $(94,176) | $(477,245) | $1.052 million |
| Net income (loss) per share | $(0.02) | $(0.01) | $(0.03) | $0.06 |
| Cash provided by operating activities | Not provided separately for the quarter | Not provided separately for the quarter | $477,484 | $178,378 |
| Adjusted EBITDA | $5,280 | $112,235 | $(276) | $304,291 |
Quarterly revenue increased 17.5%; six-month revenue increased 12.0%. For the quarter, Article Galaxy revenue grew 14.3% and reprints/ePrints grew 23.1%; management attributed both increases primarily to orders from new customers. Cost of revenue rose faster than revenue in the quarter, and gross margin declined. Management cited lower average service-fee revenue per transaction in new Article Galaxy accounts and higher reprint/ePrint content acquisition costs.
Operating expenses increased 18.3% in the quarter and 16.6% for the six-month period. Management cited higher sales and marketing, administrative compensation and consulting costs. Stock-based compensation was $277,389 for the quarter and $421,130 for six months, versus $113,798 and $221,517, respectively, in the comparable periods.
At December 31, 2015, cash was $1.764 million, up from $1.354 million at June 30, 2015. Current assets were $7.854 million, current liabilities $6.946 million, working capital $907,421, total assets $7.958 million and stockholders’ equity $1.011 million. Six-month operating cash flow was positive, primarily reflecting a $833,266 increase in accounts payable and accrued expenses, partly offset by a $527,065 increase in accounts receivable. Investing activities used $42,448; financing activities used $20,148, mainly for employee share withholding repurchases.
No line-of-credit borrowings were outstanding at period-end. The secured revolving facility provides the lesser of $4.0 million or 80% of eligible receivables; approximately $2.927 million was available. Its stated rate was 5.75% and it matures October 31, 2017. The company reported compliance with its covenants at December 31, 2015.
Material changes, outlook and risks
- The six-month comparison shifted from $1.052 million net income in 2014 to a $477,245 loss in 2015. The prior-year result included a $1.548 million noncash gain on TAAG deconsolidation; 2014 also included a discontinued-operations loss.
- Management stated that cash resources, unused credit availability and expected cash flow should support operations for the next 12 months. It also cautioned that losses may continue for an indeterminate period and that sustained profitability may not be achieved.
- Revenue is transactional and can fluctuate with customer additions or losses, and reprint/ePrint demand also varies with customer marketing budgets and suitable journal content. One customer represented 11% of current-period revenue. Two vendors represented 18% and 23% of quarterly cost-related vendor concentration, respectively.
- The company has foreign-currency exposure, including Mexican peso operating costs, and does not hedge currency risk. Deferred tax assets are subject to a full valuation allowance based on management’s assessment that realization is not yet more likely than not.
- Management, after consultation with French counsel, considered liability for unsatisfied TAAG obligations remote; the filing states that the related liability had been eliminated. On February 8, 2016, the company issued 81,428 restricted shares to employees, valued at $49,000.
- Management reported effective disclosure controls at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether revenue growth from new customers can continue and whether gross margins recover from the year-over-year decline.
- Whether operating costs, particularly sales and marketing and share-based compensation, can be managed while the company remains loss-making.
- The quality and timing of operating cash flow, including the contribution from increased accounts payable, and the company’s ability to maintain liquidity and meet credit-line covenants.
- Customer and vendor concentration, foreign-currency exposure, and the status of any residual or contingent matters related to TAAG.