Research Solutions, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2022; comparisons are to the corresponding 2021 periods. Research Solutions provides cloud-based research software subscriptions (“Platforms”) and scientific, technical and medical article delivery (“Transactions”).
Financial performance
- Revenue: Q2 revenue was $8.72 million, up 10.7%; six-month revenue was $17.40 million, up 11.4%. Q2 Platforms revenue rose 31.5% and Transactions revenue rose 5.4%. Management attributed growth to customer deployments and expansion, higher transaction order volume, and—in the six-month period—pricing initiatives.
- Gross profit and margin: Q2 gross profit was $3.40 million, up 20.0%, with a 39.0% gross margin versus 36.0%. Six-month gross profit was $6.75 million, up 22.8%, with a 38.8% margin versus 35.2%. The filing attributes improved cost ratios primarily to lower Platform software and personnel costs and lower proportional Transaction personnel costs.
- Operating results: Q2 operating loss was $329,000 versus $482,000; net loss was $256,000 versus $482,000. Six-month operating loss was $150,000 versus $848,000; net loss was $41,000 versus $854,000. Higher gross profit was partly offset by higher operating expenses, including stock-based compensation.
- Adjusted EBITDA (non-GAAP): Q2 was $201,000 versus a loss of $165,000; six-month Adjusted EBITDA was $635,000 versus a loss of $346,000. The company cautions this measure is not a substitute for GAAP results or operating cash flow.
- Cash flow: Six-month operating cash flow was $1.02 million, compared with cash use of $317,000. The 2022 result included a $805,000 decrease in prepaid royalties and $429,000 growth in deferred revenue, partly offset by a $975,000 decrease in accounts payable and accrued expenses. Investing used $316,000, including a $297,000 acquisition deposit; financing used $49,000 for share repurchases.
- Liquidity and balance sheet: Cash was $11.26 million at December 31, up from $10.60 million at June 30. Current assets were $16.89 million and current liabilities $11.60 million. Stockholders’ equity was $5.65 million, up from $4.88 million at June 30. The filing reports no outstanding line-of-credit borrowings and approximately $2.34 million available under the facility.
- Debt and facility: The secured revolving credit line has a $2.5 million maximum, subject to eligible receivables, and matures February 28, 2024. Its rate was 8.5% at December 31; the company reported compliance with its covenants.
Material changes and notable items
- Operating performance improved year over year, with revenue growth and a 3.0 percentage-point increase in Q2 gross margin; the company nevertheless remained loss-making on a GAAP basis.
- Operating expenses rose 12.5% in Q2 and 8.8% for six months. Q2 stock-based compensation increased to $609,000 from $301,000; six-month expense was $784,000 versus $472,000.
- In September, Reprints Desk agreed to acquire certain FIZ Karlsruhe customer contracts, effective January 1, 2023. It paid a non-refundable $297,450 deposit; up to $248,000 of additional consideration may depend on customer contract consents and trailing revenue. A further bonus amount may be payable based on qualifying customer orders and service fees through 2025; the filing does not state a clear maximum for this bonus.
- The company issued 1.8 million restricted shares to key management under a five-year performance-based equity program with stock-price vesting targets from $3.00 to $6.00 per share. Total shares issued and outstanding increased to 29.15 million at December 31 from 27.08 million at June 30. Unvested restricted stock compensation of $3.25 million remained to be recognized.
Outlook, risks and controls
- The filing provides no numerical revenue, earnings, or cash-flow guidance. Management describes ongoing development of Platform apps and product capabilities, but gives no quantified outlook.
- Management said COVID-19 had not caused significant negative effects on results or cash flows to date, but future effects on customer orders, subscriptions, suppliers, and service providers remain uncertain. Inflation and interest-rate pressures could increase costs and strain working capital.
- Foreign-currency movements can affect operating costs; the company does not hedge currency exposure. Two vendors represented 21% and 13% of Q2 revenue-related vendor concentration, respectively. No customer accounted for 10% or more of revenue.
- Management concluded disclosure controls were effective at a reasonable assurance level as of December 31, 2022, and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether Platform growth, transaction volumes, and pricing can sustain revenue growth and gross-margin improvement.
- Review cash-flow quality, particularly the effects of prepaid royalties, deferred revenue, and accounts payable movements.
- Track the FIZ contract transfer, customer consents, contingent purchase consideration, and any subsequent bonus payments.
- Evaluate potential dilution and future compensation expense from the performance-based restricted shares and other outstanding equity awards.
- Monitor liquidity, credit-line availability and covenants, as well as vendor concentration, foreign-exchange exposure, and the stated COVID-19 and inflation risks.