Research Solutions, Inc. — Form 10-Q summary
Reporting period: Three months ended September 30, 2019, compared with the three months ended September 30, 2018. This is the company’s fiscal 2020 first quarter, although the request labels it 2019 Q1. The company provides SaaS research-intelligence platform subscriptions and transactional delivery of scientific, technical, and medical content. Financial statements are unaudited.
Financial performance
| Metric | Quarter ended Sept. 30, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $7.595 million | $6.953 million | +$643,000; +9.2% |
| Gross profit / gross margin | $2.317 million / 30.5% | $1.948 million / 28.0% | +$369,000; margin +2.5 points |
| Operating loss | $127,000 | $234,000 | Improved by $107,000 |
| Continuing-operations loss | $108,000 | $220,000 | Improved by $112,000 |
| Net loss | $81,000 | $178,000 | Improved by $96,000 |
| Adjusted EBITDA (non-GAAP) | $36,000 | $(102,000) | Improved by $138,000 |
| Operating cash flow | $310,000 provided | $300,000 used | Improved by $610,000 |
Platform revenue rose 45.4% to $856,000; transaction revenue increased 5.9% to $6.739 million. Management attributed platform growth to new deployments and expansion among existing customers, and transaction growth primarily to orders from new customers. Cost of revenue rose 5.5%, slower than revenue, contributing to improved gross margin. Selling and marketing expense increased 27.6%, primarily on higher advertising spend; general and administrative expense increased 10.1%, primarily due to professional services fees.
Cash, liquidity, and debt
- Cash was $5.588 million at September 30, up $235,000 from June 30, 2019. Operating cash generation primarily reflected lower receivables and higher deferred revenue, partly offset by prepaid royalties.
- Working capital was $2.857 million; current assets were $10.294 million and current liabilities were $7.437 million.
- No borrowings were outstanding on the Silicon Valley Bank revolving line. Approximately $2.153 million was available; the facility limit is the lesser of $2.5 million or 80% of eligible receivables. Its stated maturity was December 31, 2019, and the company reported covenant compliance at quarter-end. The rate was 6.75% and the facility is secured by company assets.
- Total liabilities were $7.483 million, including $177,000 of operating lease liabilities. There were no investing cash flows; financing cash use of $72,000 reflected employee share repurchases for tax withholding.
Changes, outlook, and risks
- Revenue and gross profit grew, and losses narrowed, but the company remained loss-making. The quarter included a $26,000 gain from contingent consideration on the 2017 sale of its Reprints and ePrints business; the comparable prior-year gain was $42,000.
- No quantified revenue, earnings, or cash-flow guidance is provided. Management cautioned that losses may continue for an indeterminate period and that sustained profitability may not be achieved.
- Foreign-currency movements are a risk: the company has Mexican-peso operating costs, reported a $12,000 transaction loss, and does not hedge currency exposures. It also disclosed vendor concentration, with two vendors accounting for 20% and 12% of quarterly cost-of-revenue purchases, respectively; one customer represented 13% of receivables at quarter-end.
- Subsequent events included an office sublease beginning November 1, 2019, at $8,094 per month through January 2021, with one month of rent abated; and stockholder approval on November 12 to increase the 2017 incentive plan’s share authorization by one million shares.
- Management reported effective disclosure controls as of quarter-end and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- The MD&A narrative says revenue increased 1.3%, but the financial statements and comparison table show an increase of $642,592, or 9.2%; verify the apparent narrative error.
- Confirm the revolving credit facility’s renewal, replacement, or repayment arrangements before its stated December 31, 2019 maturity.
- Assess whether platform growth and gross-margin improvement can continue while operating expenses rise and the business remains unprofitable.
- Monitor the timing and amount of remaining contingent consideration from the discontinued-business sale, vendor and receivables concentrations, and the effect of the office sublease.
- Consider potential dilution: at September 30, options covered 3.297 million shares, warrants 1.885 million shares, and unvested restricted stock 292,283 shares; these securities were antidilutive for the reported loss-per-share calculation.