Research Solutions, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. The filing was signed February 13, 2020. Amounts are in U.S. dollars.
Business context
Research Solutions provides annual subscriptions to its cloud-based research intelligence platform and sells single-article scientific, technical and medical content through that platform. The filing describes development of additional platform “gadgets” intended to support research workflows.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Year-over-year change | Six months ended Dec. 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $7.53 million | +7.7% | $15.13 million | +8.5% |
| Platform revenue | $0.95 million | +42.3% | $1.81 million | +43.7% |
| Transaction revenue | $6.58 million | +4.1% | $13.32 million | +5.0% |
| Gross profit / margin | $2.27 million / 30.2% | Margin +1.8 percentage points | $4.59 million / 30.3% | Margin +2.1 percentage points |
| Operating loss | $(0.71) million | Loss increased $44,590 | $(0.84) million | Loss narrowed $62,579 |
| Net loss | $(0.59) million; $(0.03) per share | Nearly unchanged | $(0.67) million; $(0.03) per share | Loss narrowed $96,796 |
| Adjusted EBITDA, non-GAAP | $(0.18) million | Improved $7,380 | $(0.15) million | Improved $144,898 |
Revenue growth was attributed to deployments and expansion among new and existing platform customers, and transaction orders from new customers. Gross margin improvement reflected lower platform third-party data costs; six-month transaction costs also fell proportionally. Operating expenses rose 12.4% in the quarter and 12.2% for the six-month period, including higher sales and marketing, general and administrative, and stock-based compensation expense.
Net loss includes gains from the discontinued Reprints and ePrints business sale: $91,254 for the quarter and $117,445 for six months. These contingent earn-out amounts are recognized when considered realizable. Continuing-operations losses were $683,426 for the quarter and $791,074 for six months.
Cash, liquidity and obligations
- Cash and cash equivalents were $6.77 million at December 31, 2019, up $1.42 million from June 30, 2019. Working capital was $2.67 million; stockholders’ equity was $2.82 million.
- Six-month operating cash flow was positive $1.62 million, versus negative $22,719 in the prior-year period. The company attributed the current-period inflow principally to increases in accounts payable and accrued expenses ($993,845) and deferred revenue ($563,209); accounts receivable declined by $342,389.
- Investing cash flow was zero. Financing cash outflow was $199,374, from repurchases of shares surrendered by employees for tax withholding.
- No borrowings were outstanding under the Silicon Valley Bank revolving credit facility. The facility provides the lesser of $2.5 million or 80% of eligible receivables; approximately $2.32 million was available at December 31. It was secured by company assets, bore a stated 6.75% rate, and was due to mature February 14, 2020. The company reported covenant compliance at quarter-end.
- Lease liabilities totaled $145,515. The office lease runs through January 2021; the company subleased its facilities from November 2019 through the end of the lease term.
Outlook, risks and notable items
- The filing provides no specific financial guidance. Management cautions that losses may continue for an indeterminate period and that profitability may not be achieved or sustained.
- Liquidity and operating cash flow warrant monitoring: the six-month cash flow improvement was substantially associated with higher payables and deferred revenue, while the company remained loss-making.
- Publisher/vendor concentration is notable: one vendor represented 21% of six-month cost of revenue, and two others each represented 12%; a fourth was below 10%. No customer represented 10% or more of revenue or receivables.
- The company has foreign-currency exposure, including Mexican-peso operating costs, and does not hedge currency risk. It reported six-month foreign-currency transaction losses of $6,667.
- Stock-based compensation was $666,304 for six months, including $523,632 in the December quarter. At December 31, potentially dilutive securities included 3,416,580 options, 1,885,000 warrants and 254,283 unvested restricted shares; these were excluded from diluted loss per share as antidilutive.
- Stockholders approved increasing the 2017 incentive plan’s share authorization by 500,000 shares, to 2,374,513. The company repurchased $199,374 of shares during the six months under its employee tax-withholding arrangement.
- Management judged disclosure controls effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter. The filing states there were no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the revolving credit facility was renewed, replaced or otherwise addressed before its February 14, 2020 maturity; the filing does not report the outcome.
- Whether future operating cash generation can be sustained without relying on increases in payables and deferred revenue, and whether the company can narrow continuing-operations losses.
- Whether platform growth, new-customer transaction orders and improving gross margins continue, particularly given publisher/vendor concentration.
- The future effect of stock compensation, incentive-plan capacity and outstanding options and warrants on expenses and share dilution.
- The timing and amount of remaining earn-out proceeds from the discontinued business sale; reported gains are contingent consideration, not recurring operating revenue.