Research Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2017. This is the company’s fiscal third quarter; the filing itself reports the quarter ended March 31, 2017.
Business context
Research Solutions provides a cloud-based scientific, technical and medical research platform, single-article delivery and printed and electronic reprints. Platform subscriptions are recognized over time; transaction and reprint revenue is primarily recognized upon delivery. The company is developing interactive platform “gadgets” to support research workflows.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $8.644 million, down 0.9% year over year | $24.833 million, down 4.7% |
| Gross profit / margin | $1.729 million / 20.0%, versus $1.765 million / 20.2% | $4.856 million / 19.6%, versus $4.916 million / 18.9% |
| Operating income (loss) | $(639,089), versus $69,614 | $(1.874) million, versus $(389,748) |
| Net income (loss) | $(637,490), versus $32,376; loss per share $(0.03) | $(1.891) million, versus $(444,869); loss per share $(0.08) |
| Adjusted EBITDA (non-GAAP) | $(486,585), versus $227,663 | $(1.232) million, versus $227,387 |
| Operating cash flow | Not separately provided for the quarter | $(675,484), versus $782,082 |
Quarterly operating expenses increased 39.7% to $2.368 million, led by higher sales and marketing and general and administrative costs, primarily personnel and consulting. For the nine-month period, operating expenses rose 26.9% to $6.730 million. The nine-month net loss widened mainly because of higher operating expenses.
Revenue mix shifted: quarterly platform revenue rose 123.8% to $270,920, while reprints and ePrints declined 9.5% to $2.000 million. For the nine months, platform revenue increased 143.4% to $662,129 and transactions rose 3.3% to $18.246 million, but reprints and ePrints fell 27.1% to $5.925 million, driving the overall revenue decline. Reprints order volumes can fluctuate with customer marketing budgets and relevant article availability.
Cash, liquidity and obligations
- Cash and cash equivalents were $5.243 million at March 31, 2017, down $833,897 from June 30, 2016. Management attributed the operating cash use chiefly to a $1.103 million increase in prepaid royalties, partly offset by lower accounts receivable.
- Working capital was $4.312 million; total assets were $12.509 million and stockholders’ equity was $4.561 million. Current assets were $11.903 million and current liabilities $7.590 million.
- No borrowings were outstanding under the secured Silicon Valley Bank revolving credit line. Approximately $2.945 million was unused; the facility is limited to the lesser of $4 million or 80% of eligible receivables, matures October 31, 2017, and had a 5.75% interest rate. The company reported covenant compliance at quarter-end.
- A new 48-month operating lease, with monthly payments ranging from $10,350 to $11,475 through January 2021, was recognized with a right-of-use asset and lease liability. The liability was $445,187 at quarter-end; the initial liability was approximately $463,000.
- The company reported no off-balance-sheet arrangements. It reported no outstanding debt borrowings, but the lease liability is a balance-sheet obligation.
Outlook, risks and notable matters
- No specific revenue, earnings or cash-flow guidance was provided. Management cautioned that losses may continue for an indeterminate period and that profitability may not be achieved or sustained; prolonged losses and negative cash flow could impede operations and expansion.
- Management said platform revenue growth reflected additional deployments to new and existing customers. It is developing new platform functionality, but the filing provides no quantified expected impact or timetable for these initiatives.
- Vendor concentration is notable: one vendor represented 18% of nine-month cost-related vendor activity/revenue disclosure for 2017, as presented in the filing’s vendor concentration table. The filing does not identify the vendor by name in the supplied text. Reliance on key content vendors and publisher copyright arrangements is relevant to costs and delivery.
- Foreign exchange movements may affect results, particularly costs in Mexican pesos; the company does not hedge currency exposure. Nine-month foreign-currency transaction gains were $27,227, while translation produced a $16,178 comprehensive loss.
- The company adopted lease accounting guidance for a new lease during the period. It was still assessing the impact of the forthcoming revenue-recognition standard and had not determined its effect.
- Disclosure controls were concluded effective at a reasonable-assurance level as of March 31, 2017; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether platform and transaction growth can offset continued weakness in reprints and ePrints, and whether platform expansion improves gross margins.
- Drivers and sustainability of higher sales, marketing, and administrative spending, and the path toward positive operating cash flow and profitability.
- Prepaid royalty commitments, related cash requirements, and the timing of their conversion to cost of revenue.
- Renewal, repayment or replacement plans for the credit facility maturing October 31, 2017, and continued compliance with its covenants.
- Key publisher/vendor dependencies, content-cost and discount trends, and exposure to currency changes.
- Potential dilution: 3.126 million options and 1.985 million warrants were outstanding at March 31, 2017; 23.926 million common shares were outstanding at May 10, 2017.