Research Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2016. This is the company’s fiscal third quarter of 2016; the filing does not cover 2015 Q3 as stated in the request.
Business context
The company provides scientific, technical and medical information services through Article Galaxy, a cloud-based article delivery platform, and transactional reprint and ePrint services. The results exclude former French subsidiary TAAG, which was deconsolidated in 2014 and reported as discontinued operations in prior-period comparisons.
Financial performance
| Metric | Three months ended Mar. 31, 2016 | Prior-year quarter | Nine months ended Mar. 31, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $8.72 million | $8.84 million | $26.07 million | $24.32 million |
| Gross profit / margin | $1.77 million / 20.2% | $1.70 million / 19.3% | $4.92 million / 18.9% | $4.71 million / 19.4% |
| Operating income (loss) | $69,614 | $19,310 | $(389,748) | $(67,267) |
| Net income (loss) | $32,376 | $(1,816) | $(444,869) | $1.05 million |
| Operating cash flow | Not separately provided for the quarter | $782,082 | $(119,128) from continuing operations |
- Quarterly revenue fell 1.3%: Article Galaxy grew 15.0% to $6.52 million, while Reprints and ePrints declined 30.3% to $2.21 million. Management attributed the changes primarily to customer additions and higher Article Galaxy orders, offset by lower reprint/ePrint orders from existing customers.
- Nine-month revenue grew 7.2%, led by Article Galaxy growth of 12.4%; Reprints and ePrints declined 2.7%.
- Nine-month cost of revenue rose 7.9%, faster than revenue. Gross margin decreased to 18.9% from 19.4%; management cited lower average service fees per transaction for new Article Galaxy customers. Quarterly gross margin improved to 20.2% from 19.3%.
- Nine-month operating expenses increased 11.0% to $5.31 million, including higher selling, general and administrative and stock-based compensation costs. Continuing-operations loss widened to $444,869.
- Prior-year nine-month net income included a $1.55 million noncash gain from TAAG deconsolidation; accordingly, the year-over-year net-income comparison is not representative of ongoing operations.
Liquidity, debt and cash flow
- At March 31, 2016, cash was $1.92 million, working capital was $955,917, total assets were $7.96 million, and stockholders’ equity was $1.17 million. Current liabilities were $6.79 million.
- Nine-month operating cash flow was $782,082, despite the net loss. It was supported mainly by increases in accounts payable/accrued expenses ($564,290) and deferred revenue ($542,400), partly offset by an increase in accounts receivable ($614,001).
- Investing cash outflow was $180,584, including $130,800 for intangible assets; financing cash outflow was $20,147. Cash increased by $569,812 over the nine months.
- No borrowings were outstanding under the secured Silicon Valley Bank revolving line at period-end. Approximately $3.17 million was available; the facility is capped at the lesser of $4.0 million or 80% of eligible receivables, matures October 31, 2017, and carried a 5.75% rate at March 31, 2016. The company reported compliance with its covenants.
- Management stated that cash resources, available credit and expected cash flow should fund operations for the next 12 months, while cautioning that losses may continue and profitability may never be sustained.
Outlook, risks and notable items
- No specific revenue, earnings or margin guidance was provided. Management highlighted customer gains and Article Galaxy order growth, while noting that reprint/ePrint volumes fluctuate with customer marketing budgets and article availability.
- Key risks include continued losses, dependence on working-capital movements to generate operating cash, customer/order variability, and foreign-currency exposure. The company does not hedge currency risk.
- TAAG’s former liabilities were removed from the balance sheet; management, based on discussions with French counsel, considered liability for unsatisfied TAAG obligations remote.
- Stock-based compensation was $551,698 for the nine months. The filing also reports a $29,815 option-modification charge and $25,639 of quarterly other expense, whose specific cause is not clearly explained in the presented text.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the filing period: it is for the quarter ended March 31, 2016, not 2015 Q3.
- Assess whether operating cash generation is sustainable given its reliance on higher payables and deferred revenue, and monitor receivables collection.
- Track Article Galaxy growth against service-fee pressure and the sharp quarterly decline in Reprints and ePrints.
- Review the details behind the reported other expense and the company’s future stock-based compensation burden.
- Verify available borrowing capacity and ongoing covenant compliance, including how the receivables-based facility limit changes with eligible receivables.