Business context and reporting period
Research Solutions, Inc. provides on-demand scientific, technical and medical information through Article Galaxy (single-article delivery) and Reprints and ePrints. This unaudited Form 10-Q covers the three months ended September 30, 2015, the company’s fiscal first quarter of fiscal 2016, and compares results with the three months ended September 30, 2014.
Financial performance and liquidity
| Metric | Quarter ended September 30, 2015 | Prior-year quarter |
|---|---|---|
| Revenue | $8.03 million | $7.55 million |
| Gross profit; gross margin | $1.55 million; 19.4% | $1.50 million; 19.9% |
| Operating income (loss) | $(165,352) | $1,402 |
| Net income (loss) | $(178,820) | $1.15 million |
| Operating cash flow | $110,521 provided | $121,309 used |
| Adjusted EBITDA | $(5,556) | $192,056 |
- Revenue grew 6.3% year over year: Article Galaxy increased 7.7% and Reprints and ePrints increased 3.1%.
- Cost of revenue rose 6.9%, faster than revenue, and gross margin declined 0.5 percentage points. Management attributed Article Galaxy’s higher cost ratio mainly to increased content acquisition costs; the Reprints and ePrints cost ratio improved.
- Operating expenses increased 14.8% to $1.72 million, primarily reflecting higher compensation and consulting fees. The company reported a continuing-operations loss of $178,820, versus a $6,936 loss a year earlier.
- The prior-year net profit included a $1.55 million noncash gain from deconsolidating former French subsidiary TAAG, partly offset by its discontinued-operation loss. The periods are therefore not directly comparable on net income.
- At September 30, cash was $1.47 million, working capital was $980,208, total assets were $7.08 million and stockholders’ equity was $1.06 million. Cash from operations was supported principally by a $244,330 increase in accounts payable and accrued expenses, partly offset by a $146,045 increase in prepaid royalties.
- No borrowings were outstanding on the SVB line of credit. The facility is the lesser of $4.0 million or 80% of eligible receivables; approximately $1.6 million was unused at quarter-end. The reported rate was 5.75%, and the company was in compliance with its covenants.
Changes, outlook, risks and unusual items
- Management said cash resources, borrowing availability and expected cash flow should be sufficient to sustain operations for the next 12 months, while cautioning that losses may continue for an indeterminate period and profitability may not be achieved or maintained.
- On October 31, 2015, the company amended its SVB credit agreement, extending maturity to October 31, 2017 and updating financial and performance covenants; other material terms were mostly unchanged.
- TAAG entered judicial liquidation after the company relinquished control in September 2014. Management, based on discussions with French counsel, considered liability for its unsatisfied obligations remote and had eliminated the related liability by June 30, 2015.
- Article Galaxy order volumes may fluctuate with customer additions or losses; Reprints and ePrints demand can vary with customer marketing budgets and suitable article availability. One customer represented 11% of quarterly revenue; one vendor represented 17% of purchases.
- The company has foreign-currency exposure, including costs in Mexican pesos, and does not hedge currency fluctuations. Management reported no material change in internal control over financial reporting and concluded disclosure controls were effective at a reasonable assurance level.
- The company reported a net loss and has deferred tax assets primarily from U.S. net operating loss carryforwards and stock compensation; management maintained a valuation allowance pending sufficient taxable income. Adoption of the new revenue recognition standard was still under evaluation.
Important facts for investors to verify
- Confirm the cash balance: the balance sheet and cash flow statement report $1,465,026, while the MD&A liquidity table states $1,456,026.
- Assess whether revenue growth can outpace content and operating-cost increases, particularly the rise in Article Galaxy content acquisition costs and compensation and consulting expenses.
- Review cash-flow quality and working-capital movements, including the increase in accounts payable and accrued expenses and prepaid royalties.
- Monitor liquidity, unused borrowing availability, borrowing-base eligibility and compliance with the amended SVB covenants.
- Separate ongoing operating performance from the prior-year TAAG deconsolidation gain when comparing reported net income and evaluate any remaining legal exposure.