Research Solutions, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017. The company provides SaaS research-intelligence platform subscriptions and transactions for sourcing and delivering scientific, technical and medical content.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 | Prior-year comparison |
|---|---|---|---|
| Revenue | $6.82 million | $13.57 million | Up 12.1% and 10.7%, respectively |
| Gross profit / gross margin | $1.74 million / 25.4% | $3.49 million / 25.7% | Margins were 22.6% and 22.9% |
| Operating loss | $702,429 | $1.53 million | Prior-year losses were $1.06 million and $1.55 million |
| Net loss | $624,580 | $1.40 million | Prior-year losses were $842,960 and $1.25 million |
| Adjusted EBITDA (non-GAAP) | Loss of $342,019 | Loss of $855,761 | Prior-year losses were $705,519 and $1.06 million |
| Operating cash flow | Not presented separately | Cash used of $690,161 | Prior-year six-month cash provided was $776,562 |
Platform revenue increased 88.7% in the quarter and 104.8% for the six months, attributed to additional deployments to new and existing customers. Transaction revenue grew 9.3% and 7.6%, respectively, primarily due to orders from new customers. Cost of revenue grew more slowly than revenue, and gross margin improved; the filing attributes lower transaction costs as a share of revenue mainly to increased copyright discounts, while platform costs rose with third-party data costs.
Quarterly continuing-operations loss narrowed year over year, primarily as higher gross profit more than offset operating expenses. For the six months, the continuing-operations loss also narrowed slightly, but net loss increased because income from discontinued operations was lower than in the prior-year period.
Financial position and liquidity
- At December 31, 2017, cash was $4.92 million, down from $5.77 million at June 30, 2017. Working capital was $3.24 million; stockholders’ equity was $3.43 million.
- Current assets were $9.72 million and current liabilities $6.48 million. Accounts receivable declined to $3.74 million from $5.47 million at June 30.
- No borrowings were outstanding under the secured Silicon Valley Bank revolving facility; approximately $2.49 million was available. The facility’s stated maximum is the lesser of $2.5 million or 80% of eligible receivables, and it matures December 31, 2019. The company reported covenant compliance.
- Lease liabilities totaled $385,187, including current and long-term portions. The filing reports no other outstanding borrowings.
- Six-month cash use included $690,161 from operations, $43,536 for investing, and $102,955 for share repurchases; foreign exchange reduced cash by $12,678.
Material changes, outlook and risks
- The company sold its Reprints and ePrints business-line intangible assets on June 30, 2017. It recognized contingent earn-out consideration of $79,353 in the quarter and $136,502 for the six months, based on 45% of gross margin over the 30 months after closing. The filing records amounts when determined realizable.
- Management states that the company may incur losses for an indeterminate period and may never sustain profitability; it warns that prolonged losses and negative operating cash flow could impair operations and expansion. No specific revenue, earnings or cash-flow guidance is provided.
- Cash-flow deterioration compared with the prior-year six-month period reflected the operating loss and a $1.39 million decrease in accounts payable and accrued expenses, partly offset by a $1.73 million reduction in receivables.
- Three vendors each represented 12%–15% of revenue in the current periods. No customer represented 10% or more of revenue or receivables.
- The company has exposure to foreign exchange, including Mexican-peso operating costs, and does not hedge currency risk. The filing reported effective disclosure controls as of December 31, 2017 and no material change in internal control over financial reporting during the quarter.
- Adoption of the new revenue-recognition standard was still under assessment; management had not determined its effect on ongoing reporting.
Investor verification priorities
- Assess whether platform deployments and new-customer transaction orders can sustain revenue growth and improve gross margin.
- Track operating cash burn, working capital, and the drivers of the year-over-year shift to cash used in operations.
- Verify the timing and amount of future earn-out consideration from the divested business and distinguish it from recurring operating performance.
- Monitor liquidity, covenant compliance, and availability under the receivables-based credit facility.
- Review vendor concentration, foreign-exchange exposure, and potential dilution: 3.19 million options and 1.99 million warrants were outstanding at December 31, 2017.