Research Solutions, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2016, with fiscal 2015 comparisons. Although the request metadata references 2015 Q4, this filing is an annual report for FY2016; it also reports unaudited quarterly results, including the quarter ended June 30, 2016. The company provides SaaS research tools and on-demand scientific, technical and medical content, plus reprints and ePrints.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $34.36 million | $31.90 million |
| Gross profit / gross margin | $6.50 million / 18.9% | $6.18 million / 19.4% |
| Operating loss | $420,703 | $494,452 |
| Net income (loss) | ($497,858) | $774,219 |
| Adjusted EBITDA, non-GAAP | $389,320 | $613,161 |
| Operating cash flow | $185,171 provided | $331,895 used |
| Cash and cash equivalents at year-end | $6.08 million | $1.35 million |
| Working capital at year-end | $5.85 million | Not stated here |
- Revenue increased 7.7%. Article Galaxy SaaS revenue rose 127.3% to $402,038 and transaction revenue increased 11.7% to $23.69 million; reprints and ePrints revenue declined 2.4% to $10.27 million.
- Gross profit increased 5.3%, but gross margin decreased 0.5 percentage points. Management attributed higher transaction cost ratios principally to lower average service fees per transaction on new accounts, and higher reprint costs to content acquisition costs.
- SG&A increased; total operating expenses rose 3.8% to $6.92 million. Continuing-operations loss narrowed by $44,327, while the prior-year net profit included a $1.71 million non-cash gain from TAAG deconsolidation.
- FY2016 cash increased primarily because of the equity financing, not operating cash generation. The company raised $5.20 million gross ($4.78 million net) by issuing 5.2 million common shares and warrants.
- No borrowings were outstanding under the Silicon Valley Bank revolving facility at either year-end. The facility is the lesser of $4.0 million or 80% of eligible receivables; approximately $3.39 million was unused at June 30, 2016. It matures October 31, 2017 and is secured by company assets.
Material changes, outlook and risks
- TAAG, the former French subsidiary, was deconsolidated in FY2015 after insolvency proceedings. The $1.71 million non-cash gain and discontinued-operation results make FY2015 reported net income a poor indicator of recurring performance. Management said liability for TAAG’s unsatisfied obligations was remote, based on advice from French counsel.
- Management described growth plans centered on customer acquisition, cross-selling, platform development, new vertical markets and potential acquisitions or international expansion. The filing provides no quantified revenue, earnings or cash-flow guidance.
- Three largest content suppliers represented approximately 37% of content costs in FY2016. Their loss could materially reduce service attractiveness and revenue. No customer accounted for more than 10% of revenue.
- Other stated risks include continued losses and uncertain sustained profitability, intense competition and piracy, technology and cybersecurity failures, availability of additional capital, foreign-exchange exposure, and reliance on key personnel. The company does not hedge currency exposure.
- The company reported a $497,858 net loss and an accumulated deficit of $15.58 million. Deferred tax assets of $4.30 million were fully offset by a valuation allowance.
- The equity financing’s registration statement had been filed on July 22, 2016 but was not yet effective as of the filing; the registration rights agreement provides for liquidated damages if specified deadlines are missed. The filing states ordinary-course legal proceedings were not expected to have a material financial-statement effect.
- Management concluded disclosure controls and internal control over financial reporting were effective at June 30, 2016. The independent auditor gave an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Important facts for investors to verify
- Whether SaaS growth and transaction-volume gains continue, and whether gross margin stabilizes despite content and pricing pressure.
- Cash conversion and working-capital movements, particularly receivables, which increased by $599,676 during FY2016.
- Completion and effectiveness of the resale registration statement, and any resulting liquidated damages or share-sale pressure.
- Current availability and covenant compliance under the secured credit facility, and the effect of the October 2017 maturity.
- Exposure to the three largest content suppliers, dilution from warrants, options and restricted stock, and the risks of thinly traded OTCQB shares.