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Research Solutions, Inc. - Quarter Report: 2017 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)  
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2017

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

 

Commission File No. 000-53501

RESEARCH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   11-3797644
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
15821 Ventura Blvd., Suite 165, Encino, California   91436
(Address of principal executive offices)   (Zip Code)

 

(310) 477-0354

(Registrant’s telephone number, including area code)

 

5435 Balboa Blvd., Suite 202, Encino, California, 91316

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company) Smaller reporting company þ
 

Emerging growth company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

     
Title of Class   Number of Shares Outstanding on May 10, 2017
Common Stock, $0.001 par value   23,925,910

 

 

 

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements (unaudited) 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
   
PART II — OTHER INFORMATION 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 6. Exhibits 25
   
SIGNATURES 26

 

 2 

 

 

PART 1 — FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Research Solutions, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   March 31,   June 30, 
   2017   2016 
   (unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $5,242,978   $6,076,875 
Accounts receivable, net of allowance of $47,510 and $52,084, respectively   5,186,517    5,761,860 
Prepaid expenses and other current assets   196,553    164,610 
Prepaid royalties   1,276,576    173,665 
Total current assets   11,902,624    12,177,010 
           
Other assets:          
Property and equipment, net of accumulated depreciation of $682,849 and $642,051, respectively   83,662    82,207 
Intangible assets, net of accumulated amortization of $602,779 and $546,679, respectively   58,499    104,848 
Deposits and other assets   19,061    7,594 
Right of use asset, net of accumulated amortization of $18,018   445,004    - 
Total assets  $12,508,850   $12,371,659 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable and accrued expenses  $6,338,404   $5,690,768 
Deferred revenue   1,163,813    639,834 
Lease liability, current portion   88,124    - 
Total current liabilities   7,590,341    6,330,602 
           
Long-term liabilities:          
Lease liability, long-term portion   357,063    - 
           
Total liabilities   7,947,404    6,330,602 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Preferred stock; $0.001 par value; 20,000,000 shares authorized; no shares issued and outstanding   -    - 
Common stock; $0.001 par value; 100,000,000 shares authorized; 23,925,910 and 23,809,593 shares issued and outstanding, respectively   23,926    23,810 
Additional paid-in capital   22,070,330    21,642,763 
Accumulated deficit   (17,473,411)   (15,582,295)
Accumulated other comprehensive loss   (59,399)   (43,221)
Total stockholders’ equity   4,561,446    6,041,057 
Total liabilities and stockholders’ equity  $12,508,850   $12,371,659 

 

See notes to condensed consolidated financial statements

 

 3 

 

 

Research Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
   2017   2016   2017   2016 
                 
Revenue  $8,643,799   $8,724,217   $24,832,582   $26,066,544 
Cost of revenue   6,914,793    6,959,203    19,976,167    21,150,881 
Gross profit   1,729,006    1,765,014    4,856,415    4,915,663 
                     
Operating expenses:                    
Selling, general and administrative   2,334,189    1,665,090    6,633,521    5,244,267 
Depreciation and amortization   33,906    30,310    96,801    61,144 
Total operating expenses   2,368,095    1,695,400    6,730,322    5,305,411 
Income (loss) from operations   (639,089)   69,614    (1,873,907)   (389,748)
                     
Other income (expenses):                    
Interest expense   (3,000)   (6,389)   (9,000)   (14,382)
Other income (expense)   10,143    (25,639)   20,277    (18,229)
Total other income (expenses)   7,143    (32,028)   11,277    (32,611)
                     
Income (loss) from operations before provision for income taxes   (631,946)   37,586    (1,862,630)   (422,359)
Provision for income taxes   (5,544)   (5,210)   (28,486)   (22,510)
                     
Net income (loss)   (637,490)   32,376    (1,891,116)   (444,869)
                     
Other comprehensive income (loss):                    

Foreign currency translation

   (18,090)   (6,603)   (16,178)   (11,966)
Comprehensive income (loss)  $(655,580)  $25,773   $(1,907,294)  $(456,835)
                     
Basic income (loss) per common share:                    
Net income (loss) per share  $(0.03)  $-   $(0.08)  $(0.03)
Basic weighted average common shares outstanding   23,265,939    17,707,900    23,199,010    17,642,449 
                     
Diluted income (loss) per common share:                    
Net income (loss) per share  $(0.03)  $-   $(0.08)  $(0.03)
Diluted weighted average common shares outstanding   23,265,939    18,464,000    23,199,010    17,642,449 

 

See notes to condensed consolidated financial statements

 

 4 

 

 

Research Solutions, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

For the Nine Months Ended March 31, 2017

(Unaudited)

 

   Common Stock   Additional
Paid-in
   Accumulated   Other
Comprehensive
   Total
Stockholders'
 
   Shares   Amount   Capital   Deficit   Loss   Equity 
                         
Balance, July 1, 2016   23,809,593   $23,810   $21,642,763   $(15,582,295)  $(43,221)  $6,041,057 
                               
Fair value of vested stock options   -    -    247,224    -    -    247,224 
                               
Fair value of vested restricted common stock   203,275    202    270,585    -    -    270,787 
                               
Repurchase of common stock   (86,958)   (86)   (90,242)   -    -    (90,328)
                               
Net loss for the period   -    -    -    (1,891,116)   -    (1,891,116)
                               
Foreign currency translation   -    -    -    -    (16,178)   (16,178)
                               
Balance, March 31, 2017   23,925,910   $23,926   $22,070,330   $(17,473,411)  $(59,399)  $4,561,446 

 

See notes to condensed consolidated financial statements

 

 5 

 

 

Research Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended 
   March 31, 
   2017   2016 
         
Cash flow from operating activities:          
Net loss  $(1,891,116)  $(444,869)
Adjustment to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   96,801    61,145 
Amortization of lease right   18,018    - 
Fair value of vested stock options   247,224    245,523 
Fair value of vested restricted common stock   270,787    276,360 
Modification cost of options issued to directors   -    29,815 
Changes in operating assets and liabilities:          
Accounts receivable   575,343    (614,001)
Prepaid expenses and other current assets   (31,943)   (63,367)
Prepaid royalties   (1,102,911)   184,680 
Deposits and other assets   (11,467)   106 
Accounts payable and accrued expenses   647,636    564,290 
Deferred revenue   523,979    542,400 
Lease liability   (17,835)   - 
Net cash provided by (used in) operating activities   (675,484)   782,082 
           
Cash flow from investing activities:          
Purchase of property and equipment   (42,316)   (49,784)
Purchase of intangible assets   (9,751)   (130,800)
Net cash used in investing activities   (52,067)   (180,584)
           
Cash flow from financing activities:          
Advance under line of credit   -    1,000,000 
Payment under line of credit   -    (1,000,000)
Common stock repurchase and retirement   (90,328)   (20,147)
Net cash used in financing activities   (90,328)   (20,147)
           
Effect of exchange rate changes   (16,018)   (11,539)
           
Net increase (decrease) in cash and cash equivalents   (833,897)   569,812 
Cash and cash equivalents, beginning of period   6,076,875    1,354,158 
Cash and cash equivalents, end of period  $5,242,978   $1,923,970 
           
Supplemental disclosures of cash flow information:          
Cash paid for income taxes  $28,486   $22,510 
Cash paid for interest  $9,000   $14,382 
           
Supplemental noncash investing and financing activities:          
Acquisition of leased asset and lease liability  $463,022   $- 

 

See notes to condensed consolidated financial statements 

 

 6 

 

 

RESEARCH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended March 31, 2017 and 2016 (Unaudited)

 

Note 1. Organization, Nature of Business and Basis of Presentation

 

Organization

 

Research Solutions, Inc. (the “Company,” “Research Solutions,” “we,” “us” or “our”) was incorporated in the State of Nevada on November 2, 2006.  On March 4, 2013, we consummated a merger with DYSC Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we, in connection with such merger, amended our Articles of Incorporation to change our name to Research Solutions, Inc. (formerly Derycz Scientific, Inc.). Research Solutions, Inc. is a publicly traded holding company with two wholly owned subsidiaries: Reprints Desk, Inc., a Delaware corporation (“Reprints Desk”) and Reprints Desk Latin America S. de R.L. de C.V, an entity organized under the laws of Mexico (“Reprints Desk Latin America”).

 

Nature of Business

 

We provide a cloud based software-as-a-service (“SaaS”) research intelligence platform that allows on-demand access to scientific, technical, and medical (“STM”) information for life science companies, academic institutions, and other research-intensive organizations. We provide three service offerings to our customers: Article Galaxy SaaS Platforms (“Platform(s)”), Article Galaxy Transactions (“Transactions”), and Reprints and ePrints.

 

Platforms

 

Our cloud-based SaaS solution consists of proprietary software and Internet-based interfaces. Legacy functionality allows customers to initiate orders, manage transactions, obtain reporting, automate authentication, and connect seamlessly to corporate intranets. Customers can also enhance the information resources they already own or access via subscriptions or internal libraries, as well as organize workgroups to collaborate around scientific and technical information.

 

New functionality has recently been added to our Platform in the form of interactive app-like gadgets. An alternative to manual data filtering and extraction, gadgets are designed to gather, augment, and extract data across a variety of formats, including bibliographic citations, tables of contents, RSS feeds, PDF files, XML feeds, and web content. We are rapidly developing new gadgets in order to build an ecosystem of gadgets. Together, these gadgets will provide researchers with an “all in one” toolkit, delivering efficiencies in core research workflows and knowledge creation processes.

 

Our Platform is deployed as a single system across our entire customer base. Customers access the Platform securely through online web interfaces and via web service APIs, which enable customers to leverage features and functionality from within proprietary and other 3rd party software systems. The Platform can also be configured to satisfy a customer’s individual preferences in areas such as user experience, business processes, and spend management. The Platform benefits from efficiencies in scalability, stability and development costs, resulting in significant advantages versus multiple instance or installed desktop software alternatives. We leverage these technical efficiencies to fuel rapid innovation and competitive advantage.

 

Transactions

 

Our Platform provides our customers with a single source to the universe of published STM content that includes over seventy million existing STM articles and over one million newly published STM articles each year. Our Platform allows customers to find and download in digital format STM articles that are critical to their research. In addition, it facilitates customers’ compliance with applicable copyright laws.

 

Researchers and knowledge workers in life science and other research-intensive organizations generally require single copies of published STM journal articles for use in their research activities. They place orders with us for the articles they need and we source and electronically deliver the requested content to them generally in under an hour. This service is known in the industry as single article delivery or document delivery. We also obtain the necessary permissions from the content publisher so that our customer’s use complies with applicable copyright laws. We have arrangements with numerous content publishers that allow us to distribute their content. The majority of these publishers provide us with electronic access to their content, which allows us to electronically deliver single articles to our customers often in a matter of minutes.

 

Reprints and ePrints

 

Marketing departments in life science and other research-intensive organizations generally require large quantities of printed copies of published STM journal articles called “Reprints” that are distributed to physicians and at conferences. We obtain the necessary permissions from the content publisher so that our customer’s use complies with applicable copyright laws. The majority of content publishers print their content in-house and prohibit others from printing their content; however, when not prohibited by the content publisher, we use third parties to print Reprint orders. Electronic copies, called “ePrints”, are also used for distribution through the Internet and other electronic mechanisms. We have developed proprietary ePrint software that increases the efficiency of our customers’ content purchases by transitioning from paper Reprints to electronic ePrints, and by improving compliance with applicable copyright laws and promotional regulations within the life science industry. Reprints and ePrints are charged on a transactional basis and order volume typically fluctuates from month to month based on customer marketing budgets and the existence of STM journal articles that fit customer requirements.

 

 7 

 

 

Principles of Consolidation

 

The accompanying financial statements are consolidated and include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 filed with the SEC. The condensed consolidated balance sheet as of June 30, 2016 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

 

Note 2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

 

These estimates and assumptions include estimates for reserves of uncollectible accounts, analysis of impairments of recorded intangibles, accruals for potential liabilities and assumptions made in valuing equity instruments issued for services or acquisitions.

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents and accounts receivable. The Company places its cash with high quality financial institutions and at times may exceed the FDIC $250,000 insurance limit. The Company does not anticipate incurring any losses related to these credit risks. The Company extends credit based on an evaluation of the customer's financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and intends to maintain allowances for anticipated losses, as required.

 

Cash denominated in Euros with a US Dollar equivalent of $181,634 and $76,793 at March 31, 2017 and June 30, 2016, respectively, was held by Reprints Desk in accounts at financial institutions located in Europe.

 

The Company has no customers that represent 10% of revenue or more for the three and nine months ended March 31, 2017 and 2016.

 

The Company has no customers that accounted for greater than 10% of accounts receivable at March 31, 2017 and June 30, 2016.

 

The following table summarizes vendor concentrations:

 

   Three Months Ended
March 31,
   Nine Months Ended
March 31,
 
   2017   2016   2017   2016 
Vendor A   16%   18%   18%   16%
Vendor B   *    *    *    13%

 

* Less than 10%

 

 8 

 

 

Revenue Recognition

 

The Company’s policy is to recognize revenue when services have been performed, risk of loss and title to the product transfers to the customer, the selling price is fixed or determinable, and collectability is reasonably assured. We generate revenue by providing three service offerings to our customers: Platforms, Transactions, and Reprints and ePrints.

 

Platforms

 

We charge a subscription fee that allows customers to access and utilize our SaaS platform. Revenue is recognized ratably over the term of the subscription agreement, which is typically one year, provided all other revenue recognition criteria have been met. Billings or payments received in advance of revenue recognition are recorded as deferred revenue.

 

Transactions

 

We charge a transactional service fee for the electronic delivery of single articles, and a corresponding copyright fee for the permitted use of the content. This service is known in the industry as single article delivery or document delivery. We recognize revenue from single article delivery services upon delivery to the customer only when the selling price is fixed or determinable, and collectability is reasonably assured.

 

Reprints and ePrints

 

We charge a transactional fee for each Reprint or ePrint order and are responsible for printing and delivery of Reprint orders, and the electronic delivery and, in some cases, the electronic delivery mechanism of ePrint orders. The majority of content publishers print their content in-house and prohibit others from printing their content; however, when not prohibited by the content publisher, we use third parties to print Reprint orders. We recognize revenue from Reprints and ePrints services upon shipment or electronic delivery to the customer only when the selling price is fixed or determinable, and collectability is reasonably assured.

 

Deferred Revenue

 

Customer deposits and billings or payments received in advance of revenue recognition are recorded as deferred revenue.

 

Cost of Revenue

 

Platforms

 

Cost of Platform revenue consists primarily of personnel costs of our operations team, and to a lesser extent managed hosting providers and other third-party service and data providers.

 

Transactions

 

Cost of Transaction revenue consists primarily of the respective copyright fee for the permitted use of the content, less a discount in most cases, and to a much lesser extent, personnel costs of our operations team and third-party service providers.

 

Reprints and ePrints

 

Cost of Reprints and ePrints revenue consists primarily of the respective copyright fee for the permitted use of the content, and to a much lesser extent, personnel costs of our operations team, shipping, and printing.

 

Stock-Based Compensation

 

The Company periodically issues stock options, warrants and restricted stock to employees and non-employees for services, in capital raising transactions, and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based Payment Topic 718 of the Financial Accounting Standards Board (FASB) Accounting Standards Codification, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. The Company estimates the fair value of stock option and warrant awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company's Statements of Operations. The Company estimates the fair value of restricted stock awards to employees and directors using the market price of the Company’s common stock on the date of grant, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company's Statements of Operations. The Company accounts for share-based payments to non-employees in accordance with Topic 505 of the FASB Accounting Standards Codification, whereby the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates. 

 

 9 

 

 

Foreign Currency

 

The accompanying consolidated financial statements are presented in United States dollars, the functional currency of the Company. Capital accounts of foreign subsidiaries are translated into US Dollars from foreign currency at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rate as of the balance sheet date. Income and expenditures are translated at the average exchange rate of the period. Although the majority of our revenue and costs are in US dollars, the costs of Reprints Desk Latin America are in Mexican Pesos. As a result, currency exchange fluctuations may impact our revenue and the costs of our operations. We currently do not engage in any currency hedging activities.

 

Gains and losses from foreign currency transactions, which result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated, are included in selling, general and administrative expenses and amounted to a loss of $6,272 for the three months ended March 31, 2017, and a gain of $2,829, for the three months ended March 31, 2016, and a gain of $27,227 and $4,293, for the nine months ended March 31, 2017 and 2016, respectively.

 

The following table summarizes the exchange rates used:

 

   Nine Months Ended
March 31,
   Year Ended
June 30,
 
   2017   2016   2016   2015 
Period end Euro : US Dollar exchange rate   1.08    1.14    1.11    1.11 
Average period Euro : US Dollar exchange rate   1.09    1.10    1.11    1.20 
                     
Period end Mexican Peso : US Dollar exchange rate   0.05    0.06    0.05    0.06 
Average period Mexican Peso : US Dollar exchange rate   0.05    0.06    0.06    0.07 

 

Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Diluted earnings per share is computed by dividing the net income applicable to common stock holders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive. At March 31, 2017 potentially dilutive securities include options to acquire 3,125,951 shares of common stock, and warrants to acquire 1,985,000 shares of common stock.  At March 31, 2016 potentially dilutive securities include options to acquire 2,551,028 shares of common stock, and warrants to acquire 205,000 shares of common stock. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the reporting period.

 

Basic and diluted net loss per common share is the same for the three and nine months ended March 31, 2017 and the nine months ended March 31, 2016, because all stock options, warrants, and unvested restricted common stock are anti-dilutive. For the three months ended March 31, 2016, the calculation of diluted earnings per share includes unvested restricted common stock, stock options, and warrants, calculated under the treasury stock method.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company adopted ASU No. 2016-02 for a new lease entered into during the period.

 

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Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements. 

 

Note 3. Line of Credit

 

The Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) on July 23, 2010, which, as amended, provides for a revolving line of credit for the lesser of $4,000,000, or 80% of eligible accounts receivable. The line of credit matures on October 31, 2017, and is subject to certain financial and performance covenants with which we were in compliance as of March 31, 2017. Financial covenants include maintaining a ratio of quick assets to current liabilities of at least 0.8 to 1.0, and maintaining tangible net worth of $600,000, plus 50% of net income for the fiscal quarter ended from and after December 31, 2015, plus 50% of the dollar value of equity issuances after October 1, 2015 and the principal amount of subordinated debt. The line of credit bears interest at the prime rate plus 2.25% for periods in which we maintain an account balance with SVB (less all indebtedness owed to SVB) of at least $800,000 at all times during the prior calendar month (the “Streamline Period”), and at the prime rate plus 5.25% when a Streamline Period is not in effect. The interest rate on the line of credit was 5.75% as of March 31, 2017. The line of credit is secured by the Company’s consolidated assets.

 

There were no outstanding borrowings under the line as of March 31, 2017 and June 30, 2016, respectively.  As of March 31, 2017 and June 30, 2016, approximately $2,945,000 and $3,390,000, respectively, of available credit was unused.

 

Note 4. Obligations Leases

 

During the period ended March 31, 2017, the Company entered into a 48 month non-cancellable lease for its office facilities that will require monthly payments ranging from $10,350 to $11,475 through January 2021. In accounting for the lease, the Company adopted ASU 2016-02, Leases which requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments. The Company classified the lease as an operating lease and determined that the fair value of the lease liability at the inception of the lease was $463,000 using a discount rate of 3.75%. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. 

 

Note 5. Stockholders’ Equity

 

Stock Options

 

In December 2007, we established the 2007 Equity Compensation Plan (the “Plan”). The Plan was approved by our board of directors and stockholders. The purpose of the Plan is to grant stock and options to our employees, directors and key consultants to purchase our common stock. On November 10, 2016, the maximum number of shares of common stock that may be issued pursuant to awards granted under the Plan (including issuance of restricted common stock) increased from 5,000,000 to 7,000,000, as approved by our board of directors and stockholders. Cancelled and forfeited stock options and stock awards may again become available for grant under the Plan. There were 2,231,753 shares available for grant under the Plan as of March 31, 2017. All stock option grants are made under the 2007 Equity Compensation Plan.

 

The majority of awards issued under the Plan vest immediately or over three years, with a one year cliff vesting period, and have a term of ten years. Stock-based compensation cost is measured at the grant date, based on the fair value of the awards that are ultimately expected to vest, and recognized on a straight-line basis over the requisite service period, which is generally the vesting period.

 

The following table summarizes vested and unvested stock option activity:

 

   All Options   Vested Options   Unvested Options 
   Shares   Weighted
Average
Exercise
Price
   Shares   Weighted
Average
Exercise
Price
   Shares   Weighted
Average
Exercise
Price
 
Outstanding at June 30, 2016   2,717,193    1.16    2,517,333    1.17    199,860    1.06 
Granted   408,758    1.05    325,000    1.05    83,758    1.05 
Options vesting   -    -    52,224    1.09    (52,224)   1.09 
Exercised   -    -    -    -    -    - 
Forfeited/Cancelled   -    -    -    -    -    - 
Outstanding at March 31, 2017   3,125,951   $1.15    2,894,557   $1.15    231,394   $1.05 

 

The weighted average remaining contractual life of all options outstanding as of March 31, 2017 was 5.81 years. The remaining contractual life for options vested and exercisable at March 31, 2017 was 5.54 years. Furthermore, the aggregate intrinsic value of options outstanding as of March 31, 2017 was $185,399, and the aggregate intrinsic value of options vested and exercisable at March 31, 2017 was $178,278, in each case based on the fair value of the Company’s common stock on March 31, 2017.

 

During the nine months ended March 31, 2017, the Company granted 408,758 options to employees and directors with a fair value of $248,549.  The fair value was calculated using a Black-Scholes option pricing model with the following assumptions: (i) volatility rate between 77.8% and 81.4%, (ii) discount rate between 1.27% and 2.06%, (iii) zero expected dividend yield, and (iv) expected term of between 5 and 6 years based upon the average of the term of the option and the vesting period. The total fair value of options that vested during the nine months ended March 31, 2017 was $247,224 and is included in selling, general and administrative expenses in the accompanying statement of operations.  As of March 31, 2017, the amount of unvested compensation related to these options was $113,069 which will be recorded as an expense in future periods as the options vest.

 

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Additional information regarding stock options outstanding and exercisable as of March 31, 2017 is as follows:

 

Option
Exercise
Price
   Options
Outstanding
   Remaining 
Contractual 
Life (in years)
   Options
Exercisable
 
$0.59    8,150    8.91    3,396 
 0.60    5,000    8.87    2,500 
 0.65    6,150    7.61    5,125 
 0.70    225,000    8.68    225,000 
 0.77    59,500    7.39    55,792 
 0.80    16,000    8.39    16,000 
 0.90    25,667    8.35    21,222 
 0.97    6,000    9.40    - 
 1.00    370,890    2.53    364,916 
 1.02    287,000    3.33    287,000 
 1.05    507,529    9.33    430,630 
 1.07    53,898    5.55    53,898 
 1.09    166,165    9.15    43,750 
 1.10    255,000    8.25    255,000 
 1.14    3,674    9.89    - 
 1.15    228,000    5.86    228,000 
 1.20    31,414    7.14    31,414 
 1.25    32,000    5.88    32,000 
 1.30    263,000    4.93    263,000 
 1.50    380,000    0.81    380,000 
 1.75    1,067    6.83    1,067 
 1.80    169,425    6.48    169,425 
 1.85    24,000    6.14    24,000 
 1.97    1,422    6.65    1,422 
 Total    3,125,951         2,894,557 

 

Warrants

 

The following table summarizes warrant activity:

 

   Number of
Warrants
   Weighted
Average
Exercise
Price
 
Outstanding, June 30, 2016   1,990,000    1.25 
Granted   -    - 
Exercised   -    - 
Expired/Cancelled   (5,000)   3.75 
Outstanding, March 31, 2017   1,985,000   $1.25 
Exercisable, June 30, 2016   1,990,000   $1.25 
Exercisable, March 31, 2017   1,985,000   $1.25 

 

There was no intrinsic value for all warrants outstanding as of March 31, 2017, based on the fair value of the Company’s common stock on March 31, 2017.

 

 

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Additional information regarding warrants outstanding and exercisable as of March 31, 2017 is as follows:

 

Warrant
Exercise Price
   Warrants
Outstanding
   Remaining 
Contractual 
Life (in years)
   Warrants
Exercisable
 
$1.19    100,000    4.73    100,000 
 1.25    1,885,000    4.20    1,885,000 
 Total    1,985,000         1,985,000 

 

Restricted Common Stock

 

Prior to July 1, 2016, the Company issued 1,303,687 shares of restricted common stock to employees valued at $1,286,474, of which $783,845 had been recognized as an expense.

 

During the nine months ended March 31, 2017, the Company issued an additional 203,275 shares of restricted stock to employees. These shares vest over a three year period, with a one year cliff vesting period, and remain subject to forfeiture if vesting conditions are not met. The aggregate fair value of the stock awards was $210,365 based on the market price of our common stock ranging from $0.97 to $1.14 per share on the date of grant, which will be amortized over the three-year vesting period. Restricted common stock grants are made under the 2007 Equity Compensation Plan.

 

The total fair value of restricted common stock vested during the nine months ended March 31, 2017 was $270,788 and is included in selling, general and administrative expenses in the accompanying statements of operations. As of March 31, 2017, the amount of unvested compensation related to issuances of restricted common stock was $442,567, which will be recognized as an expense in future periods as the shares vest. When calculating basic net income (loss) per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their grant date.

 

The following table summarizes restricted common stock activity:

 

   Number of
Shares
   Weighted
Average
Grant Date
Fair Value
 
Non-vested, June 30, 2016   706,642    0.82 
Granted   203,275    1.03 
Vested   (359,703)   0.81 
Forfeited   -    - 
Non-vested, March 31, 2017   550,213   $0.90 

 

Common Stock Repurchase and Retirement

 

During the nine months ended March 31, 2017, the Company repurchased 86,958 shares of our common stock from employees at an average market price of approximately $1.04 per share for an aggregate amount of $90,329. The shares of common stock were surrendered by employees to cover tax withholding obligations with respect to the vesting of restricted stock. Shares repurchased are retired and deducted from common stock for par value and from additional paid in capital for the excess over par value.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Notice Regarding Forward-Looking Statements

 

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended March 31, 2017 and 2016 should be read in conjunction with our consolidated financial statements and related notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

 

We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof and, except as required by law, we assume no obligation to update any such forward-looking statements.

 

Overview

 

Research Solutions was incorporated in the State of Nevada on November 2, 2006, and in November 2006 entered into a Share Exchange Agreement with Reprints Desk. At the closing of the transaction contemplated by the Share Exchange Agreement, Research Solutions acquired all of the outstanding shares of Reprints Desk from its stockholders and issued 8,000,003 shares of common stock to the former stockholders of Reprints Desk. Following completion of the exchange transaction, Reprints Desk became a wholly-owned subsidiary of Research Solutions.

 

On July 24, 2012, we formed Reprints Desk Latin America to provide operational and administrative support services to Reprints Desk.

 

On March 4, 2013, we consummated a merger with DYSC Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we, in connection with such merger, amended our Articles of Incorporation to change our name to Research Solutions, Inc. (formerly Derycz Scientific, Inc.).

 

We provide a cloud based software-as-a-service (“SaaS”) research intelligence platform that allows on-demand access to scientific, technical, and medical (“STM”) information for life science companies, academic institutions, and other research-intensive organizations. We provide three service offerings to our customers: Article Galaxy SaaS Platforms (“Platform(s)”), Article Galaxy Transactions (“Transactions”), and Reprints and ePrints.

 

Platforms

 

Our cloud-based SaaS solution consists of proprietary software and Internet-based interfaces. Legacy functionality allows customers to initiate orders, manage transactions, obtain reporting, automate authentication, and connect seamlessly to corporate intranets. Customers can also enhance the information resources they already own or access via subscriptions or internal libraries, as well as organize workgroups to collaborate around scientific and technical information.

 

New functionality has recently been added to our Platform in the form of interactive app-like gadgets. An alternative to manual data filtering and extraction, gadgets are designed to gather, augment, and extract data across a variety of formats, including bibliographic citations, tables of contents, RSS feeds, PDF files, XML feeds, and web content. We are rapidly developing new gadgets in order to build an ecosystem of gadgets. Together, these gadgets will provide researchers with an “all in one” toolkit, delivering efficiencies in core research workflows and knowledge creation processes.

 

Our Platform is deployed as a single system across our entire customer base. Customers access the Platform securely through online web interfaces and via web service APIs, which enable customers to leverage features and functionality from within proprietary and other 3rd party software systems. The Platform can also be configured to satisfy a customer’s individual preferences in areas such as user experience, business processes, and spend management. The Platform benefits from efficiencies in scalability, stability and development costs, resulting in significant advantages versus multiple instance or installed desktop software alternatives. We leverage these technical efficiencies to fuel rapid innovation and competitive advantage. We are continually improving the functionality of the platform to further differentiate it from potential competition.

 

Transactions

 

Our Platform provides our customers with a single source to the universe of published STM content without the limitations of a fixed catalog, and includes over seventy million existing STM articles and over one million newly published STM articles each year. Our Platform allows customers to find and download in digital format STM articles that are critical to their research. In addition, it facilitates customers’ compliance with applicable copyright laws.

 

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Researchers and knowledge workers in life science and other research-intensive organizations generally require single copies of published STM journal articles for use in their research activities. They place orders with us for the articles they need and we source and electronically deliver the requested content to them generally in under an hour. This service is known in the industry as single article delivery or “document delivery”. We also obtain the necessary permissions from the content publisher so that our customer’s use complies with applicable copyright laws. We have arrangements with numerous content publishers that allow us to distribute their content. The majority of these publishers provide us with electronic access to their content, which allows us to electronically deliver single articles to our customers often in a matter of minutes.

 

Reprints and ePrints

 

Marketing departments in life science and other research-intensive organizations generally require large quantities of printed copies of published STM journal articles called Medical Reprints or “Reprints” that are distributed to physicians and at conferences. We obtain the necessary permissions from the content publisher so that our customer’s use complies with applicable copyright laws. The majority of content publishers print their content in-house and prohibit others from printing their content; however, when not prohibited by the content publisher, we use third parties to print Reprint orders. Electronic copies, called “ePrints”, are also used for distribution through the Internet and other electronic mechanisms. We have developed proprietary ePrint software that increases the efficiency of our customers’ content purchases by transitioning from paper Reprints to electronic ePrints, and by improving compliance with applicable copyright laws and promotional regulations within the life science industry. Reprints and ePrints are charged on a transactional basis and order volume typically fluctuates from month to month based on customer marketing budgets and the existence of STM journal articles that fit customer requirements.

 

Critical Accounting Policies and Estimates

 

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions.

 

The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.

 

Revenue Recognition

 

Our policy is to recognize revenue when services have been performed, risk of loss and title to the product transfers to the customer, the selling price is fixed or determinable, and collectability is reasonably assured. We generate revenue by providing three service offerings to our customers: Platforms, Transactions, and Reprints and ePrints.

 

Platforms

 

We charge a subscription fee that allows customers to access and utilize our SaaS platform. Revenue is recognized ratably over the term of the subscription agreement, which is typically one year, provided all other revenue recognition criteria have been met. Billings or payments received in advance of revenue recognition are recorded as deferred revenue.

 

Transactions

 

We charge a transactional service fee for the electronic delivery of single articles, and a corresponding copyright fee for the permitted use of the content. This service is known in the industry as single article delivery or document delivery. We recognize revenue from single article delivery services upon delivery to the customer only when the selling price is fixed or determinable, and collectability is reasonably assured.

 

Reprints and ePrints

 

We charge a transactional fee for each Reprint or ePrint order and are responsible for printing and delivery of Reprint orders, and the electronic delivery and, in some cases, the electronic delivery mechanism of ePrint orders. The majority of content publishers print their content in-house and prohibit others from printing their content; however, when not prohibited by the content publisher, we use third parties to print Reprint orders. We recognize revenue from Reprints and ePrints services upon shipment or electronic delivery to the customer only when the selling price is fixed or determinable, and collectability is reasonably assured.

 

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Stock-Based Compensation

 

We periodically issue stock options, warrants and restricted stock to employees and non-employees for services, in capital raising transactions, and for financing costs. We account for share-based payments under the guidance as set forth in the Share-Based Payment Topic 718 of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. We estimate the fair value of stock option and warrant awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in our Statements of Operations. We estimate the fair value of restricted stock awards to employees and directors using the market price of our common stock on the date of grant, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in our Statements of Operations. We account for share-based payments to non-employees in accordance with Topic 505 of the FASB Accounting Standards Codification, whereby the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates. 

 

Recent Accounting Pronouncements

 

Please refer to footnote 2 to the condensed consolidated financial statements contained elsewhere in this Form 10-Q for a discussion of Recent Accounting Pronouncements.

 

Quarterly Information (Unaudited)

 

The following table sets forth unaudited and quarterly financial data for the most recent eight quarters:

 

   Mar. 31,   Dec. 31,   Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30, 
   2017   2016   2016   2016   2016   2015   2015   2015 
Revenue:                                        
Platforms  $270,920   $219,137   $172,072   $129,963   $121,034   $92,578   $58,463   $32,000 
Transactions   6,372,679    5,866,562    6,006,399    6,025,972    6,394,127    5,702,733    5,567,241    5,382,124 
Reprints and ePrints   2,000,200    2,444,368    1,480,245    2,141,466    2,209,056    3,519,915    2,401,397    2,166,382 
Total revenue   8,643,799    8,530,067    7,658,716    8,297,401    8,724,217    9,315,226    8,027,101    7,580,506 
                                         
Cost of revenue:                                        
Platforms   58,367    45,623    29,964    23,426    21,557    17,177    11,762    7,744 
Transactions   4,997,842    4,664,690    4,714,999    4,702,892    4,918,679    4,471,950    4,290,025    4,161,298 
Reprints and ePrints   1,858,584    2,221,742    1,384,356    1,986,081    2,018,967    3,229,797    2,170,967    1,948,287 
Total cost of revenue   6,914,793    6,932,055    6,129,319    6,712,399    6,959,203    7,718,924    6,472,754    6,117,329 
                                         
Gross profit:                                        
Platforms   212,553    173,514    142,108    106,537    99,477    75,401    46,701    24,256 
Transactions   1,374,837    1,201,872    1,291,400    1,323,080    1,475,448    1,230,783    1,277,216    1,220,826 
Reprints and ePrints   141,616    222,626    95,889    155,385    190,089    290,118    230,430    218,095 
Total gross profit   1,729,006    1,598,012    1,529,397    1,585,002    1,765,014    1,596,302    1,554,347    1,463,177 
                                         
Operating expenses:                                        
Sales and marketing   963,784    854,724    580,778    520,402    525,681    498,835    496,641    419,290 
General and administrative   1,251,807    1,226,181    1,211,008    902,667    1,011,670    1,092,187    1,063,262    943,500 
Depreciation and amortization   33,906    32,426    30,469    29,702    30,310    16,096    14,738    16,934 
Stock-based compensation expense   112,326    303,097    102,589    162,192    130,568    277,389    143,741    506,634 
Foreign currency transaction loss (gain)   6,272    17,631    3,324    994    (2,829)   5,805    1,317    4,004 
Total operating expenses   2,368,095    2,434,059    1,928,168    1,615,957    1,695,400    1,890,312    1,719,699    1,890,362 
Income (loss) from operations   (639,089)   (836,047)   (398,771)   (30,955)   69,614    (294,010)   (165,352)   (427,185)

 

   Mar. 31,   Dec. 31,   Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30, 
   2017   2016   2016   2016   2016   2015   2015   2015 
Net income (loss):                                        
Income (loss) from continuing operations  $(637,490)  $(842,960)  $(410,666)  $(52,989)  $32,376   $(298,425)  $(178,820)  $(439,257)
Income from discontinued operations   -    -    -    -    -    -    -    163,453 
Net income (loss)  $(637,490)  $(842,960)  $(410,666)  $(52,989)  $32,376   $(298,425)  $(178,820)  $(275,804)
                                         
                                         
Basic income (loss) per common share:                                        
Loss per share from continuing operations  $(0.03)  $(0.04)  $(0.02)  $(0.01)  $-   $(0.02)  $(0.01)  $(0.03)
Income (loss) per share from discontinued operations  $-   $-   $-   $-   $-   $-   $-   $0.01 
Net income (loss) per share  $(0.03)  $(0.04)  $(0.02)  $(0.01)  $-   $(0.02)  $(0.01)  $(0.02)
Basic weighted average common shares outstanding   23,265,939    23,200,975    23,131,570    18,154,762    17,707,900    17,656,087    17,564,070    17,462,484 
                                         
Diluted income (loss) per common share:                                        
Loss per share from continuing operations  $(0.03)  $(0.04)  $(0.02)  $(0.01)  $-   $(0.02)  $(0.01)  $(0.03)
Income (loss) per share from discontinued operations  $-   $-   $-   $-   $-   $-   $-   $0.01 
Net income (loss) per share  $(0.03)  $(0.04)  $(0.02)  $(0.01)  $-   $(0.02)  $(0.01)  $(0.02)
Diluted weighted average common shares outstanding   23,265,939    23,200,975    23,131,570    18,154,762    18,464,000    17,656,087    17,564,070    17,462,484 

 

 16 

 

 

Comparison of the Three and Nine Months Ended March 31, 2017 and 2016

 

Results of Operations

 

   Three Months Ended March 31, 
   2017   2016   2017-2016
$ Change
   2017-2016
% Change
 
                 
Revenue  $8,643,799   $8,724,217   $(80,418)   (0.9)%
Cost of revenue   6,914,793    6,959,203    (44,410)   (0.6)%
Gross profit   1,729,006    1,765,014    (36,008)   (2.0)%
                     
Operating expenses:                    
Sales and marketing   963,784    525,681    438,103    83.3%
General and administrative   1,251,807    1,011,670    240,137    23.7%
Depreciation and amortization   33,906    30,310    3,596    11.9%
Stock-based compensation expense   112,326    130,568    (18,242)   (14.0)%
Foreign currency transaction loss (gain)   6,272    (2,829)   9,101    321.7%
Total operating expenses   2,368,095    1,695,400    672,695    39.7%
Income (loss) from operations   (639,089)   69,614    (708,703)   (1,018.0)%
                     
Other income (expenses):                    
Interest expense   (3,000)   (6,389)   (3,389)   (53.0)%
Other income (expense)   10,143    (25,639)   35,782    139.6%
Total other income (expenses)   7,143    (32,028)   39,171    122.3%
                     
Income (loss) from operations before provision for income taxes   (631,946)   37,586    (669,532)   (1,781.3)%
Provision for income taxes   (5,544)   (5,210)   (334)   (6.4)%
                     
Net income (loss)  $(637,490)  $32,376   $(669,866)   (2,069.0)%

 

   Nine Months Ended March 31, 
   2017   2016   2017-2016
$ Change
   2017-2016
% Change
 
                 
Revenue  $24,832,582   $26,066,544   $(1,233,962)   (4.7)%
Cost of revenue   19,976,167    21,150,881    (1,174,714)   (5.6)%
Gross profit   4,856,415    4,915,663    (59,248)   (1.2)%
                     
Operating expenses:                    
Sales and marketing   2,399,286    1,521,157    878,129    57.7%
General and administrative   3,688,996    3,167,119    521,877    16.5%
Depreciation and amortization   96,801    61,144    35,657    58.3%
Stock-based compensation expense   518,012    551,698    (33,686)   (6.1)%
Foreign currency transaction loss (gain)   27,227    4,293    22,934    534.2%
Total operating expenses   6,730,322    5,305,411    1,424,911    26.9%
Income (loss) from operations   (1,873,907)   (389,748)   (1,484,159)   (380.8)%
                     
Other income (expenses):                    
Interest expense   (9,000)   (14,382)   5,382    37.4%
Other income (expense)   20,277    (18,229)   38,506    211.2%
Total other income (expenses)   11,277    (32,611)   43,888    134.6%
                     
Income (loss) from operations before provision for income taxes   (1,862,630)   (422,359)   (1,440,271)   (341.0)%
Provision for income taxes   (28,486)   (22,510)   (5,976)   (26.5)%
                     
Net income (loss)  $(1,891,116)  $(444,869)  $(1,446,247)   (325.1)%

 

 17 

 

 

Revenue

 

   Three Months Ended March 31, 
   2017   2016  

2017-2016

$ Change

  

2017-2016

% Change

 
Revenue:                    
Platforms  $270,920   $121,034   $149,886    123.8%
Transactions   6,372,679    6,394,127    (21,448)   (0.3)%
Reprints and ePrints   2,000,200    2,209,056    (208,856)   (9.5)%
Total revenue  $8,643,799   $8,724,217   $(80,418)   (0.9)%

 

Total revenue decreased $80,418, or 0.9%, for the three months ended March 31, 2017 compared to the prior year, due to the following:

 

Category   Impact   Key Drivers
Platforms  

$ 149,886   Increased due to additional deployments to new and existing customers. Revenue is recognized ratably over the term of the subscription agreement, which is typically one year, provided all other revenue recognition criteria have been met. Billings or payments received in advance of revenue recognition are recorded as deferred revenue.
Transactions  

$ 21,448   Decreased primarily due to a net decrease in orders from existing customers, partially offset by orders from new customers.
Reprints and ePrints  

$ 208,856   Decreased due to a net decrease in orders from existing customers. Reprints and ePrints are charged on a transactional basis and order volume typically fluctuates from month to month based on customer marketing budgets and the existence of STM journal articles that fit customer requirements.

 

   Nine Months Ended March 31, 
   2017   2016  

2017-2016
$ Change

  

2017-2016
% Change

 
Revenue:                    
Platforms  $662,129   $272,075   $390,054    143.4%
Transactions   18,245,640    17,664,101    581,539    3.3%
Reprints and ePrints   5,924,813    8,130,368    (2,205,555)   (27.1)%
Total revenue  $24,832,582   $26,066,544   $(1,233,962)   (4.7)%

 

Total revenue decreased $1,233,962, or 4.7%, for the nine months ended March 31, 2017 compared to the prior year, due to the following:

 

Category   Impact   Key Drivers
Platforms  

$ 390,054   Increased due to additional deployments to new and existing customers. Revenue is recognized ratably over the term of the subscription agreement, which is typically one year, provided all other revenue recognition criteria have been met. Billings or payments received in advance of revenue recognition are recorded as deferred revenue.
Transactions  

$ 581,539   Increased primarily due to a net increase in orders from new and existing customers.
Reprints and ePrints  

$ 2,205,555   Decreased due to a net decrease in orders from existing customers. Reprints and ePrints are charged on a transactional basis and order volume typically fluctuates from month to month based on customer marketing budgets and the existence of STM journal articles that fit customer requirements.

 

 18 

 

 

Cost of Revenue

 

   Three Months Ended March 31, 
   2017   2016   2017-2016
$ Change
   2017-2016
% Change
 
Cost of Revenue:                    
Platforms  $58,367   $21,557   $36,810    170.8%
Transactions   4,997,842    4,918,679    79,163    1.6%
Reprints and ePrints   1,858,584    2,018,967    (160,383)   (7.9)%
Total cost of revenue  $6,914,793   $6,959,203   $(44,410)   (0.6)%

 

   Three Months Ended March 31, 
   2017   2016   2017-2016
Change *
 
As a percentage of revenue:               
Platforms   21.5%   17.8%   3.7%
Transactions   78.4%   76.9%   1.5%
Reprints and ePrints   92.9%   91.4%   1.5%
Total   80.0%   79.8%   0.2%

 

* The difference between current and prior period cost of revenue as a percentage of revenue

  

Total cost of revenue as a percentage of revenue increased 0.2%, from 79.8% for the previous year to 80.0%, for the three months ended March 31, 2017, due to the following:

 

Category   Impact as percentage
of revenue
  Key Drivers
Platforms  

  3.7 %   Increased due to additional third-party data costs.
Transactions  

  1.5 %   Increased primarily due to a reduction in copyright discounts.
Reprints and ePrints  

  1.5 %   Increased primarily due to increased content costs.

 

   Nine Months Ended March 31, 
   2017   2016  

2017-2016

$ Change

  

2017-2016

% Change

 
Cost of Revenue:                    
Platforms  $133,954   $50,496   $83,458    165.3%
Transactions   14,377,531    13,680,654    696,877    5.1%
Reprints and ePrints   5,464,682    7,419,731    (1,955,049)   (26.3)%
Total cost of revenue  $19,976,167   $21,150,881   $(1,174,714)   (5.6)%

 

   Nine Months Ended March 31, 
   2017   2016   2017-2016
Change *
 
As a percentage of revenue:               
Platforms   20.2%   18.6%   1.6%
Transactions   78.8%   77.4%   1.4%
Reprints and ePrints   92.2%   91.3%   0.9%
Total   80.4%   81.1%   (0.7)%

 

* The difference between current and prior period cost of revenue as a percentage of revenue

 

 19 

 

 

Total cost of revenue as a percentage of revenue decreased 0.7%, from 81.1% for the previous year to 80.4%, for the nine months ended March 31, 2017, due to the following:

 

Category   Impact as percentage
of revenue
  Key Drivers
Platforms  

  1.6 %   Increased due to additional third-party data costs.
Transactions  

  1.4 %   Increased primarily due to a reduction in copyright discounts.
Reprints and ePrints  

  0.9 %   Increased primarily due to greater fixed personnel cost as a percentage of revenue.

 

Gross Profit

 

   Three Months Ended March 31, 
   2017   2016   2017-2016
$ Change
   2017-2016
% Change
 
Gross Profit:                    
Platforms  $212,553   $99,477   $113,076    113.7%
Transactions   1,374,837    1,475,448    (100,611)   (6.8)%
Reprints and ePrints   141,616    190,089    (48,473)   (25.5)%
Total gross profit  $1,729,006   $1,765,014   $(36,008)   (2.0)%

 

   Three Months Ended March 31, 
   2017   2016  

2017-2016

Change *

 
As a percentage of revenue:               
Platforms   78.5%   82.2%   (3.7)%
Transactions   21.6%   23.1%   (1.5)%
Reprints and ePrints   7.1%   8.6%   (1.5)%
Total   20.0%   20.2%   (0.2)%

 

* The difference between current and prior period gross profit as a percentage of revenue

 

   Nine Months Ended March 31, 
   2017   2016   2017-2016
$ Change
   2017-2016
% Change
 
Gross Profit:                    
Platforms  $528,175   $221,579   $306,596    138.4%
Transactions   3,868,109    3,983,447    (115,338)   (2.9)%
Reprints and ePrints   460,131    710,637    (250,506)   (35.3)%
Total gross profit  $4,856,415   $4,915,663   $(59,248)   (1.2)%

 

   Nine Months Ended March 31, 
   2017   2016   2017-2016
Change *
 
As a percentage of revenue:               
Platforms   79.8%   81.4%   (1.6)%
Transactions   21.2%   22.6%   (1.4)%
Reprints and ePrints   7.8%   8.7%   (0.9)%
Total   19.6%   18.9%   0.7%

 

* The difference between current and prior period gross profit as a percentage of revenue

 

 20 

 

 

Operating Expenses

 

   Three Months Ended March 31, 
   2017   2016   2017-2016
$ Change
   2017-2016
% Change
 
Operating Expenses:                    
Sales and marketing  $963,784   $525,681   $438,103    83.3%
General and administrative   1,251,807    1,011,670    240,137    23.7%
Depreciation and amortization   33,906    30,310    3,596    11.9%
Stock-based compensation expense   112,326    130,568    (18,242)   (14.0)%
Foreign currency transaction loss (gain)   6,272    (2,829)   9,101    321.7%
Total operating expenses  $2,368,095   $1,695,400   $672,695    39.7%

 

Category   Impact   Key Drivers
Sales and marketing  

$ 438,103   Increased primarily due to greater personnel and consulting cost.
General and administrative  

$ 240,137   Increased primarily due to greater personnel and consulting cost.
Depreciation and amortization  

$ 3,596   Increased due to greater amortization of customer list.

 

   Nine Months Ended March 31, 
   2017   2016  

2017-2016

$ Change

  

2017-2016

% Change

 
Operating Expenses:                    
Sales and marketing  $2,399,286   $1,521,157   $878,129    57.7%
General and administrative   3,688,996    3,167,119    521,877    16.5%
Depreciation and amortization   96,801    61,144    35,657    58.3%
Stock-based compensation expense   518,012    551,698    (33,686)   (6.1)%
Foreign currency transaction loss   27,227    4,293    22,934    534.2%
Total operating expenses  $6,730,322   $5,305,411   $1,424,911    26.9%

 

Category   Impact   Key Drivers
Sales and marketing  

$ 878,129   Increased primarily due to greater personnel and consulting cost.
General and administrative  

$ 521,877   Increased primarily due to greater personnel and consulting cost.
Depreciation and amortization  

$ 35,657   Increased due to greater amortization of customer list.

 

Net Income (Loss)

 

   Three Months Ended March 31, 
   2017   2016  

2017-2016
$ Change

  

2017-2016
% Change

 
Net income (loss)  $(637,490)  $32,376   $(669,866)   (2,069)%

 

Net income decreased $669,866 or 2,069%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily due to increased operating expenses as described above.

 

   Nine Months Ended March 31, 
   2017   2016  

2017-2016
$ Change

  

2017-2016

% Change

 
Net loss  $(1,891,116)  $(444,869)  $(1,446,247)   (325.1)%

 

Net loss increased $1,446,247 or 325.1%, for the nine months ended March 31, 2017 compared to the nine months ended March 31, 2016, primarily due to increased operating expenses as described above.

 

Liquidity and Capital Resources

 

   Nine Months Ended March 31, 
Consolidated Statements of Cash Flow Data:  2017   2016 
Net cash provided by operating activities  $(675,484)  $782,082 
Net cash used in investing activities   (52,067)   (180,584)
Net cash used in financing activities   (90,328)   (20,147)
           
Effect of exchange rate changes   (16,018)   (11,539)
Net increase in cash and cash equivalents   (833,897)   569,812 
Cash and cash equivalents, beginning of period   6,076,875    1,354,158 
Cash and cash equivalents, end of period  $5,242,978   $1,923,970 

 

 21 

 

 

Liquidity

 

Since our inception, we have funded our operations primarily through private sales of equity securities and the exercise of warrants, which have provided aggregate net cash proceeds to date of approximately $15,972,000. As of March 31, 2017, we had working capital of $4,312,283 and stockholders’ equity of $4,561,446. For the nine months ended March 31, 2017, we recorded a net loss of $1,891,116, and cash used in operating activities was $675,484. We may incur losses for an indeterminate period and may never sustain profitability. We may be unable to achieve and maintain profitability on a quarterly or annual basis. An extended period of losses and negative cash flow may prevent us from successfully operating and expanding our business.

 

As of March 31, 2017, we had cash and cash equivalents of $5,242,978, compared to $6,076,875 as of June 30, 2016, a decrease of $833,897. This decrease was primarily due to cash used in operating activities.

 

Operating Activities

 

Net cash used in operating activities was $675,484 for the nine months ended March 31, 2017 and resulted primarily from an increase in prepaid royalties of $1,102,911, partially offset by a decrease in accounts receivable of $575,343.

 

Net cash provided by operating activities was $782,082 for the nine months ended March 31, 2016 and resulted primarily from an increase in accounts payable and accrued expenses of $564,290 and an increase in deferred revenue of $542,400, partially offset by an increase in accounts receivable of $614,001.

 

Investing Activities

 

Net cash used in investing activities was $52,067 for the nine months ended March 31, 2017 and resulted from the purchase of intangible assets and property and equipment.

 

Net cash used in investing activities was $180,584 for the nine months ended March 31, 2016 and resulted from the purchase of intangible assets and property and equipment.

 

Financing Activities

 

Net cash used in financing activities was $90,328 for the nine months ended March 31, 2017 and resulted from the repurchase of common stock.

 

Net cash used in financing activities was $20,147 for the nine months ended March 31, 2016 and resulted from the repurchase of common stock.

 

We entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) on July 23, 2010, which, as amended, provides for a revolving line of credit for the lesser of $4,000,000, or 80% of eligible accounts receivable. The line of credit matures on October 31, 2017, and is subject to certain financial and performance covenants with which we were in compliance as of March 31, 2017. Financial covenants include maintaining a ratio of quick assets to current liabilities of at least 0.8 to 1.0, and maintaining tangible net worth of $600,000, plus 50% of net income for the fiscal quarter ended from and after December 31, 2015, plus 50% of the dollar value of equity issuances after October 1, 2015 and the principal amount of subordinated debt. The line of credit bears interest at the prime rate plus 2.25% for periods in which we maintain an account balance with SVB (less all indebtedness owed to SVB) of at least $800,000 at all times during the prior calendar month (the “Streamline Period”), and at the prime rate plus 5.25% when a Streamline Period is not in effect. The interest rate on the line of credit was 5.75% as of March 31, 2017. The line of credit is secured by our consolidated assets.

 

There were no outstanding borrowings under the line as of March 31, 2017 and June 30, 2016, respectively.  As of March 31, 2017 and June 30, 2016, approximately $2,945,000 and $3,390,000, respectively, of available credit was unused.

 

Non-GAAP Measure – Adjusted EBITDA

 

In addition to our GAAP results, we present Adjusted EBITDA as a supplemental measure of our performance. However, Adjusted EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of liquidity. We define Adjusted EBITDA as net income (loss), plus interest expense, other income (expense), foreign currency transaction loss, provision for income taxes, depreciation and amortization, stock-based compensation, and (gain) loss on sale of fixed assets. Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

 22 

 

 

Set forth below is a reconciliation of Adjusted EBITDA to net income (loss) for the three and nine months ended March 31, 2017 and 2016:

 

   Three Months Ended March 31, 
   2017   2016  

2017-2016

$ Change

 
Net loss  $(637,490)  $32,376   $(669,866)
Add (deduct):               
Interest expense   3,000    6,389    (3,389)
Other (income) expense   (10,143)   25,639    (35,782)
Foreign currency transaction loss   6,272    (2,829)   9,101 
Provision for income taxes   5,544    5,210    334 
Depreciation and amortization   33,906    30,310    3,596 
Stock-based compensation   112,326    130,568    (18,242)
Adjusted EBITDA  $(486,585)  $227,663   $(714,248)

 

   Nine Months Ended March 31, 
   2017   2016  

2017-2016

$ Change

 
Net loss  $(1,891,116)  $(444,869)  $(1,446,247)
Add (deduct):               
Interest expense   9,000    14,382    (5,382)
Other (income) expense   (20,277)   18,229    (38,506)
Foreign currency transaction loss   27,227    4,293    22,934 
Provision for income taxes   28,486    22,510    5,976 
Depreciation and amortization   96,801    61,144    35,657 
Stock-based compensation   518,012    551,698    (33,686)
Adjusted EBITDA  $(1,231,867)  $227,387   $(1,459,254)

 

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; and in making compensation decisions and in communications with our board of directors concerning our financial performance. Adjusted EBITDA has limitations as an analytical tool, which includes, among others, the following:

 

·Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

  · Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

  · Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and

 

  · although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

 23 

 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2017, the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

 

Inherent Limitations on the Effectiveness of Controls

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

 

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

Changes in Internal Control Over Financial Reporting

 

In addition, our management with the participation of our principal executive officer and principal financial officer have determined that no change in our internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Exchange Act) occurred during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 24 

 

 

PART II — OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 16, 2017, the Compensation Committee of our Board of Directors authorized the repurchase, over a 12-month period on the last day of each trading window and otherwise in accordance with our insider trading policies, of up to $300,000 of outstanding common stock (at prices no greater than $2.00 per share) from our employees to satisfy their tax obligations in connection with the vesting of stock incentive awards. The actual number of shares repurchased will be determined by applicable employees in their discretion, and will depend on their evaluation of market conditions and other factors.

 

During the three months ended March 31, 2017, we repurchased 7,250 shares of our common stock under the repurchase plan at a price of $1.10 per share for an aggregate amount of $7,975. As of March 31, 2017, $292,025 remains under the current authorization to repurchase our outstanding common stock from our employees.

 

The following table summarizes repurchases of our common stock on a monthly basis:

 

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 through January 31 - - - $300,000
February 1 through February 28 - - - $300,000
March 1 through March 31 7,2501 $1.10 - $292,025
Total 7,250 $1.10 - $292,025

 

1 Consists of shares of common stock purchased from an employee to satisfy tax obligations in connection with the vesting of stock incentive awards.

 

Item 6. Exhibits

 

See “Exhibit Index” on the page immediately following the signature page hereto for a list of exhibits filed as part of this report, which is incorporated herein by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  RESEARCH SOLUTIONS, INC.
   
  By: /s/ Peter Victor Derycz
     
    Peter Victor Derycz
Date: May 15, 2017   Chief Executive Officer (Principal Executive Officer)
 
  By: /s/ Alan Louis Urban
     
    Alan Louis Urban
Date: May 15, 2017   Chief Financial Officer (Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number
  Description
10.1  

Office Lease dated December 29, 2016, between Research Solutions, Inc. and Douglas Emmett 2014, LLC. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-53501) filed with the Commission on January 6, 2017.

31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1   Section 1350 Certification of Chief Executive Officer *
32.2   Section 1350 Certification of Chief Financial Officer *
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

  * Furnished herewith

 

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