Annual Statements Open main menu

Research Solutions, Inc. - Quarter Report: 2020 September (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: September 30, 2020

 

¨ 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.)
   
10624 S. Eastern Ave., Ste. A-614, Henderson, NV 89052
(Address of principal executive offices) (Zip Code)

 

(310) 477-0354

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class Trading Symbol(s) Name of each Exchange on which registered
Common stock, $0.001 par value RSSS The NASDAQ Stock Market LLC

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  x      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 x Smaller reporting company x
  Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.       ¨

 

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

 

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 November 6, 2020
Common Stock, $0.001 par value   26,255,983

 

 

 

 

 

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   16 
Item 3. Quantitative and Qualitative Disclosures About Market Risk   23 
Item 4. Controls and Procedures   23 
      
PART II — OTHER INFORMATION   24 
Item 1A. Risk Factors   24 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   24 
Item 6. Exhibits   24 
      
SIGNATURES   25 

 

2 

 

 

PART 1 — FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Research Solutions, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   September 30,    
   2020   June 30, 
   (unaudited)   2020 
Assets          
Current assets:          
Cash and cash equivalents  $10,187,333   $9,311,556 
Accounts receivable, net of allowance of $88,102 and $88,485, respectively   4,455,091    4,449,260 
Prepaid expenses and other current assets   240,381    241,747 
Prepaid royalties   1,042,558    720,367 
Total current assets   15,925,363    14,722,930 
           
Other assets:          
Property and equipment, net of accumulated depreciation of $810,349 and $804,999, respectively   12,091    11,276 
Deposits and other assets   6,183    6,155 
Right of use asset, net of accumulated amortization of $421,469 and $390,691, respectively   41,553    72,331 
Total assets  $15,985,190   $14,812,692 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable and accrued expenses  $7,382,741   $6,349,845 
Deferred revenue   3,555,579    3,524,507 
Lease liability, current portion   45,550    79,326 
Total current liabilities   10,983,870    9,953,678 
           
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; 26,190,713 and 26,032,263  shares issued and outstanding, respectively   26,191    26,032 
Additional paid-in capital   26,261,156    26,134,819 
Accumulated deficit   (21,162,154)   (21,176,799)
Accumulated other comprehensive loss   (123,873)   (125,038)
Total stockholders’ equity   5,001,320    4,859,014 
Total liabilities and stockholders’ equity  $15,985,190   $14,812,692 

 

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 
   September 30, 
   2020   2019 
Revenue:          
Platforms  $1,141,688   $856,445 
Transactions   6,606,737    6,738,668 
Total revenue   7,748,425    7,595,113 
           
Cost of revenue:          
 Platforms   203,952    150,470 
Transactions   5,094,897    5,128,108 
Total cost of revenue   5,298,849    5,278,578 
Gross profit   2,449,576    2,316,535 
           
Operating expenses:          
Selling, general and administrative   2,428,938    2,435,680 
Depreciation and amortization   3,723    7,558 
Total operating expenses   2,432,661    2,443,238 
Income (loss) from operations   16,915    (126,703)
           
Other income   235    25,549 
           
Income (loss) from operations before provision for income taxes   17,150    (101,154)
Provision for income taxes   (2,505)   (6,494)
           
Income (loss) from continuing operations   14,645    (107,648)
           
Gain from sale of discontinued operations   -    26,191 
           
Net income (loss)   14,645    (81,457)
           

Other comprehensive income (loss):

Foreign currency translation

   1,165    (3,568)
Comprehensive income (loss)  $15,810   $(85,025)
           
Basic income (loss) per common share:          
Income (loss) per share from continuing operations  $-   $- 
Income per share from discontinued operations  $-   $- 
Net income (loss) per share  $-   $- 
Basic weighted average common shares outstanding   25,898,900    24,095,266 
           
Diluted income (loss) per common share:          
Income (loss) per share from continuing operations  $-   $- 
Income per share from discontinued operations  $-   $- 
Net income (loss) per share  $-   $- 
Basic weighted average common shares outstanding   26,511,180    24,095,266 

 

See notes to condensed consolidated financial statements

 

4 

 

 

Research Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity

For the Three Months Ended September 30, 2020

(Unaudited)

 

   Common Stock   Additional
Paid-in
   Accumulated   Other
Comprehensive
   Total
Stockholders'
 
   Shares   Amount   Capital   Deficit   Loss   Equity 
Balance, July 1, 2020   26,032,263   $26,032   $26,134,819   $(21,176,799)  $(125,038)  $4,859,014 
                               
Fair value of vested stock options   -    -    77,627    -    -    77,627 
                               
Fair value of vested restricted common stock   120,000    120    93,044    -    -    93,164 
                               
Repurchase of common stock   (25,500)   (25)   (58,370)   -    -    (58,395)
                               
Common stock issued upon exercise of stock options   63,950    64    14,036    -    -    14,100 
                               
Net income for the period   -    -    -    14,645    -    14,645 
                               
Foreign currency translation   -    -    -    -    1,165    1,165 
                               
Balance, September 30, 2020   26,190,713   $26,191   $26,261,156   $(21,162,154)  $(123,873)  $5,001,320 

 

See notes to condensed consolidated financial statements

 

5 

 

 

Research Solutions, Inc. and Subsidiaries 

Condensed Consolidated Statements of Stockholders' Equity

For the Three Months Ended September 30, 2019

(Unaudited)

 

   Common Stock   Additional
Paid-in
   Accumulated   Other
Comprehensive
   Total
Stockholders'
 
   Shares   Amount   Capital   Deficit   Loss   Equity 
Balance, July 1, 2019   24,375,948   $24,376   $23,631,481   $(20,514,557)  $(109,585)  $3,031,715 
                               
Fair value of vested stock options   -    -    58,198    -    -    58,198 
                               
Fair value of vested restricted common stock   70,000    70    84,404    -    -    84,474 
                               
Repurchase of common stock   (28,750)   (28)   (71,847)   -    -    (71,875)
                               
Common stock issued upon exercise of stock options   24,307    24    (24)   -    -    - 
                               
Net loss for the period   -    -    -    (81,457)   -    (81,457)
                               
Foreign currency translation   -    -    -    -    (3,568)   (3,568)
                               
Balance, September 30, 2019   24,441,505   $24,442   $23,702,212   $(20,596,014)  $(113,153)  $3,017,487 

 

See notes to condensed consolidated financial statements

 

6 

 

 

Research Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Three Months Ended
September 30,
 
   2020   2019 
Cash flow from operating activities:          
Net income (loss)  $14,645   $(81,457)
Adjustment to reconcile net income (loss) to net cash provided by operating activities:          
Gain from sale of discontinued operations   -    (26,191)
Depreciation and amortization   3,723    7,558 
Amortization of lease right   30,778    29,513 
Fair value of vested stock options   77,627    58,198 
Fair value of vested restricted common stock   93,164    84,474 
Changes in operating assets and liabilities:          
Accounts receivable   (5,831)   116,362 
Prepaid expenses and other current assets   1,366    89,902 
Prepaid royalties   (322,191)   (69,699)
Accounts payable and accrued expenses   1,032,896    23,829 
Deferred revenue   31,072    108,589 
Lease liability   (33,776)   (31,346)
Net cash provided by operating activities   923,473    309,732 
           
Cash flow from investing activities:          
Purchase of property and equipment   (4,304)   - 
Net cash used in investing activities   (4,304)   - 
           
Cash flow from financing activities:          
Proceeds from the exercise of stock options   14,100    - 
Common stock repurchase and retirement   (58,395)   (71,875)
Net cash used in financing activities   (44,295)   (71,875)
           
Effect of exchange rate changes   903    (3,114)
Net increase in cash and cash equivalents   875,777    234,743 
Cash and cash equivalents, beginning of period   9,311,556    5,353,090 
Cash and cash equivalents, end of period  $10,187,333   $5,587,833 
           
Supplemental disclosures of cash flow information:          
Cash paid for income taxes  $2,505   $6,494 

 

See notes to condensed consolidated financial statements

 

7 

 

 

RESEARCH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2020 and 2019 (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, and is a publicly traded holding company with two wholly owned subsidiaries: Reprints Desk, Inc., a Delaware corporation and Reprints Desk Latin America S. de R.L. de C.V, an entity organized under the laws of Mexico.

 

Nature of Business

 

We provide two service offerings to our customers: annual licenses that allow customers to access and utilize certain premium features of our cloud based software-as-a-service (“SaaS”) research intelligence platform (“Platforms”) and the transactional sale of published scientific, technical, and medical (“STM”) content managed, sourced and delivered through the Platform (“Transactions”). Platforms and Transactions are packaged as a single solution that enable life science and other research intensive organizations to speed up research and development activities with faster, single sourced access and management of content and data used throughout the intellectual property development lifecycle.

 

Platforms

 

Our cloud-based SaaS research intelligence platform consists of proprietary software and Internet-based interfaces sold to customers for an annual subscription fee. Legacy functionality allows customers to initiate orders, route orders for the lowest cost acquisition, manage transactions, obtain spend and usage reporting, automate authentication, and connect seamlessly to in-house and third-party software systems. Customers can also enhance the information resources they already own or license and collaborate around bibliographic information.

 

Additional functionality has recently been added to our Platform in the form of interactive app-like gadgets. An alternative to manual data filtering, identification 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, multi-tenant system across our entire customer base. Customers securely access the Platform through online web interfaces and via web service APIs that enable customers to leverage Platform features and functionality from within in-house and third-party software systems. The Platform can also be configured to satisfy a customer’s individual preferences. We leverage our Platform’s efficiencies in scalability, stability and development costs 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 70 million existing STM articles and over one million newly published STM articles each year. STM content is sold to our customers on a transaction basis. 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. These individuals are our primary users.

 

Our Platform allows customers to find and download digital versions of STM articles that are critical to their research. Customers submit orders for the articles they need which we source and electronically deliver to them generally in under an hour. This service is generally known in the industry as single article delivery or document delivery. We also obtain the necessary permission licenses from the content publisher or other rights holder so that our customer’s use complies with applicable copyright laws. We have arrangements with hundreds of 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.

 

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.

 

8 

 

 

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, 2020 filed with the SEC. The condensed consolidated balance sheet as of June 30, 2020 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, accruals for potential liabilities, assumptions made in valuing equity instruments issued for services or acquisitions, and realization of deferred tax assets.

 

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 $133,713 and $134,175 at September 30, 2020 and June 30, 2020, 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 months ended September 30, 2020 and 2019.

 

The following table summarizes accounts receivable concentrations:

 

   As of 
   September 30,   June 30, 
   2020   2020 
Customer A   15%   * 

 

* Less than 10%

 

The following table summarizes vendor concentrations:

 

  

Three Months Ended

September 30,

 
   2020   2019 
Vendor A   18%   20%
Vendor B   13%   12%

  

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ("ASC 606"). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. The Company adopted the guidance of ASC 606 on July 1, 2018. The implementation of ASC 606 had no impact on the condensed consolidated financial statements and no cumulative effect adjustment was recognized.

 

9 

 

Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company derives its revenues from two sources: annual licenses that allow customers to access and utilize certain premium features of our cloud based SaaS research intelligence platform (“Platforms”) and the transactional sale of STM content managed, sourced and delivered through the Platform (“Transactions”).

 

 

 

The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:

 

•      identify the contract with a customer;

•      identify the performance obligations in the contract;

•      determine the transaction price;

•      allocate the transaction price to performance obligations in the contract; and

•      recognize revenue as the performance obligation is satisfied.

 

Platforms

 

We charge a subscription fee that allows customers to access and utilize certain premium features of our 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. We recognize revenue from single article delivery services upon delivery to the customer provided all other revenue recognition criteria have been met.

 

Deferred Revenue

 

Contract liabilities, such as deferred revenue, exist where the Company has the obligation to transfer services to a customer for which the entity has received consideration, or when the consideration is due, from the customer.

 

Cash payments received or due in advance of performance are recorded as deferred revenue. Deferred revenue is primarily comprised of cloud-based software subscriptions which are generally billed in advance. The deferred revenue balance is presented as a current liability on the Company's consolidated balance sheets.

 

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.

 

Stock-Based Compensation

 

The Company periodically issues stock options and restricted stock awards to employees and non-employees for services. The Company accounts for such grants issued and vesting based on ASC 718, whereby the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered. 

10 

 

 

Foreign Currency

 

The accompanying condensed 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 gain of $24,249 for the three months ended September 30, 2020 and a loss of $12,123 for the three months ended September 30, 2019. Cash denominated in Euros with a US Dollar equivalent of $133,713 and $134,175 at September 30, 2020 and June 30, 2020, respectively, was held in accounts at financial institutions located in Europe.

 

The following table summarizes the exchange rates used:

 

   Three Months Ended
September 30,
   Year Ended
June 30,
 
   2020   2019   2020   2019 
Period end Euro : US Dollar exchange rate   1.17    1.09    1.12    1.14 
Average period Euro : US Dollar exchange rate   1.16    1.12    1.14    1.14 
                     
Period end Mexican Peso : US Dollar exchange rate   0.04    0.05    0.04    0.05 
Average period Mexican Peso : US Dollar exchange rate   0.04    0.05    0.05    0.05 

 

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 stockholders 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 September 30, 2020 potentially dilutive securities include options to acquire 3,340,580 shares of common stock, warrants to acquire 385,000 shares of common stock and unvested restricted common stock of 259,238.  At September 30, 2019 potentially dilutive securities include options to acquire 3,297,335 shares of common stock, warrants to acquire 1,885,000 shares of common stock and unvested restricted common stock of 292,283. 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.

 

For the three months ended September 30, 2020, the calculation of diluted earnings per share includes unvested restricted common stock, stock options and warrants, calculated under the treasury stock method. For the three months ended September 30, 2019, basic and diluted net loss per common share is the same because all stock options, warrants, and unvested restricted common stock are anti-dilutive.

 

11 

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

 

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 $2,500,000, or 80% of eligible accounts receivable. The line of credit matures on February 14, 2022, and is subject to certain financial and performance covenants with which we were in compliance as of September 30, 2020. Financial covenants include maintaining an adjusted quick ratio of unrestricted cash and net accounts receivable, divided by current liabilities plus debt less deferred revenue of at least 1.15 to 1.0, and maintaining tangible net worth of $1,500,000, plus 50% of net income for the fiscal quarter ended from and after December 31, 2017, plus 50% of the dollar value of equity issuances after October 1, 2017 and the principal amount of subordinated debt. The line of credit bears interest at an annual rate equal to the greater of 1% above the prime rate and 5.5%. The interest rate on the line of credit was 5.5% as of September 30, 2020. The line of credit is secured by the Company’s consolidated assets.

 

There were no outstanding borrowings under the line as of September 30, 2020 and June 30, 2020, respectively.  As of September 30, 2020, there was approximately $2,057,000 of available credit.

 

Note 4. Lease Obligations

 

On December 30, 2016, 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 value of the lease assets and liability at the inception of the lease was $463,000 using a discount rate of 3.75%. During the three months ended September 30, 2020, the Company made payments of $33,776 towards the lease liability. As of September 30, 2020 and June 30, 2020, lease liability amounted to $45,550 and $79,326, respectively. 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. Rent expense, including real estate taxes, for the three months ended September 30, 2020 and 2019 was $12,505 and $37,122, respectively. The right of use asset at June 30, 2020 was $72,331. During the three months ended September 30, 2020, the Company reflected amortization of right of use asset of $30,778 related to this lease, resulting in a net asset balance of $41,553 as of September 30, 2020.

 

On October 8, 2019, the Company entered into an agreement to sublease its office facilities from November 1, 2019 through January 31, 2021, the end of the lease term, for $8,094 per month with one month of abated rent. The Company recorded rent income of $24,282 during the three months ended September 30, 2020. This amount is reflected as an offset to rent expense that is included in general and administrative expenses in the accompanying statements of operations.

 

Note 5. Stockholders’ Equity

 

Stock Options

 

In December 2007, we established the 2007 Equity Compensation Plan (the “2007 Plan”) and in November 2017 we established the 2017 Omnibus Incentive Plan (the “2017 Plan”), collectively (the “Plans”). The Plans were approved by our board of directors and stockholders. The purpose of the Plans is to grant stock and options to purchase our common stock, and other incentive awards, to our employees, directors and key consultants. On November 10, 2016, the maximum number of shares of common stock that may be issued pursuant to awards granted under the 2007 Plan increased from 5,000,000 to 7,000,000. On November 21, 2017, the Company’s stockholders approved the adoption of the 2017 Plan (previously adopted by our board of directors on September 14, 2017), which authorized a maximum of 1,874,513 shares of common stock that may be issued pursuant to awards granted under the 2017 Plan. On November 12, 2019, the Company’s stockholders approved an increase in the maximum number of shares of common stock that may be issued pursuant to awards granted under the 2017 Omnibus Incentive Plan from 1,874,513 to 2,374,513. Upon adoption of the 2017 Plan we ceased granting incentive awards under the 2007 Plan and commenced granting incentive awards under the 2017 Plan. The shares of our common stock underlying cancelled and forfeited awards issued under the 2017 Plan may again become available for grant under the 2017 Plan. Cancelled and forfeited awards issued under the 2007 Plan that were cancelled or forfeited prior to November 21, 2017 became available for grant under the 2007 Plan. As of September 30, 2020, there were 348,179 shares available for grant under the 2017 Plan, and no shares were available for grant under the 2007 Plan. All incentive stock award grants prior to the adoption of the 2017 Plan on November 21, 2017 were made under the 2007 Plan, and all incentive stock award grants after the adoption of the 2017 Plan on November 21, 2017 were made under the 2017 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.

 

12 

 

 

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, 2020   3,327,580   $1.56    3,081,745   $1.50    245,835   $2.34 
Granted   173,000    2.45    -    -    173,000    2.45 
Options vesting   -    -    56,583    2.22    (56,583)   2.22 
Exercised   (141,250)   1.39    (141,250)   1.39    -    - 
Forfeited/Cancelled   (18,750)   1.95    -    -    (18,750)   1.95 
Outstanding at September 30, 2020   3,340,580   $1.61    2,997,078   $1.52    343,502   $2.44 

 

The weighted average remaining contractual life of all options outstanding as of September 30, 2020 was 5.82 years. The remaining contractual life for options vested and exercisable at September 30, 2020 was 5.44 years. Furthermore, the aggregate intrinsic value of options outstanding as of September 30, 2020 was $2,515,705, and the aggregate intrinsic value of options vested and exercisable at September 30, 2020 was $2,496,297, in each case based on the fair value of the Company’s common stock on September 30, 2020.

 

During the three months ended September 30, 2020, the Company granted 173,000 options to employees with a fair value of $238,740 which amount will be amortized over the vesting period.  The total fair value of options that vested during the three months ended September 30, 2020 was $77,627 and is included in selling, general and administrative expenses in the accompanying statement of operations.  As of September 30, 2020, the amount of unvested compensation related to stock options was $451,628 which will be recorded as an expense in future periods as the options vest. During the three months ended September 30, 2020, the Company issued 63,950 net shares of common stock upon the exercise of 141,250 options, resulting in net cash proceeds of $14,000.

 

The following table presents the assumptions used to estimate the fair values based upon a Black-Scholes option pricing model of the stock options granted during the three months ended September 30, 2020 and 2019.

 

  

Three Months Ended

September 30,

 
   2020   2019 
Expected dividend yield   0%   0%
Risk-free interest rate   0.37%   1.61%
Expected life (in years)   6    6 
Expected volatility   63%   64%

 

Additional information regarding stock options outstanding and exercisable as of September 30, 2020 is as follows:

 

Option
Exercise
Price
   Options
Outstanding
  

Remaining

Contractual

Life (in years)

   Options
Exercisable
 
$0.59    8,150    1.75    8,150 
 0.60    5,000    1.75    5,000 
 0.65    6,150    1.75    6,150 
 0.70    225,000    5.18    225,000 
 0.77    49,500    2.83    49,500 
 0.80    16,000    4.89    16,000 
 0.90    25,667    3.56    25,667 
 0.97    6,000    1.75    6,000 
 1.00    28,249    3.18    28,249 
 1.02    2,000    1.75    2,000 
 1.05    400,529    5.84    400,529 
 1.07    33,898    2.04    33,898 
 1.09    124,165    5.09    124,165 
 1.10    105,000    4.75    105,000 
 1.14    3,674    1.75    3,674 
 1.15    209,400    3.86    209,400 
 1.20    352,414    6.82    352,414 
 1.25    32,000    2.37    32,000 
 1.30    243,000    1.43    243,000 
 1.50    195,000    2.13    195,000 
 1.59    35,000    7.61    29,165 
 1.75    1,067    1.75    1,067 
 1.80    94,050    2.88    94,050 
 1.85    24,000    2.34    24,000 
 1.95    200,000    7.76    150,000 
 2.40    398,667    8.13    347,167 
 2.45    173,000    9.85    - 
 2.49    50,000    8.99    20,833 
 2.50    20,000    8.63    10,000 
 2.99    8,000    9.62    - 
 3.13    258,000    9.12    250,000 
 3.50    8,000    9.37    - 
 Total    3,340,580         2,997,078 

 

13 

 

 

Warrants

 

The following table summarizes warrant activity:

 

   Number of
Warrants
   Weighted
Average
Exercise
Price
 
Outstanding, June 30, 2020   385,000   $1.24 
Granted   -    - 
Exercised   -    - 
Expired/Cancelled   -    - 
Outstanding, September 30, 2020   385,000   $1.24 
Exercisable, June 30, 2020   385,000   $1.24 
Exercisable, September 30, 2020   385,000   $1.24 

 

The intrinsic value for all warrants outstanding as of September 30, 2020 was $391,850, based on the fair value of the Company’s common stock on September 30, 2020.

 

Additional information regarding warrants outstanding and exercisable as of September 30, 2020 is as follows:

 

Warrant
Exercise Price
   Warrants
Outstanding
   Remaining
Contractual
Life (in years)
   Warrants
Exercisable
 
$1.19    50,000    1.22    50,000 
 1.25    335,000    0.63    335,000 
 Total    385,000         385,000 

 

Restricted Common Stock

 

Prior to July 1, 2020, the Company issued 2,277,366 shares of restricted common stock to employees valued at $2,709,318, of which 1,871,187 shares have vested, 214,324 shares with fair value of $188,203 have been forfeited, and $1,785,857 has been recognized as an expense. The balance of the non-vested shares of restricted common stock was 191,855 at June 30, 2020.

 

During the three months ended September 30, 2020, the Company issued an additional 120,000 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 $294,000 based on the market price of our common stock price of $2.45 per share on the date of grant, which will be amortized over the three-year vesting period.

 

14 

 

 

The total fair value of restricted common stock vesting during the three months ended September 30, 2020 was $93,164 and is included in selling, general and administrative expenses in the accompanying statements of operations. As of September 30, 2020, the amount of unvested compensation related to issuances of restricted common stock was $595,133, 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
   Fair Value   Weighted
Average
Grant Date
Fair Value
 
Non-vested, June 30, 2020   191,855   $394,297   $2.51 
Granted   120,000    294,000    2.45 
Vested   (52,617)   (93,164)   2.32 
Forfeited   -    -    - 
Non-vested, September 30, 2020   259,238   $

595,133

   $2.52 

 

Common Stock Repurchase and Retirement

 

Effective as of February 11, 2020, the Compensation Committee of our Board of Directors authorized the repurchase, during calendar year 2020 on the last day of each trading window and otherwise in accordance with our insider trading policies, of up to $400,000 of outstanding common stock (at prices no greater than $4.00 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 September 30, 2020, the Company repurchased 25,500 shares of our common stock from employees at an average market price of approximately $2.29 per share for an aggregate amount of $58,395.

 

As of September 30, 2020, $219,379 remains available under the 2020 plan to repurchase common stock from its employees. 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.

 

Note 6.  Contingencies

 

COVID-19

 

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the responses that the Company, other businesses and governments are taking continue to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.

 

To date, we have not experienced any significant changes in our business that would have a significant negative impact on our consolidated statements of operations or cash flows.

 

The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, service providers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of Company’s financial statements, the extent to which the COVID-19 pandemic may in the future materially impact the Company’s financial condition, liquidity or results of operations is uncertain.

 

Note 7.  Subsequent Events

 

On October 5, 2020, the Company issued 50,000 shares of common stock upon the exercise of warrants for $62,500 in proceeds.

 

On October 26, 2020, the Company issued 15,270 net shares of common stock upon the cashless exercise of stock options underlying 33,270 shares of common stock for 18,000 shares of common stock used as payment.

 

15 

 

 

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 months ended September 30, 2020 and 2019 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, 2020.

 

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 is a publicly traded holding company with two wholly owned subsidiaries at June 30, 2020: Reprints Desk, Inc., a Delaware corporation and Reprints Desk Latin America S. de R.L. de C.V, an entity organized under the laws of Mexico.

 

We provide two service offerings to our customers: annual licenses that allow customers to access and utilize certain premium features of our cloud based software-as-a-service (“SaaS”) research intelligence platform (“Platforms”) and the transactional sale of published scientific, technical, and medical (“STM”) content managed, sourced and delivered through the Platform (“Transactions”). Platforms and Transactions are packaged as a single solution that enable life science and other research intensive organizations to speed up research and development activities with faster, single sourced access and management of content and data used throughout the intellectual property development lifecycle.

 

Platforms

 

Our cloud-based SaaS research intelligence platform consists of proprietary software and Internet-based interfaces sold to customers for an annual subscription fee. Legacy functionality allows customers to initiate orders, route orders for the lowest cost acquisition, manage transactions, obtain spend and usage reporting, automate authentication, and connect seamlessly to in-house and third-party software systems. Customers can also enhance the information resources they already own or license and collaborate around bibliographic information.

 

Additional functionality has recently been added to our Platform in the form of interactive app-like gadgets. An alternative to manual data filtering, identification 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, multi-tenant system across our entire customer base. Customers securely access the Platform through online web interfaces and via web service APIs that enable customers to leverage Platform features and functionality from within in-house and third-party software systems. The Platform can also be configured to satisfy a customer’s individual preferences. We leverage our Platform’s efficiencies in scalability, stability and development costs 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 70 million existing STM articles and over one million newly published STM articles each year. STM content is sold to our customers on a transaction basis. 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. These individuals are our primary users.

 

Our Platform allows customers to find and download digital versions of STM articles that are critical to their research. Customers submit orders for the articles they need which we source and electronically deliver to them generally in under an hour. This service is generally known in the industry as single article delivery or document delivery. We also obtain the necessary permission licenses from the content publisher or other rights holder so that our customer’s use complies with applicable copyright laws. We have arrangements with hundreds of 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.

 

16 

 

COVID-19

 

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as the responses that we, other businesses and governments are taking continue to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.

 

To date, we have not experienced any significant changes in our business that would have a significant negative impact on our consolidated statements of operations or cash flows.

 

The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers, service providers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of our financial statements, the extent to which the COVID-19 pandemic may in the future materially impact our financial condition, liquidity or results of operations is uncertain.

 

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

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ("ASC 606"). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. We adopted the guidance of ASC 606 on July 1, 2018. The implementation of ASC 606 had no impact on the condensed consolidated financial statements and no cumulative effect adjustment was recognized.

 

Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We derive our revenues from two sources: annual licenses that allow customers to access and utilize certain premium features of our cloud based SaaS research intelligence platform (“Platforms”) and the transactional sale of STM content managed, sourced and delivered through the Platform (“Transactions”).

 

Customers
Paid Premium Platform Features
PLATFORM REVENUE
  Free Basic Platform Features
 
Transactional Sale of STM Content
TRANSACTION REVENUE

 

We apply the following five steps in order to determine the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements:

 

•      identify the contract with a customer;

 

•      identify the performance obligations in the contract;

 

•      determine the transaction price;

 

•      allocate the transaction price to performance obligations in the contract; and

 

•      recognize revenue as the performance obligation is satisfied.

 

Platforms

 

We charge a subscription fee that allows customers to access and utilize certain premium features of our 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.

 

17 

 

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. We recognize revenue from single article delivery services upon delivery to the customer provided all other revenue recognition criteria have been met.

 

Stock-Based Compensation

 

The fair value of our stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

 

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: 

 

    Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,   Mar. 31,   Dec. 31,
    2020   2020   2020   2019   2019   2019   2019   2018
Revenue:                                                
Platforms   $ 1,141,688   $ 1,066,630   $ 1,017,789   $ 949,825   $ 856,445   $ 803,917   $ 748,726   $ 667,545
Transactions     6,606,737     6,819,150     7,029,617     6,580,613     6,738,668     6,670,685     6,629,231     6,321,297
Total revenue     7,748,425     7,885,780     8,047,406     7,530,438     7,595,113     7,474,602     7,377,957     6,988,842
                                                 
Cost of revenue:                                                
Platforms     203,952     153,241     177,919     162,508     150,470     142,368     134,672     122,077
Transactions     5,094,897     5,224,006     5,330,473     5,094,130     5,128,108     5,104,629     5,063,624     4,878,526
Total cost of revenue     5,298,849     5,377,247     5,508,392     5,256,638     5,278,578     5,246,997     5,198,296     5,000,603
                                                 
Gross profit:                                                
Platforms     937,736     913,389     839,870     787,317     705,975     661,549     614,054     545,468
Transactions     1,511,840     1,595,144     1,699,144     1,486,483     1,610,560     1,566,056     1,565,607     1,442,771
Total gross profit     2,449,576     2,508,533     2,539,014     2,273,800     2,316,535     2,227,605     2,179,661     1,988,239
                                                 
Operating expenses:                                                
Sales and marketing     498,374     692,096     626,956     638,837     550,349     659,108     542,641     445,879
Technology and product dev.     622,961     537,830     536,238     548,719     499,191     549,198     537,685     553,272
General and administrative     1,161,061     1,132,483     1,230,580     1,270,375     1,231,345     1,060,269     1,129,461     1,180,599
Depreciation and amortization     3,723     3,746     5,510     6,840     7,558     8,351     9,617     9,733
Stock-based comp. expense     170,791     143,054     142,237     523,632     142,672     126,903     131,072     453,288
Foreign currency transaction loss (gain)     (24,249)     4,214     8,648     (5,456)     12,123     7,193     2,302     10,025
Total operating expenses     2,432,661     2,513,423     2,550,169     2,982,947     2,443,238     2,411,022     2,352,778     2,652,796
Other income (expenses and income taxes)     (2,270)     4,331     23,101     25,721     19,055     27,289     22,393     16,322
Income (loss) from continuing operations     14,645     (559)     11,946     (683,426)     (107,648)     (156,128)     (150,724)     (648,235)
Gain on sale of discontinued operations     -     -     -     91,254     26,191     84,275     33,044     55,698
Net income (loss)     14,645     (559)     11,946     (592,172)     (81,457)     (71,853)     (117,680)     (592,537)
                                                 
Basic income (loss) per common share:                                                
Income (loss) per share from continuing operations   $ -   $ -   $ -   $ (0.03)   $ -   $ -   $ -   $ (0.03)
Income per share from discontinued operations   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -
Net income (loss) per share   $ -   $ -   $ -   $ (0.03)   $ -   $ -   $ -   $ (0.03)
Basic weighted average common shares outstanding     25,898,900     25,815,163     24,960,394     24,185,966     24,095,266     23,987,137     23,845,798     23,787,836
                                                 
Diluted income (loss) per common share:                                                
Income (loss) per share from continuing operations   $ -   $ -   $ -   $ (0.03)   $ -   $ -   $ -   $ (0.03)
Income per share from discontinued operations   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -
Net income (loss) per share   $ -   $ -   $ -   $ (0.03)   $ -   $ -   $ -   $ (0.03)
Diluted weighted average common shares outstanding     26,511,180     25,815,163     25,717,403     24,185,966     24,095,266     23,987,137     23,845,798     23,787,836

 

18 

 

 

Comparison of the Three Months Ended September 30, 2020 and 2019

 

Results of Operations

 

   Three Months Ended September 30, 
   2020   2019   $ Change   % Change 
Revenue:                    
Platforms  $1,141,688   $856,445   $285,243    33.3%
Transactions   6,606,737    6,738,668    (131,931)   (2.0)%
Total revenue   7,748,425    7,595,113    153,312    2.0%
                     
Cost of revenue:                    
Platforms   203,952    150,470    53,482    35.5%
Transactions   5,094,897    5,128,108    (33,211)   (0.6)%
Total cost of revenue   5,298,849    5,278,578    20,271    0.4%
                     
Gross profit:                    
Platforms   937,736    705,975    231,761    32.8%
Transactions   1,511,840    1,610,560    (98,720)   (6.1)%
Total gross profit   2,449,576    2,316,535    133,041    5.7%
                     
Operating expenses:                    
Sales and marketing   498,374    550,349    (51,975)   (9.4)%
Technology and product development   622,961    499,191    123,770    24.8%
General and administrative   1,161,061    1,231,345    (70,284)   (5.7)%
Depreciation and amortization   3,723    7,558    (3,835)   (50.7)%
Stock-based compensation expense   170,791    142,672    28,119    19.7%
Foreign currency transaction loss (gain)   (24,249)   12,123    (36,372)   (300.0)%
Total operating expenses   2,432,661    2,443,238    (10,577)   (0.4)%
Income (loss) from operations   16,915    (126,703)   143,618    (113.4)%
                     
Other income   235    25,549    (25,314)   (99.1)%
                     
Income (loss) from operations before provision for income taxes   17,150    (101,154)   118,304    117.0%
Provision for income taxes   (2,505)   (6,494)   3,989    61.4%
                     
Income (loss) from continuing operations   14,645    (107,648)   122,293    113.6%
                     
Gain from sale of discontinued operations   -    26,191    (26,191)   (100.0)%
                     
Net income (loss)  $14,645   $(81,457)  $96,102    118.0%

 

19 

 

 

Revenue

 

   Three Months Ended September 30, 
   2020   2019   $ Change   % Change 
Revenue:                
Platforms  $1,141,688   $856,445   $285,243    33.3%
Transactions   6,606,737    6,738,668    (131,931)   (2.0)%
Total revenue  $7,748,425   $7,595,113   $153,312    2.0%

 

Total revenue increased $153,312, or 2.0%, for the three months ended September 30, 2020 compared to the prior year, due to the following:

 

Category Impact   Key Drivers
Platforms é $ 285,243   Increased due to additional deployments to new and existing customers, and expansion from 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 ê $ 131,931   Decreased primarily due to lower order volume.

 

Cost of Revenue

 

   Three Months Ended September 30, 
   2020   2019   $ Change   % Change 
Cost of Revenue:                
Platforms  $203,952   $150,470   $53,482    35.5%
Transactions   5,094,897    5,128,108    (33,211)   (0.6)%
Total cost of revenue  $5,298,849   $5,278,578   $20,271    0.4%

 

   Three Months Ended September 30, 
   2020   2019   % Change * 
As a percentage of revenue:               
Platforms   17.9%   17.6%   0.3%
Transactions   77.1%   76.1%   1.0%
Total   68.4%   69.5%   (1.1)%

 

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

 

Total cost of revenue as a percentage of revenue decreased 1.1%, from 69.5% for the previous year to 68.4%, for the three months ended September 30, 2020.

 

Category   Impact as percentage
of revenue
  Key Drivers
Platforms   é   0.3%   Increased primarily due to proportionally higher personnel costs.
Transactions   é   1.0%   Increased primarily due to proportionally higher copyright and personnel costs.

 

20 

 

Gross Profit

 

   Three Months Ended September 30, 
   2020   2019   $ Change   % Change 
Gross Profit:                    
Platforms  $937,736   $705,975   $231,761    32.8%
Transactions   1,511,840    1,610,560    (98,720)   (6.1)%
Total gross profit  $2,449,576   $2,316,535   $133,041    5.7%

 

   Three Months Ended September 30, 
   2020   2019   % Change * 
As a percentage of revenue:            
Platforms   82.1%   82.4%   (0.3)%
Transactions   22.9%   23.9%   (1.0)%
Total   31.6%   30.5%   1.1%

 

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

 

Operating Expenses

 

   Three Months Ended September 30, 
   2020   2019   $ Change   % Change 
Operating Expenses:                    
Sales and marketing  $498,374   $550,349   $(51,975)   (9.4)%
Technology and product development   622,961    499,191    123,770    24.8%
General and administrative   1,161,061    1,231,345    (70,284)   (5.7)%
Depreciation and amortization   3,723    7,558    (3,835)   (50.7)%
Stock-based compensation expense   170,791    142,672    28,119    19.7%
Foreign currency transaction loss (gain)   (24,249)   12,123    (36,372)   (300.0)%
Total operating expenses  $2,432,661   $2,443,238   $(10,577)   (0.4)%

 

Category   Impact   Key Drivers
Sales and marketing   ê $ 51,975   Decreased primarily due to lower advertising media spend partially offset by greater personnel costs.
Technology and product development   é $ 123,770   Increased due to greater personnel costs.
General and administrative   ê $ 70,284   Decreased primarily due to lower consulting, rent and travel expenses.

 

Net Income (Loss)

 

   Three Months Ended September 30, 
   2020   2019   $ Change   % Change 
Net Income (Loss):                    
Income (loss) from continuing operations  $14,645   $(107,648)  $122,293    113.6%
Income from discontinued operations   -    26,191    (26,191)   (100.0)%
Total net income (loss)  $14,645   $(81,457)  $96,102    118.0%

 

Income from continuing operations increased $122,293 or 113.6%, for the three months ended September 30, 2020 compared to the prior year, primarily due to increased gross profit and decreased operating expenses as described above.

 

Liquidity and Capital Resources

 

   Three Months Ended September 30, 
Consolidated Statements of Cash Flow Data:  2020   2019 
Net cash provided by operating activities  $923,473   $309,732 
Net cash used in investing activities   (4,304)   - 
Net cash used in financing activities   (44,295)   (71,875)
           
Effect of exchange rate changes   903    (3,114)
Net increase in cash and cash equivalents   875,777    234,743 
Cash and cash equivalents, beginning of period   9,311,556    5,353,090 
Cash and cash equivalents, end of period  $10,187,333   $5,587,833 

 

21 

 

Liquidity

 

As of September 30, 2020, we had cash and cash equivalents of $10,187,333, compared to $9,311,556 as of June 30, 2020, an increase of $875,777. This increase was primarily due to cash provided by operating activities.

 

Operating Activities

 

Net cash provided by operating activities was $923,473 for the three months ended September 30, 2020 and resulted primarily from an increase in accounts payable and accrued expenses of $1,032,896, partially offset by an increase in prepaid royalties of $322,191.

 

Net cash provided by operating activities was $309,732 for the three months ended September 30, 2019 and resulted primarily from a decrease in accounts receivable of $116,362 and an increase in deferred revenue of $108,589, partially offset by an increase in prepaid royalties of $69,699.

 

Investing Activities

 

Net cash used in investing activities was $4,304 for the three months ended September 30, 2020 and resulted from the purchase of property and equipment.

 

No cash was used in or provided by investing activities for the three months ended September 30, 2019.

 

Financing Activities

 

Net cash used in financing activities was $44,295 for the three months ended September 30, 2020 and resulted from the repurchase of common stock of $58,395, partially offset by the proceeds from the exercise of stock options of $14,100.

 

Net cash used in financing activities was $71,875 for the three months ended September 30, 2019 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 $2,500,000, or 80% of eligible accounts receivable. The line of credit matures on February 14, 2022, and is subject to certain financial and performance covenants with which we were in compliance as of September 30, 2020. Financial covenants include maintaining an adjusted quick ratio of unrestricted cash and net accounts receivable, divided by current liabilities plus debt less deferred revenue of at least 1.15 to 1.0, and maintaining tangible net worth of $1,500,000, plus 50% of net income for the fiscal quarter ended from and after December 31, 2017, plus 50% of the dollar value of equity issuances after October 1, 2017 and the principal amount of subordinated debt. The line of credit bears interest at an annual rate equal to the greater of 1% above the prime rate and 5.5%. The interest rate on the line of credit was 5.5% as of September 30, 2020. The line of credit was secured by our consolidated assets.

 

There were no outstanding borrowings under the line as of September 30, 2020 and June 30, 2020, respectively.  As of September 30, 2020, there was approximately $2,057,000 of available credit.

 

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, income from discontinued operations and gain on sale of discontinued operations. 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.

 

Set forth below is a reconciliation of Adjusted EBITDA to net income (loss) for the three months ended September 30, 2020 and 2019:

 

   Three Months Ended September 30, 
   2020   2019   $ Change 
Net income (loss)  $14,645   $(81,457)  $96,102 
Add (deduct):               
Other (income) expense   (235)   (25,549)   25,314 
Foreign currency transaction loss (gain)   (24,249)   12,123    (36,372)
Provision for income taxes   2,505    6,494    (3,989)
Depreciation and amortization   3,723    7,558    (3,835)
Stock-based compensation   170,791    142,672    28,119 
Gain on sale of discontinued operations   -    (26,191)   26,191 
Adjusted EBITDA  $167,180   $35,650   $131,530 

 

22 

 

 

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.

 

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 September 30, 2020, 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.

 

23 

 

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 September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1A. Risk Factors.

 

The COVID-19 pandemic may reduce the number of articles ordered by our transactional customers, or may reduce the number of platform subscriptions, either of which could have a material adverse impact on our business and financial performance.

 

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as the responses that we, other businesses and governments are taking continue to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain.

 

To date, we have not experienced any significant changes in our business that would have a significant negative impact on our consolidated statements of operations or cash flows. However, the COVID-19 pandemic’s continued impact on the economy and our customers may reduce the number of articles ordered by our transactional customers, or may reduce the number of platform subscriptions, either of which could have a material adverse impact on our business and financial performance.

 

The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers, service providers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of our financial statements for the fiscal quarter ended September 30, 2020, the extent to which the COVID-19 pandemic may in the future materially impact our financial condition, liquidity or results of operations is uncertain.

 

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

 

Effective as of February 11, 2020, the Compensation Committee of our Board of Directors authorized the repurchase, during calendar year 2020 on the last day of each trading window and otherwise in accordance with our insider trading policies, of up to $400,000 of outstanding common stock (at prices no greater than $4.00 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 September 30, 2020, we repurchased 25,500 shares of our common stock from employees at an average market price of approximately $2.29 per share for an aggregate amount of $58,395.

 

As of September 30, 2020, $219,379 remains available under the 2020 plan to repurchase common stock from our employees. 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.

 

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

 

Period  Total Number
of Shares
Purchased
1
   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
 
July 2020   -    -    -   $277,774 
August 2020   -    -    -   $277,774 
September 2020   25,500   $2.29    -   $219,379 
Total   25,500   $2.29    -    - 

 

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

 

Exhibit

Number

  Description
10.1   Consulting Agreement dated July 1, 2020, between Reprints Desk, Inc. and Michiel van der Heijden BV. Incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed September 24, 2020.
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

++ Indicates management contract or compensatory plan

 

24 

 

 

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: November 12, 2020   Chief Executive Officer (Principal Executive Officer)
 
  By: /s/ Alan Louis Urban  
    Alan Louis Urban
Date: November 12, 2020   Chief Financial Officer (Principal Financial and Accounting Officer)

         

 

25