Description

Thesis: The “Bloomberg/Lexis Nexis of Scientific Research” platform company offers 2x to 10x return upside, while the underlying core transactions business, masked by investments in the platform segment, provides a low margin of safety downside given its consistently recurring gross profits. Eventual Nasdaq uplisting and continued strong customer acceptance of platform product are near term catalysts, while incentivized board/management with an excellent CEO with a history of selling his companies are longer term catalysts.

***this is a very illiquid nanocap ($6k a day average volume) and likely for your PA only*** (I’ve been building up a position over the last year). If you would like a bigger block I’d recommend reaching out to their IR, I think he’s arranged a few blocks in the past, since it’s a closely held company.

Overview: Research Solutions

Research Solutions, Inc., through its subsidiaries, provides annual licenses that allow customers to access and utilize features of cloud based software-as-a-service research intelligence platform. The company is also involved in the transactional sale of published scientific, technical, and medical content managed, sourced, and delivered through the Transactions platform. Its solutions enable life science and other research intensive organizations to speed up research and development activities with single sourced access and management of content and data used in the intellectual property development lifecycle. The company was formerly known as Derycz Scientific, Inc. and changed its name to Research Solutions, Inc. in March 2013. Research Solutions, Inc. was incorporated in 2006 and is based in Encino, California.

Segments

Distribution/Transaction Segment:

Basically if you’re a corporate or academic research department and if you want to pull up an academic paper on a topic that paper will cost you $31. Whether you’re at JNJ, Nvidia or 3M, your R&D department has a need for academic papers of … which there are 70mm with 1.7mm new ones a year.

The transaction business for the company does ~840,000 transactions year for $26.1mm revenues and consistent gross margins 23%. Its has 1083 customers split between 245 academic and 838 corporate of which it has 75% of the of the top 25 Pharma Companies, and a diversified cast of Small and Medium Business (SMB). It provides ~$6mm of gross profit to the company, and per CEO who has sold a similar business in the past for 2x revenues, the “vast majority” of the firm operating cash cost structure of $8.25mm is dedicated to the Platforms business, meaning this business (as a private business) doesn’t need more than $1-2mm to support it having an EBIT of $4-5mm. Capitalizing that at 10% with no credit for growth gets this business value to around $50mm (or 2x revenue estimate of CEO) or essentially the entire value of the firm. This is important because if the Platforms business doesn’t work (and its working really well right now) the business just reverts back to the boring transactions business which will then likely be forced into a sale. I sense none of the shareholder’s or the CEO are keen on just owning that business because its not very exciting.

More worryingly the business flattened out lately, and while too early to call a decline trend, its a little bit red flaggish. It should get a boost from continued growth in Platforms (that in away is a new sales channel for the Transactions business) which has 267 corporate customers currently.

The obvious question that will come up: wtf I can get these journals or papers for free on the dark web, why bother paying $31? Which is essentially why they don’t have Chinese customers, or customers really outside of North America or Europe (sorry if you’re offended buuuuut). But if you’re a western company with a big R&D budget or a university do you really want to skimp out on paying a fee and getting busted by state and federal laws? Of course not. There’s a little bit of regulatory capture and maybe the real threat is more universities giving away their content for free as occasional headlines like this pop up. At least for other academics. I would handicap for this risk with a higher interest rate if you’re not convinced of its stability, but for I think it’s a 1-2% growth business, probably with GDP long term, unless the company boosts its sales efforts. I also suspect the focus on the Platforms has let management lose focus in this segment.

Platforms Segment

This segment houses the Article Galaxy software platform via its Reprints Desk subsidiary. I would highly recommend perusing this link to get a better idea of the product https://info.reprintsdesk.com/why-article-galaxy via pdfs and videos. Key points:

-        The product acts as essentially a conduit to buy more academic papers. As the company puts it, a one stop shop with 24/7 support to the universe of technical and scientific content

-        It creates an efficient workflow for research scientists and their work group

-        It utilizes a lot of free information on any topic searched by a user in a presentable dashboard function (Hey you were searching for molecule X, here are all the papers, plus all the recent articles, and this is what it looks like) etc. This is not unlikely Bloomberg in that it’s a mix of both free information (SEC filings, transcripts) put together in a very presentable way and upsell of additional products (proprietary research).

-        Company is continuously upgrading the product with addition of mostly free “gadgets” (apps) that continue to add value to product

-        Increasing versions allow to purchase with just a credit card

-        As part of my research due diligence I’ve had about 20 scientists and PhDs spend 20-30 minutes checking out the product (though haven’t been able to get a customer) where 95% agreed it was a very useful tool and most passed it along to their friends, however, almost no one had the budgeting and decision making power to make the decision to buy the Enterprise version (avg price of $10,120/year)

So where are we now and why am I publishing this today (a few days before the next earnings call)?

-        The company has 267 corporate customers, including the world’s biggest brand names (3M, United Technologies, Stanford, Biogen, Honeywell, Roche, Gilead etc) with zero churn so far, paying $10,120 with a 81.7% gross margin a year. I don’t know if this signals market acceptance yet but it sure sounds like it.

-        Last few quarters may seem misleading with slower growth but the company decided to invest more resources into the product and has hired a number of sales personnel whose benefit wasn’t obvious until late last year with a 12% quarter on quarter customer growth. I believe this quarter, we should start to see an uptick in sequential growth as the new marketing strategy should show results. I believe they’ll begin to test out various social media schemes with LinkedIn etc which could drive volume significantly.

-        The company claims a 700,000 SMB market of which its only 1% penetrated. A 1% penetration of this would equal to $57mm in recurring gross profit a year. You can multiply that toward any of your assumptions you want. Personally, I think if it gets over 3,000 (i.e. a marginal contribution of $25mm from breakeven now) would likely result in a 10x return for the stock from today. But I’ll present my case assumptions later. I think the key will be to see wider market acceptance as I am worried that so far they’ve picked up the low hanging fruit of having their existing transaction customers (which they claim have very little overlap) try out for one or two seats.

Financials/Valuation:

If you’ve made it this far then you probably thought there was something to this story. So lets recap where we are today as of 12/31/18:

Annual revenue RUN RATE:

-        $26.1mm from Transactions.

-        $2.7mm from Platforms

-        ~$29mm run rate

Gross Profit:

-        $5.9mm from Transactions

-        $2.2mm from Platforms

-        $8.1mm run rate

Cash Opex

-        R&D: $2mm

-        S&M: $2mm

-        G&A including $1mm or so of public company costs: $4.5mm

-        $8.5mm run rate. I expect this to grow very little, maybe 2-3% a year, unevenly.

*stock comp/deprecitation/noncash expenses: $850,000 run rate

5 year/2023 scenarios:

1.      Scenario 1: Platforms is a dud. Grows 5% a year via just existing Transaction customers. Transactions at zero growth. 2023 Revenue is flat, $29mm-$30mm, with ~$9mm in Gross Profit and about the same for cash Opex expenses. Cash probably dwindles down to $3-4mm and eventually it just gets sold for the $5mm EBIT without public company costs, R&D, and most of Sales and SG&A. About $50mm where it is today, but with obvious volatility. I assign a 25% probability to this scenario.

2.      Scenario 2: Platforms grows 30%/yr to 1,000 customers by 2023 and $8.2mm in run rate revenues. Transactions grow 1% with help of Platforms. Revenue is $37.5mm, Gross Profit is $15mm. SG&A is $9mm and EBITDA is $6 to 7mm with $5mm FCF. Capitalized at 5% (10% nanocap cost of capital less 5% growth) it’s a $100mm company, respectfully, a $4.50 stock price, a double from here. I assign a 50% probability to this scenario.

3.      Scenario 3 and 4 are basically hyper Platform growth assumptions at 65% and 95% a year to get to 3,500 or 7,000 customers (1% market penetration) by 2023 with $25mm and $55mm EBITDA by 2023 with 20x EBITDA multiples and $25 and $55 stock prices of over 10x to 25x from today’s price. This is essentially how I’d like to view this business opportunity. This would need higher SG&A and I might be off on my needs here. Obviously if it catches fire and people see start to see 20% EBITDA margins with 90% flow through and the opportunity set, the sky is the limit. I should probably assign a higher probability to this happening but lets stick to 25%.

Conclusion: Transactions which is worth the current value of the firm at $2.00-$2.25 per share is the downside value of the business. The Platforms option is worth $2.50 to $50.00 and you’re essentially getting it for free.

SWOT Analysis

Strengths

-        Distribution business is very well diversified with 11,000 clients, including 70% of top global pharma companies, also opening up a tremendous channel for upselling the Platforms product which is what’s been happening

-        Distribution business provides enough cash flow to sustain the Platforms business until it reaches sustainability without additional dilution

-        $5mm+ of cash on the balance sheet, a well capitalized board member and shareholder willing to provide capital

Weaknesses/Risks

-        A tiny nanocap, wont get on anyone’s radar, stock illiquid; management distraction by Platforms might run Transaction business down and lower the margin of safety price

Opportunities

-        700,000 TAM with 267 clients today

-        Academic space other than a few big unis like Stanford is untapped, and a secondary focus for now

Threats

-        I think a bigger capitalized software or publishing firm in this space could, maybe, potentially get in here within a few years if it sees RSSS’s success and the 700,000 TAM. I think we’re a long way away from that and it likely would drive sales for RSSS as a market accepted product. I’ve seen this play out with a private financial markets SAAS firm I am involved with. Competitors came in, and building out their own platforms due to success of this one, but reality is its just driving more interest to ours.

Capital Structure

-        $4.8mm in cash

-        Untapped $2.5 credit line

-        $18mm in NOLs

-        24.2mm shares (with 5mm in options)

Great liquidity. A few years ago Pac 12 Management, a $2b AUM hedge fund sponsor family office gave them $5mm, because they wanted them to grow the Platforms business It wasn’t a raise, they weren’t even asking for it, Pac 12 suggested it and they took it. Point here even though they are pretty cash breakeven now, and I am hoping solid operating leverage going forward, besides the cash and credit line they have a stand by well capitalized sponsor that owns 25% of the firm. 

Management/Share Ownership

-        Derycz Peter – CEO/Founder …. Its been an interesting ride with him and I couldn’t come out on whether I really like him or very unsure of him. Its taken me about half a dozen convos to land on the really like him part. He owns 15% of the company so very incentivized and his family owns 20% via Bristol (I think that’s his BOL’s) firm.

-        Pac 12 owns 25%

-        The stock is very closely held, with about 80% held by insiders or those that wouldn’t be willing to sell (though the recent transaction with Samjo Capital showed that a few blocks are up for sale).

Nasdaq Uplisting

-        One of the requirements has been met, and that is a share price of above $2.00 for 6 months (or we’re close, either way the average needed is there)

-        I believe the second has to do with book value of equity and that one may be tougher. I think it has to be something like $10mm and we’re at $6mm. There are ways around it and management is looking into it. This is probably the key that’s going to drive this thing up in the next couple of years.

Catalyst

- Continued growth in Platforms

- Nasdaq Uplisting