RSSS - Research Solutions, Inc.

[frommi]

Fast growing microcap (~20 million $ marketcap, ~100 employees) company. They operate the Article Galaxy platform that lets clients buy or rent articles, scientific papers or research material from different publishers. They are the number #1 in this space in customer satisfaction with 70% of the top 25 pharma companies as clients. (Valeant is on their client list, this is probably their new customer they talked about in the last earnings call.)

 

In the past they had 3 business lines, the growth of Article Galaxy (Their SaaS-solution, revenue CAGR ~25% since 2009) is hidden and not visible without digging into the reports, but it is now at 66% of revenue and 85% of gross profit, so it should be soon visible in the public numbers.

 

Insiders ( Peter Derycz and Paul Kessler (Bristol investment fund, brother in law of Peter) ) own ~55% of the company, they and some directors bought a lot of shares below 1$. Peter Derycz has created and sold their competitor Infotrieve in 2003, then started RSSS in 2006.

 

Break even last quarter, should trade next year at roughly P/E of 8-15 with revenue growing at ~15-20% and earnings going up by 1-2 million per year. My estimates are that they have ~5 million net income by 2020, without any reinvestment of past earnings. At that time they should be worth 80-100 million $, so a possible 4-5 bagger (30-35% CAGR).

 

Balance sheet is very clean without debt and ~1 million $ in cash, revenue is sticky and i think they have a moat through scale, client and publisher relationships and their software platform.

 

Investment presentation, explains the whole thesis a lot better than i can:

http://www.brileywebcast.com/viewwebcasts/profile.php?ticker=RSSS

 

One risk is that Google drives Google scholar further and allows users to directly pay through Google`s payment system for articles.

[Libs]

Interesting idea, thanks for posting.

 

I was surprised to read in that 10-K that 3 suppliers account for 45% of their content.

The presentation slide suggested otherwise. Any thoughts on this?

[Travis Wiedower]

First thing that jumped out to me was high management compensation and the (crappy) share structure. Just the options outstanding are >10% dilution and they just voted to increase the available shares to be issued by 67%. Do you feel this is justified?

[mttddd]

Interesting idea, thanks for posting.

 

I was surprised to read in that 10-K that 3 suppliers account for 45% of their content.

The presentation slide suggested otherwise. Any thoughts on this?

 

So i looked into this and found a report from JPM with the relevant quote being "Although STM publishing is dominated by a small number of large commercial publishers (Elsevier,  Wolters Kluwer, Thomson, Springer), it is in essence a cottage industry comprising a large number of small publishers. Combined, the four leaders represent almost 50% of the market"

 

That syncs up with the 45% number

 

Also the report touches on budget pressures being a key factor for the end users. I think that is something that likely works in favor of RSSS's pricing model.

 

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCQQFjAA&url=http%3A%2F%2Fdegruyteropen.com%2FUserFiles%2FFile%2FSTM%2520Publishing%2520Industry%2520and%2520Market.doc&ei=gLeIVfePJY-uyAT91YWwDQ&usg=AFQjCNEg4QkXYfliD4J-Tj-Q8OYgC400Mg&sig2=AdCmsjgWt0K4sILf6ysEcg

[frommi]

First thing that jumped out to me was high management compensation and the (crappy) share structure. Just the options outstanding are >10% dilution

 

I was aware of the options outstanding and calculated with ~20 million shares. The possible return is so big that it was something i had no problem with, because it creates incentives to grow the company even further. Isn`t it a very strong signal that they even with the stock compensation and options they get, they bought more in the public?

 

and they just voted to increase the available shares to be issued by 67%. Do you feel this is justified?

 

They just bought back stock, so it makes no sense to increase the available shares, where did you find that? ( Or do you mean the announced reverse split to get a Nasdaq listing, that never happenend? -> They said in the presentation that they won`t do that again, and that they don`t plan to issue shares. )

[Travis Wiedower]

I was aware of the options outstanding and calculated with ~20 million shares. The possible return is so big that it was something i had no problem with, because it creates incentives to grow the company even further. Isn`t it a very strong signal that they even with the stock compensation and options they get, they bought more in the public?

 

Aligning management with shareholders is great but at some point it becomes egregious.

 

They just bought back stock, so it makes no sense to increase the available shares, where did you find that? ( Or do you mean the announced reverse split to get a Nasdaq listing, that never happenend? -> They said in the presentation that they won`t do that again, and that they don`t plan to issue shares. )

 

The DEF 14A proxy statement from November 2014 shows they increased the maximum number of shares available under the compensation plan from 3 million to 5 million. This is after they already increased the shares available in November 2012 from 1.5 million to 3 million.

 

I like the story a lot (watched the presentation you linked + other reading) but as soon as I saw the share structure I paused. Just wanted your opinion on it as it's possible they're not taking advantage of shareholders but a cursory glance looks like they are.

[Libs]

It looks like this is a complex ecosystem....for instance taxpayers and tuition fund a lot of research, which causes distortions.

 

I found this article on the threat of open ( free) access research, which would be a threat obviously:

-----------------------------------------------------

 

As of 2013, more than 10 percent of published science, technology and medicine (STM) research was published in open access journals, and it’s projected to increase.

 

“In four to five years that could easily reach around 50 percent,” said Binfield.

 

Based on the initial response to PLoS and other open-access journals, it seemed like closed-access journals’ lucrative lock on the industry was in trouble. Scientists were increasingly publishing in open access journals, and it was becoming a stipulation of many scientific grants. In 2008, the NIH stated in its Public Access Policy that the results of any research funded by the NIH must be made available for free to the public within 12 months of publication.

 

In 2012, UCSF additionally required that all research published by UCSF authors be made available for free, regardless of which journal published the research. In July 2013, the entire UC system also adopted this open access policy.

 

http://www.simbainformation.com/Global-Scientific-Technical-7681199/

 

 

[frommi]

The DEF 14A proxy statement from November 2014 shows they increased the maximum number of shares available under the compensation plan from 3 million to 5 million. This is after they already increased the shares available in November 2012 from 1.5 million to 3 million.

 

I like the story a lot (watched the presentation you linked + other reading) but as soon as I saw the share structure I paused. Just wanted your opinion on it as it's possible they're not taking advantage of shareholders but a cursory glance looks like they are.

 

Thanks. The compensation in the annual report was not looking very excessive, i noticed around 1-3% of dilution every year if the company is successfull and was ok with that. But i am not really an expert on matters of fair executive compensation.