Research Solutions, Inc. 10-K

Item 8. Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Research Solutions, Inc. and Subsidiaries Henderson, Nevada Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Research Solutions, Inc. (the “Company”) and Subsidiaries as of June 30, 2020 and 2019, the related statements of operations and other comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2006. /s/ Weinberg and Company, P.A Los Angeles, California September 24, 2020 25 Research Solutions, Inc. and Subsidiaries Consolidated Balance Sheets June 30, June 30, 2020 2019 Assets Current assets: Cash and cash equivalents $ 9,311,556 $ 5,353,090 Accounts receivable, net of allowance of $88,485 and $100,175, respectively 4,449,260 4,493,169 Prepaid expenses and other current assets 241,747 323,591 Prepaid royalties 720,367 - Total current assets 14,722,930 10,169,850 Other assets: Property and equipment, net of accumulated depreciation of $804,999 and $789,788, respectively 11,276 36,828 Deposits and other assets 6,155 14,406 Right of use asset, net of accumulated amortization of $390,691 and $270,777, respectively 72,331 192,245 Total assets $ 14,812,692 $ 10,413,329 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses $ 6,349,845 $ 4,862,895 Deferred revenue 3,524,507 2,310,206 Lease liability, current portion 79,326 129,187 Total current liabilities 9,953,678 7,302,288 Long-term liabilities: Lease liability, long-term portion - 79,326 Total liabilities 9,953,678 7,381,614 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; 26,032,263 and 24,375,948 shares issued and outstanding, respectively 26,032 24,376 Additional paid-in capital 26,134,819 23,631,481 Accumulated deficit (21,176,799 ) (20,514,557 ) Accumulated other comprehensive loss (125,038 ) (109,585 ) Total stockholders’ equity 4,859,014 3,031,715 Total liabilities and stockholders’ equity $ 14,812,692 $ 10,413,329 See notes to consolidated financial statements 26 Research Solutions, Inc. and Subsidiaries Consolidated Statements of Operations and Other Comprehensive Loss Years Ended June 30, 2020 2019 Revenue: Platforms $ 3,890,689 $ 2,809,201 Transactions 27,168,048 25,984,721 Total revenue 31,058,737 28,793,922 Cost of revenue: Platforms 644,138 507,375 Transactions 20,776,717 19,943,086 Total cost of revenue 21,420,855 20,450,461 Gross profit 9,637,882 8,343,461 Operating expenses: Selling, general and administrative 10,466,123 9,559,608 Depreciation and amortization 23,654 38,816 Total operating expenses 10,489,777 9,598,424 Loss from operations (851,895 ) (1,254,963 ) Other income 80,044 107,308 Loss from operations before provision for income taxes (771,851 ) (1,147,655 ) Provision for income taxes (7,836 ) (27,040 ) Loss from continuing operations (779,687 ) (1,174,695 ) Gain from sale of discontinued operations 117,445 214,737 Net loss (662,242 ) (959,958 ) Other comprehensive loss: Foreign currency translation (15,453 ) (14,878 ) Comprehensive loss $ (677,695 ) $ (974,836 ) Loss per common share: Loss per share from continuing operations, basic and diluted $ (0.03 ) $ (0.05 ) Income per share from discontinued operations, basic and diluted $ - $ 0.01 Net loss per share, basic and diluted $ (0.03 ) $ (0.04 ) Weighted average common shares outstanding, basic and diluted 24,760,790 23,815,761 See notes to consolidated financial statements 27 Research Solutions, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity For the Years Ended June 30, 2020 and 2019 Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Loss Equity Balance, July 1, 2018 24,016,999 24,017 22,904,691 (19,554,599 ) (94,707 ) 3,279,402 Fair value of vested stock options - - 523,978 - - 523,978 Fair value of vested restricted common stock 170,245 170 303,024 - - 303,194 Repurchase and retirement of common stock (88,250 ) (88 ) (199,935 ) - - (200,023 ) Common stock issued upon exercise of stock options 237,954 238 99,762 - - 100,000 Common stock issued upon exercise of warrants 39,000 39 (39 ) - - - Net loss - - - (959,958 ) - (959,958 ) Foreign currency translation - - - - (14,878 ) (14,878 ) Balance, June 30, 2019 24,375,948 24,376 23,631,481 (20,514,557 ) (109,585 ) 3,031,715 Fair value of vested stock options - - 610,634 - - 610,634 Fair value of vested restricted common stock 110,817 111 340,850 - - 340,961 Repurchase of common stock (116,200 ) (115 ) (321,486 ) - - (321,601 ) Common stock issued upon exercise of stock options 161,698 160 (160 ) - - - Common stock issued upon exercise of warrants 1,500,000 1,500 1,873,500 - - 1,875,000 Net loss - - - (662,242 ) - (662,242 ) Foreign currency translation - - - - (15,453 ) (15,453 ) Balance, June 30, 2020 26,032,263 $ 26,032 $ 26,134,819 $ (21,176,799 ) $ (125,038 ) $ 4,859,014 See notes to consolidated financial statements 28 Research Solutions, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended June 30, 2020 2019 Cash flow from operating activities: Net loss $ (662,242 ) $ (959,958 ) Gain from sale of discontinued operations (117,445 ) (214,737 ) Loss from continuing operations (779,687 ) (1,174,695 ) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 23,654 38,816 Amortization of lease right 119,914 115,079 Fair value of vested stock options 610,634 523,978 Fair value of vested restricted common stock 340,961 303,194 Changes in operating assets and liabilities: Accounts receivable 43,909 (241,918 ) Prepaid expenses and other current assets 199,289 218,033 Prepaid royalties (720,367 ) 93,336 Deposits and other assets 8,094 - Accounts payable and accrued expenses 1,486,950 175,949 Deferred revenue 1,214,301 644,460 Lease liability (129,187 ) (119,786 ) Net cash provided by operating activities 2,418,465 576,446 Cash flow from investing activities: Purchase of property and equipment - (15,828 ) Net cash used in investing activities - (15,828 ) Cash flow from financing activities: Common stock repurchase and retirement (321,601 ) (200,023 ) Proceeds from the exercise of stock options 1,875,000 100,000 Net cash provided by (used in) financing activities 1,553,399 (100,023 ) Effect of exchange rate changes (13,398 ) (15,685 ) Net increase in cash and cash equivalents 3,958,466 444,910 Cash and cash equivalents, beginning of period 5,353,090 4,908,180 Cash and cash equivalents, end of period $ 9,311,556 $ 5,353,090 Supplemental disclosures of cash flow information: Cash paid for income taxes $ 7,836 $ 27,040 See notes to consolidated financial statements 29 RESEARCH SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended June 30, 2020 and 2019 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 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. 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. 30 Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. These estimates and assumptions include estimates for reserves of uncollectible accounts, analysis of impairments of recorded intangibles, accruals for potential liabilities, assumptions made in valuing equity instruments issued for services or acquisitions, and realization of deferred tax assets. Cash and cash equivalents For purposes of the statements of cash flows, the Company defines cash equivalents as all highly liquid debt instruments purchased with an original maturity of three months or less. Fair value of financial instruments Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures , fair value is defined as the price at which an asset could be exchanged or a liability transferred in a transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied. A fair value hierarchy prioritizes the inputs used in measuring fair value into three broad levels as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Inputs, other than the quoted prices in active markets, are observable either directly or indirectly. Level 3 – Unobservable inputs based on the Company's assumptions. The Company is required to use observable market data if such data is available without undue cost and effort. The Company has no fair value items required to be disclosed as of June 30, 2020 or 2019 under these requirements. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values because of the short maturity of these instruments. Allowance for doubtful accounts The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding. The Company established an allowance for doubtful accounts of $88,485 and $100,175 as of June 30, 2020 and 2019, respectively. 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 $134,175 and $63,933 at June 30, 2020 and 2019, respectively, was held in accounts at financial institutions located in Europe. The Company has no customers that represent 10% of revenue or more for the years ended June 30, 2020 and 2019. The Company has no customers that accounted for greater than 10% of accounts receivable as of June 30, 2020 and 2019. 31 The following table summarizes our content costs from our vendors: Year Ended June 30, 2020 2019 Vendor A 21 % 17 % Vendor B 13 % 12 % Vendor C 10 % 10 % Property and equipment Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of 3 to 7 years. Leasehold improvements are amortized over the shorter of the useful lives of the related assets, or the lease term. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the consolidated statements of operations. Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended June 30, 2020 and 2019, the Company did not recognize any impairments for its property and equipment. 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 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 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. 32 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. Revenue by Geographical Region The following table summarizes revenue by geographical region: Year Ended June 30, 2020 2019 United States $ 17,528,224 56.4 % $ 16,169,217 56.2 % Europe 10,686,667 34.4 % 10,485,997 36.4 % Rest of World 2,843,846 9.2 % 2,138,708 7.4 % Total $ 31,058,737 100 % $ 28,793,922 100 % Accounts Receivable by Geographical Region The following table summarizes accounts receivable by geographical region: Year Ended June 30, 2020 2019 United States $ 2,670,674 60.0 % $ 2,616,197 58.2 % Europe 1,553,706 34.9 % 1,418,571 31.6 % Rest of World 224,880 5.1 % 458,401 10.2 % Total $ 4,449,260 100 % $ 4,493,169 100 % Deferred Revenue Customer deposits and billings or payments received in advance of revenue recognition are recorded as deferred revenue. Cost of Revenue Platforms Cost of Platform revenue consists primarily of personnel costs of our operations team, and to a lesser extent managed hosting providers and other third-party service and data providers. Transactions Cost of Transaction revenue consists primarily of the respective copyright fee for the permitted use of the content, less a discount in most cases, and to a much lesser extent, personnel costs of our operations team and third-party service providers. Stock-Based Compensation The Company periodically issues stock options, warrants and restricted stock to employees and non-employees for services, in capital raising transactions, and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based Payment Topic 718 of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. The Company estimates the fair value of stock option and warrant awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company's Statements of Operations. The Company estimates the fair value of restricted stock awards to employees and directors using the market price of the Company’s common stock on the date of grant, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company's Statements of Operations. In prior periods through June 30, 2019, the Company accounted for share-based payments to non-employees in accordance with Topic 505 of the FASB Accounting Standards Codification, whereby the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates. On July 1, 2019, the Company adopted Accounting Standards Update (ASU) 2018-07 which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The adoption of the standard did not have a material impact on our financial statements. Foreign Currency The accompanying consolidated financial statements are presented in United States dollars, the functional currency of the Company. Capital accounts of foreign subsidiaries are translated into US Dollars from foreign currency at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rate as of the balance sheet date. Income and expenditures are translated at the average exchange rate of the period. Although the majority of our revenue and costs are in US dollars, the costs of Reprints Desk Latin America are in Mexican Pesos. As a result, currency exchange fluctuations may impact our revenue and the costs of our operations. We currently do not engage in any currency hedging activities. Gains and losses from foreign currency transactions, which result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated, are included in selling, general and administrative expenses and amounted to loss of $19,529 and $24,500, for the years ended June 30, 2020 and 2019, respectively. Cash denominated in Euros with a US Dollar equivalent of $134,175 and $63,933 at June 30, 2020 and 2019, respectively, was held in accounts at financial institutions located in Europe. 33 The following table summarizes the exchange rates used: Year Ended June 30, 2020 2019 Period end Euro : US Dollar exchange rate 1.12 1.14 Average period Euro : US Dollar exchange rate 1.14 1.14 Period end Mexican Peso : US Dollar exchange rate 0.04 0.05 Average period Mexican Peso : US Dollar exchange rate 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 stock holders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive. At June 30, 2020 potentially dilutive securities include options to acquire 3,327,580 shares of common stock, warrants to acquire 385,000 shares of common stock and unvested restricted common stock of 191,855. At June 30, 2019 potentially dilutive securities include options to acquire 3,287,335 shares of common stock, warrants to acquire 1,885,000 shares of common stock and unvested restricted common stock of 311,535. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the reporting period. Basic and diluted net loss per common share is the same for the years ended June 30, 2020 and 2019 because all stock options, warrants, and unvested restricted common stock are anti-dilutive. Income taxes The Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Recently Issued Accounting Pronouncements In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 amends certain disclosure requirements pertaining to fair value measurement, and is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s financial position, results of operations, and cash flows. 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. Property and Equipment Property and equipment consists of the following as of June 30, 2020 and 2019: June 30, 2020 June 30, 2019 Computer equipment $ 495,585 $ 504,652 Software 282,080 282,080 Furniture and fixtures 38,610 39,884 Total 816,275 826,616 Less accumulated depreciation (804,999 ) (789,788 ) Net, Property and equipment $ 11,276 $ 36,828 Depreciation expense for the years ended June 30, 2020 and 2019 was $23,654 and $38,816, respectively. 34 Note 4 . 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 June 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 June 30, 2020. The line of credit is secured by the Company’s consolidated assets. There were no outstanding borrowings under the line as of June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020, there was approximately $2,089,000 of available credit. Note 5. 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 twelve months ended June 30, 2020, the Company made payments of $129,187 towards the lease liability. As of June 30, 2020 and 2019, lease liability amounted to $79,326 and $208,513, 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 years ended June 30, 2020 and 2019 was $111,746 and $144,963, respectively. The right of use asset at June 30, 2019 was $192,245. During the years ended June 30, 2020 and 2019, the Company reflected amortization of right of use asset of $119,914 and $115,079 related to this lease, respectively, resulting in a net asset balance of $72,331 as of June 30, 2020. Future minimum lease payments under the leases are as follows: Years Ending June 30, Amount 2021 $ 80,356 Total payments 80,356 Less: Amount representing interest 1,030 Present value of net minimum lease payments 79,326 Less: Current portion 79,326 Non-current portion $ - Note 6. 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 June 30, 2020, there were 622,429 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. 35 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 July 1, 2018 2,991,835 1.16 2,885,376 1.15 106,459 1.27 Granted 717,000 2.22 250,000 2.40 467,000 2.12 Options vesting - - 105,042 1.49 (105,042 ) 1.49 Exercised (396,500 ) 1.19 (396,500 ) 1.19 - - Forfeited/Cancelled (25,000 ) 1.05 (16,667 ) 1.05 (8,333 ) 1.05 Outstanding at June 30, 2019 3,287,335 1.38 2,827,251 1.27 460,084 2.09 Granted 324,000 3.04 250,000 3.13 74,000 2.72 Options vesting - - 278,249 2.05 (278,249 ) 2.05 Exercised (263,755 ) 1.16 (263,755 ) 1.16 - - Forfeited/Cancelled (20,000 ) 1.95 (10,000 ) 1.95 (10,000 ) 1.95 Outstanding at June 30, 2020 3,327,580 $ 1.56 3,081,745 $ 1.50 245,835 $ 2.34 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 years ended June 30, 2020 and 2019. Years Ended June 30, 2020 2019 Expected dividend yield 0 % 0 % Risk-free interest rate 0.43% - 1.69 % 2.24% - 3.00 % Expected life (in years) 5 - 6 5 - 6 Expected volatility 62% - 64 % 68% - 69 % The weighted average remaining contractual life of all options outstanding as of June 30, 2020 was 5.75 years. The remaining contractual life for options vested and exercisable at June 30, 2020 was 5.53 years. Furthermore, the aggregate intrinsic value of options outstanding as of June 30, 2020 was $2,928,695, and the aggregate intrinsic value of options vested and exercisable at June 30, 2020 was $2,883,851, in each case based on the fair value of the Company’s common stock on June 30, 2020. During the year ended June 30, 2020, the Company granted 324,000 options to employees and directors with a fair value of $488,080 which amount will be amortized over the vesting period. The total fair value of options that vested during the year ended June 30, 2020 was $610,634 and was included in selling, general and administrative expenses in the accompanying statement of operations. As of June 30, 2020, the amount of unvested compensation related to the unvested options was $290,515 which will be recorded as an expense in future periods as the options vest. During the year ended June 30, 2020, the Company issued 161,698 net shares of common stock upon the exercise of 263,755 options on a cashless basis. During the year ended June 30, 2019, the Company granted 717,000 options to employees and directors with a fair value of $881,860 which amount will be amortized over the vesting period. The total fair value of options that vested during the year ended June 30, 2019 was $523,978 and was included in selling, general and administrative expenses in the accompanying statement of operations. During the year ended June 30, 2019, the Company issued 92,954 shares of common stock upon the exercise of 221,500 options on a cashless basis and the Company issued 145,000 shares of common stock on the exercise of 175,000 options for cash and common stock, resulting in proceeds to the Company of $100,000. 36 Additional information regarding stock options outstanding and exercisable as of June 30, 2020 is as follows: Option Exercise Price Options Outstanding Remaining Contractual Life (in years) Options Exercisable $ 0.59 8,150 2.00 8,150 0.60 5,000 2.00 5,000 0.65 6,150 2.00 6,150 0.70 225,000 5.43 225,000 0.77 49,500 3.08 49,500 0.80 16,000 5.14 16,000 0.90 25,667 3.81 25,667 0.97 6,000 2.00 6,000 1.00 28,249 3.43 28,249 1.02 87,000 0.12 87,000 1.05 400,529 6.09 400,529 1.07 33,898 2.29 33,898 1.09 124,165 5.34 124,165 1.10 105,000 5.00 105,000 1.14 3,674 2.00 3,674 1.15 209,400 4.11 209,400 1.20 352,414 7.08 350,580 1.25 32,000 2.62 32,000 1.30 243,000 1.68 243,000 1.50 195,000 2.38 195,000 1.59 35,000 7.87 26,250 1.75 1,067 2.00 1,067 1.80 94,050 3.13 94,050 1.85 24,000 2.59 24,000 1.95 275,000 8.01 189,583 2.40 398,667 8.38 334,500 2.49 50,000 9.25 - 2.50 20,000 8.88 8,333 2.99 8,000 9.87 - 3.13 258,000 9.38 250,000 3.50 8,000 9.62 - Total 3,327,580 3,081,745 Warrants The following table summarizes warrant activity: Number of Warrants Weighted Average Exercise Price Outstanding, June 30, 2018 1,985,000 $ 1.25 Granted - - Exercised (100,000 ) 1.22 Expired/Cancelled - - Outstanding, June 30, 2019 1,885,000 1.25 Granted - - Exercised (1,500,000 ) 1.25 Expired/Cancelled - - Outstanding, June 30, 2020 385,000 $ 1.24 Exercisable, June 30, 2019 1,885,000 $ 1.25 Exercisable, June 30, 2020 385,000 $ 1.24 During the year ended June 30, 2020, certain holders of warrants to purchase shares of the Company’s common stock at a per share exercise price of $1.25 exercised those warrants to purchase 1,500,000 shares, generating gross proceeds to the Company of $1,875,000. The intrinsic value for all warrants outstanding as of June 30, 2020 was $434,200, based on the fair value of the Company’s common stock on June 30, 2020. Additional information regarding warrants outstanding and exercisable as of June 30, 2020 is as follows: Warrant Exercise Price Warrants Outstanding Remaining Contractual Life (in years) Warrants Exercisable $ 1.19 50,000 1.48 50,000 1.25 335,000 0.89 335,000 Total 385,000 385,000 37 Restricted Common Stock Prior to July 1, 2018, the Company issued 1,996,304 shares of restricted common stock to employees valued at $1,563,074, of which $1,482,663 had been recognized as an expense. As of June 30, 2018, 416,619 of these shares with a grant date fair value of $360,160 had not yet vested. During the year ended June 30, 2019, the Company issued an additional 170,245 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 $355,417 based on the market price of our common stock ranging from $1.99 to $2.50 per share on the date of grant, which will be amortized over the three-year vesting period. During the year ended June 30, 2020, the Company issued an additional 110,817 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 $322,875 based on the market price of our common stock ranging from $2.75 to $3.50 per share on the date of grant, which will be amortized over the three-year vesting period. The total fair value of restricted common stock vested during the year ended June 30, 2020 and 2019 was $340,961 and $303,194, respectively, and is included in selling, general and administrative expenses in the accompanying statements of operations. As of June 30, 2020, the amount of unvested compensation related to issuances of restricted common stock was $394,297, 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, 2018 416,619 $ 360,160 $ 1.08 Granted 170,245 355,417 2.09 Vested (275,329 ) (303,194 ) 1.05 Forfeited - - - Non-vested, June 30, 2019 311,535 412,383 1.66 Granted 110,817 322,875 2.91 Vested (230,497 ) (340,961 ) 1.56 Forfeited - - - Non-vested, June 30, 2020 191,855 $ 394,297 $ 2.51 Common Stock Repurchase and Retirement Effective as of November 13, 2018, the Compensation Committee of our Board of Directors authorized the repurchase, during calendar year 2019 on the last day of each trading window and otherwise in accordance with our insider trading policies, of up to $300,000 of outstanding common stock (at prices no greater than $3.00 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. 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 years ended June 30, 2020 and 2019, we repurchased approximately 116,200 and 88,250 shares of our common stock under the repurchase plan at an average price of approximately $2.77 and $2.27 per share, respectively, for an aggregate amount of $321,601 and $200,023, respectively. As of June 30, 2020, $277,774 remains under the current authorization to repurchase our outstanding common stock from our employees. Shares repurchased are retired and deducted from common stock for par value and from additional paid in capital for the excess over par value. Direct costs incurred to acquire the shares are included in the total cost of the shares. 38 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 September 2018 34,200 $ 2.20 - - December 2018 15,800 $ 2.41 - - March 2019 20,500 $ 2.24 - - June 2019 17,750 $ 2.30 - - Year ended June 30, 2019 88,250 $ 2.27 - - September 2019 28,750 $ 2.50 - - December 2019 42,500 $ 3.00 - - March 2020 25,150 $ 2.75 - $ 330,838 June 2020 19,800 $ 2.68 - $ 277,774 Year ended June 30, 2020 116,200 $ 2.77 - $ 277,774 1 Consists of shares of common stock purchased from employees to satisfy tax obligations in connection with the vesting of stock incentive awards. Note 7. Contingencies and Commitments 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. Legal Proceedings The Company is involved in legal proceedings in the ordinary course of its business. Although management of the Company cannot predict the ultimate outcome of these legal proceedings with certainty, it believes that the ultimate resolution of the Company’s legal proceedings, including any amounts it may be required to pay, will not have a material effect on the Company’s consolidated financial statements. Note 8. Income Taxes The provision for income taxes consists of the following for the years ended June 30, 2020 and 2019: Years Ended June 30, 2020 2019 Current Federal $ - $ - State 2,201 2,088 Foreign (Mexico) 5,635 24,952 Deferred Federal - - Foreign - - State - - Provision for income tax expense $ 7,836 $ 27,040 39 During the year ended June 30, 2020, the Company recorded a provision for income tax expense of $7,836 which consisted of $2,201 in state income tax payments and $5,635 in foreign (Mexico) income tax payments. During the year ended June 30, 2019, the Company recorded a provision for income tax expense of $27,040 which consisted of $2,088 in state income tax payments and $24,952 in foreign (Mexico) income tax payments. The reconciliation of the effective income tax rate to the federal statutory rate is as follows: Years Ended June 30, 2020 2019 Federal income tax rate 21.0 % 21.0 % State tax, net of federal benefit 5.0 % 5.0 % Permanent differences 3.2 % 4.8 % Change in valuation allowance (30.4 )% (33.6 )% Effective income tax rate (1.2 )% (2.8 )% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at June 30, 2020 and 2019 are as follows: June 30, 2020 June 30, 2019 Deferred tax assets: Federal net operating loss carryforward $ 2,508,894 $ 2,587,483 State net operating loss carryforward 354,752 387,834 Intangibles amortization 156,196 156,196 Stock based compensation 1,551,272 1,351,437 Other 186,901 176,403 Total deferred tax assets 4,758,015 4,659,353 Deferred tax liability: Fixed asset depreciation 49,167 46,299 Net deferred tax assets 4,807,182 4,705,652 Less valuation allowance (4,807,182 ) (4,705,652 ) $ - $ - The Company has provided a valuation allowance on the deferred tax assets at June 30, 2020 and 2019 to reduce such asset to zero, since there is no assurance that the Company will generate future taxable income to utilize such asset. Management will review this valuation allowance requirement periodically and make adjustments as warranted. The net change in the valuation allowance for the year ended June 30, 2020 was an increase of $101,530. At June 30, 2020 and 2019, the Company had federal net operating loss (“NOL”) carryforwards of approximately $13,800,000 and $12,735,000, respectively, and state NOL carryforwards of approximately $6,780,000 and $6,445,000, respectively. Federal NOLs could, if unused, completely expire in 2035. State NOLs, if unused, completely expire in 2040. Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of June 30, 2020 and 2019, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption. The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2020 and 2019, the Company has no accrued interest or penalties related to uncertain tax positions. Company is subject to taxation in the United States and various states and Mexico. The Company is subject to United States federal or state income tax examinations by tax authorities for fiscal years after 2016. Note 9. Gain from Sale of Discontinued Operations (Reprints and ePrints business line) On June 30, 2017, we sold the intangible assets of our Reprints and ePrints business line, but specifically excluding billed accounts receivable and respective liabilities, pursuant to an Asset Purchase Agreement dated June 20, 2017. The aggregate net consideration for the sale is comprised of $450,000 paid on the closing date, and earn-out payments of 45% of gross margin over the 30 month period subsequent to the closing date. We have made a policy election to record the contingent consideration when the consideration is determined to be realizable, which amounted to $117,445 and $214,737 for the years ended June 30, 2020 and 2019, respectively. As of June 30, 2020, no further consideration will be due. 40 Note 10. Subsequent Events Stock Options In July 2020, the Company issued 54,777 shares of common stock upon the exercise of stock options underlying 90,000 shares of stock. On September 17, 2020, the Company granted stock options underlying 173,000 shares of common stock to employees with a fair value of approximately $235,000. The options vest over a three-year period, and have a term of ten years. Restricted Common Stock On August 3, 2020, the Company issued 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 value of the stock award was $294,000 based on the market price of our common stock of $2.45 per share on the date of grant, which will be amortized over the three-year vesting period. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with our accountants on accounting and financial disclosure during the last two fiscal years.