Research Frontiers Incorporated — FY2021 Form 10-K Summary
Business context and reporting period
Research Frontiers develops and licenses suspended particle device (SPD-Smart) light-control technology for automotive, aerospace, architectural, marine, display and related applications. The company operates as a single segment, does not directly manufacture products, and depends on licensees and their customers for commercialization and royalty revenue.
This Form 10-K covers the fiscal year ended December 31, 2021, with comparative information for 2020. The company had more than 40 licensees and six full-time employees as of March 9, 2022. It held 219 issued patents worldwide, including 15 U.S. and 204 foreign patents.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Fee income | $1.263 million | $0.828 million | +$0.435 million |
| Operating expenses | $2.522 million | $2.778 million | -$0.256 million |
| Research and development | $0.580 million | $0.628 million | -$0.048 million |
| Operating loss | $1.839 million | $2.577 million | Loss reduced by $0.739 million |
| Net loss | $1.846 million | $2.341 million | Loss reduced by $0.495 million |
| Basic and diluted loss per share | $0.06 | $0.07 | Improved |
| Net cash used in operations | $1.804 million | $2.253 million | Improved by $0.448 million |
| Cash and cash equivalents | $0.270 million | $4.773 million | -$4.503 million |
| Marketable securities | $2.755 million | None reported | New balance |
| Working capital | $3.652 million | $5.201 million | -$1.550 million |
| Total shareholders’ equity | $3.784 million | $5.327 million | -$1.543 million |
| Accumulated deficit | $119.687 million | $117.841 million | Deficit increased by $1.846 million |
The filing does not present a separate gross margin or EBITDA measure. Fee income rose 52% year over year, while total expenses declined approximately 9%. The company remained materially unprofitable and has not generated sufficient license revenue to fully fund operations.
The company had no debt and no variable-interest-entity or other off-balance-sheet arrangements. It did have operating lease liabilities with total undiscounted payments of approximately $708,000 and a balance-sheet lease liability of $646,219 at year-end.
Material changes versus 2020
- Fee income increased primarily because of higher automotive, architectural and display fees, including one-time royalty settlements with two licensees and a special government contract in the automotive area. Aircraft-related fees declined.
- Operating expenses decreased due mainly to lower stock-based compensation, payroll, bad debts, depreciation and investor-relations costs. These savings were partly offset by higher legal costs related to collecting outstanding royalties and higher professional fees.
- Operating cash use improved, but cash and cash equivalents fell sharply because the company purchased $3.434 million of marketable securities, used $1.804 million in operations and received only $86,262 from option and warrant exercises.
- The company reclassified part of its liquidity from cash equivalents into marketable securities. At December 31, 2021, cash, cash equivalents and marketable securities totaled approximately $3.0 million.
- The company received final forgiveness in 2021 of the $202,052 Paycheck Protection Program loan recorded as other income in 2020. No comparable 2021 income was recorded.
- Shares outstanding increased modestly to 31.650 million from 31.576 million, primarily from option exercises. The company granted 198,000 fully vested options and recorded $217,008 of share-based compensation.
Guidance, outlook and management commentary
- Management expects automotive glass to remain the largest and most predictable near- and intermediate-term market for SPD technology and anticipates potential royalty growth from additional vehicle and aircraft models, marine products, trains, museums and architectural projects.
- Management expects production efficiencies, lower pricing per square foot and broader licensee adoption to expand market opportunities, but provides no quantified revenue or earnings guidance.
- The company projects a quarterly cash-flow shortfall of approximately $385,000 based on current operations and expects existing working capital to support approximately 22 months of operations. Management states that cash and cash equivalents would fund operations until late 2023, although additional financing may be required.
- Four license agreements had remaining performance obligations totaling $273,000 at December 31, 2021. Three initial terms end December 31, 2022 and one ends December 31, 2024; management expects annual renewals.
- In February 2022, licensee and strategic investor Gauzy completed a $60 million Series D financing and acquired Research Frontiers licensee Vision Systems. The combined company reported approximately $50 million of 2021 revenue, according to the filing.
Risks, contingencies and unusual items
- Liquidity is a primary risk. The company has recurring losses, an accumulated deficit of approximately $119.7 million and may need equity financing or other funding if royalties and other cash inflows do not increase.
- Revenue is highly concentrated: four licensees represented 20%, 18%, 18% and 12% of 2021 fee income. Loss of a major licensee or royalty stream could materially affect results.
- COVID-19-related manufacturing and supply-chain delays at overseas licensees negatively affected 2021 royalties. The duration and financial impact of future disruptions remain uncertain.
- Commercialization depends on licensees’ decisions, production volumes and customer adoption. The company does not control whether licensees successfully manufacture and sell products in sufficient quantities.
- Commercial SPD film is currently sourced primarily from Hitachi Chemical and Gauzy. A prolonged disruption in film availability could impair licensee sales and company royalties.
- The company faces larger and better-capitalized competitors in smart glass and related technologies, and SPD products remain subject to product-development, durability, reliability, cost and adoption risks.
- The company identified a material weakness in internal control over financial reporting after determining that its June 30 and September 30, 2021 interim financial statements required restatement for classification of certain cash equivalents as marketable securities. Management stated that enhanced controls remediated the weakness as of December 31, 2021.
- The independent auditor issued an unqualified opinion on the financial statements but identified liquidity analysis as a critical audit matter because of the judgment involved in projected cash-flow shortfalls.
- Royalty receivables were $831,636 net of a $1.017 million allowance. Two companies represented 14% and 11% of outstanding receivables.
- The company has never paid cash dividends and does not expect to do so in the foreseeable future. Its stockholder rights plan is scheduled to expire February 11, 2023 unless extended or earlier redeemed.
Important facts for investors to verify
- Whether royalty growth in 2021 was recurring or was substantially driven by the disclosed one-time settlements and special government contract.
- Current cash burn, timing of additional financing needs and whether management’s approximately 22-month liquidity estimate remains valid.
- Actual production and adoption volumes for SPD products, particularly in automotive applications and new OEM programs.
- Financial condition and payment capacity of the four largest licensees and the collectability of outstanding royalty receivables.
- Whether the remediated internal-control procedures prevent further classification errors or future restatements.
- The commercial impact of Gauzy’s acquisition of Vision Systems and the availability of SPD film from qualified suppliers.
- Expiration, renewal and economic terms of key license agreements, including the four agreements with $273,000 of remaining performance obligations.