Research Frontiers Incorporated: FY2020 Form 10-K Summary
Business Context and Reporting Period
Research Frontiers develops and licenses suspended particle device (SPD-Smart) light-control technology. The company operates as a single business segment and does not directly manufacture products; licensees manufacture and sell films, glass, windows, sunroofs, aircraft windows, architectural products and other applications. The filing covers the fiscal year ended December 31, 2020, with comparison to fiscal 2019.
The company had more than 40 licensees across automotive, aerospace, architectural, marine and display markets. Automotive applications are expected to remain the largest near- and intermediate-term source of royalty income. The company had six full-time employees as of March 11, 2021.
Financial Performance and Position
| Metric | 2020 | 2019 |
|---|---|---|
| Fee income | $828,450 | $1,564,024 |
| Operating expenses | $2,777,535 | $3,677,740 |
| Research and development expense | $628,304 | $1,035,623 |
| Operating loss | $(2,577,389) | $(3,149,339) |
| Net loss | $(2,340,864) | $(3,808,978) |
| Basic and diluted loss per share | $(0.07) | $(0.13) |
| Net cash used in operating activities | $(2,252,691) | $(2,082,719) |
| Cash and cash equivalents at year-end | $4,772,705 | $6,591,960 |
| Working capital | $5,201,443 | $6,919,428 |
| Total shareholders’ equity | $5,327,005 | $7,056,108 |
Fee income declined approximately 47% year over year. The filing does not provide a consolidated gross margin, and the company recorded an operating loss because expenses substantially exceeded licensing revenue. Cash declined by $1.82 million during 2020. Capital expenditures were $56,536, while proceeds from option and warrant exercises were $284,207.
The company had no traditional debt. It reported operating lease liabilities with total undiscounted payments of $915,000 and a present value of $812,596. It received a $202,052 Paycheck Protection Program loan and recorded the full amount as other income based on its estimate that the loan would be forgiven.
Material Changes Versus 2019
- Fee income fell by $735,574, primarily because of lower aircraft and automotive fees. Automotive royalties were affected by COVID-19-related production disruptions and the approaching end of certain Daimler vehicle model lifecycles. Higher display-market fee income partially offset the decline.
- Operating expenses decreased by $900,205, reflecting lower stock-based compensation, patent and professional fees, bad-debt expense, investor-relations and marketing costs, depreciation, and facility and insurance costs.
- Research and development expense decreased by $407,319. Excluding non-cash option expense, research and development costs were approximately $611,000 in 2020 versus $892,000 in 2019.
- The 2019 results included a $652,025 non-cash warrant market adjustment and a $50,666 fixed-asset impairment loss; neither item was recorded in 2020.
- Net loss improved by approximately $1.47 million, primarily because of lower expenses, the absence of the 2019 warrant and impairment charges, and $202,052 of PPP loan-forgiveness income.
- Shares outstanding increased to 31,575,786 at December 31, 2020 from 31,254,262 at December 31, 2019, primarily due to option and warrant exercises.
Outlook, Commentary, Risks and Unusual Items
Management expects continued investment in SPD technology, research and development, marketing and licensee support. It expects potential royalty growth from additional automotive and aircraft models and from marine, rail, museum and architectural applications, but provides no formal revenue or earnings guidance.
Management projects a quarterly cash-flow shortfall of approximately $400,000 to $450,000 under current operations and expects existing working capital to support operations for approximately 33 to 34 months, or until mid-to-late 2023. Management notes that additional financing may be required if cash proves insufficient, and future financing may not be available on favorable terms.
- COVID-19 disrupted overseas manufacturing by licensees and negatively affected royalty-generating sales in the second, third and fourth quarters. The duration and ultimate financial impact were not estimable at filing.
- Revenue is concentrated among a limited number of licensees. Five licensees represented 18%, 16%, 12%, 12% and 12% of 2020 fee income.
- Commercial success depends on licensees’ product development, manufacturing, sales and customer adoption decisions, which the company cannot control.
- Hitachi Chemical and Gauzy were the only identified sources of SPD film in commercial quantities, creating supply-chain concentration risk.
- The company faces competition from electrochromic, liquid-crystal, photochromic and thermochromic technologies, including competitors with substantially greater financial and manufacturing resources.
- The company has incurred recurring losses since inception, with an accumulated deficit of $117.8 million at December 31, 2020. Its deferred tax assets were fully offset by a valuation allowance.
- The company reported no legal proceedings requiring disclosure, no off-balance-sheet arrangements and no cash dividends. Its stockholder rights plan is scheduled to expire February 11, 2023 unless extended or earlier redeemed.
- The independent auditor issued an unqualified opinion. Liquidity analysis was identified as a critical audit matter because of the judgment involved in forecasting operating results and cash shortfalls.
Important Facts for Investors to Verify
- Whether automotive and aircraft production volumes recover from COVID-19 disruption and whether new OEM programs generate material royalty growth.
- The status, renewal terms and revenue contribution of the company’s three multiyear license agreements, which had $490,000 of remaining performance-obligation revenue at year-end.
- Whether the estimated PPP loan forgiveness was accepted by the lender and whether any repayment obligation remains.
- The adequacy of the $4.8 million cash balance relative to the projected $400,000-$450,000 quarterly cash shortfall and expected financing needs.
- Licensee concentration, royalty receivable collectability and the adequacy of the $972,202 allowance for doubtful royalty receivables.
- The availability and capacity of commercial SPD-film suppliers, particularly Gauzy and Hitachi Chemical.
- Patent expirations beginning in 2021, pending patent applications and the company’s ability to maintain meaningful intellectual-property protection.
- The potential dilution from 1,297,260 outstanding options and 1,399,991 outstanding warrants, all reported as exercisable at December 31, 2020.