Research Frontiers Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Research Frontiers develops and licenses suspended particle device (SPD) light-control technology for architectural, automotive, aerospace, marine, appliance, eyewear, and other applications. The filing covers the quarter and nine months ended September 30, 2013. The company operates as a single business segment and remains dependent on licensees commercializing products incorporating its technology.
Financial Highlights
| Metric | Three Months Ended Sept. 30, 2013 | Three Months Ended Sept. 30, 2012 | Nine Months Ended Sept. 30, 2013 | Nine Months Ended Sept. 30, 2012 |
|---|---|---|---|---|
| Fee income | $506,692 | $471,886 | $1,735,767 | $1,405,292 |
| Operating loss | $(869,483) | $(869,788) | $(3,257,155) | $(3,097,363) |
| Net loss | $(859,954) | $(866,464) | $(3,228,618) | $(2,459,335) |
| Basic and diluted loss per share | $(0.04) | $(0.04) | $(0.14) | $(0.13) |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(2,231,614) | $(1,830,293) |
Fee income increased 7% year over year in the third quarter and 24% year to date, primarily due to higher automotive royalties and minimum annual royalty and other payments. The company remained unprofitable, with operating loss margins of approximately 172% of fee income for the quarter and 188% year to date. No income tax benefit was recorded in 2013; the prior-year nine-month period included a $613,397 state research and development credit benefit.
At September 30, 2013, cash and cash equivalents were $6.1 million, short-term investments were $5.1 million, and total current assets were $12.2 million. Working capital was $11.95 million and shareholders’ equity was $12.04 million. Current liabilities were $255,155, including $63,749 of deferred revenue. The filing does not report debt, and no material debt balance is shown on the balance sheet.
Cash and cash equivalents declined by $2.28 million during the first nine months, primarily from $2.23 million used in operations and $44,539 spent on fixed assets. No equity securities were sold in 2013, compared with $6.97 million of net equity proceeds in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Nine-month fee income increased $330,475, or approximately 24%, to $1.74 million.
- Nine-month operating expenses increased $273,541 to $3.54 million, while research and development expense increased $216,726 to $1.46 million.
- Nine-month net loss increased $769,283, primarily because the 2012 period included the $613,397 tax benefit and 2013 had higher operating and research costs.
- Operating cash use increased by $401,321 year over year, and cash declined despite higher fee income.
- Shares outstanding increased to 22,916,095 from 22,646,782 at December 31, 2012, primarily reflecting stock-based awards.
- Two licensees represented approximately 42% and 13% of nine-month fee income in 2013, compared with one licensee representing approximately 68% in 2012.
For the quarter, the statement reports operating expenses of $951,410 versus $972,300 in the prior-year quarter, an approximate 2% decline, although the MD&A narrative describes this comparison as an increase. Research and development expense increased 15% to $424,765.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects to use available cash for SPD research and development, expanded marketing, and working capital. Based on existing spending, cash reserves, and budgeted revenue, management believes additional funding will not be required for the foreseeable future.
- The company has not generated sufficient licensee revenue to fund operations. Long-term success and positive cash flow depend on commercialization by licensees and continuing royalty payments.
- Future liquidity requirements may change with research and development spending, technology and competitive developments, patent costs, new licensee additions, and changes in existing licensee relationships. Additional financing may be required and may not be available on acceptable terms.
- Royalty income is concentrated among licensees and is exposed to automotive production volumes, adoption of SPD technology in vehicle models, product pricing, exchange rates, and the timing of licensee sales and royalty payments.
- As of September 30, 2013, the company had $949,053 of unamortized stock-based compensation expected to be recognized over the following 27 months. Nine-month stock-based compensation expense totaled approximately $1.10 million.
- All deferred tax benefits remain fully reserved because profitable operations are not considered sufficiently likely. The company does not expect additional state research and development credits after the credits received in 2012.
- Management concluded that disclosure controls and procedures were effective, and reported no material changes in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability and concentration of the increased royalty and fee income, particularly the contribution from automotive licensees.
- Reconcile the MD&A description of third-quarter operating expenses with the reported figures, which show a year-over-year decline.
- Assess the rate of cash consumption relative to the $11.2 million of cash and short-term investments and the company’s continuing operating losses.
- Review licensee commercialization milestones, royalty terms, deferred revenue, and any dependence on a limited number of licensees.
- Monitor research and development, patent, marketing, and stock-based compensation spending, as well as the $949,053 remaining compensation obligation.
- Confirm whether additional financing could become necessary if commercialization or royalty growth is delayed.