Research Frontiers Inc. — Q2 2013 Form 10-Q Summary
Business context and reporting period
Research Frontiers develops and licenses suspended particle device technology for controllable-light applications, including automotive, architectural, aerospace, marine, appliance, eyewear, and display products. The company operates in one business segment and primarily depends on license fees and royalties from licensees. This unaudited report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial performance and liquidity
| Metric | Six months ended June 30, 2013 | Six months ended June 30, 2012 | Three months ended June 30, 2013 | Three months ended June 30, 2012 |
|---|---|---|---|---|
| Fee income | $1.229 million | $0.933 million | $0.522 million | $0.451 million |
| Operating expenses | $2.586 million | $2.292 million | $0.918 million | $0.852 million |
| Research and development | $1.031 million | $0.869 million | $0.394 million | $0.392 million |
| Operating loss | $(2.388) million | $(2.228) million | $(0.791) million | $(0.793) million |
| Net loss | $(2.369) million | $(1.593) million | $(0.779) million | $(0.790) million |
| Net loss per share | $(0.10) | $(0.08) | $(0.03) | $(0.04) |
- Six-month operating margin was approximately negative 194%; six-month net margin was approximately negative 193%. Second-quarter operating margin was approximately negative 152%, and net margin was approximately negative 149%.
- Cash and cash equivalents were $7.030 million at June 30, 2013, down from $8.390 million at December 31, 2012. Short-term investments were $5.059 million, resulting in approximately $12.090 million of cash and investments.
- Working capital was $12.626 million and shareholders’ equity was $12.721 million at June 30, 2013. Current liabilities were $0.367 million, including $0.128 million of deferred revenue. The filing does not show funded debt.
- Operating activities used $1.317 million of cash during the first six months, compared with $0.990 million in the prior-year period. Investing activities used $0.042 million, primarily for fixed assets.
- Non-cash stock-based compensation totaled approximately $0.923 million for the first six months, including approximately $0.700 million in operating expenses and $0.223 million in research and development.
Material changes versus the prior comparable period
- Six-month fee income increased 32% to $1.229 million, principally from higher automotive licensee sales, minimum royalties, and other payments. Second-quarter fee income increased 16%.
- Six-month operating expenses increased $0.294 million, primarily because of higher payroll, marketing and public relations, patent, and material costs.
- Six-month research and development expense increased $0.161 million, principally due to higher payroll and project costs.
- Despite higher revenue, the six-month net loss increased by $0.776 million because the 2012 period included a $0.613 million state research and development tax-credit benefit that did not recur.
- Weighted-average shares outstanding increased to 22.916 million from 18.908 million, reflecting share-based issuances. The company granted 282,900 restricted shares and 80,200 fully vested options during the first six months of 2013.
Guidance, outlook, risks, contingencies, and unusual items
Management expects to use existing cash and investments to fund research and development, expanded marketing initiatives, and working capital. Based on existing spending, cash reserves, and budgeted revenues, management stated that additional funding is not expected to be required for the foreseeable future; however, the filing provides no quantified revenue or earnings guidance.
- Positive cash flow depends on broader commercialization of products using the company’s technology by licensees and receipt of continuing royalties. The company states that licensee revenue has not historically been sufficient to fund operations.
- Royalty income is concentrated among licensees and is particularly dependent on automotive adoption, vehicle production, model configurations, pricing, exchange rates, and the timing of product introductions.
- Two licensees represented approximately 41% and 16% of first-half 2013 fee income, compared with one licensee representing approximately 69% in the first half of 2012.
- License fees may be paid in advance and recorded as deferred revenue until earned. Royalty payments may also be delayed after the underlying product sale or installation.
- The company has fully reserved deferred tax benefits because profitable operations are uncertain. It does not expect additional refundable state research and development credits after the $0.613 million received in 2012.
- Remaining unamortized stock-compensation cost was $1.140 million at June 30, 2013, expected to be recognized over approximately 30 months.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether automotive and other licensee commercialization produces sustained royalty growth sufficient to reduce operating cash burn.
- The concentration and durability of fee income from the two major 2013 licensees.
- The expected runway from approximately $12.1 million of cash and short-term investments relative to quarterly operating cash usage.
- The impact of continued stock-based compensation and share issuance on future expenses and dilution.
- Whether deferred revenue is converted into recognized fee income and whether royalty receivables are collected on schedule.
- The terms, timing, and commercial status of licensee programs using SPD technology, which are key to the company’s stated outlook.