Research Frontiers Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Research Frontiers develops and markets suspended particle device (SPD) light-control technology and related products for architectural, automotive, marine, aerospace, eyewear, appliance, and electronic applications. The company operates as a single business segment and primarily earns licensing and royalty fee income.
This unaudited quarterly report covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. The filing was signed August 8, 2011. There were 18,544,355 common shares outstanding as of that date.
Financial Results and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Fee income | $140,407, versus $161,229 in 2010 | $284,848, versus $288,240 in 2010 |
| Operating expenses | $736,713, versus $590,796 in 2010 | $2,062,402, versus $1,890,984 in 2010 |
| Research and development | $327,088, versus $297,849 in 2010 | $739,060, versus $794,161 in 2010 |
| Operating loss | $(923,394), versus $(727,416) in 2010 | $(2,516,614), versus $(2,396,905) in 2010 |
| Net loss | $(919,122), or $(0.05) per share | $(2,508,403), or $(0.14) per share |
| Net loss in comparable period | $(723,650), or $(0.04) per share | $(2,389,419), or $(0.14) per share |
Fee income declined 12.9% in the second quarter and 1.2% for the first six months. Operating margins remained substantially negative because licensing revenue was significantly below operating costs. The filing does not present a separate gross margin because the company principally reports fee income and operating expenses.
At June 30, 2011, cash and cash equivalents were $3.5 million, short-term held-to-maturity investments were $2.0 million, and working capital was $5.5 million. Total assets were $6.0 million and shareholders’ equity was $5.6 million. Total liabilities were $396,534; the filing does not report conventional debt outstanding.
Cash used in operating activities was $1.5 million for the first six months, compared with $1.4 million in 2010. Investing cash use was $2.0 million, primarily for certificates of deposit, and financing provided $65,977 from option and warrant exercises. Cash declined by $3.4 million from year-end 2010 to $3.5 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter fee income decreased by $20,822, while six-month fee income decreased by $3,392.
- Second-quarter operating expenses increased $145,917, driven primarily by higher payroll and stock compensation, professional fees, and patent costs.
- Six-month operating expenses increased $171,418, principally because director fees rose $252,000 and patent costs rose $71,000, partly offset by lower payroll and stock compensation of $155,000.
- Six-month research and development expense decreased $55,101, while second-quarter research and development expense increased $29,239.
- Non-cash stock-based compensation totaled $591,327 for the first six months of 2011, compared with $666,493 in 2010. Remaining unamortized compensation cost was $659,775 at June 30, 2011.
- The company invested $2.0 million in short-term certificates of deposit during the first six months of 2011; no comparable investment was made in 2010.
- The company issued no common stock for financing in the first six months of 2011, compared with $1.6 million of net issuance proceeds in 2010.
- Shares outstanding increased from 18,281,973 at December 31, 2010 to 18,544,355 at June 30, 2011, primarily reflecting equity grants and option or warrant exercises.
Outlook, Commentary, Risks, and Unusual Items
In February 2011, Daimler AG selected the company’s SPD-SmartGlass technology for the Magic Sky Control glass roof in the Mercedes-Benz SLK Roadster. Management expected additional royalty payments from this feature to begin on schedule in the fourth quarter of 2011, subject to royalties exceeding contractual minimum annual royalties payable by Pilkington.
Management stated that, based on existing cash expenditures, cash reserves, and budgeted revenues, the company did not expect to require additional funding until the third quarter of 2013. Management cautioned that expenditures could exceed expectations and that financing might not be available on acceptable terms. Future success and positive cash flow depend substantially on commercialization by licensees and continuing royalty payments.
Five licensees accounted for approximately 18%, 18%, 16%, 11%, and 9% of first-half 2011 fee income, indicating material customer concentration. Royalty receipts may be delayed because licensees generally report and pay royalties after the quarter in which product sales occur. Advance license fees are recorded as deferred revenue and recognized when earned.
The company held a senior secured convertible note from SPD Control Systems with $150,000 of principal and $53,853 of accrued interest outstanding at June 30, 2011. The note matured May 9, 2012, was secured by SPD Control Systems’ assets and intellectual property, and was classified as a current asset. Collection and conversion outcomes remain dependent on SPD Control Systems’ development and financial condition.
The company continued to incur operating losses and negative operating cash flow. Its accumulated deficit was $82.8 million at June 30, 2011. The filing also identifies uncertainty regarding recovery of deferred tax benefits and the potential effect of estimates used in stock-based compensation accounting.
Management concluded that disclosure controls and procedures were effective as of June 30, 2011, and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Daimler’s Mercedes-Benz SLK application launched as expected and generated royalty payments above contractual minimums in the fourth quarter of 2011.
- The timing and scale of broader SPD technology commercialization and recurring royalty growth.
- The company’s ability to fund ongoing losses and research and development without raising additional capital before or after the projected third quarter 2013 funding point.
- The collectability, maturity settlement, and potential conversion value of the SPD Control Systems note and accrued interest.
- The concentration of fee income among a small number of licensees and the effect of licensee product sales on future royalties.
- The company’s continuing negative cash flow, accumulated deficit, and dependence on licensee commercialization.
- The impact of stock-based compensation and remaining unamortized compensation costs on future reported expenses and dilution.