Research Frontiers Incorporated — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Research Frontiers develops and licenses suspended particle device technology that controls the flow of light through glass and plastic. Applications include automotive, architectural, aerospace, marine, appliance, eyewear and display products. The company operates as a single business segment and primarily earns licensing and royalty-related fee income.
This unaudited filing covers the three and nine months ended September 30, 2021, with comparisons to the same periods in 2020. The company had 31,650,396 common shares outstanding as of November 4, 2021.
Financial Performance and Liquidity
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Fee income | $723,465 in 2021 versus $165,628 in 2020 | $1,050,526 in 2021 versus $697,914 in 2020 |
| Operating expenses | $571,024 versus $472,424 | $1,699,698 versus $1,924,828 |
| Research and development | $135,215 versus $136,649 | $420,203 versus $466,698 |
| Operating income (loss) | $17,226 versus $(443,445) | $(1,069,375) versus $(1,693,612) |
| Net income (loss) | $21,614, or $0.00 per share, versus $(434,223), or $(0.01) per share | $(1,063,628), or $(0.03) per share, versus $(1,457,798), or $(0.05) per share |
- Nine-month operating cash flow was $(1,873,389), compared with $(1,639,556) in the prior-year period.
- Cash and cash equivalents were $2,984,612 at September 30, 2021, down from $4,772,705 at December 31, 2020. The cash decrease was $1,788,093 for the first nine months.
- Working capital was approximately $4.2 million, and shareholders’ equity was $4,349,639 at September 30, 2021.
- Financing cash inflow was $86,262 from option and warrant exercises. Investing cash use was $966.
- The company reported no debt. Operating lease liabilities totaled $689,057 on a present-value basis, with total undiscounted lease payments of $758,000.
- The accumulated deficit was approximately $118.9 million. No income tax expense was recorded because tax benefits from net operating losses were fully reserved.
Material Changes Versus the Prior Comparable Period
- Third-quarter fee income increased by $557,837, primarily because of higher automotive and architectural income, including one-time litigation settlements and a special government contract. Aircraft-related income was lower.
- Nine-month fee income increased by $352,612, also driven primarily by automotive and architectural activity and the same unusual items.
- Third-quarter operating expenses increased by $98,600, mainly because of approximately $136,000 in higher legal costs related to royalty-collection efforts and higher facility costs.
- Nine-month operating expenses declined by $225,130, reflecting lower payroll, bad-debt, depreciation and insurance costs, partly offset by higher legal expenses.
- The third quarter moved from a net loss to modest net income. The nine-month net loss improved by $394,170, although operating cash usage increased by $233,833.
- Unlike 2020, the company recorded no PPP loan-forgiveness income in 2021. The 2020 comparable periods included $7,912 of third-quarter and $202,052 of nine-month PPP-related other income.
- Royalty receivables increased to $1,352,971 from $598,292 at December 31, 2020, net of a $972,202 allowance for doubtful accounts.
Guidance, Outlook, Risks and Unusual Items
- Management estimates a quarterly cash-flow shortfall of approximately $400,000 to $450,000 over the next 12 months and expects existing working capital to support operations for at least 23 months. The filing states that current cash and cash equivalents are expected to fund operations until approximately mid-2023.
- The company expects continued investment in SPD research and development, marketing and working capital. It may reduce operating expenses or seek additional equity financing, but there is no assurance that financing will be available on acceptable terms.
- Long-term success depends on commercialization of products using the company’s technology by licensees and receipt of continuing royalties. The company has not generated sufficient license revenue to fully fund operations.
- COVID-19 disruptions affecting overseas licensees in Europe and Asia may reduce product sales and royalties. The duration and financial impact remain uncertain.
- Automotive royalty income is expected to remain the largest source of royalty income, but is sensitive to vehicle production, OEM adoption, whether SPD technology is standard or optional, model introductions, pricing, exchange rates and broader automotive demand.
- Revenue is concentrated among licensees and markets. Four licensees represented approximately 24%, 21%, 12% and 11% of nine-month 2021 fee income; three licensees represented approximately 35%, 31% and 17% of third-quarter fee income.
- The filing identifies six license agreements with remaining initial multiyear terms. Revenue of approximately $313,000 remained to be recognized over those terms as of September 30, 2021; the company expects the agreements to renew annually.
- Reported 2021 fee income benefited materially from one-time litigation settlements and a special government contract, which may not recur.
- Management concluded that disclosure controls were effective as of September 30, 2021, and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether elevated fee income from litigation settlements and the special government contract is recurring or nonrecurring.
- The collectability and aging of the $1.35 million royalty receivable balance and adequacy of the $972,202 allowance.
- Actual royalty growth from automotive, architectural, aerospace and other licensees, including the effect of COVID-19 and supply-chain disruptions.
- Cash-burn trends relative to management’s $400,000–$450,000 quarterly shortfall estimate and the stated mid-2023 funding horizon.
- Renewal status and economics of the six license agreements, including the agreement whose initial term ends December 31, 2021.
- Potential dilution from 1,399,991 outstanding warrants and 1,006,660 outstanding options as of September 30, 2021.