Research Frontiers Incorporated — Q1 2020 Form 10-Q
Business context and reporting period
Research Frontiers develops and licenses suspended particle device technology for electronically controlled light-management products, including automotive, architectural, aerospace, marine, appliance and display applications. The company operates in one business segment and derives revenue primarily from license fees and royalties. This unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Fee income | $356,173 | $418,657 | Down $62,484, or 14.9% |
| Operating expenses | $820,441 | $751,166 | Up $69,275, or 9.2% |
| Research and development | $183,318 | $229,963 | Down $46,645, or 20.3% |
| Operating loss | $(647,586) | $(562,472) | Loss widened $85,114 |
| Net loss | $(624,594) | $(803,897) | Loss improved $179,303 |
| Net loss per share | $(0.02) | $(0.03) | Improved |
| Net cash used in operations | $(758,223) | $(732,551) | Use increased $25,672 |
Reported operating margin was approximately negative 181.8%, and net margin was approximately negative 175.4%, based on fee income. Net investment income was $22,992, compared with $6,165 in the prior-year quarter. The prior-year period included a $247,590 non-cash warrant market adjustment; no such adjustment was recorded in Q1 2020.
Cash and cash equivalents were $5.84 million at March 31, 2020, down from $6.59 million at December 31, 2019. Working capital was $6.34 million and shareholders’ equity was $6.43 million. Total liabilities were $1.20 million, consisting primarily of operating lease liabilities; the filing states that the company had no debt as of March 31, 2020. Operating lease liabilities totaled $936,173 on a present-value basis.
Investing activities provided $3,658, while financing activities provided no cash during the quarter. The company issued 156,845 shares through cashless exercise of options without receiving cash proceeds. Weighted-average shares outstanding increased to 31.32 million from 28.22 million.
Material changes versus the prior comparable period
- Fee income declined 14.9%, with lower fees in automotive, aircraft and architectural markets, partially offset by higher display-market income.
- Management attributed some of the market weakness to temporary customer shutdowns related to COVID-19.
- Operating expenses increased primarily because of higher payroll, marketing and investor-relations costs. Lower patent, legal, facility, bad-debt and travel costs partly offset the increases.
- Research and development spending decreased primarily because of lower payroll, materials, travel and allocated insurance costs.
- Net loss improved largely because Q1 2019 included the $247,590 warrant adjustment. Excluding that item, the improvement was substantially smaller.
- Cash used in operations increased despite the lower net loss, and cash declined by $754,565 during Q1 2020.
Guidance, outlook, risks and unusual items
Management expects recurring losses to continue because license revenue has not yet been sufficient to fund operations. The company projects a cash-flow shortfall of approximately $450,000 to $500,000 per quarter over the next 12 months and expects existing working capital to support operations for at least 34 months, or until early 2023 based on current assumptions.
Management expects automotive applications to remain the largest source of royalty income and anticipates potential growth from additional automotive and aircraft models, marine applications, trains, museums and architectural projects. Results remain dependent on licensee commercialization, product adoption, production volumes, pricing, exchange rates and continuing royalty payments.
COVID-19 created significant uncertainty. Overseas licensees in Europe and Asia were affected, and reduced product sales could lower future royalties. The company stated that it could not reasonably estimate the duration or financial impact of the disruption.
On April 17, 2020, after the reporting date, the company borrowed $202,052 under the Paycheck Protection Program. The loan carries 1% annual interest, has a two-year term, requires no collateral or prepayment penalty, and may be partially or fully forgiven subject to applicable conditions.
The company had $197,671 of revenue remaining to be recognized from four license agreements’ unsatisfied performance obligations as of March 31, 2020. Five licensees each contributed at least 10% of Q1 fee income, indicating customer concentration. Deferred revenue increased to $78,923 from $7,734 at year-end 2019.
Most important facts for investors to verify
- Whether COVID-19-related production and customer shutdowns caused a sustained decline in licensee sales and royalty income.
- Whether the projected quarterly cash shortfall remains within the stated $450,000–$500,000 range and supports the early-2023 liquidity outlook.
- The status, forgiveness eligibility and remaining balance of the $202,052 PPP loan.
- Growth in automotive, aircraft, marine, architectural and display applications using the company’s SPD technology.
- Renewal and performance of the four license agreements with remaining initial terms ending between December 2020 and December 2024.
- Customer concentration and the collectability of royalty receivables, which were $746,653 net of reserves at March 31, 2020.
- Potential dilution from 1,483,143 outstanding warrants and other options; 2,788,403 options and warrants were antidilutive for Q1 2020.