Research Frontiers Incorporated — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Research Frontiers develops and licenses suspended particle device (SPD) light-control technology for automotive, architectural, aerospace, marine, appliance, display and other applications. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company operates as a single business segment and primarily earns licensing and royalty income.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Fee income | $418,657 | $433,269 | Down $14,612, or 3.4% |
| Operating expenses | $751,166 | $1,009,825 | Down $258,659, or 25.6% |
| Research and development | $229,963 | $218,616 | Up $11,347, or 5.2% |
| Total expenses | $981,129 | $1,228,441 | Down $247,312, or 20.1% |
| Operating loss | $(562,472) | $(795,172) | Improved $232,700 |
| Net loss | $(803,897) | $(793,767) | Worsened $10,130 |
| Basic and diluted loss per share | $(0.03) | $(0.03) | No change |
| Net cash used in operations | $(732,551) | $(685,903) | Higher use of $46,648 |
| Cash and cash equivalents, period-end | $3,338,513 | $2,296,545 | Up $1,041,968 year over year |
Derived operating margin was approximately negative 134% in Q1 2019 versus negative 184% in Q1 2018. Derived net margin was approximately negative 192% versus negative 183%.
At March 31, 2019, working capital was $3.88 million, total assets were $5.45 million, shareholders’ equity was $3.40 million, and accumulated deficit was $112.5 million. The company reported no conventional debt, but recorded operating lease liabilities of approximately $1.09 million and a warrant liability of $749,004.
Material Changes Versus the Prior Comparable Period
- Fee income declined 3.4%; lower architectural income was partly offset by higher automotive, aircraft and display income.
- Operating expenses fell primarily because of lower payroll and related costs, patent costs, and stock listing and transfer-agent fees.
- Research and development expense increased modestly, principally due to higher payroll costs.
- Net loss was approximately unchanged despite the improved operating loss because Q1 2019 included a $247,590 non-cash warrant-market adjustment. Excluding that adjustment, management reported a Q1 2019 net loss of $556,307, or $0.02 per share.
- Cash increased $369,097 during the quarter, principally from $1.10 million of proceeds from warrant exercises, offset by operating cash use of $732,551.
- Shares outstanding increased to 28,666,831 from 27,665,211 at December 31, 2018 after the issuance of 1,001,620 shares upon exercise of warrants and options.
- Effective January 1, 2019, the company adopted ASC 842, recording approximately $897,000 of right-of-use assets and $1.09 million of lease liabilities at March 31, 2019. The adoption had no cumulative earnings effect.
Guidance, Outlook, Risks and Unusual Items
Management stated that the company has recurring losses and expects continued losses from SPD research and development and general corporate expenses. It estimates a quarterly operating cash-flow shortfall of approximately $450,000 over the next 12 months and expects current working capital to support approximately 18 months of operations. The filing separately states that existing cash and cash equivalents are expected to fund operations until at least the fourth quarter of 2020.
Future performance depends on commercialization by licensees and continuing royalty payments. Management expects automotive royalty income to remain the largest source over the next several years and cited potential contributions from additional automotive and aircraft models, marine applications, trains, museums and architectural projects. A licensee began commercial SPD production for McLaren Automotive during the quarter.
- Royalty income is exposed to automotive production volumes, model adoption, whether SPD technology is standard or optional, pricing, exchange rates and broader industry demand.
- The company has not historically generated sufficient license revenue to fund operations and may seek additional financing, including equity financing. There is no assurance that financing will be available on acceptable terms.
- If operating cash generation or financing is insufficient, the company may need to delay, reduce or severely curtail operations.
- Five licensees each represented at least 10% of Q1 2019 fee income, highlighting customer concentration. The company had six license agreements in initial multiyear terms, with aggregate remaining performance obligations of $309,867.
- A $247,590 non-cash warrant remeasurement expense increased the reported net loss and warrant liability.
- Disclosure controls were deemed ineffective at the reasonable assurance level because of a material weakness related to accounting for warrants issued in a registered offering. Management was implementing enhanced review and documentation procedures.
- Deferred tax assets remain fully reserved because management does not believe realization is more likely than not.
Important Facts for Investors to Verify
- Whether current cash resources and the stated funding horizon remain adequate as operating losses continue.
- The timing and magnitude of royalty growth from new automotive, aircraft, marine and architectural programs.
- License renewals and minimum royalty commitments, particularly for agreements whose initial terms end in December 2019.
- The collectability of royalty receivables and the adequacy of the $1.09 million reserve for doubtful accounts.
- Progress in remediating the material weakness concerning warrant accounting and whether disclosure controls are subsequently determined to be effective.
- The potential dilution and valuation impact of outstanding options and warrants; 2,752,766 potentially dilutive securities were excluded from Q1 2019 loss-per-share calculations as antidilutive.
- The availability, terms and potential dilution of any future equity financing.