Research Frontiers Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Research Frontiers develops and licenses suspended particle device (SPD) technology that controls the flow of light. Applications include automotive, architectural, aerospace, marine, appliance, eyewear and display products. The company operates as a single business segment and primarily generates licensing fee income and royalties.
This unaudited report covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. As of August 13, 2018, 25,432,739 common shares were outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Fee income | $324,853; 6.7% below 2017 | $758,122; 2.3% above 2017 |
| Total expenses | $896,784; 6.9% above 2017 | $2,125,225; 2.8% below 2017 |
| Operating loss | $(571,931) | $(1,367,103) |
| Net loss | $(569,891), or $(0.02) per share | $(1,363,658), or $(0.05) per share |
| Research and development | $250,824 | $469,440 |
| Net investment income | $2,040 | $3,445 |
The six-month operating margin was approximately negative 180.3%, compared with approximately negative 195.0% in the prior-year period. The company remained loss-making, and the filing does not present a conventional gross margin because revenue is primarily licensing fee income.
Net cash used in operating activities was $1,114,788 in the first six months of 2018, compared with $803,495 in the prior-year period. Investing activities used $11,087, while financing activities provided $1,250,000 from the issuance of common stock. Cash increased by $124,125 to $1,861,972 at June 30, 2018, compared with $2,405,619 at June 30, 2017.
At June 30, 2018, working capital was $2,144,166, total assets were $3,041,191, current liabilities were $460,153 and shareholders’ equity was $2,581,038. The filing shows no outstanding debt at that date; the $1.25 million interest-free convertible loan received in February 2018 automatically converted into equity.
Material Changes Versus the Prior Comparable Period
- Second-quarter fee income declined $23,326, or 6.7%, primarily because of the adoption of ASC 606. Management stated that fee income would have been $365,048, or 5.0% above the prior-year period, under the previous revenue standard.
- Six-month fee income increased $16,827, or 2.3%. Under the previous revenue standard, six-month fee income would have been $753,697, or $4,425 below the reported ASC 606 amount.
- Second-quarter operating expenses increased $9,179, driven principally by approximately $60,000 of additional non-cash stock-option compensation, while six-month operating expenses decreased $117,251.
- Research and development expense increased $48,774 in the quarter and $56,097 for the six-month period, reflecting higher payroll, materials, project costs and stock-based compensation.
- Six-month operating cash usage increased by $311,293 from the prior year, partly offset by the $1.25 million equity financing. The prior-year period included $1.52 million of proceeds from the sale of an investment, whereas 2018 had no comparable proceeds.
- Shares outstanding increased from 24,043,846 at December 31, 2017 to 25,432,739 at June 30, 2018, primarily due to the equity conversion.
Guidance, Outlook, Risks and Unusual Items
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption reduced opening accumulated deficit and increased royalties receivable by $58,021 and changed the timing of license-fee recognition.
- At June 30, 2018, five license agreements remained in their initial multi-year terms, with $320,966 of revenue expected to be recognized over the remaining performance obligations. Three licensees represented approximately 33%, 13% and 12% of six-month fee income.
- Management stated that quarterly projected cash-flow shortfall for the next 12 months was approximately $350,000 to $450,000, excluding non-recurring cash expenses.
- On August 13, 2018, investors led by a company licensee agreed to provide a $2.0 million equity investment. The company had received $500,000 as of the filing date and expected to issue 2,173,916 shares plus warrants for 1,086,957 shares. Based on funds received and cost-cutting measures, management expected at least 15 months of working capital; receipt of the full investment was expected to extend this to at least 24 months.
- The company has not generated sufficient licensing revenue to fund operations and expects continued reliance on cash reserves, financing and commercialization by licensees.
- Future royalty income depends heavily on automotive adoption, vehicle production volumes, product take rates, pricing, exchange rates, licensee relationships and the timing of new vehicle programs. The company expects automotive applications to remain its largest royalty source over the next several years.
- Deferred tax benefits and net operating loss carryforwards remain fully reserved because profitable operations are not considered more likely than not. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the full $2.0 million equity investment closed and the related share and warrant dilution occurred.
- Actual quarterly cash burn compared with the stated $350,000–$450,000 projected shortfall.
- Automotive licensee sales, vehicle production volumes and take rates supporting future royalty income.
- The sustainability and concentration of fee income among the company’s largest licensees.
- Actual revenue effects from ASC 606, including the timing of recognition for the $320,966 of remaining performance obligations.
- Availability of additional financing if operating losses continue or licensee commercialization is delayed.