Research Frontiers Incorporated — Form 10-Q Summary
Business context and reporting period
Research Frontiers develops and licenses suspended particle device technology that controls the flow of light in glass and plastic products. Applications include automotive, architectural, marine, aerospace, appliance and other markets. The company operates as a single business segment and primarily earns licensing and royalty fee income. This unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
As of August 4, 2022, the company had 31,650,396 common shares outstanding and traded on Nasdaq under the symbol REFR.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Fee income | $85,511, down from $113,937 | $259,339, down from $327,060 |
| Operating expenses | $682,239, up from $503,078 | $1,282,937, up from $1,128,674 |
| Research and development | $146,432, up from $139,810 | $295,257, up from $284,988 |
| Operating loss | $(743,160) | $(1,318,855) |
| Net loss | $(741,838), or $(0.02) per share | $(1,370,186), or $(0.04) per share |
| Net investment income (loss) | $1,322 | $(51,331) |
| Net cash used in operating activities | Not separately reported for the quarter | $(1,079,779) |
Approximate operating margins were negative 869% for the quarter and negative 509% for the six months, reflecting the company’s low revenue base relative to operating costs. Approximate net margins were negative 868% and negative 528%, respectively.
- Cash and cash equivalents were $1.884 million at June 30, 2022, compared with $270,000 at December 31, 2021.
- Marketable securities declined from $2.755 million at year-end to zero at June 30, 2022. Sales generated $2.695 million of investing cash and resulted in a realized loss of $60,143.
- Working capital was approximately $2.3 million, total shareholders’ equity was $2.414 million, and accumulated deficit was $121.1 million.
- The company had no debt, but reported operating lease liabilities totaling $557,203, including $190,001 current and $367,202 noncurrent.
- Cash used in operations was partially offset by proceeds from selling marketable securities, resulting in a $1.614 million increase in cash during the first six months.
Material changes versus the prior comparable period
- Quarterly fee income decreased 25% year over year; six-month fee income decreased 21%. Management attributed the decline to lower or flat economic activity across industries using SPD-SmartGlass technology.
- Quarterly operating expenses increased 36%, primarily due to approximately $157,000 of higher bad-debt expense, higher professional fees and payroll-related costs. Six-month operating expenses increased 14%, principally due to bad debts, marketing and investor-relations costs, and insurance.
- Research and development expense increased approximately 5% for both the quarter and six-month period.
- Quarterly net loss increased approximately 41% year over year, while the six-month net loss increased approximately 26%.
- The company’s six-month investment result changed from $1,360 of income in 2021 to a $51,331 loss in 2022, primarily because of the sale of marketable securities and market-rate changes.
- The allowance for doubtful royalty receivables increased to $1.173 million at June 30, 2022, from $1.017 million at December 31, 2021.
Guidance, outlook, risks and unusual items
- Management expects revenue in all market segments to increase beginning later in 2022 as new automotive models and other products using SPD-SmartGlass are introduced.
- The company expects automotive to remain its largest royalty-income source and anticipates potential growth from additional car and aircraft models, marine products, trains, museums and architectural projects.
- Management projects a quarterly cash-flow shortfall of approximately $300,000 to $350,000 over the next 12 months and expects existing working capital to support operations for more than 24 months. The filing states that current cash and cash equivalents are expected to fund operations until early 2024, subject to actual spending and financing availability.
- The company continues to incur recurring losses and has not generated sufficient license revenue to fully fund operations. It may reduce expenses or seek additional equity financing, but the availability and terms of any financing are uncertain.
- COVID-19-related manufacturing and supply-chain disruptions among overseas licensees in Europe and Asia could reduce product sales and royalties. The duration and financial impact were not reasonably estimable in the filing.
- Royalty income is concentrated among licensees and depends on automotive production volumes, OEM adoption, whether SPD technology is standard or optional equipment, pricing, exchange rates and broader industry demand. Two licensees represented approximately 64% of six-month 2022 fee income.
- Four license agreements had continuing performance obligations at June 30, 2022. Revenue of approximately $207,000 remained to be recognized over their remaining initial terms; three initial terms end December 31, 2022 and one ends December 31, 2024. Management expects annual renewals, but renewal is not assured.
- The company received a $202,052 Paycheck Protection Program loan, which was forgiven during 2021.
- Deferred tax assets and net operating loss benefits remain fully reserved because management concluded that realization was not more likely than not.
- Management concluded that disclosure controls were effective as of June 30, 2022, and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether expected new automotive and other product introductions translate into sustained royalty growth and improved revenue concentration.
- The collectability of royalty receivables and the adequacy of the $1.173 million allowance for doubtful accounts.
- Actual quarterly cash burn versus the projected $300,000 to $350,000 shortfall and whether funding will be needed before early 2024.
- License renewals after the three agreements’ initial terms expire on December 31, 2022, and the timing of the remaining $207,000 of contracted revenue.
- The effect of COVID-19, supply-chain conditions, overseas manufacturing disruptions and automotive production volumes on licensee sales and royalties.
- Potential dilution or financing terms if the company issues equity; 1,399,991 warrants and 1,068,960 options were outstanding at June 30, 2022.