Research Frontiers Incorporated — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 14, 2019. The company operates in one segment and develops, licenses, and supports suspended particle device (SPD-Smart) light-control technology for automotive, aerospace, architectural, marine, transportation, and specialty applications. It has more than 40 licensees and does not directly manufacture products.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Fee income | $1.489 million | $1.509 million | Down $20,428, or 1.4% |
| Operating expenses | $3.043 million | $3.128 million | Down $84,519, or 2.7% |
| Research and development | $863,401 | $799,702 | Up $63,699, or 8.0% |
| Operating loss | $2.418 million | $2.419 million | Essentially unchanged |
| Net loss | $2.686 million | $2.414 million | Up $272,269, or 11.3% |
| Basic and diluted loss per share | $0.10 | $0.10 | Unchanged as reported |
| Net cash used in operating activities | $2.071 million | $1.471 million | Higher cash use |
| Cash and cash equivalents | $2.969 million | $1.738 million | Up $1.232 million |
| Working capital | $3.254 million | $2.051 million | Up $1.203 million |
| Shareholders’ equity | $3.099 million | $2.567 million | Up $532,124 |
Fee income was approximately 97.0% below total expenses. The operating margin was approximately negative 162.4%, and the net margin was approximately negative 180.4%. The company has an accumulated deficit of $111.691 million and has incurred recurring losses since inception.
2018 cash generation was primarily financing-driven: the company received $3.314 million from common stock and warrant issuances and option and warrant exercises, while using $2.071 million in operations and $11,663 for fixed assets. No material funded debt is disclosed. A $501,414 warrant liability was recorded at December 31, 2018.
Material changes versus the prior period
- The company adopted ASC 606 using the modified retrospective method. Reported 2018 fee income was $64,826 lower than it would have been under the prior revenue standard. The adoption also produced a $58,021 adjustment to opening accumulated deficit and increased opening royalties receivable.
- Operating expenses declined primarily because of lower professional fees, payroll, patent, insurance, and travel costs, partly offset by higher film costs.
- Research and development spending increased 8.0% to $863,401 as payroll and materials costs rose.
- Net loss increased primarily because of a $278,044 non-cash warrant market-value adjustment, partly offset by lower operating expenses and higher investment income.
- Cash increased substantially due to 2018 equity financing, including a $1.25 million convertible loan that converted into common stock and warrants and a $2.0 million stock offering led by Gauzy Ltd.
- Weighted-average shares outstanding increased to 25.956 million from 24.044 million, while shares outstanding at December 31 increased to 27.665 million from 24.044 million.
Outlook, liquidity, risks, and unusual items
- Management estimated a quarterly cash-flow shortfall of approximately $450,000 based on current operations, excluding non-recurring cash expenses. It expected existing working capital to support approximately 18–24 months of operations and stated that cash could fund operations until at least the fourth quarter of 2020, subject to actual spending and financing availability.
- The company has not generated sufficient license revenue to fully fund operations and may need additional equity financing. There is no assurance that financing will be available on acceptable terms.
- Future revenue depends heavily on licensees and their customers commercializing SPD products. Four licensees accounted for 35%, 13%, 11%, and 10% of 2018 fee income, indicating material concentration.
- Automotive applications, including Daimler’s Magic Sky Control products, remain the principal near-term royalty opportunity. Management also cited potential growth in aircraft, architectural, marine, rail, museum, and specialty applications, but no quantified revenue guidance was provided.
- Hitachi Chemical and Gauzy Ltd. were identified as the only sources of commercial quantities of SPD film. A prolonged supply disruption could adversely affect licensee sales and company royalties.
- The company faces competition from electrochromic, liquid-crystal, thermochromic, photochromic, and other technologies, many backed by substantially greater financial resources.
- Management disclosed a material weakness in internal control over financial reporting related to accounting for warrants issued in a registered offering. Remediation procedures and enhanced review standards were implemented beginning in the fourth quarter of 2018, but the filing does not state that the weakness had been fully remediated.
- The company is party to patent-infringement litigation against E Ink and others. The Federal Circuit ruled in E Ink’s favor on claim construction in December 2017; the filing states that no hearing or trial date had been set.
- A March 2019 license to VariGuard SmartGlass Inc. is a related-party transaction because two company officers are principals of the licensee. The license provides for royalties of 10% to 15%.
- The company had approximately $1.293 million of operating lease obligations, with the primary facility lease expiring March 31, 2025. Adoption of the new lease standard was expected to increase recognized lease assets and liabilities by approximately $0.8 million to $1.2 million.
- The company has no history of paying cash dividends and does not expect to pay dividends in the foreseeable future.
Key facts investors should verify
- Whether licensee commercialization, particularly in automotive applications, is translating into sustained royalty growth.
- The effect of ASC 606 on quarterly and annual revenue comparability and future deferred revenue recognition.
- Current cash burn, remaining liquidity, and the timing and terms of any required equity financing.
- The status and potential financial impact of the E Ink patent litigation.
- Whether the disclosed internal-control material weakness has been remediated and whether additional warrant-accounting adjustments are required.
- The concentration and collectability of royalty receivables; the company reported $1.095 million of reserves against gross royalty receivables at year-end.
- The availability and scalability of SPD film from Gauzy and Hitachi Chemical and the impact of any supply interruption.
- Dilution risk from outstanding options and warrants, including 2.628 million warrants and non-employee options outstanding at December 31, 2018.