Research Frontiers Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2019, filed March 12, 2020. Research Frontiers develops and licenses suspended particle device technology, marketed as SPD-Smart, for variable light-control products used in automotive, aerospace, architectural, marine, transportation, display and specialty applications. The Company operates in one business segment and does not directly manufacture products. It had more than 40 licensees and eight full-time employees as of March 9, 2020.
Financial Highlights
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Fee income | $1.564 million | $1.489 million | +$75,382, or 5.1% |
| Total expenses | $4.764 million | $3.907 million | +$857,168, or 21.9% |
| Operating loss | $(3.200) million | $(2.418) million | Loss increased $781,786 |
| Net loss | $(3.809) million | $(2.686) million | Loss increased $1.123 million |
| Basic and diluted loss per share | $(0.13) | $(0.10) | Worsened $0.03 |
| Net cash used in operations | $(2.083) million | $(2.071) million | Approximately unchanged |
Calculated operating margin was approximately negative 204.6% in 2019 versus negative 162.4% in 2018; net margin was approximately negative 243.5% versus negative 180.4%. These margins are based on fee income and reported losses.
- Research and development expense was $1.036 million, up from $863,401. Excluding non-cash equity compensation, reported R&D costs were approximately $892,000 versus $854,000.
- Operating expenses were $3.678 million, including approximately $698,247 of non-cash stock and option compensation. Total non-cash stock-based compensation was $841,612, compared with $69,309 in 2018.
- The Company recorded a $652,025 non-cash warrant market adjustment and a $50,666 fixed-asset impairment loss.
- Net investment income was $43,052, compared with $10,135 in 2018. No income tax expense or benefit was recorded because deferred tax assets were fully reserved.
- Cash and cash equivalents were $6.592 million at year-end, compared with $2.969 million in 2018. Working capital was $6.919 million and shareholders’ equity was $7.056 million.
- Cash increased $3.623 million, primarily from $5.771 million of equity and warrant proceeds and option and warrant exercises, partially offset by operating cash use of $2.083 million and capital expenditures of $65,282.
- The Company had no conventional debt. Lease liabilities totaled $975,833 on a present-value basis, with total undiscounted operating lease payments of $1.129 million.
- Accumulated deficit was $115.500 million. The Company has never paid a cash dividend and does not expect to pay one in the foreseeable future.
Material Changes Versus 2018
- Fee income increased 5.1%. Excluding the suspended VariGuard business unit, management stated that 2019 fee income would have been approximately $130,316, or 9%, higher than 2018.
- Higher automotive and architectural royalty income was partly offset by lower aircraft royalties and the suspension of VariGuard operations.
- Operating expenses increased primarily because of higher equity compensation, bad-debt expense, investor-relations and marketing costs, and professional fees, partly offset by lower cash payroll costs.
- The Company raised approximately $4.6 million through a May 2019 common-stock and warrant offering and received approximately $1.171 million from option and warrant exercises. Shares outstanding increased to 31.254 million at year-end from 27.665 million.
- September 2018 warrants were amended in 2019 and reclassified from warrant liability to equity. The Company recorded the related $652,025 market adjustment before reclassification.
- ASC 842 lease accounting was adopted January 1, 2019, resulting in recognition of a $941,000 right-of-use asset and a $1.134 million lease liability at adoption, with no cumulative earnings adjustment.
- On March 14, 2019, the Company suspended its VariGuard business unit and licensed the related business opportunities to a new entity. Two Company officers are principals of that licensee, making the arrangement a related-party transaction approved by the Board.
- The Company changed its independent registered public accounting firm from BDO USA LLP to CohnReznick LLP in October 2019. The filing reports no disagreements or reportable events with BDO.
Outlook, Commentary and Risks
Management expects automotive glass to remain the largest and most predictable near- and intermediate-term market. It cited potential growth from additional automotive and aircraft models, architectural projects, trains, marine products, museums and consumer electronics. Gauzy expanded SPD film production capacity, including a Stuttgart facility opened in December 2019. The filing does not provide formal revenue or earnings guidance.
Management projected a quarterly cash-flow shortfall of approximately $450,000 to $500,000 based on current operations and stated that existing working capital was expected to support operations for approximately 36 months, or until late 2022 under current assumptions. Additional financing may be required if spending exceeds expectations or commercialization does not produce sufficient royalties.
- Profitability depends on licensees and their customers commercializing SPD products; the Company has not generated sufficient licensing revenue to fund operations.
- Royalty income is concentrated: three licensees represented 38%, 12% and 10% of 2019 fee income.
- Hitachi Chemical and Gauzy were identified as the only commercial sources of SPD film, creating supply-chain concentration risk.
- The technology competes with electrochromic, liquid-crystal, photochromic and thermochromic products, often from companies with substantially greater resources.
- Automotive, aircraft, marine, rail and real-estate production declines could reduce licensee sales and royalties.
- SPD commercialization, long-term durability, product reliability, cost reductions and market adoption remain uncertain.
- The Company depends on key personnel, patent protection, continued research and development, and access to future capital.
- The Company had $1.136 million of gross royalty receivables reserves against $656,062 of net royalty receivables at year-end; two companies represented 14% and 13% of outstanding receivables.
Most Important Facts for Investors to Verify
- Whether royalty growth accelerates beyond the modest 2019 increase and becomes sufficient to offset annual cash operating needs.
- Production volumes, model launches and adoption rates for SPD-Smart products, particularly in automotive applications.
- The financial condition and activity levels of the largest licensees and the concentration of fee income.
- Commercial production capacity, quality and supply continuity from Gauzy and Hitachi Chemical.
- Actual cash burn, equity financing requirements and whether the stated late-2022 liquidity outlook remains valid.
- The effect of equity compensation, warrant exercises and future offerings on dilution.
- Expiration, renewal and revenue-recognition timing for the four license agreements with remaining performance obligations totaling $579,369.
- Potential limitations on using approximately $71.452 million of federal net operating loss carryforwards, including possible Section 382 restrictions.