Research Frontiers Incorporated — Q1 2022 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 in glass and plastic. Applications include automotive, architectural, marine, aerospace, appliance, eyewear, and display products. The company operates in one business segment and primarily earns licensing and royalty fee income.
This filing covers the three months ended March 31, 2022. The interim financial statements are unaudited and prepared under U.S. GAAP. Research Frontiers is a smaller reporting company listed on Nasdaq under the symbol REFR. It had 31,650,396 common shares outstanding as of May 5, 2022.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Fee income | $173,828 | $213,123 |
| Operating expenses | $600,698 | $625,596 |
| Research and development | $148,825 | $145,178 |
| Total expenses | $749,523 | $770,774 |
| Operating loss | $(575,695) | $(557,651) |
| Net investment loss/(income) | $(52,653) | $344 |
| Net loss | $(628,348) | $(557,307) |
| Basic and diluted loss per share | $(0.02) | $(0.02) |
| Net cash used in operating activities | $(497,954) | $(642,660) |
Fee income declined approximately 18% year over year. The company remained loss-making; its reported operating margin was approximately negative 331% and net margin approximately negative 362%, calculated from reported fee income. No income tax expense was recorded because the company has recurring losses and maintains a full valuation allowance against deferred tax assets.
Cash and cash equivalents were $2.47 million at March 31, 2022, compared with $270,000 at December 31, 2021. The increase principally reflected $2.69 million of proceeds from selling marketable securities, partially offset by $498,000 of operating cash usage. The company held no marketable securities at quarter-end.
Working capital was approximately $3.0 million, total assets were $3.86 million, total liabilities were $704,000, and shareholders’ equity was $3.16 million. The company reported no debt; liabilities primarily consisted of operating lease obligations. Present value of operating lease liabilities was $603,000.
Material Changes Versus the Prior Comparable Period
- Fee income decreased by $39,295, or approximately 18%, to $173,828.
- Operating expenses decreased by $24,898, primarily because of lower professional fees, partly offset by higher payroll, marketing, and investor-relations costs.
- Research and development expense increased by $3,647, or approximately 3%.
- Net loss increased by $71,041, or approximately 13%, primarily because of lower fee income and a $60,143 realized loss on the sale of marketable securities.
- Operating cash use improved by $144,706 compared with Q1 2021, principally because royalty receivables declined rather than increased.
- No options or warrants were exercised in Q1 2022, compared with $86,262 of proceeds from exercises in Q1 2021.
- Three licensees each represented at least 10% of Q1 2022 fee income, accounting for approximately 34%, 30%, and 10%, indicating significant customer concentration.
Guidance, Outlook, Risks, and Unusual Items
Management expects the automotive market to remain the largest source of royalty income. It expects revenue across market segments to increase later in 2022 as additional vehicle models and other products using SPD-SmartGlass technology are introduced. Management also cited potential growth in aircraft, marine, train, museum, and architectural applications.
The company projects a quarterly cash-flow shortfall of approximately $300,000 to $325,000 over the next 12 months. Management believes existing working capital will support operations for at least 23 months and that current cash and cash equivalents will fund operations until early 2024, although there is no assurance that expenditures will remain within projections or that additional financing will be available on acceptable terms.
Research Frontiers has incurred recurring losses since inception and has not generated sufficient licensee revenue to fund operations. Future viability depends on commercialization by licensees and continuing royalty payments. The company may seek additional equity financing and could be required to reduce or curtail operations if it cannot generate sufficient cash or raise funds.
COVID-19-related manufacturing and supply-chain disruptions affecting licensees in Europe and Asia continued to pose risks to product sales and royalty collections. The company increased its allowance for potentially uncollectible royalty receivables for certain affected licensees. The filing states that the duration and financial impact of these disruptions cannot be reasonably estimated.
During Q1 2022, the company sold short-term bond fund investments for proceeds of $2.69 million and recognized a $60,143 realized loss. Its $202,052 Paycheck Protection Program loan was forgiven during 2021. Four license agreements had remaining performance obligations totaling $263,000 at March 31, 2022, expected to be recognized over their remaining initial terms.
Management concluded that disclosure controls and procedures were effective as of March 31, 2022, and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Verify the timing and scale of expected new automotive and other product launches and their effect on royalty revenue.
- Monitor cash burn against the projected $300,000–$325,000 quarterly shortfall and the stated early-2024 cash runway.
- Assess the company’s dependence on a small number of licensees and the collectability of royalty receivables.
- Track the effects of COVID-19, automotive production volumes, supply-chain conditions, and licensee sales on royalty income.
- Confirm whether additional equity financing becomes necessary and evaluate potential dilution from the 1,399,991 outstanding warrants and 1,199,710 outstanding options.
- Review renewal outcomes for the four license agreements, including three initial terms ending December 31, 2022.
- Reconcile future liquidity with operating lease payments totaling $656,000 before imputed interest.