Research Frontiers Incorporated: 2017 Q3 Form 10-Q Summary
Business Context and Reporting Period
Research Frontiers develops and licenses suspended particle device technology that controls the flow of light. Applications include automotive, architectural, aerospace, marine, train, appliance, eyewear and display products. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Three Months 2017 | Three Months 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Fee income | $488,336 | $304,772 | $1,229,631 | $958,337 |
| Total expenses | $792,587 | $870,835 | $2,978,966 | $3,836,722 |
| Operating loss | $(304,251) | $(566,063) | $(1,749,335) | $(2,878,385) |
| Net loss | $(303,138) | $(559,731) | $(1,745,505) | $(2,853,182) |
| Net loss per share | $(0.01) | $(0.02) | $(0.07) | $(0.12) |
- Fee income increased 60.2% for the quarter and 28.3% for the nine-month period versus the prior-year comparable periods.
- Based on fee income and total expenses, the operating margin was approximately negative 62.3% for the quarter and negative 142.3% for the nine months. The filing does not report gross profit or gross margin.
- At September 30, 2017, cash and cash equivalents were $2.19 million, compared with $1.69 million at December 31, 2016. The increase primarily reflected the maturity of a $1.52 million certificate of deposit.
- Working capital was $2.60 million and shareholders’ equity was $3.16 million at September 30, 2017. Total assets were $3.58 million.
- The company used $1.02 million in operating activities during the first nine months of 2017, compared with $2.71 million in the prior-year period. Investing activities provided $1.52 million, primarily from the investment maturity.
- Current liabilities were $421,751. The filing does not disclose any outstanding debt or borrowings.
- Four licensees represented approximately 31%, 15%, 12% and 11% of nine-month 2017 fee income, indicating material customer concentration.
Material Changes Versus the Prior Comparable Period
- Nine-month fee income increased by $271,294, driven principally by higher licensee revenue from the aircraft, architectural, automotive and marine sectors and revenue from a new transparent-display licensee.
- Nine-month operating expenses declined by $295,850, mainly due to lower patent and patent litigation costs, payroll and related costs, and investor relations and marketing costs.
- Nine-month research and development expense declined by $561,906, primarily because of lower payroll costs.
- The nine-month net loss improved by $1.11 million, while the quarterly net loss improved by $256,593.
- Short-term investments declined from $1.52 million at December 31, 2016 to zero at September 30, 2017 as the certificate of deposit matured; the proceeds were included in cash and cash equivalents.
Guidance, Outlook, Risks and Unusual Items
- Management estimates a projected cash-flow shortfall of approximately $400,000 per quarter over the next 12 months, based on current operations and excluding non-recurring cash expenses.
- Management expects existing working capital to fund operations for approximately 12 to 15 months, assuming anticipated expense reductions. The company may seek additional financing, but availability and terms are uncertain.
- The company has not generated sufficient license revenue to fund operations. Future positive cash flow depends on commercialization of products using its technology and continuing royalty payments from licensees.
- Automotive royalty revenue is expected to remain important and is subject to vehicle production volumes, adoption rates, model launches, pricing, exchange rates and the extent to which SPD technology is standard or optional equipment.
- Revenue is concentrated among a limited number of licensees and is subject to collection timing, royalty reporting delays and potential offsets of royalties against advance payments.
- The company received royalty revenue above minimum annual levels in the first quarter from Magic Sky Control applications on certain Daimler vehicles, creating additional royalty revenue for the remainder of 2017. Future amounts remain dependent on production, take rates, exchange rates and pricing.
- The company is evaluating the effect of the new revenue recognition standard, effective in the first quarter of 2018, and intends to use the modified retrospective method. The filing does not provide a clear quantified impact.
- Management disclosed a material weakness related to controls over the allowance for doubtful accounts. Enhanced review and documentation procedures were implemented during 2017, with remediation targeted by year-end 2017, subject to testing.
- No income tax expense was recorded because the company has incurred cumulative operating losses and maintains a full valuation allowance against deferred tax assets.
Investor Verification Items
- Verify the sustainability and collection of increased fee income, particularly the concentration among four licensees and the dependence on automotive royalties.
- Assess whether the projected $400,000 quarterly cash shortfall and stated expense reductions support the estimated 12-to-15-month liquidity horizon.
- Monitor whether additional financing becomes necessary and the potential dilution or other terms of any financing.
- Review the remediation and testing of the material weakness involving doubtful-account allowances.
- Determine the eventual effect of the new revenue recognition standard on royalty timing, deferred revenue and reported results.
- Track commercialization, vehicle production volumes, SPD adoption rates and royalty payments across automotive and non-automotive applications.