Research Frontiers Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Research Frontiers develops and licenses patented suspended particle device (SPD-Smart) light-control technology for smart windows, skylights, sunroofs, aircraft shades, marine products and related applications. The Company does not manufacture or directly market finished products; commercial activity depends on 39 licensees and their customers. The filing covers the fiscal year ended December 31, 2011, with selected fourth-quarter data included.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Fee income | $846,000 | $768,000 | Up 10.2% |
| Operating expenses | $3.619 million | $3.253 million | Up 11.2% |
| Research and development | $1.391 million | $1.405 million | Down 1.0% |
| Operating loss | $4.163 million | $3.890 million | Loss increased 7.0% |
| Net loss | $4.134 million | $3.875 million | Loss increased 6.7% |
| Net loss per share | $0.22 | $0.22 | Unchanged |
| Cash used in operations | $3.353 million | $3.202 million | Use increased 4.7% |
| Cash and cash equivalents | $2.403 million | $6.958 million | Down $4.554 million |
| Short-term investments | $1.255 million | — | New balance |
| Working capital | $4.002 million | Not clearly provided | — |
| Total assets | $4.417 million | $7.785 million | Down 43.3% |
| Long-term debt | None | None | Unchanged |
Fee income was approximately 16.9% of total operating costs, producing an operating margin of approximately negative 492% and a net margin of approximately negative 489%. These ratios are calculated from licensing fee income rather than product sales revenue.
Fourth-quarter 2011 fee income was $353,934, operating loss was $834,328, and net loss was $825,825, or $0.04 per share.
Material changes versus the prior comparable period
- Fee income increased by $78,460, primarily because automotive product sales by one licensee exceeded its minimum annual royalty threshold.
- Operating expenses increased by $365,385, principally from higher payroll and related costs, director fees and insurance. Two directors were added during 2011.
- Research and development spending was broadly stable, decreasing by $13,965. Excluding stock-based compensation, reported R&D spending was approximately $1.282 million in 2011 versus $1.235 million in 2010.
- Cash declined substantially because of $3.353 million used in operations and $1.255 million of net investment in certificates of deposit. Equity issuances and option exercises provided only $65,977, compared with $6.409 million in 2010.
- Non-cash stock-based compensation was $702,837 in 2011, compared with $772,604 in 2010, including $594,492 in operating expenses and $108,345 in R&D.
- Automotive commercialization advanced through Daimler’s launch of the SPD-based Magic Sky Control roof on the Mercedes-Benz SLK and the planned 2012 launch on the Mercedes-Benz SL. These developments were not yet reflected as a broad, predictable revenue stream for Research Frontiers.
Guidance, outlook, commentary and risks
Management expects continued investment in SPD technology, licensee support and market development. The Company believes automotive glass is the largest and most predictable near- and intermediate-term opportunity, while aerospace, architectural and marine applications remain under development. No quantified revenue or earnings guidance was provided.
Based on existing cash expenditures, cash reserves and budgeted revenues, management stated that additional funding would not be required until the second quarter of 2013. This expectation is subject to spending exceeding budget, revenue shortfalls and financing availability. The Company acknowledged that it has not generated sufficient license revenue to fund operations and may require additional capital.
- Profitability depends on licensees successfully commercializing SPD products and paying continuing royalties.
- Hitachi Chemical was the sole source of commercial quantities of SPD film, creating a supply-disruption risk.
- SPD products are relatively early in commercialization and face competition from electrochromic, liquid-crystal and other technologies, including competitors with substantially greater resources.
- Long-term reliability, durability, production costs and market adoption remain subject to development and customer testing.
- Revenue is concentrated among a small number of licensees: five licensees contributed 32%, 15%, 12%, 11% and 6% of 2011 fee income, respectively.
- The Company had a cumulative net loss of $84.408 million at December 31, 2011 and a full valuation allowance against approximately $24.718 million of deferred tax assets.
- Federal net operating loss carryforwards were approximately $55 million, with $3.333 million scheduled to expire in 2012 if unused.
- Operating lease commitments totaled approximately $381,000, and 2012 employment agreements included base salaries of $425,000 and $300,000 for two officers.
- A $150,000 secured convertible note receivable from SPD Control Systems was outstanding, with a May 9, 2012 maturity date and accrued interest of approximately $61,450.
BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2011.
Most important facts for investors to verify
- Whether Daimler and other automotive programs translate into sustained production volumes and materially higher royalty income.
- The timing and terms of any financing needed after the Company’s projected second-quarter 2013 liquidity horizon.
- Actual cash burn, royalty collections and licensee concentration in subsequent filings.
- Whether additional SPD film suppliers achieve commercial production and reduce the single-source risk.
- The status, collectability and maturity resolution of the SPD Control Systems note receivable.
- Patent expirations beginning in 2012, pending applications, and the Company’s ability to protect its intellectual property.