Research Frontiers(REFR) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ending September 30, 2023, show a decrease in total assets and cash compared to year-end 2022, with fee income increasing significantly and a reduced net loss for the nine-month period, while cash flow from operations remained negative Condensed Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $4.23 million from $5.37 million at year-end 2022, primarily due to a reduction in cash and cash equivalents, partially offset by new marketable securities investments, leading to a decrease in total shareholders' equity Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $524,985 | $4,230,916 | | Marketable securities | $2,499,625 | $0 | | Total current assets | $3,910,438 | $4,921,488 | | Total assets | $4,227,126 | $5,366,451 | | Liabilities & Equity | | | | Total current liabilities | $264,246 | $301,863 | | Total liabilities | $374,213 | $569,586 | | Total shareholders' equity | $3,852,913 | $4,796,865 | | Total liabilities and shareholders' equity | $4,227,126 | $5,366,451 | Condensed Consolidated Statements of Operations For the nine months ended September 30, 2023, fee income increased by 45.8% to $597,362, reducing the operating loss to $1.53 million and the net loss to $1.43 million, an improvement from the prior year, while the third quarter saw modest fee income growth and a slight decrease in net loss Statement of Operations Summary (Unaudited) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Fee income | $597,362 | $409,783 | $164,146 | $150,443 | | Operating loss | $(1,527,917) | $(1,805,044) | $(513,808) | $(486,189) | | Net loss | $(1,428,454) | $(1,853,915) | $(472,166) | $(483,729) | | Basic and diluted net loss per share | $(0.04) | $(0.06) | $(0.01) | $(0.02) | Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity decreased from $4.80 million at the beginning of 2023 to $3.85 million by September 30, 2023, primarily due to a net loss of $1.43 million, partially offset by $484,502 in capital raised from warrant exercises - For the nine months ended September 30, 2023, total shareholders' equity decreased by approximately $944,000, driven by a net loss of $1,428,454 and partially offset by proceeds of $484,502 from the exercise of warrants[13] Condensed Consolidated Statements of Cash Flows For the first nine months of 2023, cash and cash equivalents decreased by $3.71 million, driven by $1.75 million used in operating activities and $2.44 million in investing activities for marketable securities, partially offset by $484,502 from warrant exercises, contrasting with a cash increase in the prior year due to stock and warrant sales Cash Flow Summary for the Nine Months Ended September 30 (Unaudited) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,746,317) | $(1,615,566) | | Net cash (used in) provided by investing activities | $(2,444,116) | $2,693,752 | | Net cash provided by financing activities | $484,502 | $3,450,000 | | Net (decrease) increase in cash | $(3,705,931) | $4,528,186 | | Cash and cash equivalents at end of period | $524,985 | $4,798,150 | Notes to the Condensed Consolidated Financial Statements The notes detail the company's SPD light-control technology business, accounting policies, and financial condition, including recurring losses, a projected quarterly cash shortfall of $200,000-$250,000, and revenue recognition from licensing agreements with high concentration among four licensees - The company operates in a single business segment, developing and marketing suspended particle devices (SPDs) for applications in automotive, architectural, aerospace, and other industries[20] - As of September 30, 2023, the company had working capital of approximately $3.6 million and cash, cash equivalents, and marketable securities of about $3.0 million; management projects a quarterly cash flow shortfall of $200,000 to $250,000 but believes current working capital is sufficient for at least the next 12 months[21] - Revenue recognition under ASC 606 identifies three performance obligations in license agreements: Grant of Use, Technical Support, and access to New Improvements, with the 'Grant of Use' value recognized upfront and other obligations recognized over the contract period[26][31] - Fee income is highly concentrated, with four licensees accounting for approximately 29%, 20%, 20%, and 18% of total fee income for the first nine months of 2023[39] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies The company's critical accounting policies include revenue recognition under ASC 606, which allocates transaction prices among performance obligations, managing royalty receivables with an allowance for doubtful accounts, and determining the fair value of stock-based compensation using the Black-Scholes model, all requiring significant management estimates - Revenue from license agreements is recognized under ASC 606, with the value of the 'Grant of Use' recognized upfront in the first period of the contract, while 'Technical Support' and 'New Improvements' are recognized over the contract period[57][59] - The company evaluates the collectability of royalty receivables quarterly and maintains an allowance for doubtful accounts for specifically identified risks[62] - Stock-based compensation for options and warrants is valued using the Black-Scholes model, which relies on assumptions about dividend yields, volatility, and interest rates[63][64] Results of Operations The company's results show revenue growth driven by the automotive market, with third-quarter fee income rising 9.1% year-over-year and a slight decrease in net loss, while the nine-month period saw a 45.8% increase in fee income and a 22.9% improvement in net loss due to higher royalties and lower operating expenses - The automotive market is the company's largest source of royalty income and is expected to remain so, with revenue influenced by automotive industry trends, adoption rates of SPD-SmartGlass technology, and the number of vehicle models featuring the technology[66] Comparison of Three Months Ended September 30 | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Fee Income | $164,146 | $150,443 | +9.1% | | Operating Expenses | $542,635 | $487,476 | +11.3% | | Net Loss | $(472,166) | $(483,729) | -2.4% | Comparison of Nine Months Ended September 30 | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Fee Income | $597,362 | $409,783 | +45.8% | | Operating Expenses | $1,695,129 | $1,770,414 | -4.2% | | Net Loss | $(1,428,454) | $(1,853,915) | -22.9% | Financial Condition, Liquidity and Capital Resources As of September 30, 2023, the company held approximately $3.0 million in cash, cash equivalents, and marketable securities, with working capital of $3.6 million, despite a $3.7 million decrease in cash during the first nine months due to operations and marketable securities purchases, and management projects sufficient capital for at least the next twelve months despite a quarterly cash shortfall - The company's cash and cash equivalents decreased by $3,705,931 in the first nine months of 2023, primarily due to cash used in operations ($1.75M) and purchases of marketable securities ($5.43M), offset by sales of securities ($2.99M) and proceeds from warrant exercises ($0.48M)[82] - Management projects a quarterly cash flow shortfall of approximately $200,000 to $250,000 but expects to have sufficient working capital for more than the next five years of operations based on current assumptions[83] - The company's eventual success depends on the commercialization of its technology by licensees and the generation of sufficient royalty revenue to fund operations, which has not yet been achieved[84] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk Disclosure The company states that there has been no material change in its market risk disclosures since its Annual Report on Form 10-K for the year ended December 31, 2022 - There has been no material change in the company's market risk from the disclosures provided in the 2022 Form 10-K[85] Item 4. Controls and Procedures Evaluation of Controls and Procedures Management, including the CEO and acting interim CFO, evaluated the company's disclosure controls and procedures as of September 30, 2023, concluding they were effective, with no material changes to internal control over financial reporting during the third quarter - The Chief Executive Officer and acting interim Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[86] - There were no material changes in the company's internal control over financial reporting during the three months ended September 30, 2023[87] PART II - OTHER INFORMATION Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, which include officer certifications (Rule 13a-14(a)/15d-14(a) and Section 1350) and various Inline XBRL data files - The exhibits filed with this report include certifications from Joseph M. Harary and Inline XBRL Instance Documents[89] SIGNATURES Report Authorization The report was duly authorized and signed on November 2, 2023, by Joseph M. Harary, in his capacity as President, CEO, acting interim CFO, and Treasurer - The Form 10-Q was signed on November 2, 2023, by Joseph M. Harary, President, CEO, and acting interim CFO[91]