Notes
to Condensed Consolidated Financial Statements
March
31, 2023
(Unaudited)
Note
1. Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) for interim financial information and with the instructions to Rule 8-03 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature.
Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2023. The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited
consolidated financial statements at that date. For further information, refer to the consolidated financial statements and footnotes
thereto included in the Annual Report on Form 10-K relating to Research Frontiers Incorporated for the fiscal year ended December 31,
2022.
Certain
amounts in the accompanying March 31, 2022 condensed consolidated statements of cash flows have been reclassified to conform to the March
31, 2023 presentation.
Note
2. Business
Research
Frontiers Incorporated (“Research Frontiers” or the “Company”) operates in a single business segment which is
engaged in the development and marketing of technology and devices to control the flow of light. Such devices, often referred to as “light
valves” or suspended particle devices (“SPDs”), use colloidal particles that are either incorporated within a liquid
suspension or a film, which is usually enclosed between two sheets of glass or plastic having transparent, electrically conductive coatings
on the facing surfaces thereof. At least one of the two sheets is transparent. SPD technology, made possible by a flexible light-control
film invented by Research Frontiers, allows the user to instantly and precisely control the shading of glass/plastic manually or automatically.
SPD technology has numerous product applications, including SPD-Smart™ windows, sunshades, skylights and interior partitions for
homes and buildings; automotive windows, sunroofs, sun visors, sunshades, rear-view mirrors, instrument panels and navigation systems;
aircraft windows; museum display panels; eyewear products; and flat panel displays for electronic products. SPD-Smart light control film
is now being developed for, or used in, architectural, automotive, marine, aerospace and appliance applications.
The
Company has primarily utilized its cash, cash equivalents, and investments generated from sales of our common stock, proceeds from the
exercise of options and warrants, and royalty fees collected to fund its research and development of SPD light valves, for marketing
initiatives, and for other working capital purposes. The Company’s working capital and capital requirements depend upon numerous
factors, including the results of research and development activities, competitive and technological developments, the timing and cost
of patent filings, and the development of new licensees and changes in the Company’s relationships with its existing licensees.
The degree of dependence of the Company’s working capital requirements on each of the foregoing factors cannot be quantified; increased
research and development activities and related costs would increase such requirements; the addition of new licensees may provide additional
working capital or working capital requirements; and changes in relationships with existing licensees would have a favorable or negative
impact depending upon the nature of such changes. We have incurred recurring losses since inception and expect to continue to incur losses
as a result of costs and expenses related to our research and continued development of our SPD technology and our corporate general and
administrative expenses. Our capital requirements and operations to date have been substantially funded through sales of our common stock,
exercise of options and warrants and royalty fees collected. As of March 31, 2023, we had working capital of approximately $4.6 million,
cash and cash equivalents and marketable securities of approximately $4.1 million, shareholders’ equity of approximately $4.8 million
and an accumulated deficit of approximately $122.8 million. Our projected cash flow shortfall based on our current operations adjusted
for any non-recurring cash expenses and adjusted for additional royalties expected to be received for use of our products in new production
for the next 12 months is approximately $200,000 to $250,000 per quarter. Based on our current expectations of our cash flow shortfall
for the next 12 months, our working capital would support our activities for at least the next 12 months from the issuance of these financial
statements.
In
the event that we are unable to generate sufficient cash from our operating activities or raise additional funds, we may be required
to delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse
effect on our business, operating results, financial condition and long-term prospects. The Company may seek to obtain additional funding
through future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might
be available. The eventual success of the Company and generation of positive cash flow will be dependent upon the commercialization of
products using the Company’s technology by the Company’s licensees and payments of continuing royalties on account thereof.
To date, the Company has not generated sufficient revenue from its licensees to fund its operations.
Recent
Global Events:
On
March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and
recommended containment and mitigation measures worldwide.
Since
2020 revenues have been negatively impacted from the pandemic due to delays in manufacture of products using our technology. Most of
the products using our technology are manufactured by licensees overseas in Europe and Asia who have been similarly affected by the pandemic.
The disruption caused by public health crises, such as COVID-19, could result in lower levels of sale activity for products using our
technology resulting in lower level of royalties owed to us from the sale of these products. The duration of the potential business disruptions
and related financial impact cannot be reasonably estimated at this time, but could materially adversely affect our business, financial
condition, results of operations, and cash flows.
Note
3. Patent Costs
The
Company expenses costs relating to the development, acquisition or enforcement of patents due to the uncertainty of the recoverability
of these items.
Note
4. Revenue Recognition
The
Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (Topic 606). The standard provides
a single comprehensive revenue recognition model for all contracts with customers and supersedes existing revenue recognition guidance.
The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized.
The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount
that the entity expects to be entitled to in exchange for those goods or services.
ASC
606 follows a five-step approach to determining revenue recognition including: 1) Identification of the contract; 2) Identification of
the performance obligations; 3) Determination of the transaction price; 4) Allocation of the transaction price; and 5) Recognition of
revenue.
The
Company determined that its license agreements provide for three performance obligations which include: (i) the Grant of Use to its Patent
Portfolio (“Grant of Use”), (ii) Stand-Ready Technical Support (“Technical Support”) including the transfer of
trade secrets and other know-how, production of materials, scale-up support, analytical testing, etc., and (iii) access to new Intellectual
Property (“IP”) that may be developed sometime during the course of the contract period (“New Improvements”).
Given the nature of IP development, such New Improvements are on an unspecified basis and can occur and be made available to licensees
at any time during the contract period.
When
a contract includes more than one performance obligation, the Company needs to allocate the total consideration to each performance obligation
based on its relative standalone selling price or estimate the standalone selling price if it is not observable. A standalone selling
price is not available for our performance obligations since we do not sell any of the services separately and there is no competitor
pricing that is available. As a consequence, the best method for determining standalone selling price of our Grant of Use performance
obligation is through a comparison of the average royalty rate for comparable license agreements as compared to our license agreements.
Comparable license agreements must consider several factors including: (i) the materials that are being licensed, (ii) the market application
for the licensed materials, and (iii) the financial terms in the license agreements that can increase or decrease the risk/reward nature
of the agreement.
Based
on the royalty rate comparison referred to above, any pricing above and beyond the average royalty rate would relate to the Technical
Support and New Improvements performance obligations. The Company focuses a significant portion of its time and resources to provide
the Technical Support and New Improvements services to its licensees which further supports the conclusions reached using the royalty
rate analysis.
The
Technical Support and New Improvements performance obligations are co-terminus over the term of the license agreement. For purposes of
determining the transaction price, and recognizing revenue, the Company combined the Technical Support and New Improvements performance
obligations because they have the same pattern of transfer and the same term. We maintain a staff of scientists and other professionals
whose primary job responsibilities throughout the year are: (i) being available to respond to Technical Support needs of our licensees,
and (ii) developing improvements to our technology which are offered to our licensees as New Improvements. Since the costs incurred to
satisfy the Technical Support and New Improvements performance obligations are incurred evenly throughout the year, the value of the
Technical Support and New Improvements services are recognized throughout the initial contract period as these performance obligations
are satisfied. If the agreement is not terminated at the end of the initial contract period, it will renew on the same terms as the initial
contract for a one-year period. Consequently, any fees or minimum annual royalty obligations relating to this renewal contract will be
allocated similarly to the initial contract over the additional one-year period.
We
recognize revenue when or as the performance obligations in the contract are satisfied. For performance obligations that are fulfilled
at a point in time, revenue is recognized at the fulfillment of the performance obligation. Since the IP is determined to be a functional
license, the value of the Grant of Use is recognized in the first period of the contract term in which the license agreement is in force.
The value of the Technical Support and New Improvements obligations is allocated throughout the contract period based on the satisfaction
of its performance obligations. If the agreement is not terminated at the end of the contract period, it will renew on the same terms
as the original agreement for a one-year period. Consequently, any fees or minimum annual royalties (“MAR”) relating to this
renewal contract will be allocated similarly over that additional year.
The
Company’s license agreements have a variable royalty fee structure (meaning that royalties are a fixed percentage of sales that
vary from period to period) and frequently include a minimum annual royalty commitment. In instances when sales of licensed products
by its licensees exceed the MAR, the Company recognizes fee income as the amounts have been earned. Typically, the royalty rate for such
sales is 10-15% of the selling price. While this is variable consideration, it is subject to the sales/usage royalty exception to recognition
of variable consideration in ASC 606 10-55-65 and therefore is not recognized until the subsequent sales or usage occurs or the MAR period
commences.
Because
of the immediate recognition of the Grant of Use performance obligation: (i) the first period of the contract term will generally have
a higher percent allocation of the transaction price under ASC 606 than under the accounting guidance used prior to the adoption of ASC
606, and (ii) the remaining periods in the year will have less of the transaction price recognized under ASC 606 than under the accounting
guidance used prior to the adoption of ASC 606. After the initial period in the contract term, the revenue for the remaining periods
will be based on the satisfaction of the Technical Support and New Improvements obligations. Since most of our license agreements start
as of January 1st, the revenue recognized for the contract under ASC 606 in our first quarter will tend to be higher than the accounting
guidance used prior to the adoption of ASC 606.
As of March 31, 2023, the Company had $125,000 in unbilled revenue included in royalties receivables.
Certain
of the contract fees are accrued by, or paid to, the Company in advance of the period in which they are earned resulting in deferred
revenue (contract liabilities). Such excess amounts are recorded as deferred revenue and are recognized as revenue in future periods
as earned. Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated
balance sheets.
The
Company operates in a single business segment which is engaged in the development and marketing of technology and devices to control
the flow of light. Our revenue source comes from the licensing of this technology and all of these license agreements have similar terms
and provisions. The majority of the Company’s licensing fee income comes from the activities of several licensees participating
in the automotive market. The Company currently believes that the automotive market will be the largest source of its royalty income
over the next several years. The Company’s royalty income from this market may be influenced by numerous factors including various
trends affecting demand in the automotive industry and the rate of introduction of new technology in OEM product lines. In addition to
these macro factors, the Company’s royalty income from the automotive market could also be influenced by specific factors such
as whether the Company’s SPD-SmartGlass technology appears as standard equipment or as an option on a particular vehicle, the number
of additional vehicle models that SPD-SmartGlass appears on, the size of each window on a vehicle and the number of windows on a vehicle
that use SPD SmartGlass, fluctuations in the total number of vehicles produced by a manufacturer, and in the percentage of cars within
each model produced with SPD-SmartGlass, and changes in pricing or exchange rates.
As
of March 31, 2023, the Company has one license agreement that is in its initial multiyear term (“Initial Term”) with continuing
performance obligations going forward. The Initial Term of this agreement will end as of December 31, 2024. The Company currently expects
this agreement will renew annually at the end of the Initial Term. As of March 31, 2023, the aggregate amount of the revenue to be recognized
upon the satisfaction of the remaining performance obligations for this license agreement is $105,000. The revenue for the remaining
performance obligations for this license agreement is expected to be recognized evenly throughout the remaining period of the Initial
Term.
Note
5. Fee Income
Fee
income represents amounts earned by the Company under various license and other agreements relating to technology developed by the Company.
During
the first three months of 2023, three licensees accounted for 10% or more of fee income of the Company; these licensees accounted for
approximately 39%, 24% and 24% of fee income recognized during such period. During the first three months of 2022, three licensees accounted
for 10% or more of fee income of the Company; these licensees accounted for approximately 34%, 30% and 10% of fee income recognized during
such period.
Note
6. Stock-Based Compensation
The
Company has granted options/warrants to consultants. GAAP requires that all stock-based compensation be recognized as an expense in the
financial statements and that such costs be measured at the fair value of the award at the date of grant. These awards generally vest
ratably over 12 to 60 months from the date of grant and the Company charges to operations quarterly the current market value of the options
using the Black-Scholes method. During the three months ended March 31, 2023 and 2022, there were no charges related to options or warrants
granted to consultants.
During
the three months ended March 31, 2023 and 2022, the Company did not grant options to employees or directors.
There
was no compensation expense recorded relating to restricted stock grants to employees and directors during the three months ended March
31, 2023 and 2022.
As
of March 31, 2023, there were 307,500 shares available for future grant under our 2019 Equity Incentive Plan, which was approved by the
Company’s shareholders in June 2019.
Note
7. Income Taxes
Since
inception, the Company has incurred losses from operations and as a result has not recorded income tax expense. Benefits related to net
operating loss carryforwards and other deferred tax items have been fully reserved since it was more likely than not that the Company
would not achieve profitable operations and be able to utilize the benefit of the net operating loss carryforwards.
Note
8. Basic and Diluted Loss Per Common Share
Basic
net loss per share excludes any dilution. It is based upon the weighted average number of common shares outstanding during the period.
Dilutive net loss per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The Company’s dilutive loss per share equals basic loss per share for the periods ended
March 31, 2023 and 2022, respectively, because all common stock equivalents (i.e., options and warrants) were antidilutive in
those periods. The number of options and warrants that were not included (because their effect is antidilutive) was 3,788,060 and 2,599,701
for the periods ended March 31, 2023 and 2022, respectively.
Note
9. Equity
During
the three months ended March 31, 2023 received proceeds of $484,503 in connection with the exercise of warrants covering 358,891 shares
of common stock. No options or warrants were exercised during the three-month period ended March 31, 2022.
On
September 16, 2022, the Company entered into subscription agreements from a group of private accredited investors to sell them 2.0
million shares of common stock of the Company
at a price of $2.30
per share (which represents the closing market price of the
Company’s common stock on September 14, 2022 which was the date that the transaction was agreed to). The Company will receive $4.6
million in proceeds from the sale of common stock
to the investors. For each share received, the investor also received one warrant (expiring on September 30, 2027) to purchase one share
of common stock at an exercise price of $2.76/share.
The shares were issued to the investors in a private placement and, along with the shares issued in connection with the exercise of any
warrants in the future, are not registered and therefore currently subject to at least a six-month holding -month period by the investor.
As of September 30, 2022, the Company received $3,450,000
under these subscription agreements and has issued
1,500,000
common shares and issued 1,500,000
warrants. In addition, the Company expects to
receive the remaining $1,150,000
under these subscription agreements in May 2023.
The
Company did not sell any equity securities during the three month periods ended March 31, 2023 and 2022.
As
of March 31, 2023, there were 2,541,100 warrants and 1,246,960 options outstanding.
Note
10. Leases
The
Company determines if an arrangement is a lease at its inception. This determination generally depends on whether the arrangement conveys
the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration.
Control of an underlying asset is conveyed if the Company obtains the rights to direct the use of, and to obtain substantially all of
the economic benefits from the use of, the underlying asset. Lease expense for variable leases and short-term leases is recognized when
the obligation is incurred.
The
Company has operating leases for certain facilities and equipment with a weighted average remaining lease term of 2 years as of March
30, 2023. Operating leases are included in right of use lease assets, other current liabilities and long-term lease liabilities on the
condensed consolidated balance sheet. Right of use lease assets and liabilities are recognized at each lease’s commencement date
based on the present value of its lease payments over its respective lease term. The Company does not have an established incremental
borrowing rate as it does not have any debt. The Company uses the stated borrowing rate for a lease when readily determinable. When the
interest rates implicit in its lease agreements is not readily determinable, the Company used an interest rate based on the marketplace
for public debt. The weighted average discount rate associated with operating leases as of March 31, 2023 is 5.5%.
Operating
lease expense for the three months ended March 31, 2023 was approximately $54,000. The Company has no material variable lease costs or
sublease income for the three months ended March 31, 2023.
Maturities
of operating lease liabilities as of March 31, 2023 were as follows:
Schedule
of Maturities of Operating Lease
| | |
March 31, 2023 | |
| | |
| |
| For the year ending December 31, 2023 | |
$ | 163,000 | |
| For the year ending December 31, 2024 | |
| 222,000 | |
| For the year ending December 31, 2025 and beyond | |
| 56,000 | |
| Total lease payments | |
| 441,000 | |
| Less: imputed lease interest | |
| (24,385 | ) |
| Present value of lease liabilities | |
$ | 416,615 | |
Note
11. Marketable Securities
The
Company classifies investments in marketable securities as trading, available-for-sale or held-to-maturity at the time of purchase and
periodically re-evaluates such classification. Trading securities are carried at fair value, with unrealized holding gains and losses
included in earnings. Held-to-maturity securities are recorded at cost and are adjusted for the amortization or accretion of premiums
or discounts over the life of the related security. Unrealized holding gains and losses of available-for-sale securities are excluded
from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized. In determining
realized gains and losses, the cost of the securities sold is based on the specific identification method. Interest and dividends on
the investments are accrued at the balance sheet date.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date. Fair value measurements are broken down into three levels
based on the reliability of inputs as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access at the measurement date. An active market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices
that are observable for the asset or liability (e.g., interest rates and yield curves observable at commonly quoted intervals or current
market) and contractual prices for the underlying financial instrument, as well as other relevant economic measures. Level 3 inputs are
unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs
are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the
measurement date.
At
March 31, 2022, the Company had no investments in marketable securities. During the quarter ended March 31, 2022, the Company sold investments
in marketable securities including short term bond funds, that resulted in a realized loss of $60,143 during the quarter.
At
March 31, 2023, the Company had investments in marketable securities. During the three months ended March 31, 2023, the Company incurred
an unrealized gain in market value on investments in marketable securities of $22,900.
At
March 31, 2023, all investments are Level 1 and were classified as trading and consisted of the following:
Schedule
of Investments were Classified as Level 1 Trading Securities
| | |
| |
March 31, 2023 | |
| | |
| |
Value of trading | |
| | |
Investment | |
Investments | |
| | |
| |
| |
| United States Treasury Security | |
US Treasury Bill
$3 million face
Dated 11-03-2022
Due 05-04-2023 | |
$ | 2,988,060 | |
| | |
| |
| | |
| | |
Unrealized gain | |
$ | 22,900 | |
