# Research Frontiers Inc: Form 10-Q/A for the period ended Jun 30, 2021

- Company: [Research Frontiers Inc](/companies/refr.md) (CIK 793524)
- Form: 10-Q/A
- Filed: 2022-02-24
- Accepted by EDGAR: Feb 24, 2022, 16:30 ET
- Period: 2021-06-30
- Accession: 0001493152-22-005408
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/793524/000149315222005408/form10-qa.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/793524/000149315222005408/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-04-01 to 2021-06-30 | $113.9k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2021-01-01 to 2021-06-30 | $327.1k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Research and development | 3 months, 2021-04-01 to 2021-06-30 | $139.8k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2021-01-01 to 2021-06-30 | $285.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2021-04-01 to 2021-06-30 | −$529.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2021-01-01 to 2021-06-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2021-04-01 to 2021-06-30 | −$527.9k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-01-01 to 2021-06-30 | −$1.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-04-01 to 2021-06-30 | −$0.02 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2021-01-01 to 2021-06-30 | −$0.03 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2021-01-01 to 2021-06-30 | −$1.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2021-01-01 to 2021-06-30 | $935 | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2021-06-30 | $339.6k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-06-30 | $4.5m | us-gaap:AssetsCurrent |
| Total assets | at 2021-06-30 | $5.2m | us-gaap:Assets |
| Current liabilities | at 2021-06-30 | $300.6k | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-06-30 | $857.8k | us-gaap:Liabilities |
| Shareholders' equity | at 2021-06-30 | $4.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 18,591 characters.

### Critical Accounting Policies

The following accounting policies are important to understanding our financial condition and results of operations and should be read as an integral part of the discussion and analysis of the results of our operations and financial position. For additional accounting policies, see Note 2 to our December 31, 2020 consolidated financial statements, “Summary of Significant Accounting Policies.”

The Company recognizes revenue in accordance with ASC 606, *Revenue from Contracts with Customers*. The Company determined that its license agreements provide for three performance obligations: (i) Grant of Use, (ii) Technical Support, and (iii) New Improvements.

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. 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.

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. 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 contract period as these performance obligations are satisfied.

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 Company has entered into license agreements covering products using the Company’s SPD technology. When royalties from the sales of licensed products by a licensee exceed its contractual minimum annual royalties, the excess amount is recognized by the Company as fee income in the period that it was earned. Certain of the fees are accrued by, or paid to, the Company in advance of the period in which they are earned resulting in deferred revenue.

Royalty receivables are stated less allowance for doubtful accounts. The allowance represents estimated uncollectible receivables usually due to licensees’ potential insolvency. The allowance includes amounts for certain licensees where risk of default has been specifically identified. The Company evaluates the collectability of its receivables on at least a quarterly basis and records appropriate allowances for uncollectible accounts when necessary.

The Company has historically used the Black-Scholes option-pricing model to determine the estimated fair value of each option grant. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Furthermore, if management uses different assumptions in future periods, stock-based compensation expense could be materially impacted in future years.

On occasion, the Company may issue to consultants either options or warrants to purchase shares of common stock of the Company at specified share prices. These options or warrants may vest based upon specific services being performed or performance criteria being met. In accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods or services, the Company is required to record consulting expenses based upon the fair value of such options or warrants on the earlier of the service period or the period that such options or warrants vest as determined using a Black-Scholes option pricing model and are marked to market quarterly using the Black-Scholes option valuation model.

The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. An example of a critical estimate is the full valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits will be realized in future periods.

### 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. As a result, the Company expects operations at its facility to continue to be affected in some capacity, as the COVID-19 virus continues to proliferate and the federal, state and local governments under which we operate continue to adopt new rules. The Company has put in place enhanced procedures, such as restricting international and domestic travel, adopting a variety of steps designed to ensure social distancing in our facilities, including working remotely where available, and increasing our cleaning and sanitizing procedures in our facilities, in an effort to protect its employees and communities.

Revenues were negatively impacted since the onset of 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. Net of amounts previously reserved which were fully written off in 2020, the Company increased its allowance for uncollectible royalty receivables in 2020 until the collectability from certain licensees can be better ascertained in the regions affected by COVID-19.

In connection with the COVID-19 crisis, Congress passed, and the president signed, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which, among other things, provides relief for businesses impacted by the pandemic. The Company applied for and received $202,052 in proceeds from the Paycheck Protection Program (“PPP Loan”) made available under the CARES Act. The PPP Loan is intended to offer businesses hurt by the COVID-19 pandemic economic assistance with the potential for the principal to be forgiven based on certain expenses incurred during the first 24 weeks after the issuance of the PPP Loan. The Company has received notification that this loan has been forgiven. Consequently, the Company recorded $202,052 as other income for the year ended December 31, 2020 representing the PPP Loan estimated to be forgiven. For the three and six months ended June 30, 2020, the Company estimated that $194,140 of this loan had been forgiven.

### Results of Operations

### Overview

The majority of the Company’s 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 model like produced with SPD-SmartGlass, and changes in pricing or exchange rates. Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also, licensees offset some or all of their royalty payments on sales of licensed products for a given period by applying these advance payments towards such earned royalty payments.

In 2019 and 2020, the Company received royalty revenues from sales of the Magic Sky Control option using the Company’s technology to Daimler (as well as sales of SPD-SmartGlass products to McLaren Automotive) that were accretive to the Company’s royalty revenue. Production efficiencies are expected to continue and accelerate with the introduction of the higher vehicle production volumes for various car models going forward, and the Company expects that lower pricing per square foot of the Company’s technology could expand the market opportunities, adoption rates, and revenues for its technology in automotive and non-automotive applications. The Company expects to generate additional royalty income from the near-term introduction of additional new car and aircraft models from other OEMs (original equipment manufacturers), continued growth of sales of products using the Company’s technology for the marine industry in yachts and other watercraft, in trains, in museums, and in larger architectural projects.

Because the Company’s license agreements typically provide for the payment of royalties by a licensee on product sales within 45 days after the end of the quarter in which a sale of a licensed product occurs (with some of the Company’s more recent license agreements providing for payments on a monthly basis), and because of the time period which typically will elapse between a customer order and the sale of the licensed product and installation in a home, office building, automobile, aircraft, boat or any other product, there could be a delay between when economic activity between a licensee and its customer occurs and when the Company gets paid its royalty resulting from such activity.

As discussed in Note 2, the Company currently does not have the ability to assess whether the COVID-19 pandemic is likely to have a material impact on our near-term financial results. Most of the products using the Company’s technology are manufactured by licensees overseas in Europe and Asia who have been similarly affected by the pandemic. The disruption caused by 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.

### Three months ended June 30, 2021 compared to the three months ended June 30, 2020

The Company’s fee income from licensing activities for the three months ended June 30, 2021 was $113,937 as compared to $176,113 for the three months ended June 30, 2020, representing a $62,176 decrease between these two periods. Lower fees in the automotive, aircraft and architectural markets were partially offset by higher fee income from licensees in the display market.

Operating expenses decreased by $128,885 for the three months ended June 30, 2021 to $503,078 from $631,963 for the three months ended June 30, 2020. This decrease is the result of lower payroll and related costs ($48,000), lower depreciation ($37,000) as well as lower bad debt expense ($58,000) partially offset by higher patent costs ($9,000).

Research and development expenditures decreased by $6,921 to $139,810 for the three months ended June 30, 2021 from $146,731 for the three months ended June 30, 2020. This decrease was the result of lower materials costs ($6,000).

The Company’s net investment income for the three months ended June 30, 2021 was $1,016 as compared to $9,460 for the three months ended June 30, 2020. The difference was primarily due to lower interest rates as well as unrealized reductions in market value of investments and lower cash balances available for investment.

In addition, the Company recorded $194,140 of other income for the three months ended June 30, 2020 representing the portion of the PPP loan estimated to be forgiven through such date. There was no PPP loan forgiveness during the three months ended June 30, 2021.

As a consequence of the factors discussed above, the Company’s net loss was $527,935 ($0.02 per common share) for the three months ended June 30, 2021 as compared to $398,981 ($0.01 per common share) for the three months ended June 30, 2020.

### Six months ended June 30, 2021 compared to the six months ended June 30, 2020

The Company’s fee income from licensing activities for the six months ended June 30, 2021 was $327,060 as compared to $532,286 for the six months ended June 30, 2020, representing a $205,226 decrease between these two periods. Lower fees in the automotive, aircraft and architectural markets were partially offset by higher fee income from licensees in the display market.

Operating expenses decreased by $323,732 for the six months ended June 30, 2021 to $1,128,672 from $1,452,404 for the six months ended June 30, 2020. This decrease was the result of lower payroll and related costs ($196,000), lower depreciation ($73,000) and lower bad debts expense ($53,000).

Research and development expenditures decreased by $45,060 to $284,989 for the six months ended June 30, 2021 from $330,049 for the six months ended June 30, 2020. This decrease was the result of lower payroll and related costs ($31,000) as well as lower allocated insurance costs ($12,000).

The Company’s net investment income for the six months ended June 30, 2021 was $1,359 as compared to $32,452 for the six months ended June 30, 2020. The difference was primarily due to lower interest rates as well as unrealized reductions in market value of investments and lower cash balances available for investment.

In addition, the Company recorded $194,140 of other income for the six months ended June 30, 2020 representing the portion of the PPP loan estimated to be forgiven through such date. There was no PPP loan forgiveness during the six months ended June 30, 2021.

As a consequence of the factors discussed above, the Company’s net loss was $1,085,242 ($0.03 per common share) for the six months ended June 30, 2021 as compared to $1,023,575 ($0.03 per common share) for the six months ended June 30, 2020.

### Financial Condition, Liquidity and Capital Resources

The Company has primarily utilized its cash, cash equivalents, short-term investments, marketable securities, and the proceeds from its investments to fund its research and development, for marketing initiatives, and for other working capital purposes. The Company’s working capital and capital requirements depend upon numerous factors, including, but not limited to, the results of research and development activities, competitive and technological developments, the timing and costs of patent filings, and the development of new licensees and changes in the Company’s relationship with 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.

During the six months ended June 30, 2021, the Company’s cash and cash equivalents balance decreased by $4,433,098 principally as a result of cash used for the purchase of marketable securities of $3,433,633 as well as cash used for operations of $1,386,442 partially offset by cash proceeds from the sale of marketable securities of $300,000 and cash proceeds from the exercise of options and warrants of $86,262. As of June 30, 2021, the Company had cash and cash equivalents and marketable securities of $3,471,590, working capital of $4,200,673 and total shareholders’ equity of $4,328,025.

Our quarterly projected cash flow shortfall, based on our current operations adjusted for any non-recurring cash expenses for the next 12 months, is approximately $400,000-$450,000 per quarter. We expect to have sufficient working capital for at least the next 24 months of operations. We may seek to eliminate some operating expenses in the future to reduce our cash flow shortfall.

The Company expects to use its cash to fund its research and development of SPD light valves, its expanded marketing initiatives, and for other working capital purposes. The Company believes that its current cash and cash equivalents would fund its operations until mid-2023. There can be no assurances that expenditures will not exceed the anticipated amounts or that additional financing, if required, will be available when needed or, if available, that its terms will be favorable or acceptable to the Company. Eventual success of the Company and generation of positive cash flow will be dependent upon the extent of 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 fully fund its operations.

## Market risk

As filed, 221 characters.

The information required by Item 3 has been disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. There has been no material change in the disclosure regarding market risk.

## Controls and procedures

As filed, 7,987 characters.

### Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We designed our disclosure controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and acting interim Chief Financial Officer, with assistance from other members of our management, has reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2021, and, based on his evaluation, has concluded that our disclosure controls and procedures contained a material weakness in internal control over financial reporting which was identified by the Company during our year-end internal control procedures. A material weakness is a deficiency or combination of deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As of June 30, 2021, there was a material weakness in the Company’s management quarterly review control related to the assessment of the classification of cash equivalents and marketable securities. During the second quarter, the Company invested in two mutual funds that did not consist of securities with original maturities of three months or less. While the securities that were purchased were of a highly liquid nature, they did not meet the GAAP definition of a cash equivalent and should have been presented as marketable securities. The Company’s quarterly control procedures over interim reporting were not adequate to identify this change on a timely basis until the Company’s year-end financial reporting process. The Company has modified its interim control procedures to include specific procedures and controls over of the reporting of investments consistent with its year-end review procedures.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. See the description of the material weakness in internal controls over financial reporting outlined Evaluation of Disclosure Controls and Procedures above.

### Forward-Looking Statements

The information set forth in this Report and in all publicly disseminated information about the Company, including the narrative contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above, includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by that section. Readers are cautioned not to place undue reliance on these forward-looking statements as they speak only as of the date hereof and are not guaranteed.

#### PART II. OTHER INFORMATION

#### Item1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows, prospects and/or the trading price of our common stock. Although the risk and uncertainty listed below is that we consider significant, material risks and uncertainties that are not presently known to us may also adversely affect our business, financial condition or results of operations. In evaluating our business and an investment in our securities, you should consider the following risk factor, in addition to the other information presented in this report, as well as the other reports we file from time to time with the SEC:

### Risks Related to Our Business

**We have identified a material weakness in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.**

On February 18, 2022, our board of directors, following discussions with management, determined that our unaudited condensed consolidated financial statements for the quarters ended June 30, 2021 and September 30, 2021 filed with the SEC on August 5, 2021 and November 4, 2021, respectively, required restatement to correct the classification of certain cash equivalents as marketable securities. The board’s determination to restate such financial statements was identified by management during the course of preparing the Company’s financial statements for the year ended December 31, 2021.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation of those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As described elsewhere in this filing, we have identified a material weakness in our internal control over financial reporting related the classification of cash equivalents and marketable securities. As a result of this material weakness, our management has concluded that our internal control over financial reporting was not effective as of the end of the period covered by this report.

We are taking measures to remediate the material weakness described herein. However, if we are unable to remediate our material weakness in a timely manner or we identify additional material weaknesses or significant deficiencies in our internal controls or disclosure controls, we may be unable to provide required financial information in a timely and reliable manner and we may incorrectly report financial information. If our financial statements are not filed on a timely basis, we could be subject to adverse action by shareholders, Nasdaq, the SEC or other regulatory authorities. The existence of material weaknesses or significant deficiencies in internal control over financial reporting could adversely affect our reputation or investor perceptions of us, which could have a negative effect on the trading price of our stock. In addition, we may incur additional costs to remediate material weaknesses or significant deficiencies in our internal control over financial reporting.

We cannot assure you that the measures we are taking will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.

Filed Feb 24, 2022.
Source: SEC EDGAR, the filing index for accession 0001493152-22-005408. Last ingested by Listed: Oct 24, 2026, 14:57 ET. No prices; not investment advice.