RESEARCH
FRONTIERS INCORPORATED
Consolidated
Balance Sheets
(Unaudited)
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,188,054
|
|
|
$
|
1,691,603
|
|
Short-term
investments
|
|
|
-
|
|
|
|
1,523,333
|
|
Royalty
receivables, net of reserves of $1,006,424 in 2017 and $1,110,020 in 2016
|
|
|
782,191
|
|
|
|
1,117,146
|
|
Prepaid
expenses and other current assets
|
|
|
51,067
|
|
|
|
256,892
|
|
Total
current assets
|
|
|
3,021,312
|
|
|
|
4,588,974
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
526,293
|
|
|
|
651,655
|
|
Deposits
and other assets
|
|
|
33,567
|
|
|
|
33,567
|
|
Total
assets
|
|
$
|
3,581,172
|
|
|
$
|
5,274,196
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
104,448
|
|
|
$
|
29,932
|
|
Accrued
expenses and other
|
|
|
270,637
|
|
|
|
339,338
|
|
Deferred
revenue
|
|
|
46,666
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
421,751
|
|
|
|
369,270
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.0001 per share; authorized 100,000,000 shares, issued and outstanding 24,043,846 shares in 2017 and 2016
|
|
|
2,404
|
|
|
|
2,404
|
|
Additional
paid-in capital
|
|
|
111,551,490
|
|
|
|
111,551,490
|
|
Accumulated
deficit
|
|
|
(108,394,473
|
)
|
|
|
(106,648,968
|
)
|
Total
shareholders’ equity
|
|
|
3,159,421
|
|
|
|
4,904,926
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
3,581,172
|
|
|
$
|
5,274,196
|
|
See
accompanying notes to consolidated financial statements.
RESEARCH
FRONTIERS INCORPORATED
Consolidated
Statements of Operations
(Unaudited)
|
|
Nine
months ended
|
|
|
Three
months ended
|
|
|
|
Sept
30, 2017
|
|
|
Sept
30, 2016
|
|
|
Sept
30, 2017
|
|
|
Sept
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
income
|
|
$
|
1,229,631
|
|
|
$
|
958,337
|
|
|
$
|
488,336
|
|
|
$
|
304,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,380,328
|
|
|
|
2,676,178
|
|
|
|
607,291
|
|
|
|
624,080
|
|
Research
and development
|
|
|
598,638
|
|
|
|
1,160,544
|
|
|
|
185,296
|
|
|
|
246,755
|
|
Total
Expenses
|
|
|
2,978,966
|
|
|
|
3,836,722
|
|
|
|
792,587
|
|
|
|
870,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,749,335
|
)
|
|
|
(2,878,385
|
)
|
|
|
(304,251
|
)
|
|
|
(566,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
3,830
|
|
|
|
25,203
|
|
|
|
1,113
|
|
|
|
6,332
|
|
Net
loss
|
|
$
|
(1,745,505
|
)
|
|
$
|
(2,853,182
|
)
|
|
$
|
(303,138
|
)
|
|
$
|
(559,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
24,043,846
|
|
|
|
24,043,846
|
|
|
|
24,043,846
|
|
|
|
24,043,846
|
|
See accompanying notes to consolidated financial
statements.
RESEARCH
FRONTIERS INCORPORATED
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Nine
months ended
|
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,745,505
|
)
|
|
$
|
(2,853,182
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
131,725
|
|
|
|
141,481
|
|
Loss
on sale of asset
|
|
|
-
|
|
|
|
1,776
|
|
Allowance
for uncollectible accounts
|
|
|
(1,785
|
)
|
|
|
-
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Royalty
receivables
|
|
|
336,739
|
|
|
|
(220,895
|
)
|
Prepaid
expenses and other current assets
|
|
|
205,825
|
|
|
|
69,770
|
|
Deferred
revenue
|
|
|
46,666
|
|
|
|
10,000
|
|
Accounts
payable and accrued expenses
|
|
|
5,815
|
|
|
|
136,293
|
|
Net
cash used in operating activities
|
|
|
(1,020,520
|
)
|
|
|
(2,714,757
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(6,362
|
)
|
|
|
(8,055
|
)
|
Proceeds
from sale of fixed asset
|
|
|
-
|
|
|
|
6,000
|
|
Change
in investments
|
|
|
1,523,333
|
|
|
|
(6,836
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
1,516,971
|
|
|
|
(8,891
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
496,451
|
|
|
|
(2,723,648
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
1,691,603
|
|
|
|
5,712,310
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,188,054
|
|
|
$
|
2,988,662
|
|
See
accompanying notes to consolidated financial statements.
RESEARCH
FRONTIERS INCORPORATED
Notes
to Consolidated Financial Statements
September
30, 2017
(Unaudited)
Note
1. Basis of Presentation
The
accompanying unaudited consolidated condensed 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 10-01 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 and nine months ended September 30, 2017 are not necessarily
indicative of the results that may be expected for the fiscal year ending December 31, 2017. 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 (the “Company”) for the fiscal year ended December 31, 2016.
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; train windows; 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,
train, aerospace and appliance applications.
The
Company has historically utilized its cash and cash equivalents and the proceeds from the sale of its investments 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 forgoing 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 on the nature of such
changes. 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. As of September 30, 2017, the
Company had cash and cash equivalents of $2,188,054, working capital (total current assets less total current liabilities) of
$2,599,561 and total shareholder’s equity of $3,159,421. The Company expects to have sufficient working capital for the
next 12-15 months of operations. Since last year the Company has reduced its cash shortfall and is working to further reduce it,
and may seek new sources of financing. However, there can be no assurance as to the availability or terms upon which such financing
and capital might be available.
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 has entered into a number of license agreements covering its light-control technology. The Company receives minimum annual
royalties under certain license agreements and records fee income on a ratable basis each quarter once collectability is reasonably
assured. In instances when sales of licensed products by its licensees exceed minimum annual royalties, the Company recognizes
fee income as the amounts have been 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. Such excess amounts are recorded as deferred revenue and are recognized
into income in future periods as earned.
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 nine months of 2017, four licensees accounted for 10% or more of fee income of the Company; these
licensees accounted for approximately 31%, 15%, 12% and 11%, respectively of fee income recognized during such period. During
the first nine months of 2016, three licensees accounted for 10% or more of fee income of the Company; these licensees accounted
for approximately 30%, 29% and 15%, respectively of fee income recognized during this 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 nine months ended September 30, 2017 and 2016 there were
no charges related to options granted to consultants.
The
Company did not grant any stock options to employees and directors during the nine months ended September 30, 2017 and 2016.
There
was no compensation expense recorded relating to restricted stock grants to employees and directors during the nine months ended
September 30, 2017 and 2016.
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 not more likely than not
that the Company would achieve profitable operations.
Note
8
. Equity
The
Company did not sell any equity securities during the nine months ended September 30, 2017 and 2016. The Company did not receive
any proceeds during the nine months ended September 30, 2017 and 2016 in connection with stock issued by the exercise of options
and warrants previously granted.
Note
9
. Treasury Stock
The
Company did not repurchase any of its stock during the nine months ended September 30, 2017 and 2016.
Note
10
. Investments
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 classifications. 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 on 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 securities sold is based on the specific identification method. Interest
and dividends on the investments are accrued at the balance sheet date. At December 31, 2016 all investments were classified as
held to maturity and consisted of the following:
|
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Certificates
of Deposit
|
|
|
Maturity
|
|
Value
of Held to Maturity Investment
|
|
|
Value
of Held to Maturity Investment
|
|
Investment
|
|
|
Date
|
|
(based
on cost)
|
|
|
(based
on cost)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,523,333
|
|
|
February
23, 2017
|
|
$
|
-
|
|
|
$
|
1,523,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
1,523,333
|
|
Note
11
. Fair Value Measurements
We
value financial instruments using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2, defined as inputs other than quoted prices for similar assets or liabilities in active markets that are either directly
or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring
an entity to develop its own assumptions.
Note
12. New Accounting Pronouncements
In
May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle
that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a
five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced
disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts
with customers. In July 2015, the FASB affirmed its proposal of a one-year deferral of the effective date of the new revenue
standard. As a result, the new guidance will be effective for the Company beginning in the first quarter of 2018. The amendments
may be applied retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial
application and the Company intends to apply the modified retrospective method. The Company currently recognizes its minimum annual
royalties (fixed payments) ratably over the term of the contract and we are evaluating the number of performance obligations within
each specific contract and whether the licenses of IP are distinct from the related performance obligations in order to conclude
on the timing and pattern of revenue recognition under the new standard. The Company is continuing to evaluate the standard’s
impact on the consolidated results of operations and financial condition. In addition, we continue to assess the potential
impact the new standard will have on our related disclosures and internal processes to address the new standard.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”)
No. 2016-02, Leases. ASU 2016-02 requires lessees to apply a modified retrospective transition approach for leases existing at,
or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption
of the new guidance is permitted. The new standard is effective for the Company beginning in the first quarter of 2019. While
not yet in a position to assess the full impact of this application of the new standard, the Company expects that the impact of
recording the lease liabilities and the corresponding right to use assets will have an impact on its total asset and liabilities
with a minimal impact on equity.
In
May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in
Topic 718. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning
after December 15, 2017. Early adoption is permitted. The Company does not believe this new accounting standard update will have
a material impact on its consolidated financial statements.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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 consolidated financial statements, “Summary of Significant Accounting Policies” in our
Form 10-K report for the period ending December 31, 2016.
The
Company has entered into a number of license agreements covering products using the Company’s SPD technology. The Company
receives fees and minimum annual royalties under certain license agreements and records fee income on a ratable basis each quarter
as earned. In instances when sales of licensed products by its licensees exceed minimum annual royalties, the Company recognizes
fee income as the amounts have been 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.
The
Company expenses costs relating to the development or acquisition of patents due to the uncertainty of the recoverability of these
items. All of our research and development costs are charged to operations as incurred. Our research and development expenses
consist of costs incurred for internal and external research and development. These costs include direct and indirect overhead
expenses.
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 are used, stock-based compensation expense could be 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 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 would be 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.
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates. Examples of our critical estimates include: (i) the full
valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits would be realized in
future periods, and (ii) royalty receivable reserves.
New Accounting Pronouncements
In
May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle
that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a
five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced
disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts
with customers. In July 2015, the FASB affirmed its proposal of a one-year deferral of the effective date of the new revenue
standard. As a result, the new guidance will be effective for the Company beginning in the first quarter of 2018. The amendments
may be applied retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial
application and the Company intends to apply the modified retrospective method. The Company currently recognizes its minimum
annual royalties (fixed payments) ratably over the term of the contract and we are evaluating the number of performance obligations
within each specific contract and whether the licenses of IP are distinct from the related performance obligations in order to
conclude on the timing and pattern of revenue recognition under the new standard. The Company is continuing to evaluate the standard’s
impact on the consolidated results of operations and financial condition. In addition, we continue to assess the potential
impact the new standard will have on our related disclosures and internal processes to address the new standard.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”)
No. 2016-02, Leases. ASU 2016-02 requires lessees to apply a modified retrospective transition approach for leases existing at,
or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption
of the new guidance is permitted. The new standard is effective for the Company beginning in the first quarter of 2019. While
not yet in a position to assess the full impact of this application of the new standard, the Company expects that the impact of
recording the lease liabilities and the corresponding right to use assets will have an impact on its total asset and liabilities
with a minimal impact on equity.
In
May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in
Topic 718. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning
after December 15, 2017. Early adoption is permitted. The Company does not believe this new accounting standard update will have
a material impact on its consolidated financial statements.
Results
of Operations
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 each model 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 result in the recognition
of deferred revenue for the current accounting period, which will be recognized as fee income in future periods. Also, licensees
may 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. 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 its 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.
In
the first quarter of 2017, the Company received royalty revenues from sales of the Magic Sky Control option on the S-Class sedans
and coupe, and on the SLK and SL roadsters in excess of minimum annual royalty levels in its license agreements with our licensees
who supply this glass to Daimler which resulted in accretive royalty revenue from these licensees for the remained of the year.
Fluctuations in exchange rates, total vehicle production levels, and take rates for the Magic Sky Control option are expected
to continue. Production efficiencies are also expected to continue 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.
As noted previously, the Company is working with all levels of licensees in the supply chain to further reduce the cost of final
products using the Company’s technology.
Nine
months ended September 30, 2017 Compared to the Nine months ended September 30, 2016
The
Company’s fee income from licensing activities for the nine months ended September 30, 2017 was $1,229,631 as compared to
$958,337 for the nine months ended September 30, 2016 representing a $271,294 increase between these two periods. This increase
was principally the result of higher revenues from licensees in the aircraft, architectural, automotive and marine sectors as
well as revenue from a new licensee focused on the transparent display sector.
Operating
expenses decreased by $295,850 for the nine months ended September 30, 2017 to $2,380,328 from $2,676,178 for the nine months
ended September 30, 2016. This decrease was principally the result of lower patent and patent litigation costs ($108,000) as well
as lower payroll and related costs ($100,000) and lower investor relations and marketing costs ($84,000).
Research
and development expenditures decreased by $561,906 to $598,638 for the nine months ended September 30, 2017 from $1,160,544 for
the nine months ended September 30, 2016. This decrease was principally the result of lower payroll costs ($516,000).
The
Company’s net investment income for the nine months ended September 30, 2017 was $3,830 compared to $25,203 earned for the
nine months ended September 30, 2016 with lower earnings due to redemption of the Company’s investments in 2017.
As
a consequence of the factors discussed above, the Company’s net loss was $1,745,505 ($0.07 per common share) for the nine
months ended September 30, 2017 as compared to $2,853,182 ($0.12 per common share) for the nine months ended September 30, 2016.
Three
months ended September 30, 2017 Compared to the Three months ended September 30, 2016
The
Company’s fee income from licensing activities for the three months ended September 30, 2017 was $488,336 as compared to
$304,772 for the three months ended September 30, 2016 representing a $183,564 increase between these two periods. This increase
was principally the result of higher revenues from licensees in the aircraft, automotive and marine sectors as well as revenue
from a new licensee focused on the transparent display sector.
Operating
expenses decreased by $16,789 for the three months ended September 30, 2017 to $607,291 from $624,080 for the three months ended
September 30, 2016. This decrease was principally the result lower payroll and related costs ($50,000), as well as lower office
and facility costs ($15,000) and lower travel and entertainment costs ($10,000) partially offset by higher patent and patent litigation
costs ($44,000).
Research
and development expenditures decreased by $61,459 to $185,296 for the three months ended September 30, 2017 from $246,755 for
the three months ended September 30, 2016. This decrease was principally the result of lower payroll costs ($25,000) as well as
lower materials costs ($16,000) as well as lower office and facility costs ($12,000).
The
Company’s net investment income for the three months ended September 30, 2017 was $1,113 compared to $6,332 earned for the
three months ended September 30, 2016 with lower earnings due to redemption of the Company’s investments in 2017.
As
a consequence of the factors discussed above, the Company’s net loss was $303,138 ($0.01 per common share) for the three
months ended September 30, 2017 as compared to $559,731 ($0.02 per common share) for the three months ended September 30, 2016.
Financial
Condition, Liquidity and Capital Resources
The
Company has primarily utilized its cash, cash equivalents, short-term investments, 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 nine months ended September 30, 2017, the Company’s cash and cash equivalents balance increased by $496,451. The increase
was due to the maturity of a certificate of deposit for $1,523,333 partially offset by cash used for operations of $1,020,520
and the purchase of fixed assets of $6,362. As of September 30, 2017, the Company had cash and cash equivalents of $2,188,054,
working capital (total current assets less total current liabilities) of $2,599,561 and total shareholder’s equity of $3,159,421.
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 per quarter. We may eliminate some operating expenses in the future, which will
further reduce our cash flow shortfall if needed. Based on the expected benefit of expense reductions, we expect to have sufficient
working capital for the next 12-15 months of operations. Since last year we have reduced our cash shortfall and are working to
further reduce it, and may seek new sources of financing.
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. 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 licensees to fund its operations.