UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) of

THE SECURITIES AND EXCHANGE ACT OF 1934

RESEARCH FRONTIERS INCORPORATED

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (516) 364-1902

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ]No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ]No [X]

Securities registered pursuant to Section 12(b) of the Act:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of AugustMay 13, 2018,2019, there were outstanding 25,432,739 shares28,666,831shares of Common Stock, par value $0.0001 per share.

RESEARCH FRONTIERS INCORPORATED

Consolidated Balance Sheets

(Unaudited)

See accompanying notes to consolidated financial statements.

RESEARCH FRONTIERS INCORPORATED

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to consolidated financial statements.

RESEARCH FRONTIERS INCORPORATED

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to consolidated financial statements.

RESEARCH FRONTIERS INCORPORATED

Consolidated Statements of Shareholders’ Equity

(Unaudited)

RESEARCH FRONTIERS INCORPORATED

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to consolidated financial statements.

RESEARCH FRONTIERS INCORPORATED

Notes to Consolidated Financial Statements

June 30, 2018March 31, 2019

(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 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 and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.2019. 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, 2017.2018.

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:including SPD-Smart™ windows, sunshades, skylights and interior partitions for homes and buildings; automotive windows;windows, sunroofs, sun-visors, sunshades, rear-view mirrors, instrument panels and navigation systems; aircraft windows; train 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 historically utilized its cash, and cash equivalents, short-term investments, 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 forgoingforegoing 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 onupon 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 limited capital resources 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, 2019, we had working capital of approximately $3.9 million, cash of approximately $3.3 million, shareholders’ equity of approximately $3.4 million and an accumulated deficit of approximately $112.5 million. 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 $450,000 per quarter. We may eliminate some operating expenses in the future, which will further reduce our cash flow shortfall if needed. We expect to have sufficient working capital for the next 18 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.

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. 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 June 30, 2018, the Company had cash and cash equivalents of $1,861,972, working capital (total current assets less total current liabilities) of $2,144,166 and total shareholders’ equity of $2,581,038. Since last year the Company has reduced its cash shortfall.

On August 13, 2018, the Company announced that a group of investors led by a licensee of the Company’s SPD technology agreed to make a $2,000,000 equity investment in the Company (please see Note 9 for additional details of this transaction). With the addition of proceeds from this investment, the Company expects as of this filing to have sufficient working capital for at least the next 24 months of operations.

Note 3. Recently Adopted Accounting Pronouncement

Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board’s Standard,Leases (Topic 842), as amended. The standard requires all leases to be recorded on the balance sheet as a right of use asset and a lease liability.The standard provides practical expedients in order to simplify adoption, including the following:

The Company used the above practical expedients as the transition method in the application of the new lease standard at January 1, 2019. The Company applied a policy election to exclude short-term leases from balance sheet recognition and also elected certain practical expedients at adoption. As permitted, the Company did not reassess whether existing contracts are or contain leases, the lease classification for any existing leases, initial direct costs for any existing lease, which were not previously accounted for as leases, are or contain a lease. At adoption on January 1, 2019, an operating lease liability of $1,134,000 and an operating lease right of use asset of $941,000 was recorded. The operating lease liability was $193,000 more than the operating lease right of use asset due to unamortized lease incentive from periods prior to the adoption of the new lease standard. There was no cumulative earnings effect adjustment.

Note 4. 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 4.5. Revenue Recognition

In May 2014, the FASB issued guidance on revenue recognition (ASC 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.

This new ASC 606 guidance was adopted by the Company beginning January 1, 2018. ASC 606 was applied using the modified retrospective method, with the cumulative effect of the initial adoption being recognized as an adjustment to opening retained earnings at January 1, 2018. The comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC 605”). The Company’s policy relating to revenue under ASC 605 is described in Note 2(e) of the Company’s Form 10-K for the year ended December 31, 2017. The policies described herein refer to those in effect as of January 1, 2018.

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 commitments.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. In the second quarter of 2018, the Company reported $40,193 lower revenue under ASC 606 as compared to the accounting guidance used prior to the adoption of ASC 606 due to the higher percent of the transaction price being recognized in the first quarter. In the first six months of 2018, the Company reported $4,425 higher revenue under ASC 606 as compared to the accounting guidance used prior to the adoption of ASC 606 due to the higher percent of the transaction price being recognized in the first quarter.

ASC 606 was applied using the modified retrospective method to all contracts that were not completed contracts as of the implementation date, with the cumulative effect of the initial adoption being recognized as an adjustment to opening retained earnings at January 1, 2018. As of January 1, 2018, we had four license agreements that were still under their multi-year initial term. The Company elected to use the Modified Retrospective approach when adopting the provisions of ASC 606. Using the Modified Retrospective Approach, with the adoption of ASC 606 as of January 1, 2018, the Company will not recognize $58,021 of revenue in future periods from these four license agreements that it would have recognized under ASC 605. The non-recognition of future revenues associated with the adoption of ASC 606 is solely from a financial reporting standpoint and does not impact the Company’s licensees’ obligations to pay royalties to the Company under their license agreements. The Company recorded a cumulative adjustment to decrease opening accumulated deficit and increase accounts receivable balance as of January 1, 2018 by $58,021.

As of June 30, 2018, the net closing royalties receivable balance is $634,340. Had ASC 606 not been adopted, the Company’s net closing accounts receivable balance as of June 30, 2018 would have been $661,858. The Company does not have any contract assets under ASC 606 as of January 1, 2018 and June 30, 2018. There was $824 of revenue recognized during the six months ended June 30, 2018 that was included in contract liability (deferred revenue) as of the beginning of the period and the balance of this account as of June 30, 2018 is $102,848. Had ASC 606 not been adopted, the Company’s deferred revenue balance as of June 30, 2018 would have been $114,028.March 31, 2019.

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. Such excess amounts are recorded as deferred revenue and are recognized into income in future periods as earned.

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 June 30,March 31, 2019, the Company has six license agreements that are in their initial multiyear term (“Initial Term”) with continuing performance obligations going forward. The Initial Term of four of these agreements will end as of December 31, 2019, one will end as of December 31, 2021, and one will end as of December 31, 2022. The Company currently expects that all six of these agreements will renew annually at the end of the Initial Term. As of March 31, 2019, the aggregate amount of the revenue to be recognized upon the satisfaction of the remaining performance obligations for the six license agreements is $309,867. The revenue for these remaining performance obligations for each of the six license agreements is expected to be recognize evenly throughout their remaining period of the Initial Term.

As of March 31, 2018, the Company hashad five license agreements that are in their initial multiyear term (“Initial Term”) with continuing performance obligations going forward. The Initial Term of twothree of these agreements will end as of December 31, 2019, one will end as of December 31, 2020, one will end as of December 31, 2021, and one will end as of December 31, 2022. The Company currently expects that all five of these agreements will renew annually at the end of the Initial Term. As of June 30, 2018, the aggregate amount of the revenue to be recognized as of March 31, 2018 upon the satisfaction of the remaining performance obligations for the fivefour license agreements is $320,966.$364,812. The revenue for these remaining performance obligations for each of the five license agreements is expected to be recognize evenly throughout their remaining period of the Initial Term.

Note 5.6. 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 sixthree months of 2019, five licensees accounted for 10% or more of fee income of the Company; these licensees accounted for approximately 31%, 14%, 13%, 11 and 10%, respectively, of fee income recognized during such period. During the first three months of 2018, threefour licensees accounted for 10% or more of fee income of the Company; these licensees accounted for approximately 33%, 13%14%, 12% and 12%, respectively of fee income recognized during such period. During the first six months of 2017, three licensees accounted for 10% or more of fee income of the Company; these licensees accounted for approximately 31%, 17% and 13%11%, respectively, of fee income recognized during this period.

Note 6.7. 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 and six months ended June 30,March 31, 2019 and 2018 and 2017 there were no charges related to options granted to consultants.

During the three and six months ended June 30, 2018,the Company granted 150,182 fully vested options to employees and recorded share-based compensation of $69,309.The Company valued these grants using the Black-Scholes option pricing model with the following assumptions:

The Company did not grant any stock options to employees and directors during the three and six months ended June 30, 2017.March 31, 2019 and 2018.

There was no compensation expense recorded relating to restricted stock grants to employees and directors during the three and six months ended June 30, 2018March 31, 2019 and 2017.2018.

Note 7.8. 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 and be able to utilize the benefit of the net operating loss carryforwards.

Note 8.9. Basic and Diluted Loss Per Common Share

Basic loss per share excludes any dilution. It is based upon the weighted average number of common shares outstanding during the period. Dilutive 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, 2019 and 2018 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 2,752,766 and 2,825,803 for the three months ended March 31, 2019 and 2018.

Note 10. Equity

During the three months ended March 31, 2019, the Company received $1,101,782 in proceeds from the exercise of outstanding warrants and issued 1,001,620 shares of its capital stock in connection with these exercises.

On or around February 16, 2018, a small group of long-time shareholders of the Company who are accredited investors made an interest-free five-year convertible loan of $1.25 million to the Company which, upon the occurrence of certain conditions which have already occurred, automatically converted into 1,388,893 shares of common stock at a price equal to the market price of the Company’s common stock when the loan was made, plus warrants expiring February 28, 2023 to purchase 1,388,893 shares of common stock at an exercise price of $1.10, $1.20 or $1.35 per share depending on the exercise date. No payments are due on this note during its five-year term or after conversion into equity.

On April 23, 2018, Research Frontiers Incorporated filed a prospectus supplement relating to the issuance and sale of the above common stock and warrant securities with the Securities and Exchange Commission.

The Company has recorded this transaction as an equity transaction whereby the proceeds were accounted for as the issuance of the Company’s common stock on the date that the proceeds were received.

The Company did not sell any equity securities during the three and six months ended June 30, 2017.

Note 9. Subsequent Event

On August 13,September 7, 2018, the Company announced that it had sold common stock to a group of investors led by Gauzy Ltd., a licensee of the Company’s SPD technology agreed to make a $2,000,000 equity investment in the Company. As of the date of this filing, the Company has received $500,000 of the investmenttechnology. The aggregate proceeds from this offering. With the addition of the anticipated proceeds from this investment, the Company expects to have sufficient working capital for at least the next 24 months of operations. Based on the current funding received and additional strategic cost cutting measures implemented at the date of this filing, the Company will have sufficient working capital of at least the next 15 months of operations.these stock offerings was $2,000,000. At the closing, the investors will receivereceived 2,173,916 shares of Research Frontiers common stock at a price of $0.92 per share, as well as five-year warrants to purchase 1,086,957 shares of Research Frontiers common stock at an exercise price of $1.10, $1.20 or $1.38 per share depending on the exercise date.

Note 10. Treasury Stock In connection with the issuance of certain of these warrants during the third quarter of 2018, the Company recorded $223,370 as a warrant liability upon the issuance of these warrants on August 13, 2018 and recorded a non-cash accounting expense of $278,044 to mark the warrants to their estimated market value as of December 31, 2018. This resulted in a liability of $501,414 recorded on the Company’s December 31, 2018 balance sheet. During the three months ended March 31, 2019, the Company recorded a non-cash accounting expense of $247,590 to mark the warrants to their estimated market value as of March 31, 2019.

The Company did not repurchasesell any of its stockequity securities during the three ended March 31, 2019 and six month periods ended June 30, 2018 and 2017.respectively.

Note 11. Fair Value MeasurementsLeases

We value financial instruments usingThe Company determines if an arrangement is a three-tier fair value hierarchy, which prioritizeslease at its inception. This determination generally depends on whether the inputs usedarrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active marketsexchange for identical assets or liabilities; Level 2, defined as inputs other than quoted pricesconsideration. 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 similar assets or liabilities in active markets that are either directly or indirectly observable;variable leases and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.short-term leases is recognized when the obligation is incurred.

The Company has operating leases for certain facilities, vehicles and equipment with a weighted average remaining lease term of 5.9 years. 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 its 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, 2019 is 5.5%.

Operating lease expense for the three months ended March 31, 2019 was approximately $44,000 as compared to approximately $45,000 under the accounting standards in effect for the period ended March 31, 2018. The Company has no material variable lease costs or sublease income for the three months ended March 31, 2019. Subsequent to the Company’s adoption of the new lease accounting guidance on January 1, 2019, the Company recorded new right of use lease assets of approximately $0.9 million and associated lease liabilities of approximately $1.1 million.

Maturities of operating lease liabilities as of March 31, 2019 were as follows:

Pursuant to the Company’s adoption of the new lease accounting guidance, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 2018, the following table presents the Company’s future minimum rental commitments under operating leases as of December 31, 2018:

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 noteNote 2 to our consolidated financial statements, “Summary of Significant Accounting Policies” in our Form 10-K report for the period ending December 31, 2017.Policies.”

The Company adopted ASC 606, the new revenue recognition standard, beginning January 1, 2018. The comparative prior periods have not been adjusted and continue to be reported under ASC 605. 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 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 arehad been used in the current period, stock-based compensation expense could behave 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 would beis 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.

Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board’s Standard,Leases (Topic 842), as amended. The standard requires all leases to be recorded on the balance sheet as a right of use asset and a lease liability. The Company used a transition method that applies the new lease standard at January 1, 2019. The Company applied a policy election to exclude short-term leases from balance sheet recognition and also elected certain practical expedients at adoption. As permitted, the Company did not reassess whether existing contracts are or contain leases, the lease classification for any existing leases, initial direct costs for any existing lease, which were not previously accounted for as leases, are or contain a lease. At adoption on January 1, 2019, an operating lease liability of $1,133,821 and an operating lease right of use asset of $941,000 was recorded. The operating lease liability was $192,537 more than the operating lease right of use asset due to unamortized lease incentive from periods prior to the adoption of the new lease standard. There was no cumulative earnings effect adjustment.

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. ExamplesAn example of oura critical estimates include: (i)estimate is the full valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits wouldwill be realized in future periods, (ii) royalty receivable reserves, and (iii) the allocation of revenue recognition of fee income from license agreements between Grant of Use, Technical Support and New Improvements.periods.

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 adoptedcurrently 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 ASC 606 guidance beginning January 1, 2018. The comparative prior periods have not been adjustedtechnology 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 continue to be reported under ASC 605.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 resultresulting 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.

In 2019 and 2018, the Company received royalty revenues from sales of the Magic Sky Control option on the S-Class Coupe, Maybach and S-Class Sedan, and SL and SLK/SLC roadsters in excess of the minimum annual royalty levels for the two licensees supplying products using the Company’s technology to Daimler. As such, royalties from these five car models was accretive to the Company’s royalty revenue. In addition, during the first quarter of 2019 one of the Company’s licensees started commercial production of SPD products for McLaren Automotive. 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 OEM’s (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 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 2018, the Company received royalty revenues from sales of the Magic Sky Control option on the S-Class sedans and coupe in excess of allocated minimum annual royalty levels in its license agreement with our licensee who supplies this glass to Daimler. As a consequence, all subsequent royalties earned by this licensee during the remainder of the year with be recognized in the period in which they are earned. 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.

Three months ended June 30, 2018March 31, 2019 Compared to the Threethree months ended June 30, 2017March 31, 2018

The Company’s fee income from licensing activities for the three months ended June 30, 2018March 31, 2019 was $324,853$418,657 as compared to $348,179$433,269 for the three months ended June 30, 2017March 31, 2018 representing a $23,326$14,612 decrease between these two periods. This decrease in revenues was principally the result of the adoption of ASC 606 which, as described above is a different revenue recognition standard. In 2018, the Company adopted the new ASC 606 revenue recognition guidance which applies to revenues reported beginning with the first quarter of 2018. We would have reported $365,048 ofLower fee income representing a $16,869 increase infrom the reportedarchitectural licensees was partially offset by higher fee income for the period ending June 30, 2018 had we continued to use the accounting guidance used prior to the adoption of ASC 606.in automotive, aircraft and display market sectors.

Operating expenses increaseddecreased by $9,179$258,659 for the three months ended June 30, 2018March 31, 2019 to $645,960$751,166 from $636,781$1,009,825 for the three months ended June 30, 2017.March 31, 2018. This increasedecrease was the result of higher non-cash stock option compensation costs ($60,000) partially offset by lower payroll and related costs ($14,000),156,000) as well as lower marketing and website costs ($6,000), and lower professional fees and patent costs ($20,000) and lower stock listing and transfer agent fees ($50,000).

Research and development expenditures increased by $48,774$11,347 to $250,824$229,963 for the three months ended June 30, 2018March 31, 2019 from $202,050$218,616 for the three months ended June 30, 2017.March 31, 2018. This increase was principally the result of higher payroll and related costs ($10,000),12,000).

In connection with the issuance of certain warrants during the third quarter of 2018, the Company recorded a non-cash expense of $247,590 to mark these to their market value as well as higher non-cash stock option compensation cost ($9,000) and higher material and project costs ($29,000).

of March 31, 2019.

The Company’s net investment income for the three months ended June 30, 2018March 31, 2019 was $2,040$6,165 as compared to $840 earned$1,405 for the three months ended June 30, 2017 with higher earningsMarch 31, 2018. The difference was primarily due to higher cash balances available for investment in addition to higher interest rates.

As a consequence of the factors discussed above, the Company’s net loss was $569,891 ($0.02 per common share) for the three months ended June 30, 2018 as compared to $489,812 ($0.02 per common share) for the three months ended June 30, 2017.

Six months ended June 30, 2018 Compared to the Six months ended June 30, 2017

The Company’s fee income from licensing activities for the six months ended June 30, 2018 was $758,122 as compared to $741,295 for the six months ended June 30, 2017 representing a $16,827 increase in fee income between these two periods. We would have reported $753,697 of fee income, representing a $4.423 decrease in the reported fee income for the period ending June 30, 2018 had we continued to use the accounting guidance used prior to the adoption of ASC 606.

Operating expenses decreased by $117,251 for the six months ended June 30, 2018 to $1,655,785 from $1,773,036 for the six months ended June 30, 2017. This decrease was the result of lower payroll and related costs ($132,000), as well as lower patent and professional fees ($42,000) and lower travel and foreign withholding tax costs ($15,000) partially offset by higher non-cash stock option compensation cost ($60,000) and higher marketing and materials costs ($31,000).

Research and development expenditures increased by $56,097 to $469,440 for the six months ended June 30, 2018 from $413,343 for the six months ended June 30, 2017. This increase was the result of higher payroll costs ($44,000) as well as higher non-cash stock option compensation costs ($9,000) and higher materials costs ($13,000) partially offset by lower allocated insurance costs ($10,000).

The Company’s net investment income for the six months ended June 30, 2018 was $3,445 compared to $2,717 earned for the six months ended June 30, 2017 with higher earnings due to higher cash balances available for investment in the current period in addition to higher interest rates.investment.

As a consequence of the factors discussed above, the Company’s net loss was $1,363,658$803,897 ($0.050.03 per common share) for the sixthree months ended June 30, 2018March 31, 2019 as compared to $1,442,367$793,767 ($0.060.03 per common share) for the sixthree months ended June 30, 2017.March 31, 2018. Had the Company not incurred the non-cash expense to mark the warrants to their market value, the Company’s net loss would have been $247,590 less or $556,307 ($0.02 per common share) for the three months ended March 31, 2019 as compared to $793,767 ($0.03 per common share) for the three months ended March 31, 2018.

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 sixthree months ended June 30, 2018,March 31, 2019, the Company’s cash and cash equivalents balance increased by $124,125. The increase was due to the equity infusion$369,097 principally as a result of cash proceeds of $1,101,782 from the investment describedissuance of common stock in Note 8connection with the exercise of $1,250,000warrants, partially offset by $1,114,788 cash used for operations of $732,551 and $11,087 cash used tofor the purchase fixed assets. As of June 30, 2018,property and equipment of $134. At March 31, 2019 the Company had cash and cash equivalents of $1,861,972,$3,338,513, working capital (total current assets less total current liabilities) of $2,144,166$3,882,852 and total shareholders’ equity of $2,581,038.$3,397,375.

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 $350,000 to $450,000 per quarter. We may eliminate some operating expenses in the future, which will further reduce our cash flow shortfall if needed.

On August 13, 2018, the Company announced that a group of investors led by a licensee of the Company’s SPD technology agreed to make a $2,000,000 equity investment in the Company (please see Note 9 for additional details of this transaction). With the addition of proceeds from this investment, the Company expects as of this filing We expect to have sufficient working capital for at least the next 2418 months of operations. Based on the current funding receivedSince last year we have reduced our cash shortfall and additional strategic cost cutting measures implemented at the dateare working to further reduce it and may seek new sources of this filing, the Company will have sufficient working capital of at least the next 15 months of operations.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. The Company believes that its current cash and cash equivalents would fund its operations until at least the fourth quarter of 2020. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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, 2017.2018. There has been no material change in the disclosure regarding market risk.

Item 4. Controls and Procedures

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 chief financial officer, with assistance from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2018,March 31, 2019, and, based on their evaluation, have concluded that, because of the need to test a new control during 2019 over the determination of the method for accounting for warrants issued in connection with a registered offering of common stock, that our disclosure controls and procedures were effective.not effective at the reasonable assurance level solely as a result of the material weakness in our internal control over financial reporting discussed below.

Changes in Internal Control Over Financial Reporting

There were no changesIn connection with the preparation of our consolidated financial statements as of and for the quarter ended September 30, 2018, we identified a material weakness in our internal control over financial reporting (as definedrelated to our controls over the method for accounting for warrants issued in Rules 13a-15(f)connection with a registered offering of common stock. This control deficiency did not result in a material adjustment to our financial statements for the period ended September 30, 2018. Management is in the process of implementing remediation procedures to address the control deficiency that led to the material weakness. The remediation plan included, but is not limited to, the implementation of additional review procedures regarding the method for accounting for warrants issued in connection with a registered offering of common stock. The enhanced review/evaluation procedures and 15d-15(f)documentation standards were put in place starting in the fourth quarter of the Exchange Act) during the six months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.2018.

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

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

Date: August 13, 2018May 14, 2019