Item 7. Management’s Discussion and Analysis
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
Information
included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning
future events and results. We generally use the words “believes,” “expects,” “intends,” “plans,”
“anticipates,” “likely,” “will” and similar expressions to identify forward-looking statements. Such
forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which
are beyond our control, which may cause our actual results, performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties
and factors include, but are not limited to, those factors set forth in this Annual Report on Form 10-K under “Item 1A. –
Risk Factors” above. Except as required by applicable law, including the securities laws of the United States, we undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Annual Report
on Form 10-K .
In
reviewing Management’s Discussion and Analysis of Financial Condition and Results of Operations, you should refer to our consolidated
financial statements and the notes related thereto.
Critical
Accounting Policies and Estimates
The
following accounting estimates 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.”
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 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.
The
Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”. The Company determined that its license
agreements provide for three performance obligations: (i) Grant of Use, (ii) Technical Support, and (iii) New Improvements.
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The
best method for determining the 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 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 credit losses. 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 credit losses when necessary.
Results
of Operations
Overview
The
majority of the Company’s fee income comes from the activities of several licensees participating in the automotive market. The
Company currently believes that the automotive market will be the largest source of its royalty income over the next several years. The
Company’s royalty income from this market may be influenced by numerous factors including various trends affecting demand in the
automotive industry and the rate of introduction of new technology in OEM product lines and the impact of COVID-19. In addition to these
macro factors, the Company’s royalty income from the automotive market could also be influenced by specific factors such as whether
the Company’s SPD-SmartGlass technology appears as standard equipment or as an option on a particular vehicle, the number of additional
vehicle models that SPD-SmartGlass appears on, the size of each window on a vehicle and the number of windows on a vehicle that use SPD-SmartGlass,
fluctuations in the total number of vehicles produced by a manufacturer, and in the percentage of cars within model like produced with
SPD-SmartGlass, and changes in pricing or exchange rates. Certain license fees, which are paid to the Company in advance of the accounting
period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, which will be recognized
as fee income in future periods. Also, licensees offset some or all of their royalty payments on sales of licensed products for a given
period by applying these advance payments towards such earned royalty payments.
In
2024 and 2023, the Company received royalty revenues from sales of SPD-SmartGlass products for various car models that were accretive
to the Company’s royalty revenue. Production efficiencies are expected to continue and accelerate with the introduction of the
higher vehicle production volumes for various car models going forward, and the Company expects that lower pricing per square foot of
the Company’s technology could expand the market opportunities, adoption rates, and revenues for its technology in automotive and
non-automotive applications. The Company expects to generate additional royalty income from the near-term introduction of additional
new car and aircraft models from other OEMs (original equipment manufacturers), continued growth of sales of products using the Company’s
technology for the marine industry in yachts and other watercraft, in trains, in museums, and in larger architectural projects.
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Year
ended December 31, 2024 Compared to the Year ended December 31, 2023
The
Company’s fee income from licensing activities for the year ended December 31, 2024 was $1,335,531 compared to $909,598 for
the year ended December 31, 2023. This increase in fee income in 2024 by $425,933, an increase of 47%, was primarily the result of
higher royalties from the automotive and aircraft markets, an increase by 48%, as compared to 2023. The Company expects revenue in
all market segments to increase further as new car models and other products using the Company’s SPD-SmartGlass technology are
introduced into the market.
Operating
expenses decreased by $152,237 for the year ended December 31, 2024 to $2,207,397 from $2,359,634 for the year ended December 31, 2023.
The decrease is the result of lower credit loss expense ($70,000), lower marketing and investor relations costs ($59,000), lower patent
costs ($45,000) as well as lower legal and professional fees ($37,000), partially offset by higher foreign taxes withheld on payments
received from foreign licensees ($34,000). Operating expenses for the years ended December 31, 2024 and 2023 include $84,000 and $137,000,
respectively, of non-cash charges for stock options granted to employees and directors.
Research
and development expenditures decreased by $13,259 for the year ended December 31, 2024 to $570,007 from $583,266 for the year ended December
31, 2023. This decrease was the result of lower materials costs ($15,000), lower allocated insurance costs ($14,000) partially offset
by higher allocated facility costs ($17,000). Research and development costs include non-cash charges for stock options granted to employees
of $5,000 and $8,000 in 2024 and 2023, respectively.
The
Company’s net investment income for the year ended December 31, 2024 was $95,339 as compared to net investment income of $124,938
for the year ended December 31, 2023. This difference was primarily due to changes in interest rates paid on money market accounts and
gain on sale of investments of $57,149 during the year ended December 31, 2023, as well as lower cash balances available for investment.
The
Company recorded $35,152 of other income during the year ended December 31, 2024 relating to an Employee Retention Credit, a
refundable payroll tax credit available under the Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”) that
was designed to keep employees on the payroll during the COVID-19 pandemic.
No
income tax benefit or expense was recorded for the years ended December 31, 2024 and 2023.
As
a consequence of the factors discussed above, the Company’s net loss was $1,311,382 ($0.04 per common share) for the year ended
December 31, 2024, which was $596,982, (31%) lower than the net loss of $1,908,364 ($0.06 per common share) for the year ended December
31, 2023.
Financial
Condition, Liquidity and Capital Resources
The
Company has primarily utilized its cash, cash equivalents and proceeds from sales of our common stock, proceeds from the exercise of
options and warrants, and royalty fees collected 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 obtaining 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
2024, the Company’s cash and cash equivalents balance decreased by $481,772 principally as a result of cash used for operations
of $788,819 and for the purchase of property and equipment of $1,623, partially offset by cash generated from the issuance of capital
stock and warrants of $300,000 as well as cash generated from the exercise of options of $8,670. At December 31, 2024, the Company had
cash and cash equivalents of $2.0 million, working capital of $2.5 million and total shareholders’ equity of $2.6 million. Based
on current operations, we expect to have sufficient working capital for more than the next five years of operations.
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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 for more than
the next five years. 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. The 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.
During
2023, the Company’s cash and cash equivalents balance decreased by $1,754,958 principally as a result of cash generated from the
exercise of warrants of $484,502 as well as cash generated from the sale and maturities of marketable securities of $5,491,535 offset
by cash used for operations of $2,295,051 and cash used for the purchase of marketable securities of $5,434,386 and for the purchase
of property and equipment of $1,558. At December 31, 2023, the Company had cash and cash equivalents of $2.5 million, working capital
of $3.3 million and total shareholders’ equity of $3.5 million.
Inflation
The
Company does not believe that inflation has a significant impact on its business.
Contractual
Obligations:
The
Company has an operating lease for its facility with a remaining lease term of 7.0 years, including renewal options as of December 31,
2024. The maturities over time of the operating lease obligations as of December 31, 2024 were as follows:
December 31, 2024
Year 1
$ 217,000
Years 2-3
450,000
Years 4-5
481,000
Thereafter
511,000
Total lease payments
$ 1,659,000
See
Note 8 to our Consolidated Financial Statements for further discussion of the Company’s lease obligations.
Off-Balance
Sheet Arrangements
The
Company has no variable interest entities or other off-balance sheet obligation arrangements.
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 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.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
consolidated financial statements listed in Item 15(a)(1) and (2) are included in this report beginning on page F-1.
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ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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