Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

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.

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. Certain license agreements contain minimum annual royalty provisions and prepaid royalty structures. In periods where sales volumes increase rapidly or supply transitions occur, royalty income attributable to such sales may be absorbed by previously paid minimum royalties and not recognized until thresholds are exceeded. As a result, our reported revenues in a particular period may not directly correspond to underlying product sales volumes, which could increase volatility in our reported results.

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. 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 2025 and 2024, 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.

Year ended December 31, 2025 Compared to the Year ended December 31, 2024

The Company's fee income from licensing activities for the year ended December 31, 2025 was $1,121,248 compared to $1,335,531 for the year ended December 31, 2024. This decrease in fee income in 2025 by $214,283, a decrease of 16%, was primarily the result of lower royalties from the automotive and aircraft markets. The Company expects revenue in all market segments to increase as new car models and other products using the Company's SPD-SmartGlass technology are introduced into the market.

Automotive royalty income during 2025 was negatively impacted by the bankruptcy and replacement of a European licensee supplying Ferrari. While underlying Ferrari vehicle sales were strong in 2025, royalty income recognition was reduced due to (i) the cessation of operations by the former licensee and (ii) the application of minimum annual royalty credits under the replacement licensee agreement. Beginning in the third and fourth quarters of 2025, these minimum thresholds were exceeded, allowing additional Ferrari-related royalty income to be recognized.

Operating expenses increased by $437,287 for the year ended December 31, 2025 to $2,644,684 from $2,207,397 for the year ended December 31, 2024. The increase is the result of higher credit loss expense ($129,000), higher directors fees and expenses ($162,000, consisting of non-cash costs of stock options granted to directors), higher marketing and investor relations costs ($68,000) as well as higher film purchase costs ($40,000) and higher professional fees ($37,000). Operating expenses for the years ended December 31, 2025 and 2024 include $354,000 and $84,000, respectively, of non-cash charges for stock options granted to employees, directors and consultants.

Research and development expenditures increased by $38,725 for the year ended December 31, 2025 to $608,732 from $570,007 for the year ended December 31, 2024. This increase was the result of higher occupancy costs ($47,000) as well as higher employee compensation costs ($12,000) partially offset by lower insurance costs ($25,000). Research and development costs include non-cash charges for stock options granted to employees of $21,000 and $5,000 in 2025 and 2024, respectively.

The Company's net investment income for the year ended December 31, 2025 was $39,227 as compared to net investment income of $95,339 for the year ended December 31, 2024. This difference was primarily due to lower cash balances available for investment.

The Company recorded $47,357 and $35,152 of other income during the years ended December 31, 2025 and 2024, respectively, 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, 2025 and 2024.

As a consequence of the factors discussed above, the Company's net loss was $2,045,584 ($0.06 per common share) for the year ended December 31, 2025, as compared to the net loss of $1,311,382 ($0.04 per common share) for the year ended December 31, 2024.

Financial Condition, Liquidity and Capital Resources

On February 18, 2026, the Company entered into subscription agreements from a group of private accredited investors, which included family members of a director of the Company, as well as the owner of a licensee of the Company licensed to produce SPD-SmartGlass products including for the retrofit architectural glass market.

The investors purchased 1.1 million shares of common stock of the Company at a price of $1.00 per share (which represents the closing market price of the Company's common stock on February 13, 2026 which was the date that the transaction was agreed to). The Company received $1.1 million in proceeds from the sale of common stock to the investors. For each share received, the investor also received one warrant (expiring on February 28, 2031) to purchase one share of common stock at an exercise price of $1.10 for warrant exercises occurring on or before February 28, 2027, $1.20 for warrant exercises occurring between March 1, 2027 through February 29, 2028, $1.30 for warrant exercises occurring between March 1, 2028 through February 28, 2029, and $1.50 for warrant exercises occurring after February 28, 2029 and prior to the expiration of the warrants.

The shares were issued to the investors in a private placement and, along with the shares issued in connection with the exercise of any warrants in the future, are not registered and therefore currently subject to at least a six-month holding period by the investor.

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 2025, the Company's cash and cash equivalents balance decreased by $1,329,887 principally as a result of cash used for operations of $1,329,161 and for the purchase of property and equipment of $726. At December 31, 2025, the Company had cash and cash equivalents of $0.7 million, working capital of $0.9 million and total shareholders' equity of $1.0 million. Based on current operations, we expect to have sufficient working capital for a period of at least 12 months from the date of this filing.

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 foreseeable future. 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 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 foreseeable future.

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 6.0 years, including renewal options as of December 31, 2025. The maturities over time of the operating lease obligations as of December 31, 2025 were as follows:

		December 31, 2025
Year 1		$	223,000
Years 2-3			464,000
Years 4-5			496,000
Thereafter			259,000
Total lease payments		$	1,442,000

See Note 9 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.