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REFR > SEC Filings for REFR > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for RESEARCH FRONTIERS INC


6-Nov-2012

Quarterly Report

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," filed with our Form 10-K for December 31, 2011.

The Company has entered into a number of license agreements covering potential products using the Company's SPD technology. The Company receives minimum annual royalties under certain license agreements and records fee income on a ratable basis each quarter. 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 had been used in the current period, stock-based compensation expense could have been materially impacted. Furthermore, if management uses different assumptions in future periods, stock-based compensation expense could be materially impacted in future years.

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

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. An example of a critical estimate is the full valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits will be realized in future periods.


Results of Operations

Nine month periods ended September 30, 2012 and 2011

The Company's fee income from licensing activities for the nine months ended September 30, 2012 was $1,405,292, as compared to $492,048 for the nine months ended September 30, 2011. Most of the increase in fee income during this period was a result of higher product sales in the automotive market from one of our licensees. This licensee's sales levels exceeded its minimum annual royalty levels under its license agreement thereby resulting in the amount of royalty fee income of $962,610 being recognized as additional fee income for the nine months ended September 30, 2012.

Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also, licensees 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 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 is paid its royalty resulting from such activity.

Operating expenses increased by $522,849 for the nine months ended September 30, 2012 to $3,263,891 from $2,741,042 for the nine months ended September 30, 2011. This increase was the result of higher payroll and related costs ($482,000) plus higher professional fees ($69,000) and patent costs ($14,000) partially offset by lower marketing costs ($26,000). Included in operating expenses are $679,000 and $613,000 of non-cash compensation charges for the first nine months 2012 and 2011, respectively relating to common stock and options granted to directors, employees and consultants.

Research and development expenditures increased by $158,744 to $1,238,764 for the nine months ended September 30, 2012 from $1,080,020 for the nine months September 30, 2011. This increase was principally the result of higher payroll and related costs ($115,000) as well as higher materials and project costs ($43,000). Included in research and development expenses are $109,000 and $83,000 of non-cash compensation charges for the nine months ended September 30, 2012 and 2011, respectively.

The Company's net investment income for the nine months ended September 30, 2012 was $24,631 as compared to $18,771 for the nine months ended September 30, 2011. This difference was primarily due to interest earned on invested balances, and the interest on the Note from SPD Control Systems.

The Company recorded an income tax benefit of $613,397 for the nine months ended September 30, 2012. This benefit results from state research and development refundable credits that the Company applied for related to the years ended December 31, 2006, 2007, 2008 and 2009. The Company does not currently expect to collect additional credits. No income tax benefit or expense was recorded for the nine months ended September 30, 2011.

As a consequence of the factors discussed above, the Company's net loss was $2,459,335 ($0.13 per common share) for the nine months ended September 30, 2012 as compared to $3,310,243 ($0.18 per common share) for the nine months ended September 30, 2011.


Three month periods ended September 30, 2012 and 2011

The Company's fee income from licensing activities for the three months ended September 30, 2012 was $471,886, as compared to $207,200 for the three months ended September 30, 2011. Most of the increase in fee income during this period was a result of higher product sales in the automotive market from one of our licensees.

Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also, licensees 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 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 is paid its royalty resulting from such activity.

Operating expenses increased by $293,660 for the three months ended September 30, 2012 to $972,300 from $678,640 for the three months ended September 30, 2011. This increase was the result of higher payroll ($253,000) and marketing costs of ($78,000) partially offset by lower patent ($27,000) and insurance ($10,000) costs. Included in operating expenses are $172,000 and $79,000 of non-cash compensation charges for the three months ended September 30, 2012 and 2011, respectively, relating to common stock and options granted to directors, employees and consultants.

Research and development expenditures increased by $28,414 to $369,374 three months ended September 30, 2012 from $340,960 for the three months ended September 30, 2011. This increase was principally the result of higher material costs (21,000) as well as higher payroll and non-cash compensation changes of ($17,000) as well as higher occupancy costs partially offset by lower allocated insurance costs ($22,000). Included in research and development expenses are $34,000 and $26,000 of non-cash compensation charges for the three months ended September 30, 2012 and 2011, respectively, relating to common stock and options granted to employees.

The Company's net investment income for the three months ended September 30, 2012 was $3,324, as compared to net investment income of $10,560 for the three months ended September 30, 2011. This difference was primarily due to lower cash balance available for investments.

As a consequence of the factors discussed above, the Company's net loss was $866,464 ($0.04 per common share) for the three months ended September 30, 2012 as compared to $801,840 ($0.04 per common share) for the three months ended September 30, 2011.

Financial Condition, Liquidity and Capital Resources

The Company has primarily utilized its cash 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 first nine months of 2012, the Company's cash and cash equivalents balance increased by $5,562,390 principally as a result of $6,974,750 of net proceeds from the sale of common stock units which was partially offset by cash used for operations of $1,830,293. At September 30, 2012, the Company had working capital of $9,320,617 and total shareholders' equity of $9,410,151.

During 2012 the Company sold, pursuant to the Company's effective registration statement filed with the SEC, equity in the Company as follows:

  Date           Shares issued       Warrants issued       Unit price        Proceeds
July 30, 2012           589,227           117,846            $2.97        $ 1,745,549 *
August 28, 2012       1,900,000           380,000            $2.97        $ 5,229,201 **


Total                 2,489,227           497,846                         $ 6,974,750

*Net of fees of $4,455

** Net of fees of $413,719

In addition, on October 2, 2012 the Company received net proceeds of approximately $5.3 million in connection with the sale of units aggregating 1,250,000 shares of the Company's common stock and warrants to purchase 250,000 shares of common stock. The per unit price was $4.49.

The Company expects to use its cash to fund its research and development, its expanded 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, 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 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. Based upon existing levels of cash expenditures, existing cash reserves and budgeted revenues as well as the funding described above, the Company believes that it would not require additional funding for the foreseeable future. There can be no assurance 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.

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