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REFR > SEC Filings for REFR > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for RESEARCH FRONTIERS INC

Form 10-Q for RESEARCH FRONTIERS INC


6-Aug-2013

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" in our Form 10-K report for the period ending December 31, 2012. The Company has entered into a number of license agreements covering potential products using the Company's SPD technology. The Company receives fees and minimum annual royalties under certain license agreements and records fee income on a ratable basis each quarter. 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 on the earlier of the service period or the period that such options or warrants vest as determined using a Black-Scholes option pricing model. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. 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

Six months ended June 30, 2013 Compared to the six months ended June 30, 2012

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 an 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.

The Company's fee income from licensing activities for the six months ended June 30, 2013 increased 32% to $1,229,075, as compared to $933,406 for the six months ended June 30, 2012. Most of the increase in fee income during this period was a result of higher product sales and minimum annual royalty and other payments from licensees in the automotive market. 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 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 gets paid its royalty resulting from such activity.

Operating expenses increased by $294,432 for the six months ended June 30, 2013 to $2,586,023 from $2,291,591 for the six months ended June 30, 2012. This increase was principally the result of higher payroll and related costs ($178,000), plus higher marketing and public relations costs ($107,000) patent costs ($42,000) and higher material costs ($25,000) partially offset by lower professional fees ($51,000). Included in operating expenses are approximately $700,000 and $507,000 of non-cash compensation charges for the six months ended June 30, 2013 and 2012, respectfully, relating to common stock and options granted to directors, employees and consultants.


Research and development expenditures increased by $161,334 to $1,030,724 for the six months ended June 30, 2013 from $869,390 for the six months ended June 30, 2012. This increase was principally the result of higher payroll and related costs ($143,000) as well as higher materials and project costs ($24,000) partially offset by lower allocated insurance costs ($12,000). Included in research and development expenses are approximately $223,000 and $74,000 of non-cash compensation charges for the six months ended June 30, 2013 and 2012, respectively.

The Company's net investment income for the six months ended June 30, 2013 was $19,008 as compared to $21,307 for the six months ended June 30, 2012. The difference was primarily due to interest from higher cash balances available for investment partially offset the interest on the Note from SPD Control Systems which was collected at the end of March 2012.

No income tax benefit or expense was recorded for the six months ended June 30, 2013. The Company recorded an income tax benefit of $613,397 for the six months ended June 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.

As a consequence of the factors discussed above, the Company's net loss was $2,368,664 ($0.10 per common share) for the six months ended June 30, 2013 as compared to $1,592,871 ($0.08 per common share) for the six months ended June 30, 2012.

Three months ended June 30, 2013 Compared to the three months ended June 30, 2012

The Company's fee income from licensing activities for the three months ended June 30, 2013 increased 16% or $71,016 to $521,844 from $450,828 for the three months ended June 30, 2012. Most of the increase was due to minimum royalties and other payments received from existing licensees.

Operating expenses increased by $65,975 for the three months ended June 30, 2013 to $918,192 from $852,217 for the three months ended June 30, 2012. This increase was principally the result of higher payroll and related costs ($25,000), plus higher marketing and public relations costs ($67,000) and higher material costs ($25,000) partially offset by lower director's expenses ($29,000) and professional fees ($21,000). Included in operating expenses are approximately $168,000 and $84,000 of non-cash compensation charges for the three months ended June 30, 2013 and 2012, respectfully, relating to common stock and options granted to directors, employees and consultants.

Research and development expenditures increased by $2,636 to $394,288 for the three months ended June 30, 2013 from $391,652 for the three months ended June 30, 2012. This increase was principally the result of higher materials and project costs ($15,000) partially offset by lower allocated insurance costs ($13,000). Included in research and development expenses are approximately $41,000 and $34,000 of non-cash compensation charges for the three months ended June 30, 2013 and 2012, respectively.


The Company's net investment income for the three months ended June 30, 2013 was $11,156 as compared to $3,490 for the three months ended June 30, 2012. The difference was primarily due to interest from higher cash balances available for investment partially offset the interest on the Note from SPD Control Systems which was collected at the end of March 2012.

No income tax benefit or expense was recorded for the three months ended June 30, 2013 or 2012 as a result of losses incurred in both periods.

As a consequence of the factors discussed above, the Company's net loss was $779,480 ($0.03 per common share) for the three months ended June 30, 2013 as compared to $789,551 ($0.04 per common share) for the three months ended June 30, 2012.

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 first six months of 2013, the Company's cash and cash equivalents balance decreased by $1,359,759 principally as a result of cash used for operations of $1,311,996 as well as the purchase of fixed assets of $35,743. At June 30, 2013, the Company had working capital of $12,625,922 and total shareholders' equity of $12,721,444.

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'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, 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. To date the Company has not generated sufficient revenue from its licensees to fund its operations.


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