SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2006 Commission File No. 1-9399
RESEARCH FRONTIERS INCORPORATED
(Exact name of registrant as specified in charter)
Delaware 11-2103466
(State of incorporation or organization) (IRS Employer
Identification No.)
240 Crossways Park Drive, Woodbury, N.Y. 11797
(Address of principal executive offices) (Zip Code)
(516) 364-1902
(Registrant's telephone number, including area code)
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 is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
As of May 12, 2006, there were outstanding 13,812,559 shares of
Common Stock, par value $0.0001 per share.
RESEARCH FRONTIERS INCORPORATED
Consolidated Balance Sheets
March 31,2006
Assets (Unaudited) December 31,2005
Current assets:
Cash and cash equivalents $ 2,715,919 3,644,685
Royalty receivables, net of reserves of
$93,674 in 2006 and $78,674 in 2005 51,250 40,000
Prepaid expenses and other current assets 71,325 138,408
Total current assets 2,838,494 3,823,093
Fixed assets, net 104,235 111,507
Deposits 22,605 22,605
Total assets $ 2,965,334 3,957,205
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 70,370 132,584
Deferred revenue 5,000 5,000
Accrued expenses and other 161,816 173,367
Total liabilities 237,186 310,951
Commitments and Contingencies
Shareholders' equity:
Capital stock, par value $0.0001 per share;
authorized 100,000,000 shares, issued and
outstanding 13,812,559 and 13,812,559 shares,
respectively 1,381 1,381
Additional paid-in capital 62,577,771 62,577,771
Accumulated deficit (59,851,004) (58,932,898)
Total shareholders' equity 2,728,148 3,646,254
Total liabilities and shareholders' equity $ 2,965,334 3,957,205
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,2006 March 31,2005
Fee income $ 26,250 41,250
Operating expenses 636,662 594,915
Research and development 330,900 409,069
967,562 1,003,984
Operating loss (941,312) (962,734)
Net investment income 23,206 22,236
Net loss $ (918,106) (940,498)
Basic and diluted net loss per common share $ (.07) (.07)
Weighted average number of common shares outstanding 13,812,559 13,323,670
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,2006 March 31, 2005
Cash flows from operating activities:
Net loss $ ( 918,106) ( 940,498)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 8,157 10,812
Changes in assets and liabilities:
Royalty receivables (11,250) (107,750)
Prepaid expenses and other current assets 67,083 2,364
Deferred revenue -- 103,750
Accounts payable and accrued expenses (73,765) (29,676)
Net cash used in operating activities (927,881) (960,998)
Cash flows from investing activities:
Purchase of fixed assets (885) (8,619)
Net cash used in investing activities (885) (8,619)
Cash flows from financing activities:
Proceeds from issuances of common stock and warrants -- 5,000,000
Net cash provided by financing activities -- 5,000,000
Net increase (decrease) in cash and cash equivalents (928,766) 4,030,383
Cash and cash equivalents at beginning of year 3,644,685 2,602,063
Cash and cash equivalents at end of period $ 2,715,919 6,632,446
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Notes to Consolidated Financial Statements
March 31, 2006
(Unaudited)
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 10-01 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
months ended March 31, 2006 are not necessarily indicative of the
results that may be expected for the fiscal year ending December
31, 2006. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Annual
Report on Form 10-K (Form 10-K) relating to Research Frontiers
Incorporated (the Company) for the fiscal year ended December
31, 2005.
Business
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: SPD-Smart windows, sunshades,
skylights and interior partitions for homes and buildings;
automotive windows, sunroofs, sun-visors, sunshades, rear-view
mirrors, instrument panels and navigation systems; aircraft
windows; eyewear products; and flat panel displays for electronic
products. SPD-Smart light control film is now being used in
architectural, automotive, marine, aerospace and appliance
applications.
Patent Costs
The Company expenses costs relating to the development or
acquisition of patents due to the uncertainty of the recoverability
of these items.
Revenue Recognition
The Company has entered into a number of license agreements
covering its light control 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. Such excess amounts are
recorded as deferred revenue and recognized into income in future
periods as earned.
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for stock-based
employee compensation under the intrinsic value method as
outlined in the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations while
disclosing pro-forma net income and net income per share as if the
fair value method had been applied in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under the intrinsic
value method, no compensation expense was recognized if the
exercise price of the Company's employee stock options equaled
or exceeded the market price of the underlying stock on the date of
grant. Since the Company had issued all stock option grants with
exercise prices equal to, or greater than, the market value of the
common stock on the date of grant, through December 31, 2005 no
compensation cost was recognized in the consolidated statements
of operations.
Effective January 1, 2006, the Company adopted SFAS No.
123(R), "Share-based Payment." SFAS No. 123(R) replaces SFAS
No. 123 and supersedes APB Opinion No. 25. SFAS 123(R)
requires that all stock-based compensation berecognized as an
expense in the financial statements and that such costs be measured
at the fair value of the award. This statement was adopted using the
modified prospective method, which requires the Company to
recognize compensation expense on a prospective basis. Therefore,
prior period financial statements have not been restated. Under this
method, in addition to reflecting compensation expense for new
share-based payment awards, expense is also recognized to reflect
the remaining vesting period of awards that had been included in
pro-forma disclosures in prior periods. Since all options
outstanding as of December 31, 2005 were fully vested, and no
new options were granted during the quarter ending March 31,
2006, there was no compensation expense recognized for those
options in the consolidated statement of income for the three
months ended March 31, 2006. SFAS 123(R) also requires that tax
benefits related to stock option exercises be reflected as financing
cash inflows instead of operating cash inflows. For the three
months ended March 31, 2006, this new treatment resulted in no
change in cash flows from financing activities or cash flows from
operating activities. Because there were no options granted during
the quarter ended March 31, 2006, there was no impact on net loss
for the three months ended March 31, 2006 regardless of whether
the Company had consistently measured the compensation cost for
the Company's stock option grants under the fair value method
adopted in fiscal 2006. The Company expects that the adoption of
SFAS No. 123(R) could have a material effect on the Company's
consolidated financial statements, depending upon the number and
terms of stock options issued by the Company in the future. The
adoption of SFAS No. 123(R) had no impact on previously granted
options, since all options granted prior to January 1, 2006 are fully vested.
In 1998, the shareholders approved a stock option plan (1998
Stock Option Plan) which provides for the granting of both
incentive stock options at the fair market value at the date of grant
and nonqualified stock options at or below the fair market value at
the date of grant to employees or non-employees who, in the
determination of the Board of Directors, have made or may make
significant contributions to the Company in the future. The
Company may also award stock appreciation rights or restricted
stock under this plan. The Company initially reserved 540,000
shares of its common stock for issuance under this plan. In 1999,
the Company's shareholders approved an additional 545,000
shares for issuance under this Plan, and in each of 2000 and 2002,
the Company's shareholders approved an additional 600,000
shares for issuance under this Plan. As of March 31, 2006, awards
for 60,879 shares of common stock were available for issuance
under this Plan.
At the discretion of the Board of Directors, options expire in ten
years or less from the date of grant and are generally fully
exercisable upon grant but in some cases may be subject to vesting
in the future. Full payment of the exercise price may be made in
cash or in shares of common stock valued at the fair market value
thereof on the date of exercise, or by agreeing with the Company
to cancel a portion of the exercised options. When an employee
exercises a stock option through the surrender of options held,
rather than of cash for the option exercise price, compensation
expense is recorded in accordance with APB Opinion No. 25.
Accordingly, compensation expense is recorded for the difference
between the quoted market value of the Company's common stock
at the date of exchange and the exercise price of the option.
The following summarizes the shares of common stock under
option for all plans at December 31, 2005 and March 31, 2006,
and the activity with respect to options for the three months ended
March 31, 2006:
Number of Shares Weighted Average
Subject to Option Exercise Price
Balance at December 31, 2005 2,690,993 $ 11.45
Granted -- --
Cancelled (45,500) $ 11.36
Exercised -- $ --
Balance at March 31, 2006 2,645,493 $ 11.46
The following table summarizes information about stock options
at March 31, 2006:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Shares Exercise
Exercise Price Outstanding Life (Years) Price Exercisable Price
$3.00 to $6.00 388,433 7.61 $ 5.86 388,433 $ 5.86
$6.01 to $7.50 636,750 3.13 $ 7.12 636,750 $ 7.12
$7.51 to $9.00 457,800 3.19 $ 8.38 457,800 $ 8.38
$9.01 to $12.00 408,960 5.74 $10.51 408,960 $ 10.51
$12.01 to $15.00 319,250 5.90 $13.30 319,250 $ 13.30
$15.01 to $19.00 107,000 4.66 $18.99 102,000 $ 19.00
$19.01 to $37.03 327,300 4.95 $27.77 327,300 $ 27.77
2,645,493 4.82 $11.46 2,640,493 $ 11.44
During 2005, the Company issued options to a consultant to
purchase 500 shares of common stock at an exercise price of $5.60
per share and recorded $1,483 of non-cash expense in connection
with the issuance of these options.
Shareholders' Equity
Issuance of Common Stock
For the three months ended March 31, 2005, the Company
received $5,000,000 of net cash proceeds from the issuance to
institutional investors of one million shares of its common stock
and the issuance of five-year warrants to purchase 200,000 shares
of common stock at an exercise price of $7.50 per share.
Treasury Stock
The Company did not repurchase any of its stock during the three
months ended March 31, 2006 or 2005.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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" contained in the Company's Annual Report on Form 10-K.
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 accordance with Emerging Issues Task
Force Issue 96-18, 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 date that such options or warrants vest
as determined using a Black-Scholes option pricing model.
Depending upon the difference between the exercise price and the
market price of the Company's common stock on the date that such
options or warrants vest, the amount of non-cash expenses that
could be recorded as a result of the vesting of such options or
warrants can be material.
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 for the Three Month Periods Ended March 31, 2006 and 2005
The Company's fee income from licensing activities for the first
quarter of 2006 was $26,250, as compared to $41,250 for the first
quarter of 2005. This difference in fee income was primarily the
result of the timing and amount of minimum annual royalties paid,
and the date of receipt of such payment on certain license
agreements, by end-product 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.
Operating expenses increased by $41,747 for the first quarter of
2006 to $636,662 from $594,915 for the first quarter of 2005. This
increase was primarily the result of higher consulting fees and
reserves for bad debts, partially offset by lower insurance,
marketing, and depreciation expenses, and lower accounting and
stock listing fees.
Research and development expenditures decreased by $78,169 to
$330,900 for the first quarter of 2006 from $409,069 for the first
quarter of 2005. This decrease was primarily the result of
decreased payroll, consulting, insurance and depreciation
expenses, partially offset by higher equipment rental, travel and
materials costs.
The Company's net investment income for the first quarter of 2006
was $23,206, as compared to net income from its investing
activities of $22,236 for the first quarter of 2005. This difference
was primarily due to higher interest rates during 2006 partially
offset by lower cash balances available to invest.
As a consequence of the factors discussed above, the Company's
net loss was $918,106 ($0.07 per common share) for the first
quarter of 2006 as compared to $940,498 ($0.07 per common
share) for the first quarter of 2005.
Financial Condition, Liquidity and Capital Resources
During the first three months of 2006, the Company's cash and
cash equivalent balance decreased by $928,766 principally as a
result of cash used to fund the Company's operating activities of
$927,881. At March 31, 2006, the Company had working capital
of $2,601,308 and its shareholders' equity was $2,728,148.
The Company occupies premises under an operating lease
agreement which expires on January 31, 2014 and requires
minimum annual rent which rises over the term of the lease to
approximately $138,269.
In February 2005, the Company raised $5 million in net proceeds
in connection with the registered sale to institutional investors of
one million shares of its common stock and the issuance of five-
year warrants to purchase 200,000 shares of common stock at an
exercise price of $7.50 per share.
The Company expects to use its cash to fund its research and
development of SPD light valves 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 until the first quarter of 2007. 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.
New Accounting Standards
In December 2004, the Financial Accounting Standards
Board, or FASB, issued SFAS No. 123R "Share Based Payment,"
which replaces SFAS No. 123 and supersedes APB No. 25. SFAS
No. 123R requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial
statements. This statement applies to all share-based payment
transactions in which an entity acquires goods or services by
issuing its shares, options or other equity instruments. This
statement establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees,
except for equity instruments held by employee share ownership
plans. This statement is effective as of the beginning of the first
annual reporting period that begins after June 15, 2005, which was
the Company's first fiscal quarter of 2006. The Company expects
that the adoption of SFAS No. 123R could have a material effect
on the Company's consolidated financial statements, depending
upon the number and terms of stock options issued by the
Company in the future. The adoption of SFAS No. 123R had no
impact on previously granted options, since all options granted
prior to January 1, 2006 are fully vested.
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, 2005. There has been no material change in the
disclosure regarding market risk.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on
Form 10-Q, the Company carried out an evaluation, under the
supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures
are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiary)
required to be included in the Company's periodic SEC filings.
There were no changes in the Company's internal control over
financial reporting during the quarterly period ended March 31,
2006 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
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
31.1 Rule 13a-14(a)/15d-14(a) Certification of Robert L. Saxe-Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Joseph M. Harary-Filed herewith.
32.1 Section 1350 Certification of Robert L. Saxe- Filed herewith.
32.2 Section 1350 Certification of Joseph M. Harary- Filed herewith.
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.
RESEARCH FRONTIERS INCORPORATED
(Registrant)
/s/ Robert L. Saxe
Robert L. Saxe, Chairman
(Principal Executive Officer)
/s/ Joseph M. Harary
Joseph M. Harary, President and Treasurer
(Principal Financial, and Accounting Officer)