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 September 30, 2004 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 an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of
November 8, 2004, there were outstanding 12,802,059 shares of
Common Stock, par value $0.0001 per share.
RESEARCH FRONTIERS INCORPORATED
Consolidated Balance Sheets
September 30,2004
Assets (Unaudited) Dec.31,2003
Current assets:
Cash and cash equivalents $ 3,297,857 5,072,290
Marketable investment securities-available for sale 4,875 7,875
Royalty receivable, net of reserves of $50,000 137,851 159,891
Prepaid expenses and other current assets 82,126 82,027
Total current assets 3,522,709 5,322,083
Investment in SPD Inc. -- 209,704
Fixed assets, net 126,155 135,878
Deposits and other assets 22,605 22,605
Total assets $ 3,671,469 5,690,270
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 77,867 85,821
Deferred revenue 45,577 23,683
Accrued expenses and other 171,637 111,339
Total liabilities 295,081 220,843
Shareholders' equity:
Capital stock, par value $0.0001 per share;
authorized 100,000,000 shares, issued and
outstanding 12,802,059 shares at September 30, 2004
and 12,683,413 shares at December 31, 2003 1,280 1,268
Additional paid-in capital 57,512,019 56,395,409
Accumulated other comprehensive loss (7,625) (4,625)
Accumulated deficit (54,129,286) (50,922,625)
Total shareholders' equity 3,376,388 5,469,427
Total liabilities and shareholders' equity $ 3,671,469 5,690,270
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Consolidated Statements of Operations
(Unaudited)
Nine months ended Three months ended
Sept.30,2004 Sept.30,2003 Sept.30,2004 Sept.30,2003
Fee income $ 134,975 229,625 $ 41,648 80,308
Operating expenses 1,763,836 1,847,154 534,847 605,492
Research and development 1,389,519 1,456,738 385,821 412,734
Charge for reduction in value
of investment in SPD Inc. 209,704 255,200 -- --
3,363,059 3,559,092 920,668 1,018,226
Operating loss (3,228,084) (3,329,467) (879,020) (937,918)
Net investment income 21,423 23,765 8,211 6,733
Net loss $ (3,206,661) (3,305,702) $ (870,809) (931,185)
Basic and diluted net loss
per common share $ (.25) (.27) $ (.07) (.07)
Weighted average number of
common shares outstanding 12,787,407 12,365,354 12,802,059 12,528,406
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
Sept.30,2004 Sept.30, 2003
Cash flows from operating activities:
Net loss $ (3,206,661) (3,305,702)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 59,497 84,046
Charge for reduction in value of
investment in SPD Inc. 209,704 255,200
Expense relating to cashless
exercise of stock options 15,708 40,987
Expense relating to issuance of
stock options and warrants
for services performed -- 27,900
Changes in assets and liabilities:
Royalty receivable 22,040 (139,244)
Prepaid expenses and other current assets (99) (49,928)
Deferred revenue 21,894 92,745
Accounts payable and accrued expenses 52,344 (31,453)
Net cash used in operating activities (2,825,573) (3,025,449)
Cash flows from investing activities:
Investment in SPD Inc., at cost -- (74,902)
Purchase of fixed assets (49,774) (45,948)
Net cash used in investing activities (49,774) (120,850)
Cash flows from financing activities:
Proceeds from issuances of common stock 1,100,914 3,536,988
Net cash provided by financing activities 1,100,914 3,536,988
Net (decrease) increase in cash and cash equivalents (1,774,433) 390,689
Cash and cash equivalents at beginning of year 5,072,290 5,117,571
Cash and cash equivalents at end of period $ 3,297,857 5,508,260
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Notes to Consolidated Financial Statements
September 30, 2004
(Unaudited)
Basis of Presentation
The accompanying unaudited consolidated 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 nine months ended September 30,
2004 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2004. 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, 2003.
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 RFI, 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.
Investment in SPD Inc.
During the second quarter of 2001, the Company, through its wholly-
owned subsidiary, SPD Enterprises, Inc., invested approximately
$750,000 for a minority equity interest in SPD Inc., a subsidiary of
Hankuk Glass Industries Inc., Korea's largest glass manufacturer,
which was dedicated exclusively to the production of suspended
particle device (SPD) light-control film and a wide variety of end-
products using SPD film. In April 2003, the Company's wholly-owned
subsidiary, SPD Enterprises, Inc., invested $74,902 in SPD Inc.,
raising its equity ownership from 6.67% to 6.91%. SPD Inc.'s parent
company invested at the same time and at the same price, $748,931,
raising its equity ownership in SPD Inc. from 66.67% to 69.09%.
During 2003, the Company recorded total non-cash accounting charges
of $615,200 against income to reflect a reduction in the value of its
investment in SPD Inc. These non-cash charges were determined as
follows: During the first quarter of 2003, the Company recorded a non-
cash charge against income of $255,200 to reflect a reduction in the
value of its investment in SPD Inc. determined based upon recent
financing activity of SPD Inc. The Company also recorded a further
non-cash charge against income of $360,000 as of the end of 2003 to
reflect a reduction in the value of its investment in SPD Inc.
determined based upon its review of the financial position and results
of operations of SPD Inc. as of and for the year ended December 31,
2003. On April 28, 2004, SPD Inc. informed the Company that it is
planning to sell its equipment and other assets and cease its business
activities. As a result, the Company wrote off its entire remaining
investment in SPD Inc. of $209,704 in the first quarter of 2004. The
Company's license agreement with Hankuk Glass Industries provides
for the payment of minimum annual royalties to the Company in 2002
and 2003. As of September 30, 2004 and December 31, 2003, the
Company has a receivable of $50,000 from Hankuk Glass Industries
for 2003 minimum annual royalties. This receivable was paid in full
in October 2004.
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
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 provides alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee
compensation as originally provided by SFAS No. 123, "Accounting
for Stock-Based Compensation." Additionally, SFAS No. 148 amends
the disclosure provisions of SFAS No. 123 to require prominent
disclosure in both the annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of
the method used on reported results. The Company adopted the
disclosure provisions of this statement in the fiscal quarter ended
March 31, 2003.
The exercise price for stock options granted are generally set at the
average of the high and low trading prices of the Company's common
stock on the trading date immediately prior to the date of grant, and the
related number of shares granted are fixed at the date of grant. Under
the principles of APB Opinion No. 25, the Company does not
recognize compensation expense associated with the grant of stock
options. SFAS No. 123 requires the use of option valuation models to
determine the fair value of options granted after 1995. Pro forma
information regarding net loss and net loss per common share shown
below was determined as if the Company had accounted for its
employee stock options and shares sold under its stock purchase plan
under the fair value method set forth in SFAS No. 123.
The fair value of the options was estimated at the date of grant using
a Black-Scholes option pricing model. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized over
the options' vesting periods.
The following table illustrates the effect on net loss and loss per
common share as if the fair value method had been applied:
Nine months ended Three months ended
Sept.30,2004 Sept.30,2003 Sept.30,2004 Sept.30,2003
Net loss $(3,206,661) (3,305,702) (870,809) (931,185)
Add:Total stock-based employee
compensation expense
included in net loss $ 15,708 40,987 -- --
Deduct:Total stock-based
employee compensation
determined under
fair-value based
method for all awards $ (200,733) (816,987) -- (56,275)
Pro forma $(3,391,686) (4,081,702) (870,809) (987,460)
Basic and diluted net loss
per common share As reported $ (0.25) (0.27) $ (0.07) (0.07)
Pro forma $ (0.27) (0.33) $ (0.07) (0.08)
Shareholders' Equity
Issuance of Common Stock
For the nine months ended September 30, 2004, the Company received
$1,100,914 of net cash proceeds from the issuance of (i) 99,417 shares of
common stock issued upon the exercise of warrants resulting in net
proceeds of $954,724; and (ii) 17,500 shares of common stock issued upon
the exercise of options resulting in net proceeds of $146,190. In addition,
1,729 shares were issued through the cashless exercise of certain options
under which the number of shares issuable upon exercise of such option
was reduced by 15,771 shares in payment of the exercise price of options
to purchase 17,500 shares. In connection therewith, the Company recorded
a non-cash compensation expense of $15,708 during the second quarter of 2004.
For the nine months ended September 30, 2003, the Company received
$3,536,988 of net cash proceeds from (i) the issuance of 25,000 shares of
common stock of the Company (along with a ten-year warrant to purchase
25,000 shares of common stock of the Company at an exercise price of
$9.00 per share) in a private placement to a director of the Company
resulting in net proceeds of $165,000; (ii) 294,300 shares of common stock
issued upon the exercise of warrants resulting in net proceeds of
$2,862,379; and (iii) the issuance of 69,475 shares of common stock issued
upon the exercise of options resulting in net proceeds of $509,590. In
addition, 3,754 shares were issued through the cashless exercise of certain
options and warrants, resulting in non-cash directors expense of $40,987
being recorded, and 9,995 shares with a value of $108,995 were delivered
to the Company and immediately retired in payment of the exercise price
of options to purchase 15,000 shares.
Treasury Stock
The Company did not repurchase any of its stock during the nine months
ended September 30, 2004 or 2003.
Issuance of Options
During the second quarter of 2003, the Company issued options to a
consultant to purchase 5,000 shares of common stock at an exercise price
of $9.54 per share. The Company recorded $27,900 of non-cash expense
in connection with the issuance of these options.
Comprehensive Loss
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. (SFAS No. 130) requires that companies disclose
comprehensive income, which includes net loss, foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as available-
for-sale. The components of comprehensive loss for the three and nine
months ended September 30, 2004 and 2003 are as follows:
Nine months ended Three months ended
Sept.30,2004 Sept.30,2003 Sept.30,2004 Sept.,2003
Net loss $(3,206,661) (3,305,702) (870,809) (931,185)
Unrealized holding gain (loss)
arising during period (3,000) (5,375) -- (3,375)
Total comprehensive loss $(3,209,661) (3,311,077) (870,809) (934,560)
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 Company applied the cost method of accounting for its
minority equity interest in SPD Inc., a subsidiary of Hankuk Glass
Industries, Inc. Because no public market existed for the common
stock of SPD Inc., the Company reviewed the operating performance,
financing and forecasts for such entity in assessing the net realizable
value of this investment. During 2003, the Company recorded total
non-cash accounting charges of $615,200 against income to reflect a
reduction in the value of its investment in SPD Inc. These non-cash
charges were determined as follows: During the first quarter of 2003,
the Company recorded a non-cash charge against income of $255,200
to reflect a reduction in the value of its investment in SPD Inc.
determined based upon recent financing activity of SPD Inc. The
Company also recorded a further non-cash charge against income of
$360,000 as of the end of 2003 to reflect a reduction in the value of its
investment in SPD Inc. determined based upon its review of the
financial position and results of operations of SPD Inc. as of and for
the year ended December 31, 2003. On April 28, 2004, SPD Inc.
informed the Company that it is planning to sell its equipment and
other assets and cease its business activities. As a result, the Company
wrote off its entire remaining investment in SPD Inc. of $209,704 in
the first quarter of 2004.
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.
Controls and Procedures
We maintain a system of controls and procedures designed to
provide reasonable assurance as to the reliability of the financial
statements and other disclosures included in this report, as well as to
safeguard assets from unauthorized use or disposition. We evaluated
the effectiveness of the design and operation of our disclosure controls
and procedures under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer, as of the end of the quarter ending September 30,
2004. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures are effective at a reasonable assurance level in timely
alerting them to material information required to be included in our
periodic Securities and Exchange Commission filings. There were no
changes that occurred during the quarterly period ended September 30,
2004 that materially affected, or are reasonably likely to material
affect, our internal control over financial reporting.
Results of Operations for the Nine Month
Periods Ended September 30, 2004 and 2003
The Company's fee income from licensing activities for the first nine
months of 2004 was $134,975 as compared to $229,625 for the first
nine months of 2003. 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 decreased by $83,318 for the first nine months of
2004 to $1,763,836 from $1,847,154 for the first nine months of
2003. This decrease was primarily the result of lower payroll,
marketing, legal, depreciation, and directors expenses, partially offset
by higher insurance, patent, non-cash compensation, and consulting
expenses and higher accounting fees.
Research and development expenditures decreased by $67,219 to
$1,389,519 for the first nine months of 2004 from $1,456,738 for the
first nine months of 2003. This decrease was primarily the result of
decreased payroll and depreciation expenses, partially offset by higher
insurance expenses and costs associated with licensee support through
professional conferences.
During the first nine months of 2004 and 2003, the Company recorded
non-cash charges against income of $209,704 and $255,200,
respectively, to reflect a reduction in the value of its investment in SPD
Inc.
The Company's net investment income for the first nine months of
2004 was $21,423, as compared to net investment income of $23,765
for the first nine months of 2003. This difference was primarily due to
lower investment balances.
As a consequence of the factors discussed above, the Company's net
loss was $3,206,661 ($0.25 per common share) for the first nine
months of 2004 as compared to $3,305,702 ($0.27 per common share)
for the first nine months of 2003.
Results of Operations for the Three Month
Periods Ended September 30, 2004 and 2003
The Company's fee income from licensing activities for the third
quarter of 2004 was $41,648 as compared to $80,308 for the third
quarter of 2003. 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 decreased by $70,645 for the third quarter of 2004
to $534,847 from $605,492 for the third quarter of 2003. This decrease
was primarily the result of lower payroll, marketing, and depreciation
expenses, partially offset by increased accounting fees and insurance
expenses.
Research and development expenditures decreased by $26,913 to
$385,821 for the third quarter of 2004 from $412,734 for the third
quarter of 2003. This decrease was primarily the result of lower
payroll, consulting, depreciation and office expenses and materials
cost, partially offset by higher insurance costs.
The Company's net investment income for the third quarter of 2004
was $8,211, as compared to net investment income of $6,733 for the
third quarter of 2003. This difference was primarily due to higher
interest rates.
As a consequence of the factors discussed above, the Company's net
loss was $870,809 ($0.07 per common share) for the third quarter of
2004 as compared to $931,185 ($0.07 per common share) for the third
quarter of 2003.
Financial Condition, Liquidity and Capital Resources
During the first nine months of 2004, the Company's cash and cash
equivalent balance decreased by $1,774,433 principally as a result of
cash used to fund the Company's operating activities of $2,825,573,
offset by $1,100,914 of proceeds received, net of expenses, from the
private placement of common stock and the issuance of common stock
upon the exercise of options. At September 30, 2004, the Company
had working capital of $3,227,628 and its shareholders' equity was
$3,376,388.
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.
On October 1, 1998, the Company announced that Ailouros Ltd., a
London-based institutional money management fund, committed to
purchase up to $15 million worth of common stock of the Company
through December 31, 2001. This commitment was in the form of a
Class A Warrant issued to Ailouros Ltd. which gave the Company the
option in any three-month period to deliver a put notice to Ailouros
requiring them to purchase an amount of common stock specified by
the Company at a price equal to the greater of (A) 92% of the seven-
day average trading price per share of common stock, or (B) a
minimum or "floor" price per share set by the Company from time to
time. The pricing was initially subject to an overall cap of $15 per
share, which cap was eliminated by mutual agreement so that the
Company could put stock to Ailouros at selling prices in excess of $15
per share. However, the Company was not required to sell any shares
under the agreement. Before the beginning of each of a series of three-
month periods specified by the Company, the Company determined the
amount of common stock that the Company wished to issue during
such three-month period. The Company also set the minimum selling
or "floor" price, which could be reset by the Company in its sole
discretion prior to the beginning of any subsequent three-month period.
Therefore, at the beginning of each three-month period, the Company
would determine how much common stock, if any, would be sold (the
amount of which could range from $0 to $1.5 million during such
three-month period), and the minimum selling price per share. In
March 2000, Ailouros agreed to expand its commitment beyond the
original $15 million, thereby giving the Company the right to raise
additional funds from Ailouros so long as the Company did not have
to issue more shares than were originally registered with the Securities
and Exchange Commission, and in December 2001 the expiration date
of the Class A Warrant was extended to December 31, 2003. In
December 2003, this expiration date for the Class A Warrant was
further extended to December 31, 2005. As of March 31, 2004, the
Company issued the remaining 99,417 shares registered and available
for issuance under the Class A Warrant, resulting in net proceeds of
approximately $1 million in the quarter ended March 31, 2004. Thus,
Ailouros has no further obligation to provide funding to the Company.
As noted below, while no additional funding is projected to be required
by the Company in order to maintain its current levels of expenditures
for research and development, market development and other
operations until the third quarter of 2005, the Company and Ailouros,
which has been the Company's principal source of capital funding
since 1999, are in discussions regarding an additional equity
investment by Ailouros to provide additional working capital for the Company.
During the second quarter of 2001, the Company, through its wholly-
owned subsidiary, SPD Enterprises, Inc., invested approximately
$750,000 for a minority equity interest in SPD Inc., a subsidiary of
Hankuk Glass Industries Inc., Korea's largest glass manufacturer,
which was dedicated exclusively to the production of suspended
particle device (SPD) light-control film and a wide variety of end-
products using SPD film. In April 2003, the Company's wholly-owned
subsidiary, SPD Enterprises, Inc., invested $74,902 in SPD Inc.,
raising its equity ownership from 6.67% to 6.91%. SPD Inc.'s parent
company invested at the same time and at the same price, $748,931,
raising its equity ownership in SPD Inc. from 66.67% to 69.09%.
During 2003, the Company recorded total non-cash accounting charges
of $615,200 against income to reflect a reduction in the value of its
investment in SPD Inc. These non-cash charges were determined as
follows: During the first quarter of 2003, the Company recorded a non-
cash charge against income of $255,200 to reflect a reduction in the
value of its investment in SPD Inc. determined based upon recent
financing activity of SPD Inc. The Company also recorded a further
non-cash charge against income of $360,000 as of the end of 2003 to
reflect a reduction in the value of its investment in SPD Inc.
determined based upon its review of the financial position and results
of operations of SPD Inc. as of and for the year ended December 31,
2003. On April 28, 2004, SPD Inc. informed the Company that it is
planning to sell its equipment and other assets and cease its business
activities. As a result, the Company wrote off its entire remaining
investment in SPD Inc. of $209,704 in the first quarter of 2004.
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 for the next 12 months from
September 30, 2004. 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.
The Company will need to raise additional capital no later
than the third quarter of 2005 if operations, including research and
development and marketing, are to be maintained at current levels. If
the Company cannot raise additional funds, it will be required to
reduce expenses during the remainder of 2004 and 2005. 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 Pronouncements
In March 2004, the Financial Accounting Standards Board ("FASB")
issued a proposed statement, "Share-Based Payment - An Amendment
to Statement Nos. 123 and 95," that addresses the accounting for
share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance
of such equity instruments. The proposed statement would eliminate
the ability to account for share-based compensation transactions using
Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and generally would require, instead,
that such transactions be accounted for using a fair value based
method. In October 2004, the FASB delayed the effective date of this
standard to be applied prospectively for interim or annual periods
beginning after June 15, 2005, as if all share-based compensation
awards granted, modified or settled after December 15, 1994 had been
accounted for using the fair value based method of accounting.
Management will continue to monitor the FASB's progress on the
issuance of this proposed statement and its impact on the Company's
consolidated financial statements.
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, 2003. There has been no material change in the
disclosure regarding market risk.
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 and Reports on Form 8-K
(a) 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.
(b) Reports on Form 8-K. None.
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)
Date: November 8, 2004