REFR

Business Context and Reporting Period

Company: Research Frontiers Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company operates in a single segment focused on developing and marketing "light valve" or suspended particle device (SPD) technology. This technology controls light flow in architectural, automotive, marine, and aerospace applications. Revenue is primarily derived from licensing agreements involving minimum annual royalties and sales-based royalties.

Key Financial Metrics

Cash Flow Summary (Q1 2011): Net cash used in operating activities was $(668,448). Net cash used in investing activities was $(2,284). Net cash provided by financing activities was $65,977 (from option/warrant exercises). Net decrease in cash was $(604,755).

Material Changes vs. Prior Period

• Revenue Growth: Fee income increased by approximately 14% ($17,430) compared to Q1 2010, driven by royalties from new and existing licensees in architectural and aircraft markets.
• Expense Reduction: Research and development expenses decreased by $84,341 (17%), primarily due to a reduction in non-cash stock-based compensation charges ($121,000 decrease), partially offset by higher cash payroll and material costs.
• Operating Expenses: Increased slightly by $25,503. This was driven by higher director fees ($260,000), marketing ($22,000), and patent costs ($22,000), offset by lower payroll/stock compensation ($230,000) and a recovery of a previously written-off bad debt ($25,000).
• Net Loss Improvement: Net loss narrowed by $76,488 compared to the prior year quarter.
• Liquidity: Cash balances decreased by $604,755 during the quarter due to operating cash burn, though the company maintains a strong cash position relative to liabilities.

Outlook, Risks, and Management Commentary

• Strategic Milestone: Daimler AG selected the Company's SPD-SmartGlass technology for the "Magic Sky Control" glass roof in the new Mercedes-Benz SLK Roadster. Royalty payments from this feature are expected to begin in Q4 2011, subject to exceeding minimum annual royalties.
• Liquidity Outlook: Management believes existing cash reserves and budgeted revenues will fund operations until the third quarter of 2013 without additional financing. However, this is contingent on commercialization success by licensees.
• Stock-Based Compensation: The Company granted 63,000 restricted shares in Q1 2011. Remaining unamortized compensation costs are $753,928, to be recognized over the next 33 months.
• Risks: Success depends heavily on the commercialization of products by licensees. There is no assurance that expenditures will not exceed anticipated amounts or that additional financing will be available if needed. The Company has a significant accumulated deficit of $(81.9) million.
• Contingencies: The Company holds a $150,000 senior secured convertible note from SPD Control Systems Corp., a licensee developing automotive controllers. The note bears 10% interest and is convertible into SPD Control Systems stock.

Investor Verification Checklist

• Revenue Concentration: Verify the stability of the top five licensees, who accounted for approximately 70% of fee income in Q1 2011.
• Mercedes-Benz Royalties: Confirm the timeline and volume of sales for the Mercedes-Benz SLK Roadster to assess the likelihood of royalty payments exceeding minimums in Q4 2011.
• Cash Burn Rate: Monitor the quarterly cash burn rate (approx. $668k in operating cash outflows) against the projected runway to Q3 2013.
• Stock Dilution: Review the impact of remaining unamortized stock-based compensation ($753,928) on future earnings and potential dilution from option exercises.
• SPD Control Systems Note: Assess the credit risk and convertibility status of the $150,000 note receivable from SPD Control Systems Corp.