Proxy Madness at Research Frontiers

Few companies can release a proxy statement to which stockholders react by dropping the company’s stock price by 15%. However, Research Frontiers (REFR) [$5.91 0.00%, market cap: $91.3M] does earn that dubious distinction. When I last wrote about Research Frontiers, the stock closed at $14.93. At a recent price of $5.19 per share, the stock is down over 64% since I called it a ‘failed company.’

While the proxy contains the standard stock options (including $900k to the Chairman), stock appreciation rights, and other payments to executives, the interesting part is the company’s take on a shareholder proposal. The proposal reads in full (bold text mine):

RESOLUTION: Provide more detail information on film production quantities and sales.

BE IT RESOLVED: On a quarterly basis beginning within 30 days of the 2008 annual meeting with the previous quarter’s data, the company shall separately report revenue by license fees and royalties; and report total royalty revenue that the licensees are required to report by their license agreement even though it might be below minimum royalty payments. Additionally, the company shall provide information on how much film is produced for sale as reported by licensees as required by their license agreement. This information can be aggregated for all licensees so that any individual licensee’s information remains confidential.

Rationale for adoption: While there has been reported film production and sales going back many years, there has not been any officially reported measure of film produced or revenue from sales that would inform shareholders of the true extent of the commitment by licensees to develop SPD products. In as much as the Company is 100% dependent on licensees for SPD film production and sales, this information equates to the viability of the Company and the only way to fairly value the Company. Additionally, the Company has over the years, partnered with licensees in the release of information about SPD products for sale and sold but there has been no information given to independently verify this.

Unlike most shareholder proposals, this seems like a reasonable request for Research Frontiers to provide more detail on what its licensees are actually producing. The company’s reason to reject the proposal argues that the proposal would require giving out the licensees’ proprietary information, but the proposal clearly indicates that only aggregate disclosures would be necessary. More likely, the company wants to avoid disclosing that few if any actual products are being manufactured and shipped and all its revenues are coming from license fees and not from royalties on actual products. Considering that in 2007 Research Frontiers reported $402,000 in revenue and yet boasts a large lists of licensees (see the 10k for details), I find it hard to believe that any of the licensees are shipping actual products and paying royalties.

More information:

2007 10K

2008 14A (Proxy Statement)

Disclosure: I have no position in REFR.