False profits

On June 14, 2001, REFR stock spiked from around $24 to nearly $28, as a result of a press release entitled "Research Frontiers Announces Its First Profit Targets as Part of New "Road Map" for the Future". The press release featured this quote from REFR founder and then-president Robert Saxe:

"We have now substantially completed the goals set forth in the 'road map' we outlined for our shareholders in mid-1999, which focused on building the SPD supply infrastructure. With the achievement of those goals, and based on commercial sales projections for SPD light-control products by our licensees, for the first time we can reasonably predict the timing of future revenues and profits. Based upon projected timetables and sales goals of Research Frontiers� licensees for SPD film and end-products, the Company expects to earn royalties from sales of licensed products (payable under license agreements within 45 days after the end of the quarter in which sales of licensed products occur) early next year, achieve its first quarterly profit next year, and achieve its first full-year of profit in 2003, but possibly in 2002. Thereafter profits are expected to escalate rapidly."

As we know now, it didn't exactly work out that way for REFR. So what went wrong? One after-the-fact spin attempt tried to blame the failure on 9/11, but a press release from September 24th, two weeks after the attacks, put the kibosh on that out before it got anywhere.

The blame ultimately went where it was seemingly intended to go all along, the hapless, yet totally unaccountable licensee, InspecTech Aero Services. The September 24th release referenced a "goal" InspecTech had set of selling and installing 5,000 SPD aircraft windows per month. With REFR projected to earn between $90 and $150 per window in royalties, that would come to anywhere between $5.4 million and $8 million per year, enough to make REFR profitable assuming expenditures remained constant.

If you've reviewed REFR's financial statements, then you don't need me to tell you that it didn't quite work out that way. Despite an impressive list of aircraft that InspecTech claimed to have "engineered" windows for, actual sales were insignificant, possibly even nonexistent. REFR's revenues went nowhere, and even a handful of its shareholders were driven to give up in frustration.

So what went so horribly wrong at InspecTech? How was REFR apparently caught so off-guard by this total failure of one of its seemingly most active licensees? What exactly is this InspecTech, that claims to be "the leading company in the aerospace industry" on its front webpage? I'll get more into those questions in the next part.