Into the abyss

I don't normally comment on stock price movements without any sort of news trigger, but today's drop, especially in the context of the tumble this stock has taken since the Tokyo auto show, is just breathtaking. It's not an effect you normally see outside the world of unlisted penny stocks whose issuers are flooding the market with shares. Which might be partially the case: REFR did indeed issue quite a large number of options based on the expense they represented, but somehow I think even that is not enough to explain the implosion we're witnessing.

Even some the biggest bulls on the message boards were invoking $6.00 as an average-down point, a level that would have seemed laughable just last week.

In a way, there's a kind of symmetry to this whole mess: up big on non-news, down big on no news.

In other news: Gene Marcial, call your office!

An early morning quarterly

The third quarter 10-Q came out very early this morning, bolstering the notion raised by some cynics that the failure of the company to file on the accelerated schedule deadline of Friday, might have been the result of an administrative snafu. (Monday, the SEC was closed for Veteran's Day, so this morning was the first opportunity to file after the 5:30pm Eastern deadline last Friday.)

The points that stand out from an initial reading:

• Revenues were up, pretty much as expected, almost entirely as a result of the Hitachi "guaranteed access" deal. There had been a few questions as to whether the payments were truly guaranteed, but they seem to be at least being recorded on schedule. Although, given the rather similar bulge in receivables, it appears Hitachi had not, as of September, actually gotten around to cutting REFR a check as yet.
• Losses for the quarter, however, were way up, mostly due to the company seemingly giving out stock options like candy to its employees. No less than $1.78 million worth of options expenses were recorded under operating and R&D expenses in the quarter, actually dwarfing all other expenses under those categories. One might well ask if a factor in the sharp decline of the past few weeks wasn't the result of employees cashing out some of these options!
• On the licensee front, we learned that AGP has renegotiated some terms of its license. The only change spelled out in the filing was that REFR's royalty cut tripled from 5% to 15%. Why AGP would agree to such an arrangement, which would only hamper its competitiveness if there is to be a marketplace for SPD products, is something of a mystery. One gets the feeling the answer lies in the "other things" the filing did not specify.
• Finally, were there product sales? This blogger has read through the filing twice and didn't find any definitive language one way or the other on the subject.

In summary, while not 100% business as usual this past quarter, the bottom line is that REFR remains nowhere near a profit. Better luck next quarter!

Update: A poster on Yahoo! came up with a theory on AGP that rings so true I'm surprised I didn't think of it. It makes perfect sense that each end-product licensee would be able to "buy" a lower royalty rate by agreeing to a minimum royalty payment. So, the increase in the rate strongly suggests that AGP is greatly lowering, or very likely, eliminating, its "minimum". Draw your own conclusions about AGP's confidence in the market for SPD products from that.

Has the cap come off?

In the early part of this decade, when REFR roared as high as $40 a share and hung around in the $15-$30 zone for quite a long time before the end of the SPD Inc. era flushed the stock, a rather hefty amount of focus was placed on the size of the short interest. Even though the total shares outstanding were well over 10 million even in 2000, the short interest seemed to hit a hard cap right around 2 million shares. A lot of comments about how "the shorts were out of ammo" could be read, and predictions of a massive short squeeze were made almost daily.

Actually, in that last bit, little has changed since that time, but one relatively new development is that short interest has broken through the barrier that had been just over 2 million shares, and has reached 2.5 million and is still climbing.

So how is that happening? Well, for lack of a better theory, the diagnosis of "what's changed" points a finger at the listing of options on REFR a few months back. The basic idea seems to be that, by purchasing put options, you buy the right to sell REFR at a given price and time, and this right seems to circumvent the borrowing restrictions that kick in whenever the availability of shares to short runs low. Thus, short interest is allowed to increase more freely, with brokers now having to extract borrows after the fact rather than preventing the trades up front.

Now, for all I know that could be all hooey, but it's really the only working theory either side of the debate seems to have come up with. All we know for sure is that the short interest is reaching records highs, and in the meantime the stock, ever since the Hino show announcement, has been in free fall, and those two items are probably not 100% coincidence.

In other news, REFR, which for the past few years has been filing quarterly reports 40 days after the end, did not do so this quarter. This might be because the status of accelerated filer no longer applies to it for whatever reason. Assuming that is so, the filing will most likely come on Wednesday instead. Because goodness knows, REFR is such a complex organization that those extra five days are vital to putting out a proper report on the company's finances.