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John Emerson
John Emerson
Articles (106) 

REFR: How to Avoid Story Stocks

February 22, 2013 | About:

While I was perusing the list of 52-week lows I spotted a familiar name, Research Frontiers Inc. (NASDAQ:REFR). Like the proverbial bad penny, REFR had returned to my investing psyche. You see, sometime back in the mid-1990s I received a tip on the stock from my former broker suggesting that I purchase some shares in the company. It seems that he was taken in by the company’s description of their “revolutionary” smart glass technology. Mind you my broker was no fool; he was the same person who later suggested that I purchase shares of Apple (AAPL) at slightly over $10 per share. However, in the case of Research Frontiers, he had fallen for a story rather than a viable business.

Research Frontiers has been listed on the Nasdaq for around two decades, successfully enticing investors and raising capital by creating an alluring story which has no substance. Similar to the sailors who were lured to their destruction by the sweet voices of the mythical Greek sirens, even experienced investors have fallen prey to the seductive snare of this story stock. When an individual purchases shares in such a company, he has crossed the line from investment to speculation: Often times the departure occurs unwittingly. Avoiding such equities is paramount to an investor’s long-term returns.

The subject of today's article is a discussion of Research Frontiers and some fundamental techniques which enable an investor to quickly discern a story stock from a sound investment.

Characteristics of a Story Stock

Story stocks typified by a definable set of characteristics:

1) They are not shareholder friendly.

2) Executive compensation is excessive (as revealed in the proxy statement).

3) Revenues are low (as displayed in the income statement).

4) They have large accumulated deficits (listed in the equity portion of the balance sheet).

5) They are funded by perpetual shelf filings which increase their share count and their additional paid-in capital in the equity portion of the balance sheet.

6) They habitually burn cash (as demonstrated in the cash flow statement under cash flow from operations).

Shareholder Unfriendly

Story stocks exist for a single reason: They provide their management (and sometimes their board) with a very productive livelihood while providing their shareholders with little in return.

The following statement by long-time REFR shareholder (who recently petitioned the board of directors unsuccessfully to include him as a director) appeared on their annual proxy statement:

Statement by Darryl Daigle

I have been a shareholder of Research Frontiers for more than 21 years and currently own a substantial equity position in the Company which, according to the most recently published ownership records, makes me the largest individual shareholder outside of management and the independent directors of the Company.

As a shareholder I have been independently active among the Research Frontiers shareholder community, have performed extensive independent due diligence on the Company and its licensees, and have supported the Company and its shareholders for the past two decades.

I believe that, based on the Company’s current ownership, which predominantly consists of retail shareholders, that our retail shareholders need stronger representation on the Board of Directors. I believe that it is important for board members to have a meaningful personal economic stake in the business and success of the companies on whose boards they serve. I have purchased the stock that I own, both in the open market, and directly from the Company, using my own personal resources. I made this investment because I believe that Research Frontiers’ SPD technology has the potential to make revolutionary changes in the way that automobiles, aircraft, and architectural applications will be designed and used. I believe that the prospects for the Company are quite positive, but believe that more can be done to build shareholder value to reflect the Company’s bright prospects. I hope to use my more than 25 years experience as a successful business owner, and two decades experience as an investor in Research Frontiers, to provide retail shareholders with an effective and independent voice on the Board of Directors of the Company.

Not surprisingly, Mr. Daigle’s request drew the following response on the same proxy statement:

The Company’s Nominating and Corporate Governance Committee believes that its current Board of Directors has the necessary skill and experience to lead the Company during its current phase of operations, and recommends that stockholders vote FOR the three Board Nominees (Gregory G. Grimes, Joseph M. Harary, Richard Hermon-Taylor) to serve as Class I directors and WITHHOLD AUTHORITY to vote for Darryl Daigle to serve as a Class I director.

Excessive Executive Compensation

The proxy statement of REFR profiles the compensation for its CEO, Joseph M. Harary, for the last three years:

Stock/Option Incentive Plan Compensation Total

Name and Principal Position


Salary ($)

Bonus ($)

Awards ($)

Compensation ($)


Joseph M. Harary

425,000 260,000 212,763 31,058 928,821

President, Chief Executive

425,000 173,250 235,125 50,673 884,048


425,000 321,000 128,361 65,561 939,922

Mr. Harary has drawn an average annual compensation of over $900,000 to manage a company with 13 employees and average revenues of less than $1 million a year.

Low Revenues

Research Frontiers has only recorded $1 million in revenues once in past 10 years. In other words, the total compensation of its CEO is greater that the entire sum of their yearly revenues in most years.













-4.13 Mil


-4.13 Mil





-3.87 Mil


-3.87 Mil





-4.00 Mil


-4.00 Mil




1.68 Mil

-2.60 Mil


-2.60 Mil





-7.57 Mil


-7.57 Mil





-3.30 Mil


-3.30 Mil





-3.75 Mil


-3.75 Mil





-4.26 Mil


-4.26 Mil





-4.77 Mil


-4.77 Mil



Large Accumulated Deficits on the Balance Sheet

Successful companies demonstrate increasing retained earnings in the equity portion of their balance sheet; contrarily, story stocks like REFR show progressively increasing accumulated deficits. A check of past balance sheets reveals that REFR has increased its accumulated deficits from $46.15 million at year-end 2002 to $86.87 million as of the last reported quarter.

“Nothing is certain in life but death and taxes,” according to the old saying; I think we can add, “Resource Frontiers will lose money this year” to that age-old truism.

Serial Shelf Offerings and Additional Paid-In Capital

Despite its perpetual cash burn, Research Frontiers has been extremely adept at raising capital through repeated shelf offerings. A check of the companies’ additional paid-in capital reveals that the company has raised over $44 dollars in equity approximately the last 10 years.

P.T. Barnum had a legitimate point when he noted that “a sucker is born every minute.”

Perpetual Cash Burn

No one can accuse Research Frontiers of cooking its books. It is totally unabashed when it comes to reporting its steady cash drain. Its perpetual losses in net income are matched almost perfectly by its losses in cash flows from operations. Further, it requires almost no capital expenditures to accelerate its cash burn. Thus its accumulated deficits are nearly a perfect match for its negative free cash flow.

Let the Buyer Beware

I have been having some fun with Research Frontiers, but I find it unlikely that the current shareholders find any amusement in my discussion of the company. REFR is exactly the type of company which leads novice investors to proclaim that the market is little more than a “crapshoot.” That type of attitude invariably leads to the practice of speculation, rapid trading of stocks and ultimate losses, in the interest of safety. Investors who lose money through poor stock selection generally come to the conclusion that their error lay in “holding the equity too long” rather than in the purchase itself.

In reality, investors can easily avoid story stocks which rely upon hype rather than financial performance to attract supporters. A few simple checks of the financial statement of REFR clearly reveal that the company has little in the way of substance — that has been the case for two decades, yet the company is able to continue to complete successful shelf offerings. The most recent capital raising was completed last autumn, and it insured that the management will continue to draw its exorbitant wages for at least a few more years.

In conclusion, the best way investors can protect themselves from poor investments is to hold a healthy amount of skepticism when dealing with companies who proclaim that they have revolutionary products on the horizon. Past financial statements frequently tell a much better story than the pretty picture that is painted by an unscrupulous management team which relies upon selling additional stock to fund their livelihood. So always remember caveat emptor when a story sounds too good to be true.

About the author:

John Emerson
I have been of student of value investing since the mid 1990s. I have continued to read and study value theory on an ongoing basis. My investment philosophy most closely resembles Walter Schloss although I employ considerably less diversification. I also pattern my style after Buffett's early investment career when he was able to purchase shares of tiny companies.

Rating: 4.0/5 (20 votes)


Amirojuve - 4 years ago    Report SPAM
Great article, Thank you.

One red flag that saved me a few times was to discover companies that still issues shares to pay their debt and still keep paying dividend to the shareholders.

Henniker82 - 4 years ago    Report SPAM
Great write-up! If I am ever in need of another loyal friend I will seek out Darryl Daigle. Twenty years and he is still a true believer! Good on him for becoming an active voice, though.
Aldandrea - 4 years ago    Report SPAM
The notorious short, Manual Asensio, of Asensio & Co. has wrote volumes on the REFR fraud back around 2000. Not sure if these reports are still floating around but they may make for entertaining reading. The REFR scam goes back a long ways yet the company keeps attracting more investment with more or less the same hyped con. Amazing how they keep getting away with a scam that is netting them millions. Many, many people know about REFR. So where is the SEC?
Leonsmall - 4 years ago    Report SPAM

Darryl Daigle IS on the Board of Directors of Research Frontiers. Their technology Suspended Particle Device ("SPD") was just adopted in the Mercedes S-Class, which is the 3rd model it's been in since 2011. The technology cost 90MM to develop, had it's first commercialization in 2001 in aircraft. Since then the company has worked on developing an infrastructure of licensees that are putting SPD products in aircraft, automotive, marine, and architectural markets.

There has been an organized campaign to discredit this company by short sellers who followed an unfortunate recommendation by Mr. Manuel Asensio, more of his exploits are found on http://www.asensioexposed.com Do you have a short position in this company because if you had bothered to contact the analyst at Craig-Hallum, you would know that the royalties from the S-Class will make this company profitable next year.

Do you even know what SPD is or how long it takes to make such a breakthrough? Gentex used a 40 year old competing technology, went into business in 1974 and didn't have their first self-dimming mirror until the early 1980s.

How irresponsible is the monitoring of this site, that they would allow such an egregious article to be written. I challenge you to dispute my comments.

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