Research Frontiers Incorporated
Q4 2018 Earnings Call Transcript

Published: 15 Mar 2019

[Operator:]

Good afternoon ladies and gentlemen. Welcome to Research Frontiers’ Investor Conference Call to discuss the Fourth Quarter and Full Year of 2018 Results and Recent Developments. During today’s presentation, all parties will be in a listen-only mode. [Operator Instructions] This conference is being recorded today. A replay of this conference call will be available starting later today in the Investors section of Research Frontiers’ website at www.smartglass.com, and will be available for replay for the next 90 days. Safe Harbor announcement. Please note that some of the comments made today may contain forward-looking information. The words expect, anticipate, plans, forecasts and similar expressions are intended to identify forward-looking statements. Statements that are not historical facts are forward-looking statements that are made pursuant to the Safe Harbor Provisions that are part of the Securities Litigation Reform Act of 1995. These statements reflect the company’s current beliefs and a number of important factors could cause actual results for future periods to differ materially from those expressed. Significant factors that could cause results to differ from those anticipated are described in our filings with the SEC. Research Frontiers undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. The company will be answering many of the questions that were emailed to it prior to this conference call, either in their presentation or as part of the Q&A session at the end. In some cases, the company has responded directly to email questions prior to this call or will do so afterwards, in order to answer more questions of general interest to shareholders on this call. [Operator Instructions] I would now like to turn the conference call over to Joe Harary, President and Chief Executive Officer of Research Frontiers. Please go ahead, sir.

[Joe Harary:]

Thank you, Erica. And good afternoon everyone, and thanks for being here. Joining me today is Seth Van Voorhees, our Chief Financial Officer. We have some very exciting developments to talk about here, but before we do that, let me jump right into the numbers briefly. If we use the same accounting standards as last year, royalty income would have been about $65,000 higher than last year. As I noted in the past, as cars get further and further away from their initial introduction date, the total number of cars produced each year declines. So to maintain steady royalties under that environment requires higher and higher take rates for options. To put this also in context, if we look at Gentex as a good example of a company – that has a technology-based product in the automotive industry; in their last report for the fourth quarter, they reported net income down 19% and a decline in revenue on vehicle production concerns. So there were some headwinds in the industry that we overcame with higher royalty income this year versus last year. 2018 also represented the fourth consecutive year that expenses at Research Frontiers have decreased and the fifth consecutive year of lower operating losses for your company compared to the prior year. On a cash basis, our expenses were down by over $40,000 in 2018 versus 2017. We came in at a net loss of $0.02 per share, which is right in line with analysts’ expectations for the fourth quarter results of operations. During 2018 we also solidified our balance sheet by raising $3.25 million in additional capital from long-term investors in February and September, and since then we received over $1.1 million from the early exercise of warrants by these investors. We are in good financial shape with plenty of resources to move forward. To answer Dave’s emailed questions, we now have almost $3.4 million in cash as of today and remain debt free. Now I would like to talk about what many of you realize are quite significant recent developments. I look forward to our quarterly conference calls and to our annual stockholders meeting because it gives me a chance to speak to many of our investors. It is also a personal time for me when I can reflect on what we have accomplished and what our future looks like. The times for such reflection, sometimes they’re hard to come by. All of us at Research Frontiers from our employees to our board members are working at a frenetic pace. There are no shortages of opportunities around the world for us and our licensees. And sometimes it is frustrating because the seeds of our success are sometimes hidden underground and we can’t even tell our shareholders where we have planted those seeds. I’m happy that our shareholders have now begun to see where those seeds have been planted and are even seeing the fruits of our efforts in very clear and demonstrable ways. Today I will highlight these significant developments and discuss what they mean to our future revenue and profitability. For the past several years on our conference calls together, I have been focusing on some basic themes that have driven the direction that our company has moved in. First was the need to make our SPD-SmartGlass technology more affordable to the customer. We knew that we would be highly successful if we could do this and not sacrifice the fact that we had the best performing and most durable and reliable smart glass on the planet as shown by the largest number of installations in the field by any company in the world with tens of thousands of SPD-SmartGlass equipped cars, yachts, aircraft homes and offices using our technology for years. To this day, Mercedes has not reported even one problem with our SPD-SmartGlass, even though they’re using it in the toughest area of the car, the roof, and in the most demanding and severe climates in the world. To make our technology more affordable, we focused on all areas of our supply chain and licensee base. We also focused on our technology itself. Costs came down in the lamination, in the fabrication, and in the electronics. This year you saw starting in Munich at the electronica show, Texas Instruments introduced a driver for SPD-SmartGlass with the electronics on specially designed chips to power our smart glass more efficiently and at much lower costs. We developed ways to make our SPD-SmartGlass more inherently durable, thus minimizing the additional work and materials that our licensees had to add to the system. This reduced costs on many levels. Our licensees invested in process improvements and equipment to make SPD-SmartGlass products even more reliable and efficient. Licensees such as AGP in South America and Vision Systems in Europe have made substantial investments in this area. For example, throughout the year, we have updated the industry and our shareholders on developments by Vision Systems as they introduced new products for the aircraft, marine and train industries at major trade shows around the world. But what underlies this activity? Last week, prior to visiting the Geneva auto show, I was privileged to visit Vision Systems’ new facilities in Brignais, France and saw firsthand the transformation at their company. They expanded the number of people working there to 300, invested millions of euros in new equipment and expanded their facilities and even built the new modern headquarters to support the growth of their SmartLite division, which is devoted to SPD-SmartGlass technology. Another exciting area of transformation and a major driver in our efforts to reduce the costs of our technology to the industry and to the end customer started to be revealed about six months ago. In early September, our licensee, Gauzy in Israel led a $2 million investment in Research Frontiers. This investment was unprecedented in both our company’s history and Gauzy’s as well. When that investment was announced, we also jointly announced for the first time that Gauzy would in fact be making SPD film for the entire industry. Needless to say, this was very well received by the market and the industry. Our shareholder value has also increased since that announcement was made. About a month later in early October, I was honored to be present at the ribbon cutting ceremony in Tel Aviv for Gauzy’s SPD Smart film production line. This took many pleasantly by surprise because of the speed in which it had happened. After all, Gauzy only took their license from us a year earlier. And on February 1st another major event happened. Research Frontiers and Gauzy rang the opening bell on NASDAQ to celebrate Gauzy’s second factory line. This time the factory was specifically designed to be optimized for SPD technology with state-of-the-art equipment. It has the capacity to produce over 1 million square meters of SPD film per year. Ladies and gentlemen, depending upon the surface area, that’s about enough film to make 1 million to 2 million sunroofs per year, 8 million to 10 million aircraft windows or over 700,000 architectural windows. Needless to say, a fraction of any of these volumes makes Research Frontiers a highly profitable company. Sam Finta and Jeff Harvey both emailed in questions asking us to perhaps help people new to Research Frontiers’ business, quantify this. Let me try to help here. First in automotive; if we take the lowest end of the royalty range that we disclosed for Mercedes, we’re getting about $100 per car in royalties. To achieve $2 million in revenue per quarter that Jeff Harvey had asked about, that would be about 20,000 cars. If we assume an average large sunroof is 1 square meter, then this means that we would be using about 8% of Gauzy’s annual production capacity to achieve this. Full 1 million square meter capacity of this factory for automotive at this royalty level would mean $100 million in royalty income to Research Frontiers. In aircraft, we’re getting about $150 per window in royalties. 8 million to 10 million aircraft windows would be $1.2 billion to $1.5 billion in royalties. However, before we get too excited about that number, we estimate that there are about 160,000 new aircraft windows produced annually, so that would represent $24 million in royalty income and use less than 2% of Gauzy’s production capacity. The aftermarket is much larger. We estimate that there are about 2 million commercial aircraft windows out there. And this is expected to double by 2030. 2 million aircraft windows represents $300 million in royalties, assuming $150 per window. This would use just under 23% of Gauzy’s production capacity. The nice thing about being a licensing company is that our expenses do not increase as revenues increase. It is our licensees who do the heavy lifting here. So when you subtract out our roughly steady $3.6 million per year in cash expenses, a fraction of any of these markets makes us cash flow positive and quite profitable. Now, undoubtedly costs in royalties per car or per plane will be lower when we get into really high volumes, but the conclusion is still the same. This factory’s capacity can make Research Frontiers highly, highly profitable. Getting back to the new Gauzy factory for a moment, they’ve also built in capabilities to add functionality to the film on the production line and to speed up lead times for delivery. And of course, having a second source of supply of our SPD Smart film adds an appropriate level of competition in the film supply area of our supply chain, which has already resulted in a meaningful reduction in costs for what is often the most expensive component of a smart window; the film. One question I was asked by a shareholder in advance of this call was

[Operator:]

[Operator Instructions] Our first question comes from Thomas McCarthy from Raymond James. Please state your question. Thomas McCarthy Hi, Joe. What is the status of the sales of the Panasonic product the showroom window? And also is Gauzy selling their version currently? Or if not, when would that be expected to happen? Joe Harary It’s a great question, Tom. So, first question. Panasonic and NSG UMU has gotten underwriter laboratories approval for this. So, there is no clear sailing for the United States. They’ve had sales in Europe, they’ve had sales in Asia, and they plan to roll it out in the United States. But I will tell you this, one of the things that really excited me was they have improved performance well beyond what we originally saw, the performance of the combination SPD and PDLC. I was invited by Panasonic to a private showing that they only had for their top customers of what’s coming. And I saw that they also had something that was quite amazing [Audio Dip] out there because of their performance [Audio Dip] in the four quarter of this year. So very exciting in that area. And the other question of Gauzy, right now the projection display work they’ve been doing, has been focusing on the architectural area conference rooms and things like that. And they have especially designed a film for that and they are selling that, and some of the really cool stuff that they’re doing in automotive, is stuff that’s still in development. But I would say quite advanced. And I think it’s [Audio Gap] at the Corning booth at CES and saw side by side existing heads up displays and sunvisor technologies and what they had with SPD, you would see very clearly a much better product. And it’s quite exciting to see these very, very giant companies with tremendous resources starting to market this. And it’s not even in our traditional areas, our traditional areas of automotive, architectural marine and obviously these other area just come up, for me, it’s quite exciting. Thomas McCarthy Good. Joe, you might not know that the quality of your transmission has been fluctuating, you might want to edit the written transcript of this, and also perhaps if you are in a cell phone, you might want to stand closer to a window or whatever. Joe Harary Yes. Thank you, Tom. Unfortunately, what happened was our main telephone system went out about 20 minutes before this call started to I have to conduct it by cell phone. Murphy’s Law!

[Operator:]

Our next question comes from [indiscernible]. Please state your question. Unidentified Analyst Yes, Joe. I like to know, when you talk about 12 OEM manufacturers that Gauzy is talking to, are they directly speaking to these companies, individually… Joe Harary I might’ve heard only part of your question, but, is Gauzy speaking directly with these 12 OEMs, yes. And so basically are we as well as the other licensees that would be fabricating the product for them.

[Operator:]

Our next question comes from John Nelson [Private Investor]. Please state your question. John Nelson Hi. I noticed the R&D dropped significantly from 2016 to 2017, and then moved up a bit in 2018. Is the R&D going towards cost reductions of the product? Or are there any improvements of the products that – that you’re working on which you can tell us about? Joe Harary Sure. A lot of the R&D is focused on technical support for licensees to help them get a product out the door much quicker. But there are significant efforts going on in areas of improving all aspects of the technology. And I can’t really go into the details of all that we are working on, but we’re always working to get the cost down, the performance up and help our licensees succeed. John Nelson Okay. Thank you. Joe Harary Thanks.

[Operator:]

Our next question comes from Mark Raymundo [ph]. Please state your question. Unidentified Analyst Hey, Joe. I know, you’re a part of McLaren and Mercedes, but which of the two do you feel is the best investment? I know, they’re both fantastic investments, but I’m just curious if you have an opinion? Joe Harary Between Mercedes and McLaren, in terms of potential for Research Frontiers. Unidentified Analyst Yes. Joe Harary Well, Mercedes makes quite a bit more cars, so I would say that in the intermediate term, and remember the new S Class is coming out in 2020 or that’s what it’s scheduled to come out. The potential volumes there are quite large. And then there’s other vehicles and a lot of that depends on just getting the cost down and sticking to our knitting. So McLaren makes about 4,500 to 4,800 cars a year. We do a lot more than that with Mercedes. Unidentified Analyst Okay. Thank you. Thank you very much. Joe Harary Thank you.

[Operator:]

Our next question comes from [indiscernible]. Please state your question. Unidentified Analyst Yes. Hi, Joe. This is Lesley [ph]. So I was just questioning when we’re getting to the savings, the 5.5% extra miles on the electric cars in that, I would assume that, they’ll probably be using windows all the way around getting rid of the visors inside the car. That revenue should be ramping up, I would think before 2020. Is that not right? Joe Harary Yes. That’s what we expect 2020 to be a very significant year for us in automotive. And not only because of what we’ve talked about, but it’s a tip of an iceberg that we see. I mean, it’s, we could see underneath the water where, companies like AGC and AGP and Pilkington and all the automotive company licensees are. They’re talking to us about cars that have substantially higher volumes than Mercedes even right now. And it’s not just, the energy savings are coming from reducing the air conditioning loads, and using the air conditioning less. So you apply less power to cooling the car and more towards driving it at an electric vehicle, but the most significant areas, where he comes in is the windshield and the roof and the back windows. Unidentified Analyst Right. But right now, those – talking about the 2020 cars, those actually start coming out in 2019. Do they not? Joe Harary No. I am talking about calendar years, not model years. I look at when start of production is on a calendar year basis, not on what the nameplate says. So, start of production for these vehicles is 2019, which is this year, and delivered to the customers, in 2020. Unidentified Analyst Got you. Okay. That’s great. So, we’ll see a ramp up in making revenue as early then. Joe Harary Yes. I mean the real ramp up is going to come in 2020 for automotive. If anyone is looking quarter-by-quarter in 2019, you’re still going to see activity, but a lot of it is from a lot of different markets. For example are there new aircraft that are using SPD or more short-term developments? When you get into the big numbers and the big jumps in revenue, they come in chunks, basically from automotive and that’s something that you could expect in 2020. Unidentified Analyst Very good. Thank you for the answers. Joe Harary Well, we do expect – but just to amplify, we do expect some fairly significant other developments between now and then. So, I think everyone will be enjoying 2019 and really, really enjoying 2020… Unidentified Analyst Do you think… Joe Harary pardon?

[Operator:]

We have a follow-up question from [indiscernible]. Please go ahead. Unidentified Analyst Yes, Joe. Gauzy has a facility in China, now to sell into China; you usually have to give up your technology to the government. Is Gauzy a subject to that criteria? Joe Harary No. And they cannot – they have no rights to give our technology to anybody. They could use it, but they cannot convey it to anybody. Unidentified Analyst Because otherwise, they don’t allow you to sell there in China. Joe Harary You could sell the film and have it laminated there, and that’s probably what’s going to happen with most of the Chinese customers. Unidentified Analyst Okay. Thank you. Joe Harary And they are not the only ones that are really targeting the Chinese market. There’s an incredible amount of significant activity in China in the electric vehicle market and those – that activity is not something that anyone wants to miss out on. But there are ways to do that and it doesn’t involve the secret sauce going in the China. Unidentified Analyst Last week, the German government said they’re going to allocate $40 billion for the next three years in electric vehicles. Do you have any comments on that regard? Joe Harary I do. Volkswagen just today announced that by 2025, they’re going to have 22 million electric vehicles and it’s up about 47% from their prior target and if you look at everybody else, they’re also moving in that direction. BMW and Mercedes have a joint venture on electric vehicles and then you see a lot of platform sharing. So, companies are starting to really understand that they have to work together and the government is certainly helping that happen by providing funding and making investments in that, that is very strategic. And quite frankly, the problem they’re having in Europe is that nobody wants diesels, first because of the emissions cheating scandals that plagued the industry. In some cities, they’ve even banned diesel cars and coming into them. So, electrification is really going to be, I think a major, major initiatives and that’s going to be very, very good for us to quote Dieter Zetsche from Daimler. He said that the battery technology is not moving fast enough for our industry. We need to have a certain level of performance and the way you achieve that is with conservation of energy and that’s where we come in. Unidentified Analyst Good work and thank you. Joe Harary Thanks, Art.

[Operator:]

Our next question comes from Claire Horton [ph]. Please state your question. Unidentified Analyst Hi, Joe. You mentioned those two electric vehicles at the Los Angeles Auto Show. Joe Harary Yes. Unidentified Analyst Those must be – I mean that must be public information. is there a reason why you can’t reveal? Joe Harary It’s not public – it’s not public information what technology is being used there. At least from the automakers standpoint, that may change. Some automakers keep this stuff close to the vest. They don’t like to talk about how they’re doing it. They just want people to focus on the vehicles. But this company is a very, very well received and focused company that has really made a name for itself since the LA Auto Show. And I’m sure there’s a lot of speculation out there, and a lot of it’s probably right on, about what these vehicles are, but we can’t talk about it yet and I hope that will change. But the volumes they’re talking about are huge and the timeframe they’re talking about for delivery to customers is 2020. So there’ll be a lot of good stuff happening. Unidentified Analyst All right. Joe Harary And by the way, and I think that I have a high-level of confidence that the licensees that are involved with all of these automotive projects have already cracked the code on putting SPD in serial production. There’s several different ones that are working on all of these different auto makers. And I think there’s going to be a great product that is going to be really, really well, well received by the public. Unidentified Analyst Well, that’s good news. Joe Harary And it’s a car I could afford. Unidentified Analyst That’s great. All right, well, thanks. Joe Harary Thanks a lot. Unidentified Analyst All right. Thank you.

[Operator:]

[Operator Instructions] At this time we have no further questions.

[Joe Harary:]

Okay. I’d like to make some closing remarks. We have a number of growth areas for our business in automotive. Our largest market right now is automotive and the focus has been on reducing CO2 emissions and we can save 4 grams per kilometer of pollution. And with the new standards coming in Europe in the next few years, this amounts to a savings of about €380 per car in and avoided penalties from the regulators. There’s also a pronounced movement towards electric vehicles. Our SPD-SmartGlass technology can increase the driving range of electric vehicles by 5.5%. And electrification is a the cornerstone of Audi’s future and they recently announced that they will debut 30 electrified vehicles by 2025. Their parent Volkswagen Group, which also owns such brands as Porsche and Škoda, sold over 10 million cars in 2018, but only 40,000 of these were plug-in electric cars. That’s less than 0.4%. Volkswagen announced today that they plan to produce 22 million electric vehicles by 2028, a 47% increase from their previously announced electric vehicle targets. Today we spoke about not one but four new car models using our SPD-SmartGlass technology. I can assure you that this is not the only new cars we will be speaking about in the next few conference calls. 2019 and 2020 are expected to be the big beginning of highly significant years for us in the automotive industry. Trains are doing well and could be our second biggest market over the next few years, but there’s some possible and exciting major developments and programs in the aircraft market that could keep aircraft as our second biggest market next to automotive. And with the introduction of a wider and less expensive film and competition among SPD filmmakers; Hitachi and Gauzy, all markets will benefit. And it also opens up for the first time the very large potential architectural smart glass market. Our licensees have made substantial investments in the coming success. They see it coming and are acting upon it. Many investors also have seen the success coming. New investors have established large positions in Research Frontiers. Existing long-term investors have also added to their positions. They also see our coming success and have acted upon it. Almost all of the warrants issued in connection with our February offering were exercised more than four years before they were set to expire, bringing in over $1.1 million in additional capital to our company. Investors in the September offering have also begun to exercise their warrants to increase their position in Research Frontiers. We all see the successes in multiple markets that are rapidly coming. We are working hard to expand upon these successes and there’s no shortage of opportunities for us or our technology, and we’ll look forward to sharing this success with you, together. I also want to thank everyone for participating on today’s conference call and your support over the years. Thanks again.

[Operator:]

This concludes today’s conference call. Thank you for attending.