Earnings Call Transcript - REFR Q3 2022

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to Research Frontiers Investors’ Conference Call to discuss the Third Quarter of 2022 Results of Operations and Recent Developments. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened to all questions. This conference is being recorded today. A replay of this conference 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. 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 can 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. This conference will be answering many of the questions that were e-mailed 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 the call or will do so afterwards in order to answer more questions of general interest to shareholders on this call. 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, President & CEO

Thank you, Bailey, and welcome aboard. Hello, everyone, and welcome to our third quarter of 2022 investor conference call. In our last call, we talked about how inflation and recession likely wouldn't impact our business and explained why. We also addressed concerns about the energy situation and its effects on our operations, particularly in Europe. Additionally, we mentioned new car models set to launch in the third and fourth quarters this year, along with other developments in the smart-glass industry. Today, we will review our performance against those predictions. Here’s a brief financial overview. As indicated in the press release issued this afternoon, we saw an increase in fee income from automotive and aircraft markets this quarter. Our expenses have decreased compared to the same period last year, and they were also $192,000 lower than in the second quarter. This is a solid performance given the inflationary backdrop, and we managed our costs effectively. Our net loss this quarter was $258,000 less than the previous quarter, and our financial position remains strong. We have raised capital on favorable terms and maintain a debt-free status. As of September 30, 2022, we had $4.8 million in cash and cash equivalents, $5.2 million in working capital, and total shareholders' equity of $5.4 million. We anticipate having enough working capital for at least the next five years based on a reduced quarterly burn rate of $250,000 to $300,000, along with expected higher revenues from new car models in the next year. Earlier, we highlighted the introductions of new car models in Q3 and Q4 featuring our SPD-SmartGlass technology. This has indeed come to fruition, with Cadillac set to deliver the Celestiq by the end of 2023, and another European sports car manufacturer launching a model equipped with an SPD-SmartGlass panoramic roof in early 2023. The Cadillac roof is notably the largest automotive roof glass produced to date and comes as standard equipment. The other vehicle, while resembling a sports car, offers the panoramic roof as an option, exclusively in SPD-SmartGlass. We’re excited about these introductions, and we expect another Asian carmaker to launch a high-volume vehicle featuring SPD-SmartGlass this month. Shifting gears to the aircraft and mass transit markets, we had significant project developments over the past year, including Airbus's ACJ 220 program and SPD electronically dimmable windows by Vision Systems in new aircraft models. Two aircraft were showcased at the recent NBAA convention in Orlando, and I was impressed with how our technology performed. The specialty materials developed alongside SPD by Gauzy and Vision Systems are exceptional, and Vision Systems also had a successful exhibition. They’ve recently announced projects involving 17 aerospace programs, 9 marine programs, 9 specialty vehicle programs, and 3 railway programs. Now, on to broader economic trends. As a former federal reserve economist, I closely monitor global economic indicators. We've structured our business to be resilient against inflation and recession, and I'm pleased to report that supply chain and energy issues have not significantly affected us or our licensees. For instance, Gauzy's facility in Germany operates without the need for high-energy machinery, primarily requiring comfortable working temperatures, which means they haven’t had to increase prices due to energy costs. Additionally, natural gas prices in Europe have decreased by 70% since their peak in August, and shipping costs have also dropped significantly, with backlogs at major ports now nearly resolved. We continue to see the automotive market poised for growth, with upcoming models utilizing our SPD-SmartGlass technology expected to launch soon. Economic activity is increasing across various sectors, including developments by Vision Systems, Gauzy, AGP, and LG Display, all working with SPD. Major exhibitions have showcased SPD innovations, with expectations of even larger displays at the upcoming CES in Las Vegas and the Marine Equipment Trade Show in Amsterdam. Previous estimates have indicated that recent automotive introductions could represent more than double the SPD film sales we've seen from Hitachi in our best year. Moreover, Gauzy has significantly increased its production capacity for SPD emulsion, which affects our royalty earnings linked to SPD-end products. This production scaling, alongside workforce hiring at Gauzy and others, serves as an excellent indicator of expected sales and royalty income. I look forward to addressing your questions today. We have received several inquiries from shareholders in advance of this call, and I will address some of those. To start, John Nelson asked why we completed a $4.6 million private placement on September 16, 2022, and about the fund's potential usage. We initiated this funding primarily out of fiscal responsibility, with flexibility for future opportunities. Demonstrating stability within our supply chain is crucial, especially as some companies have faced challenges. In contrast to other smart window companies that have significantly diluted their shareholders in recent months, our company has maintained a reputable standing in the market, evidenced by our stock performance this year. If we don’t utilize the raised funds, we can return them as dividends or reinvest them into our growth. Regarding investor participation, we've welcomed substantial individual and institutional shareholders, many of whom have been with us since the 1990s. Further, regarding the automotive industry, I believe that premium segments will continue to thrive even amidst economic downturns, similar to trends observed during the 2008 financial crisis. Reports highlight a boom in ultra-luxury car sales in Europe, signaling profitability in that segment. However, there will be variability among companies, as many have recently gone public without sustainable business models. I expect more activity from well-established manufacturers who are actively investing in electric vehicles due to government incentives and mandates, which ultimately benefit Research Frontiers. The move towards larger panoramic roofs is another industry trend to note, as these roofs create the need for innovative shading solutions like SPD-SmartGlass. Additionally, the growing interest in smart glass systems is notable, with various manufacturers, including Hyundai, showing strong sales potential in EV markets, supported by strategic technology partnerships. Hyundai is particularly interesting given its role as a strategic investor and its significant position in the EV market. I keep a close eye on their upcoming models, especially the Grandeur, which is expected to launch in early August 2023 and has already garnered strong pre-launch demand. In summary, we are witnessing exciting initiatives across automotive and smart-glass technologies, with plenty of opportunities ahead for Research Frontiers. I encourage questions and further discussions on the topics we've covered today.

Operator, Operator

And our first question comes from Jeff Harvey. Jeff, your line is open.

Unidentified Analyst, Analyst

Hi Joe.

Joe Harary, President & CEO

Hi Jeff.

Unidentified Analyst, Analyst

So my question is, I understand that SPD roof will save energy on an EV. The question is how many EVs are going to have roofs at all? Do you have any idea what percentage of new EVs are expected to have a panoramic roof? That's really the crux of the whole matter.

Joe Harary, President & CEO

Yes, that's an excellent question. We're discovering that when you can manage the shading, roofs become very desirable. Making them stationary, like what we're seeing with panoramic roofs, reduces both weight and the number of components. Several EVs have faced significant issues with their panoramic roofs due to the absence of a shading system. Customers have had to come up with makeshift solutions to tackle this problem, and automakers are aware of these concerns. They have reached out to us because they recognize that this is a challenge that needs attention. To address your question, we typically find that around 80% of cars in the United States in the mid-level and upper-level market feature sunroofs. This trend is somewhat different in Europe, where sunroofs have historically been less common, although they are quite popular in the Middle East. The presence of these roofs is usually more evident in luxury and sportier vehicle styles. I believe this segment will continue to grow significantly. Please continue.

Unidentified Analyst, Analyst

If you were to guess, like, say, in the $30,000 to $40,000 range, how much added cost would it be for somebody to order one with an SPD roof? I mean that's really the thing we have to discuss; it's an extra cost. And as you said, if they're getting 80% of people ordering panoramic roofs, then it makes a lot of sense.

Joe Harary, President & CEO

Right. So there's two aspects of that question. So number one is, what does it cost the automakers? And then what do they charge the customer? Typically, the customer is going to pay 3x to 5x what it costs the automakers for a component because that's where they make their money. But that's going to depend also on what the market can bear. Let's just take a present example. If you look at McLaren, for example, the roof is about $8,000. However, it's the same glass, the same roof, and actually the same supplier as a $2,000 retail roof at Mercedes. So it depends on what the market for the car will bear, the same glass, same supplier, but a much different retail price. It's up to the automakers to decide how much they think they can get and still maximize profit and revenue. The good news is, on our end, we're focusing on the cost side of the equation. We want to make this as affordable as possible even for mid-level cars. Some of the cars that I mentioned earlier in the call are actually mid-level cars that have panoramic roofs and are specking in SPD. I think it's going to be a popular option even at the mid-level. Just so you know the unit volumes; the premium market is about 3% of the unit volume of the car market. If you get down into the mid-level, you're talking about many, many, many multiples of that in terms of your home.

Unidentified Analyst, Analyst

To get into that space.

Joe Harary, President & CEO

Absolutely.

Unidentified Analyst, Analyst

Thank you.

Joe Harary, President & CEO

Thanks, Jeff.

Operator, Operator

And our next question will come from Michael Kay. Michael, your line is open.

Unidentified Analyst, Analyst

Hello Joe.

Joe Harary, President & CEO

Hello Michael.

Unidentified Analyst, Analyst

Could you clarify? You said fee income increased compared to the previous quarter and also for the one in 2021. But I looked at the SEC filing, and I could be mistaken, so I apologize, but it seemed that there was a sharp decrease in fee income in the...

Joe Harary, President & CEO

If you read the press release, what we said is that when you exclude the one-time items from last year, fee income last year to this year is up in automotive and aircraft. Last year, we had some collections from licensees that were in a different period than when they were incurred, contributing to a higher amount, and also some other one-time things like new contracts and large payments under them. If you just compare apples-to-apples last year versus this year, we were higher this quarter than the same quarter last year, and we were certainly higher. I think this is also more relevant from last quarter to this quarter in terms of our revenues.

Unidentified Analyst, Analyst

And when will the sun guard come out that's supposed to be fitted onto existing cars? Isn't Vision Systems going to market that eventually?

Joe Harary, President & CEO

Yes. The sun visor you're talking about...

Unidentified Analyst, Analyst

The sun visor, yes.

Joe Harary, President & CEO

Right. That's being worked on not only by Vision Systems but by others as well. You're also seeing it incorporated into the windshield itself on some cars like McLaren, where they build it into the laminate itself, which is kind of cool.

Unidentified Analyst, Analyst

But would people eventually be able to buy it separately and install it under existing cars?

Joe Harary, President & CEO

Yes. Yes. Aftermarket sun visors...

Unidentified Analyst, Analyst

I think that would be an easy thing to do. That would be a big source of revenue because people wouldn't have to actually buy just the car that had it already in. If they could just install it themselves.

Joe Harary, President & CEO

I agree. I agree. People like to upgrade their cars. This seems like a very not only practical but interesting way of upgrading your car, that puts something very, very cool in it.

Unidentified Analyst, Analyst

And are you not allowed to name the sports vehicle that you mentioned that has installed SPD?

Joe Harary, President & CEO

I'm not yet allowed to name it, but I think that everybody can probably ascertain from the timing of the introduction in mid-September and the fact that they're very well known for their sports cars, and some of the comments by their CEO, what I'm talking about. If you look back on this conference call, you'll probably be able to have a reasonable degree of confidence.

Unidentified Analyst, Analyst

Ok thank you, Joe.

Joe Harary, President & CEO

You're welcome. Good talking to you.

Operator, Operator

And our next question comes from John Nelson. John, your line is open.

Unidentified Analyst, Analyst

Thank you. Hi, Joe.

Joe Harary, President & CEO

Hi, John. Thanks for the earlier questions also. Appreciate it.

Unidentified Analyst, Analyst

You're welcome. I just feel real good about the course that you're taking. And again, the private placement, I think, was excellently designed and executed. So thank you from one of your shareholders...

Joe Harary, President & CEO

Thank you, John. I appreciate that.

Unidentified Analyst, Analyst

I've got a couple of questions. One is related to a kind of an offshoot of transparency; Anderson Corporation and Ubiquitous Energy announced plans recently in a press release in August to develop energy-generating windows and doors without aesthetic compromise. My question is, is REFR working with any glass or window manufacturers on using SPD in this space, which is being called transparent solar for windows and doors?

Joe Harary, President & CEO

One of our licensees, Vision Systems, developed the Energia window, a transparent photovoltaic that was similar to what Anderson is now working on, but that was years ago. It can generate 20 times more power than the window requires. A key aspect of our technology is that we operate on such low power that even low-efficiency transparent photovoltaics function effectively with it. They created an aircraft window that was entirely self-powered. This is significant not only for energy savings but also for ease of installation. You could see in their videos how easily it snaps into the side of an aircraft without needing wiring; it's essentially a plug-and-play solution. The extra power it generated allowed them to add a USB charging port for charging a cell phone. This concept is very practical. Many transparent photovoltaics have visible lines in the glass, which are undesirable for many window applications, though I'm unsure if Ubiquitous Energy has that issue. Several companies, including some from Princeton, have made advancements in aesthetically pleasing transparent photovoltaics, making it valuable to utilize window space for power generation when possible. This is certainly achievable due to our low power consumption.

Unidentified Analyst, Analyst

Well, it might be something worth SPD investigating as far as whether they could be combined with the transparent solar.

Joe Harary, President & CEO

Yes. No, we very much have development work going on in that area.

Unidentified Analyst, Analyst

Okay. Terrific.

Joe Harary, President & CEO

Yes, to set fair expectations, our costs have decreased significantly. Initially, the cost of new technology is usually high. It remains uncertain whether some of these transparent photovoltaic technologies will be economically viable for adoption. However, that's somewhat separate from our situation. What we provide is not just a smart window but likely one of the largest markets for self-powered transparent photovoltaics in windows.

Unidentified Analyst, Analyst

Okay. Got it. Second question is, do you know at this time whether the magic roof on the 2023 Hyundai Grandeur would be offered as a single option or part of a package on unlimited or a broad set of the model tanks for the Grandeur?

Joe Harary, President & CEO

I don't think that decision has been made yet. I don't think it's going to be standard equipment, but I don't know if it's going to be part of a stand-alone option like Mercedes did or part of a package. I hasten to add, it hasn't been officially announced yet, so...

Unidentified Analyst, Analyst

Okay. Got it. Right. And last question regarding the Research Frontiers press release on October 17. You mentioned 41 Vision Systems contracts in transportation.

Joe Harary, President & CEO

Very impressive, they have been busy.

Unidentified Analyst, Analyst

Yes. Were they...

Joe Harary, President & CEO

I know the question you can ask me, how many were new and how many were legacy ones; most were new.

Unidentified Analyst, Analyst

Yes.

Joe Harary, President & CEO

Most were new. They have been very active.

Unidentified Analyst, Analyst

Yes. Okay, excellent.

Joe Harary, President & CEO

I wish I could clone those guys; they're amazing.

Unidentified Analyst, Analyst

Yes. The other question related to that is whether the specialty vehicle contracts include automotive companies, such as Hyundai and the…

Joe Harary, President & CEO

No, but remember Vision Systems is licensed for certain things and automotive passenger cars is not one of them. Although I wouldn't mind if they got involved with that. Specialty vehicles are more like harvesters and construction equipment and things that have a lot of glass that really have a need for solar control. You wouldn't think about it, but if you sat in a big harvester, there is a lot of glass in there and when you’re out in the field, you want to make sure that you don't have to truck around the second air conditioner just for the cab of the harvester. This is where the glass really helps.

Unidentified Analyst, Analyst

Okay. And the last one is related to the sun visor update that a previous questioner mentioned. Do you have any comments that you can give us on a timetable for that product?

Joe Harary, President & CEO

Not that I could share.

Unidentified Analyst, Analyst

Okay. Thanks.

Joe Harary, President & CEO

Thanks a lot, John.

Operator, Operator

And our next question will come from Alan Ginsberg.

Unidentified Analyst, Analyst

Hi Joe.

Joe Harary, President & CEO

Hi Alan, how are you?

Unidentified Analyst, Analyst

Pretty good. My question is this. It seems like a lot of things are coming together now from all that you said.

Joe Harary, President & CEO

It wasn't an overnight success. I'll assure you and you assure me also.

Unidentified Analyst, Analyst

Believe me, I know it's not an overnight...

Joe Harary, President & CEO

You know the hard work that went behind it.

Unidentified Analyst, Analyst

My question is this; with everything coming together, wouldn't it be prudent, especially since you have some money now, to increase your investor relations? I mean, the stock, you could tell me that the stock has been doing better, but it has no volume. From what you're saying, it could really do very well in the future, much better than what we're talking about in the past year. Wouldn't an increase in exposure to investors be something that you would think would be good timing right now?

Joe Harary, President & CEO

I think that increasing our investor relations, especially since we have so many good things to talk about to investors, is appropriate. How quickly and how much we ramp it up is a different story? Right now, I focus, obviously, as a shareholder, I'd like to see our stock price always be higher; it's where my net worth is. But I also have to focus on the business, and that's really what I have been focusing on. I think that as we generate revenues, the population of investors that will invest in Research Frontiers grows. My wife likes to invest in companies that pay dividends; I'd like to be a dividend-paying company very soon.

Unidentified Analyst, Analyst

But maybe you could hire a few people or one person that would have investor relations function working.

Joe Harary, President & CEO

We do have an Investor Relations function working.

Unidentified Analyst, Analyst

Okay. Thank you.

Joe Harary, President & CEO

Thanks, Alan.

Operator, Operator

And at this time, there are currently no more questions. I will hand the call back over to you, sir.

Joe Harary, President & CEO

Thank you. I would like to share some final thoughts. Some companies in this industry have invested heavily, which has led them to face high labor costs, raw material costs, manufacturing expenses, substantial capital investments, and significant debt. While resources are essential for industry growth, I feel that the strategies employed by these companies are not optimal. Given their current cash situations and how they have raised funds, as well as their burn rates being significantly higher than ours, it's possible that they may struggle to remain in business or end up with poor balance sheets before our next call. We have opted for an alternative strategy that is simple and effective. Our focus is to maintain the best technology, even if it initially comes at a higher price, and then collaborate with top talent to reduce costs. We encourage our industry and our licensees to allocate resources wisely, which they have done. They attract the best talent, make strategic decisions, and grow based on the demand for SPD-SmartGlass. A noteworthy example is Gauzy, which has recently increased its emulsion production capacity fivefold. Recent activities have seen a lot of interest directed towards new vehicles, trains, aircraft, and innovative display systems that utilize SPD-SmartGlass and SPD film. While we can't always detail the actions of our licensees, they often share their progress publicly. Many have highlighted the job growth stemming from SPD, which we take pride in, evidenced by the employment increases at Gauzy, Vision Systems, and AGP in relation to their SPD-SmartGlass ventures and their clients. Their hiring trends reflect their expansion into key regions and industries globally. We aim to enhance energy efficiency, operational effectiveness, logistics, transportation, and overall quality of life. History teaches us that the best way to foresee the future is to create it. Both we and our licensees are doing just that, not by taking reckless risks, but by clearly understanding the direction of critical decisions and key industries. We've observed considerable strategic investments from our licensees including AGP, Gauzy, and Vision Systems. Additionally, customer demonstrations have showcased how these companies can enhance comfort, efficiency, and safety in vehicles and improve the experience of travel while utilizing energy-saving technology. Our innovations will be prevalent in homes and offices. We are committed to making life better through energy conservation, efficient information delivery, and enhancing existing products, including various types of windows and sunroofs for vehicles and homes. The real challenge has not been the technology itself, which is now reliable and ready for mass production, but rather assisting established manufacturers in understanding the benefits of SPD smart technology. With each new product launch—whether it's a car model or a new application of SPD technology as seen with LG's work in televisions—public awareness and knowledge regarding product enhancements improve. We are proud of our achievements and how we effectively utilize our resources to lead the smart glass market. Research Frontiers is financially robust and well-prepared for future success. Indicators of economic activity look positive for us. Our licensees have broadened their production capabilities, key customers like Hyundai have made significant investments, and our anticipated product offerings through the end of 2023 are strong. In terms of broader economic trends, the adoption of electric vehicles has advanced at a greater speed than we could have predicted five years ago; nearly every major automotive manufacturer has pledged to transition to all-electric. For conventional vehicles during this time, we can assist in reducing CO2 emissions by up to 4 grams per kilometer. Glass is a sought-after building material that enhances the functionality and livability of homes and offices. Our technology facilitates beneficial daylight when wanted while blocking unwanted UV rays and heat, thus conserving energy. In transportation modes such as aircraft, trains, and vehicles, we enhance passenger experience by allowing a connection to the outside while preventing harmful UV rays and ensuring security and privacy. We have worked diligently to reach this point, and we will continue our efforts for you, our shareholders. We appreciate your trust and support. Thank you, and please remember to vote if you haven't already.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for attending. You may now disconnect.