Research Frontiers Incorporated (REFR) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to Research Frontiers Investor Conference Call to discuss the Second Quarter of 2018 Results and Recent Developments. During today's presentation, all parties will be in a listen-only mode and following the presentation the conference will be opened for questions [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 expects, 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 the 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 over to Joseph Harary, President and Chief Executive Officer of Research Frontiers. Please go ahead, sir.

Thank you, Erica, and good afternoon, everyone. Joining me today is Seth Van Voorhees, he is our CFO and President of our VariGuard division. Let's start with the financial results. Fee income for the first six months was up from the same period last year. For the second quarter, it was down slightly but this was attributable to a new revenue recognition accounting standard ASC606 that came into effect this year. To compare apples to apples, fee income in the second quarter would have been up almost 5% this year over last year. One of our shareholders is asked by email whether US trade tariffs discussions with the eurozone has changed the flow of cars for Mercedes. When we have not seen a change, but it may be too early to tell. In June, Daimler cut its 2018 profit forecast because of the trade war between China and the United States, sparking fears of a wave of downgrade earnings in the auto industry. You also have the uncertainty of Brexit impacting automakers as well. However, since the cars with magic sky control are not manufactured in the US like Mercedes SUVs are which is where their profit forecast came from, we may not be affected by either Brexit or the eurozone trade talks. Automotive didn't contribute as much to our royalty income as last year, but this was expected by us -- rather it didn't contribute as much as last quarter, but this was expected by us because of 606 and also because typically in the second quarter of each year, car makers reduce overall production to make room for the new car models that come out in the fall. Expenses declined in the first half of this year by $61,154. When backing out non-cash expenses from the grant of stock options in the second quarter of this year, expenses would have been down about $130,000 or 6% as compared to the first half of last year. We continued to march steadily and with determination towards being cash flow positive. We achieved these both by revenue growth and expense reduction. Our loss for the first half of this year was about $79,000 lower than the first half of 2017, and it would have been about $150,000 lower when you back out second quarter non-cash operating [ph] expenses. We are getting there steadily and last year marked the fifth year in a row of declining losses year-over-year. I want to talk about our financing. In our last quarterly conference call, a shareholder emailed me a question asking if we would be doing another equity financing. I said that if we did it would be with the strategic investors and that it would have to advance our mission as a company. Now I'd like to discuss something very excited and unprecedented in our history as a company, today’s announcement of the investment in our company by one of our licensees. First, let me say that this is an unprecedented not only in our case but in our licensees' history as well. This is the first investment that they have made in an outside company and strategic partner. And this comes on the heels of a substantial internal investment that they made in hiring new people, and special equipment to bring SPD smart technology to various industries. For the past year, I've been talking to you about the importance of getting the cost of our technology to the customer down, and for wider width so that we can finally address the biggest market for glass, the architectural market. I could say with great confidence that this licensee will play a significant role in achieving both of these goals, and it will happen much sooner than most of you think. At some point in the very, very near future, we're going to be able to reveal more information about this licensee and the investment, and I look forward to sharing those details with you. We received by email before this call, questions from investors and we addressed many of the general topics in our presentation today. Here are some additional questions that were emailed to us. We talked about the eurozone and the conclusion that it probably is not going to have an impact on us. Another question was have the electric car manufacturers committed to using SmartGlass in cars and extend it to all windows? If not have they committed to use for any of their new cars? The answer is yes to both questions. The electric vehicle manufacturers that we've been speaking to are talking about using our SPD SmartGlass in more than just the roof. The roof is probably the most dramatic use of it because of what Mercedes has done with it, but putting our glass in the side and rear glass and in the windshield are projects we're all working. Okay. Another question comes from [indiscernible] from Sarasota, Florida. Can we expect to have five-foot windows available in 2019? This is a huge opportunity for your company. Well, the answer to that question is something that I'll talk about in more detail later on, but the short answer to your question is, yes, we expect to have five foot or greater windows before 2019 which is how the question was phrased. Another shareholder, actually several asked if we don't rise above the dollar bid price for NASDAQ, what are our plans? Do we plan on doing a reverse stock split? And we've discussed this. We, first of all, we don't believe that we're going to be below $1 during the next six month period that NASDAQ grants us in order to come into compliance. So we have plenty of time to get into compliance. My discussions with our NASDAQ representative basically confirm that at this stage we shouldn't be at all concerned. However, as a backstop, we have looked at an alternative trading market for Research Frontiers stock and everything should remain the same if we go off of NASDAQ and on to this alternative market including our trading symbol, and market makers and other information as well on trading characteristics, so we don't have any plans for that. I want to now ask Erica, our operator to open up the conference for any additional questions. People participating in today might have that we haven't already covered. But I also ask that you please hold any questions regarding what is happening in specific markets since I'll be covering these more -- in more detail in my closing remarks. And if we have not fully answered any questions that were either emailed to us in our presentation today or in the live Q&A coming up now, please feel free to call or email us after the call.

[Operator Instructions] Our first question comes from Ishfaque. Please state your question.

Hi, good afternoon, Joe. Couple questions from me. So you mentioned the strategic investor. Could you give us some color in terms of how the license fee can help on the architectural front?

Well, the two biggest goals that we have in architectural is the ability to make wider windows, and to have a less expensive product because in a car you're talking about a sunroof that maybe one meter, 1.5 meters, 1.8 meters in the case of the Maybach. In an architectural application, you're talking about buildings that have thousands of square meters of glass. So the ability to get the cost down per square meter becomes significant. So those are the two areas that we expect this licensee to have a direct impact, and there will be more details I promise you shared about that at the appropriate time, and it won't be that long that shareholders have to wait for that, and we're quite excited about it.

Okay and follow up do that.

I guess the other thing I would say Ishfaque is that, the fact that they've agreed to make an equity investment in Research Frontiers shows their confidence also in their ability to carry through with this and the future of the market. So we're very excited that we got the stamp of approval also.

Okay and in terms of the name of the licensee, are you allowed to disclose that?

Not at this point, but it's not because of anything other than their own investor relations.

Okay. Yes and my second question was, so you said automobile was lower in Q2 as a result of primarily seasonality. Do you think that one's going to go away during Q3, Q4 for the rest of this year?

Yes. The projections that we've gotten from our auto glass licensees all show the seasonality of the second quarter, and then a rebound in the third and fourth quarter. And we've seen this historically as we get more and more experience with production cycles, we’re seeing this more and more. The other thing and this is harder to quantify but a lot more exciting is that if you remember the last conference call, I said that between the last conference call and the one before, we had a major automotive project come on board between the last conference call and this one, the same thing happens. So we're quite excited that the message that we've been giving to the automotive industry about the benefits of SmartGlass are beginning to reach the right ears and actually reach the engineers and the marketing people where they understand the benefits beyond just having a cool piece of glass in the car for SPD SmartGlass. And just to refresh everyone's memory, the main markets -- the main benefits are reducing co2 emissions which is a very, very important topic right now. And we reduce co2 emissions by 4 grams per kilometer. Just to quantify that, one automaker; there was an analysis done by the -- of the auto industry about their ability to comply with co2 emission rules that are coming into Europe in 2021. And most of the car companies were planning on diesel engines for compliance and with the dieselgate scandal and this backlash against diesel engines and even some cities in Europe forbidding them from coming in, every car maker has changed their plans in terms of how to comply with this rule. Eight out of the 11 major automakers in the world, they're not going to be in compliance with the co2 emission targets in Europe, and just to give you -- there's one major premium automaker that is 4 grams per kilometer short of meeting the goal. And if you remember, our glass can reduce co2 emissions by 4 grams per kilometer. Without that reduction in the co2 emissions, they face $460 million in penalties under the laws that are coming in. So one certainly very important I think benefit of SPD is the ability to address that. The second benefit is the greater move towards electrification of vehicles, and we increase the driving range of electric vehicles by 5.5% according to Continental Automotives’ calculations of using our glass. So that's also a message and the fact that the last couple projects that have come onboard have been electric vehicles. And fairly high volume ones shows that that message is beginning to get out as well. So even though we can predict the rest of the year and beyond -- a little bit beyond with Mercedes based on the production call-outs that Asahi and Pilkington get from them, in the case of where our automotive revenues can be going, it could actually be, if they could actually dwarf what we're currently doing right now based on the projects.

Our next question comes from Ash Cornblack. Please state your question.

Hi, Joe. Great job on the new funding and it's great to hear what you [multiple speakers] on the tariffs. I have a question on a risk consideration and it relates to key men. I mean as you've pared down your staff, you're currently at a staff of four key people. They're all in their late 50s. What protections are in place, god forbid for the company and the stockholders in the event of loss of a key person?

Well Ash thank you for saying god forbid and maybe to quote the comedian Stephen Wright, I plan on living forever and so far so good. However, one of the things you should understand is that we have succession planning. We have also passed the mantle so to speak on key aspects of our technology over to key licensees. So you would really need a worldwide devastating event to really wipe out the key men that are involved throughout the industry and making this happen. So we would consider -- continue to collect royalties and benefit from the work that our licensees are doing even if something happened to me or Seth or Mike or any of the other or Steve Slovak, if something happened there. However, I just realized that what I said is totally against my own interest, but as a shareholder it's totally in line with my interest. So we should be fine in that area.

Very good, thank you.

Oh and the other question or the other aspect of that is, we are in the process of hiring additional people. I mean the opportunities that are presented to us have really been extraordinary, and with the coming anticipation of the architectural market especially, there's going to be additional hires at Research Frontiers to help in those areas. So we're not going to be as small as we are, but we're certainly going to be focused, and we're certainly going to try to run and continue to run a very tight ship and a lean operation, but also take advantage of the opportunities that have been presenting themselves to us.

So can I ask what kind of time frame you're looking at on those new hires?

We've already been posted and got flooded with resumes. The question is finding the right people that can operate in this environment. This tough environment not for anything but companies that have much, much larger staffs. If we take our two architectural licensees for example, I'm sorry competitors, we have staged and we have view, well they have sales and rep forces that are 40-50 people. And they are barely eking out projects. Now the benefit we have is, first of all, you don't have to wait 48 minutes for our windows to switch like you do with electrochromic. So the performance aspects are much better. The uniformity to change is much better. The fact that we're a film based technology adds all sorts of advantages as well. So we have better performance, but also we have such a wide network now of licensees and in the closing remarks I'll talk about some of what they're doing to do this to continue to sell. But we'll continue to leverage what we're doing and the person that we do hire or the people that we do hire is probably going to be doing a lot of something similar to what we do in the automotive industry, which is coordinate our efforts with those of our licensees, and their marketing and sales departments to leverage the operations.

Our next question comes from Michael Kay. Please state your question.

Hello, Joe. If you could -- the Research Frontiers solicit an investment from these from this licensee or did they approach Research Frontiers? And would you --could you characterize the investment in terms of being substantial or less than substantial?

Yes. To answer both questions, they approached us. They saw the strategic benefit of owning a piece of the overall SPD industry and also being more closely aligned with us. And the second part of your question is, yes, it was a fairly substantial investment for them and for us to receive.

But this would be in terms like equity but like could you say it wouldn't be more than 5% ownership something like that or --

I don't want to give any more characteristic -- characterization of it until the details of the --transaction turnout.

When do you think the details would be? Within a week or two weeks roughly.

Probably, yes, within that timeframe is when I think a lot more information will come out. People would be very pleased.

Could there possibly be a conflict of interest since some of the licensees compete with each other? So if this licensee has an ownership stake in Research Frontiers, others may feel that the company will be giving them certain privileges and the discounts that the other licensees wouldn't get. So how would you address that issue?

The way we've structured everything and the characteristic of the licensee, there shouldn't be any conflict of interest at all. I can only see it as completely benefiting everyone of our licensees and their customers.

Oh very good. And the other thing, you may cover this towards the end but could you give an update about what progress Gaussian hat is making in terms of facilitating the marketing and expansion of SPD because you were very bullish on what they could contribute to the company.

Yes. They're making great progress and there are a couple licensees that I would love to clone and replicate, and they're certainly one of them.

Vision Systems too.

Vision, certainly, yes, Vision Systems is another one. They-- and they're both companies that have really put their money behind SPD technology. I mean if you look at Vision Systems, their Smart Light Division is the largest team on the planet devoted to SPD technology. Their Smart Light Division is one third of their 240 member company, and they get the best engineers; the best marketing people. They have 40 people and 40 support staff that are in the Smart Light Division, and they recently expanded the physical footprint of that as well. So when we talk about the closing remarks, you're going to hear a lot about trains and trains or something that vision systems is very, very strong in and that could be our second biggest market very quickly.

Our next question comes from George Wonkanka. Please state your question.

About a year and eight months ago, January 2017, a joint press release mentioned something new, unique and highly visible was coming down the road, and this release was from Nippon sheet glass and from Research Frontiers and new in this front. .

Right. Sure. Well, that was that referred to and we couldn't say it at the time but then afterwards we were able to --we got permission to be able to talk about it more fully, was Panasonic's transparent screen product. And basically for those that are not familiar with it, it's a glass panel that has both a PDLC or Polymer Dispersed Liquid Crystal, which is a clear to white switchable film and an SPD that's specially optimized for this application by Itachi Chemical. And what that allows you to do is project onto glass very high contrast images and adjust for ambient lighting conditions. So if you look at most --if you look at most projection systems where they're projecting on PDLC. If you have a bright light behind the glass, you don't see anything really except a washed out image. What the SPD layer does is solve that so that you get a very vibrant image. And this has been used now in museums for multimedia displays. It's being used in high-end audio-visual. It's being used in outdoor signage. And as the 2020 Olympics in Tokyo approach, I'm told that many of the displays that Panasonic is going to have there is going to be this type of display because how useful and functional would it be. If you're watching the games and the glass in front of you either is showing statistics or maybe a motivational video about the athletes or an advertisement or something. But then when the action goes back onto the track, the glass totally disappears from view so it's not obstructing anyone's view. And another big market is retail. You walk by a storefront right now and there --there has been a lot of talk about the death of retail due to Amazon and others and online retailers. What's happening in the retail space is that retailers are looking for more of an experiential effect when you go shopping. They want people to go into stores, but just going there to buy clothes and walk out or whatever you could do online now. So they're looking for more pizzazz if you will in the experience. Personal shoppers, multimedia, cafes all these things are getting integrated into shopping malls now. And this can be a very important part of that experience as well. And I think part of what's behind Panasonic and if you look at their promotional videos, it's clear is the retail space. And there you absolutely need to have something that's going to adjust ambient lighting because you're not going to turn off all the lights in Macy's just because Joe walks by the front window, and you want to show me a video. So the glass can do that without having to adjust ambient lighting conditions. And then one I guess final point on Panasonic. They're in the process now of getting or finishing up getting underwriter approval for their product for the United States launch.

And Joe it seems though that the SPD has been ruled out for something like the MSG sphere where you have a probably liquid crystal that's going to be used. Is that correct? What can you say about that?

I can't really talk about it that project. I will say that even if we're not expecting and I'm not saying whether we are not in the MGM sphere here. We know of projects for example in the Middle East where the architect thought he was getting a shading product put PDLC and contacted our licensees to say this is horrible. This PDLC, it's not blocking any light. We need you to replace it with SPD. And these can be fairly substantial replacement projects. The fact that we're such a versatile technology and easy to retrofit also makes kind of rescuing the early decisions of some architects more feasible with SPD technology.

Our next question comes from Jeffery Hardy. Please state your question.

Hi, Joe. Just a couple of things. I would suggest that you don't save closing your marks for the end. I think they should come before the questions so that we may have questions about what you have just talked about. And secondly, you indicated I think in the second conference call that you were going to hire an investor relations firm, and I wonder where we are on that. I think one of the problems the market has with a company like you because you have licensees you're not allowed to talk much about the relationship you have. You did indicate you were going to hire somebody, and I just think that might help going forward.

Yes, and just to give you an update on that. We have identified and reached an agreement on an investor relations firm. Their suggestion is not to do anything in the big in August because nobody is paying attention to the markets at this point from the investor relations standpoint. So, yes, they try to save us some money by saying that we're going to start in September. And the investor relations firm comes very, very highly recommended by one of our major shareholders. So we have it on good authority that it should be doing a very effective job is from.

At this time we have no further questions.

Okay, well, Erica. Thank you. I'm going to make some closing remarks now. And we're going to go into a lot more detail. For those that attended the annual meeting you might have heard some of the things that we are going to talk about, but it helps just put things in context. We've been focusing with effort and precision on growing revenues and reducing expenses. We saw a good revenue growth last year, and that growth continues this year. We've seen substantial cost reductions as well. We've had $2.5 million in cost reductions in the past two years or so. And with five straight years of year-over-year reductions at our net loss, which continued in the first half of this year, we are steadily approaching our goal of being cash flow positive and profitable. Unlike our competitors, we have kept our overhead and other expenses low. This will make us cash flow positive and profitable faster. This will also give us greater flexibility as well. With less resources, we have done more than anyone in the SmartGlass industry and in every market. In automotive, there are more sales in three weeks than the entire automobile business that's [Indiscernible] Ferrari over the entire six year life of that project. We are now the only technology being used in high volumes serial production in the automotive industry. And this is just with sunroofs. You're beginning to see SPD moved to other areas of the car and there are programs being discussed that can use SPD in far larger surface areas, and in other places in the car. This includes side and rear windows, sun visors, windshields and other areas. We offer valuable solutions that are becoming highly relevant. We reduce cabin temperatures inside the car by 18 degrees. We can reduce AC compressor sizes by up to 40%. We can increase the driving range of electric vehicles by 5.5%, and increase the driving range and reduce co2 emissions by 4 grams per kilometer in internal combustion vehicles. With the new regulations coming in Europe in 2021, 4 g/km of co2 savings can save one premium automaker $460 million in fleet penalties. In automotive, we continue to dominate that industry with no competitors. Since our last conference call, additional automotive OEMs have started new projects and new uses for a SPD SmartGlass. We and our licensees in the auto glass business are working now with almost every major automaker in the world. In trains, more trains are using our technology to help their a/c systems keep up with the solar heat gain and enhance the passenger experience. We expect more and more trains to use our technology especially in Europe and Asia and train cars with our technology are well along with their performance testing on the rails in these areas of the world. New trains are being built as we speak using our SPD SmartGlass in them. And trains with vastly larger amounts of SmartGlass are being designed right now. Trains can be our second-biggest market in the next few years. In aircraft, we're still the longest flying and most reliable electronically dimmable window in aviation. We're also on the most variety of aircraft from fixed-wing to helicopters, and we're making progress with the major aircraft manufacturers and their airline customers. As they get more experience with different performance characteristics of different electronically dimmable window technologies, they can appreciate the fast switching speed and uniform change of SPD. And we remain the only technology that airlines and other owners can use to retrofit their existing fleets of aircraft. In marine, wear our newly built mega yachts with magnificent hull and interior designs, we're also on the Mercedes designs Silver Arrow and on the Troy Lee and Hatteras production yachts which are higher volume. And we've been successfully tested and now being deployed on cruise ships. As far as specialty use, different specialty uses for our SPD SmartGlass technology continued to expand. Panasonic launched their transparent screen projection display system with our technology first in Asia and now is focusing on Europe and North America. Electrolux, other appliance makers are now working with us. There are applications in the medical and healthcare industry as well as the lighting industry. This should not be surprising if you walk into a Best Buy or other consumer electronics store, you now see rows and rows of home automation systems. We work well with these systems. You will also see rows and rows of products used in their innovative ways of controlling the lighting in your home or office. But it is only when you can control the tint of your windows that you can control the majority of the light entering your living or work space. And an architectural, I want to conclude by turning in more detail to the largest user of glass in the world. If automotive uses 27% of the world's glass, architectural uses twice as much about 60% of the world's glass. There are two main shading technologies architectural. SPD and Electrochromic. And the question is which one will prevail and which companies will successfully cross the finish line. All of the other players in this market have been having difficulty gaining traction in this market. And our two main competitors are losing between 10 to 40 times more than we do as a company. Even though we focus on five major market areas, and they only focus on one, the architectural market. To put this in another context, what our two competitors have lost in one year exceeds the total amount that we have invested in developing SPD SmartGlass technology, and its markets since we started in business a long time ago. As I've mentioned before, the key in the architectural market is to be able to supply SPD smart panels in 1.5 meter widths. Also because of the large surface area per project for architectural uses, getting the cost of the product down is also a key element. Because of the work that is being done to make SPD available in wider widths, and the work being done to reduce costs, we can finally firmly turn our attention to the architectural market. And I just learned on Friday of yet another project. In this case, a well-known luxury hotel that will be using SPD SmartGlass in a number of their rooms. The SPD industry continues to expand with new customers, new uses, larger teams of people devoted to our technology, and increased economic activity. Our technology is used by large industrial corporations and household brands internationally. Our job is clear, expand the markets, make it accessible to more and more people in more and more industries, and grow revenues. We continue to make steady progress in all of these areas. And our success comes from inside our company with hard work and the focus of talented and practical people. It also comes from outside our company from standing on the shoulders of established giants. Giants such as Mercedes, Honda, Textron, Airbus, Augusta Welland, Hitachi, Panasonic, Asahi, AGP, Pilkington, Nippon Sheet Glass, Isoclima and Vision Systems. Our success also comes from standing shoulder to shoulder with some young and aggressive companies like Gaussian in Israel which now employs over 60 people. And SmartGlass international with operations in Europe and the Middle East. So where will our future success come from? Well, certainly from these same companies and undoubtedly from standing on the shoulders of even more new household names, and even more aggressive new companies those are hungry and eager to change the world. So now with the prospects of wider and cheaper SPD glass panels just around the corner; as we are now moving to the largest potential market for SmartGlass, the architectural market will we be successful? Will we gain traction in an area? Where other companies including our current competitors are struggling? Well in every other industry we've shown time and time again that we can succeed where others have failed. And we have made changes to prepare for success in the architectural SmartGlass market. And this success is coming. We've succeeded in many key areas this year and last year. And this success is beginning to result in higher current sales and higher projections for future sales. We are licensees and their customers continue to work hard and we look forward to sharing the results of this hard work with you our investors. Thank you very much.

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