Research Frontiers Incorporated (NASDAQ:REFR) Q3 2023 Earnings Call Transcript

Research Frontiers Incorporated (NASDAQ:REFR) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good afternoon, ladies and gentlemen. Welcome to the Research Frontiers Investor Conference Call to discuss the Third Quarter of 2023 Results of Operations and recent developments. [Operator Instructions] This conference is being recorded today. A replay of this conference call will be available starting later today in the Investor’s 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 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 e-mailed to it prior to the conference call, either in the presentation or as part of the Q&A session at the end. In some cases, the company has responded directly to e-mail 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]. Also, we ask that you keep your questions brief in the interest of time. 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, Paul, and hello, everyone, and welcome to our third quarter of 2023 investor conference call. First, let me start off by saying a number of our shareholders have asked about Gauzy and their safety and business with the war going on in Israel. Some of the questions to date has the Israeli war with Hamas impacted Gauzy’s business operations in any significant way? Please comment on the effect of any of the war in the Middle East is having on Gauzy’s operations in Israel? Is Gauzy currently producing and shipping SPD film coating to their plant in Germany? Gauzy has worldwide locations, but can it continue to function effectively, if its headquarters located – location is seriously impacted by conflict?

Well, first of all, I want to thank all of you for your concern and Eyal Peso, and I and everyone at Gauzy really appreciate the messages inquiring about their safety. Thankfully, everyone is safe. And while I’m horrified by the situation in Israel, and see things happening in the world that I never thought I’d see in my lifetime or ever, I could report that Gauzy’s operations have not been interrupted by the war there. Of course, they pay attention to it. How can one not do that? Good entrepreneur must factor in things like resources and competition and is really entrepreneur has a whole different dimension of things to add to that normally and especially right now. And Gauzy has been incredibly busy, both before and after October 7. And they’ve been admirably juggling work and family safety and doing it with very calm determination.

Everyone pulls together in normal times and especially now. And they know they have investors and employees and customers, and they’re depending on them. And we’ve been working with them daily and things appear much closer to normal than one would expect. As a matter of fact, the only reason Eyal Peso cannot be on this call today is that he has a pack business schedule, and that should give you an idea about business pressing on even more time. But once again, thank you and on behalf of Eyal, he asked me to thank everyone for their good wishes and concerns. The Tesla cybertruck was announced in 2019 with production slated for late 2021. Reports now indicate that production will start November 30 of this year, 2023. When the first prototype of the cybertruck was demonstrated at the launch event, my friend, Franz von Holzhausen, Tesla’s Chief Designer, threw a metal ball at the bulletproof glass, and it cracked.

When I first met Elon Musk in person, it was at the Model S concept launch event in New York. And prior to that, Tesla was making the Tesla Roadster with the body being produced by LOTUS out of fiberglass. At another in-person meeting, Elon Musk was trying to figure out how to produce 10,000 cars a year. In 2022, Tesla produced 1.37 million vehicles, which was a 47% increase over 2021 and in 2023, Tesla is expected to produce and sell around 1.8 million vehicles far more than the 10,000 they were originally trying to figure out how to produce. So what do all these things tell us? That if you’re in the automotive industry, even the most capable players don’t always get it right, at least not right away. And sometimes there’s technical issues like the glass on the cybertruck prototype, which incidentally was not our smart glass at the time.

And sometimes it’s timing issues as shown by the multiple delays in the introduction of the cybertruck. But for the most part, a company that had never produced a car is now the dominant player in the electric vehicle market with the highest margins and volumes. In other words, things get done and they often get done in a big way, but rarely on schedule and almost never in a straight line. This is the world of the automotive manufacturer, and it’s also the world we live in. We are told time frames and sometimes they are delayed as witnessed by the first car to use our technology, the SLK convertible roadster, which is five months overdue, once again, not because of our glass by the way. And sometimes things are ahead of schedule. The SLK convertible came out with our glass and it was ahead of the target date.

And sometimes marketing plans change. Just six months before the launch of the Cadillac CELESTIQ at CES, the head of the project did not know when it would be launched and when it would be announced. It came out six months later with much fanfare. So we do our best to operate in this environment, and we try to strike a balance between providing guidance when we can to our shareholders or simply waiting for something to happen and announcing it afterwards. So there’s a balance there. And many people, including myself and our licensees, were disappointed to learn that an Asian mid-priced auto manufacturer had decided to move back the introduction of its special luxury edition for the first half of next year. We share what we know when we can, and often it is just what we’re told.

And in the world we live in, it’s not possible to thread the needle in terms of timing. So there is that balance and the Asian automaker has moved the timetable back by about half a year, but it’s still on track there. Fortunately, we plan for such contingencies to make sure we’re not going to run out of resources before anticipated events happen. For the past 37 years, we’ve been debt free. We have been successful at raising capital long before we may need it to keep the number of shares outstanding relatively low compared to our peers. For the past eight years, we’ve been constantly focusing on reducing operating expenses. Some of our competitors are not so fortunate or successful at achieving the same thing, and we are rapidly running out of cash.

While they may measure their cash runway in terms of weeks, we have over five years worth of cash and continue to be debt-free. Vue is trading pre-reverse stock split at less than a nickel per share, and Kraken is at less than half a penny. At Research Frontiers, we don’t want our shareholders to have to speculate about whether our technology will make it out of the lab and into the real world. It has already done that in multiple industries. We don’t want our shareholders to have to speculate about whether the technology will be high-performing and reliable, two qualities that are essential in any upscale market. Mercedes and then McLaren and then General Motors and then Ferrari all have proven this in serial production. Airbus and Boeing and numerous other jet and turboprop and helicopter manufacturers are also proving this.

New products in addition to the manufacturers I just mentioned will be coming out. Since our last conference call, we added yet another auto manufacturer project. This one is from North America. Now as a caveat, for this new project, do we have an estimated timeline and volumes? Yes. Will there be a straight line towards commercial production on that timeline? Maybe yes, maybe no. However, our longstanding experience in this industry has taught us to plan for both, things coming out ahead of schedule and things coming out behind schedule. Let’s go to the numbers. Our fee income was up 46% for the first nine months of this year. Automotive income was up 81% in Q3 2023 compared to Q3 2022. For the first nine months of this year, automotive fee income was up over 120% from last year.

And Ferrari has shown healthy growth in sales each quarter of this year for their new Purosangue. Our net loss is substantially lower and we’re looking forward to becoming cash flow positive and profitable by executing on our business plan. We expect revenue in all market segments to increase as new car models, aircraft, trains and other products using our SPD Smart Glass technology are introduced into the market. With that, I look forward to answering your questions. We took some of them that were emailed to us and included them in my presentation earlier. Here are some additional questions that were emailed to us. And in some cases, I’m combining several related questions into one. John Nelson had asked in the markets that the film was sold into which market sales are growing fastest quarter-over-quarter and year-over-year.

A factory worker in a safety vest tightening a V-belt on a power transmission assembly.

Clearly, automotive followed by aircraft, and we expect architectural to become more significant in 2024 and later years? Another question by Mr. Nelson, any potential new markets that REFR plans to move into? I’m certainly excited about our red and butter industry growth prospects. More cars trains and planes, the traditional usage. As far as non-traditional markets, I’m particularly excited about the use of SPD with transparent OLED technology for displays and alternative areas of the car to the sunroof such as headlights, heads-up displays and Sundvisers and in Sunvisers, both as an attach visor or built into the windshield. I’m also excited about some of the new projects for SPD-SmartGlass and architectural. And there, we believe it’s going to be both in retrofit and in new installations.

And I think that’s going to be very significant. Next question. Given the slow sales of EVs and no announced adoptions, the market for SPD may not be a high priority, considering, say, Ford is losing $40,000 a vehicle. The EV market is slowing down as the lack of interest stems from the lack of charging stations. Coupled with the auto strikes, I presume the royalties from the auto sector are now pushed out further. And also why we not heard about any architectural wins? Well, thank you, Jeff, for that question. First of all, based on what’s in the pipeline, I expect architectural projects, both new and retrofit in 2024. And I don’t think the UAW strike affected us at all. We’re mostly in Europe and in Asia, and the strike is also basically over now and things are returning to normal.

Regarding EVs, I think a lot of companies were caught up in the EV development momentum and did not fully realize the economic and technical challenges. I don’t think that will help us, however, it will affect us. However, I don’t think it’s going to hurt us. First, some companies like BMW and Mercedes and Tesla have a leg up on other traditional car companies trying to make EVs, much higher margins than, let’s say, Ford. Also, the same 5.5% increase in driving range for EVs applies to increased gas mileage for internal combustion engine vehicles and is also added in ICE’s 4 grams per kilometer reduction in CO2 emissions. So we’ll be fine either way. I mean, there’s even an argument, Jeff, that if EV slowed down, you’re going to have to do more to reduce CO2 emissions through the reduction techniques of using things like smart glass.

So it may actually help us, although, I’m not rooting for a reduction in EVs. I think some are very good vehicles and some have challenges that eventually will be overcome. Next question, LG is introducing multiple models of transparent OLED for commercial and residential applications. I would think that any used in Windows in an outdoor sunny environment, we need SPD, do you have any ballpark estimate as to what percentage of these different markets might use SPD? Thank you. First of all, I agree that, any time a transparent OLED is used outdoors or with daylight behind it, such as turning the window in your home into a television or putting it infill on a vehicle window like BMW spoke about at CES this year with their SPD Smart Glass equipped car that they demo then highlighted at Oliver Zipse’s keynote address you’re going to need SPD film.

Any time there’s daylight behind a display, I think you’re going to need it. I don’t think anyone can predict today, including LG, the penetration rates there, but I think that the markets are enormous. And I mentioned earlier, it’s one of the new markets for SPD that I’m quite excited about. Another question. Hi, Joe, in the Q1 2023 conference call, you talked about retrofit SPD windows, Accordingly, but we have a very well-established, mature well-capitalized licensee that has developed their own retrofit solution architecture, and we see that as being a game changer for architectural SPD Smart Windows too. And then in Q2, unquoted as saying, we haven’t put a time frame on it. I don’t see any showstoppers and why it couldn’t come out tomorrow if it needed to.

And I think we’re all pushing for that because I think we all understand that in the architectural market, it’s is a game changer. Well, thank you, Rick, for the question. As I mentioned earlier, this is one of the new emerging areas that I’m quite excited about and expect retrofit architectural applications to come online next year. And just to kind of maybe put a little bit more detail into why I think it’s a game changer. Right now, you either have to take out your glass and put a new glass, which in a residential application for a home is not that big of a deal. But for a building, a multi-family unit, which is the prime area for smart glass, you would have to put up scaffolding if you’re in New York, get landlord approval and all sorts of things.

So being able to retrofit it from the inside, like the system we have allows us to do I think, is definitely a game changer and would substantially reduce the costs and simply allow a building to be retrofitted perhaps even over a weekend when there’s nobody in the building if it’s an office building. Another Jeff asked four questions. We’ve answered three of them. Here’s the fourth. Does management believe the company website is adequate in upgrading with fresh content and a new design is unnecessary. Well, thanks that question, Jeff. We’re a business-to-business company. So while websites are important, it’s less critical than if we were a B2C business. And there, I’m sure some differences of opinion. Some of the automakers we work with actually have complemented us on our current website.

So I don’t think it’s affecting sales and they know where to go and they want to get the best switchable glass. But having said that, and to put this in context, in 1995, when the internet was first becoming commercialized, we saw the potential. In 1995, there were an estimated 23,500 websites in the world. We were one of them. And I actually had to learn HTML coding because the current tools for web design just didn’t exist back then. And today, there’s over 1.5 billion estimated websites around the world. Over the years, we’ve gone through multiple evolutions of our website. And while it may not be an immediate priority, I’m sure we will upgrade it. And while opinions can differ on our website, there’s always room for improvement in everything we do.

So — something that we’ll probably focus on Next question. The Lucid car has a large sunroof, and I have read that they are complaining about the interior heat. Has anyone approached Research Frontiers for a solution? Well, thank you, Mr. Hutton for that question. Yes, we actually have an ongoing project with Lucid to help them with this and we’re seeing heat buildup inside the vehicle is becoming more and more of a problem in need of a solution, especially with panoramic glass roofs becoming more common. And if you just go out there and look at the blogs, you’ll see a lot of people are complaining about a number of different vehicles that have massive heat buildup. And I remember there was a wonderful video actually when the McLaren first came out, the automotive news reported that was doing the test drive a bit of video, and he was talking about how the prior version of it was like sitting in a microwave oven, but how cool the SPD smart glass was in that vehicle and how cool to the touch it was?

Anyway, today, we’ve discussed a lot of exciting topics, and I’ll now ask our operator, Paul, to open up the conference to any additional questions, people participating today might have that we haven’t already covered.

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Q&A Session

Operator: [Operator Instructions] And our first question is from Francis Kotreba [ph]. Your line is open.

Unidentified Analyst: Good afternoon, Joe.

Joe Harary: Hi, how are you doing?

Unidentified Analyst: Pretty good. Last conference call, you mentioned that the shareholders are going to be greatly rewarded. And this particular 2023, do you stand by that statement?

Joe Harary: Well, the timing is obviously, off. Our stock is down. And as a shareholder, I don’t — I’m not happy about that because my net worth is tied up in this company. But I do think that part of this was the delay in the Asian vehicle that we were expecting to have happen in the fourth quarter. And like I said, we take ownership of that.

Unidentified Analyst: Yes. But with all the uncertainty, why would you make such a statement, Joe?

Joe Harary: Because we were told – we were told that, that would be the timing. And then we were told that the timing changed. That’s the nature of the automotive industry.

Unidentified Analyst: But it’s the nature of the CEO to present himself in such a case, then he doesn’t bring all the hope together for all the shareholders. Don’t you agree?

Joe Harary: It’s a fair point. Like I said, we do the best we can with the information we’re given. I mean, the alternative is just wait for everything to happen and announce it after the fact. But I think that a lot of people would prefer to get at least a sense as to the directions that we’re moving in and the progress we’re making. And I was — and I’ll admit it was a judgment call and I was wrong on that one.

Unidentified Analyst: Thank you

Joe Harary: Thank you.

Operator: And our next question comes from John Nelson [ph]. Your line is open.

Unidentified Analyst: Hi, Joe.

Joe Harary: Hi, John. By the way, thank you for your renewed investment in the company.

Unidentified Analyst: Well, it’s all about potential. So I am feeling good about my investment in Research Frontiers. The press release states that fee income during the first nine months was up 46% versus last nine months last year. And then fee income for the third quarter was up 9% quarter compared to last year’s quarter. What’s — why the — what accounts…

Joe Harary: Why the difference?

Unidentified Analyst: Yes.

Joe Harary: Yes. A lot of it is timing. I mean, when you’re comparing quarter-to-quarter, there could be specific events in one particular quarter last year that — where there was a blip up. And when you take a longer period of time like nine months versus nine months, you get — it’s a little more smoothed out. And that’s why the automotive income was up substantially for the nine months.

Unidentified Analyst: Okay. Good.

Joe Harary: And also, as I mentioned earlier, I think you started to see Ferrari really kick in with good growth and the adoption of SPD is kick in.

Unidentified Analyst: Okay. Thank you.

Joe Harary: Thanks a lot.

Operator: [Operator Instructions] And our next question comes from Art Brady. Your line is open.

Unidentified Analyst: Hi Joe, Art Brady here.

Joe Harary: Hey Art.

Unidentified Analyst: Can you give us a little picture on when the actual billings would start with LG?

Joe Harary: All of our license agreements have a provision that the licensee typically pays us 45 days after the end of the quarter in which a product is sold. So there may be products sold as part of the development process and things like that, but the real numbers come in when it hits the consumer markets, just like Automotive, just like Aircraft, just like Architectural.

Unidentified Analyst: So that would mean starting maybe early January?