Research Frontiers Incorporated (NASDAQ:REFR) Q4 2023 Earnings Call Transcript

Research Frontiers Incorporated (NASDAQ:REFR) Q4 2023 Earnings Call Transcript March 7, 2024

Research Frontiers Incorporated  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. Welcome to Research Frontiers Investor Conference Call to discuss the Fourth Quarter and Full Year 2023 Results of operations and recent developments. During today’s presentations, 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. 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, that 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 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 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 over to Joe Harary, President and Chief Executive Officer of Research Frontiers. Please go ahead, sir.

Joe Harary: Hey, thank you, Paul, and hello everyone, and welcome to our fourth quarter and full year 2023 investor conference call. As you have seen from the numbers that we released about 30 minutes ago in our 10-K, revenues were up quite substantially, 109% in this past year, costs have been reduced and we’re much closer to profitability. Today, we’re going to discuss what’s underneath these numbers and why we can all expect 2024 to be an even better year for Research Frontiers and its shareholders and licensees. Research Frontiers is the market leader in smart glass. We’re also the most diversified company in the smart glass industry, with product applications in automotive, aircraft, architectural glass, marine glass, and augmented reality displays, and other areas, including consumer products.

We’re also the most diversified in terms of skills and capabilities of the companies we work with and geographically diverse, with licensees operating on almost every continent except Antarctica. This broad and diverse footprint allows us to coordinate, collaborate and service the needs of our customers locally and rapidly, wherever they are. Right now, the markets we primarily serve are automotive and aircraft, and this has been our bread and butter since 2011, when the first Mercedes came out in series production with our technology in it. We were the first to apply switchable tint technology to the aircraft industry in both general aviation and transport category aircraft. We are the only switchable tint technology in helicopters. And this past year, we were introduced on several aircraft produced by Airbus and more recently by Boeing.

Perhaps of even greater significance here is the change in the way that the switchable tint technology being used in these aircraft was selected. It was selected by the customer and not just by the manufacturer. That is a result of the sustained and focused effort by Research Frontiers and our licensees to highlight the benefits that SPD technology brings to the passengers, to the cabin crew, and to the comfort and passenger experience of everyone on board. In terms of reliability and confidence, SPD-Smart technology is the longest smart glass technology being used in cars and aircraft, and even architectural applications, which up until recently was something we didn’t speak about too much. Fortunately, Gauzy is able to currently produce much wider film than Hitachi Chemical was able to produce in the past.

This has opened up the architectural markets with new products, including an elegant and easy to implement retrofit solution with the potential to dramatically reduce the costs and streamline the installation process of smart windows throughout the world. I’m happy to say today that this retrofit solution is not only ready for use, but it’s already passed years and years of field testing. We’re quite excited about it because it has the enormous revenue potential for Research Frontiers and our licensees, and also makes incorporating or adding a smart window system to any home or building in the world a much easier decision. Let’s talk more about the three areas we see for near-term focus in the architectural market. First, let’s first focus on the benefits, energy efficiency, elegant shading capabilities, and view preservation.

Homes, offices and apartments with magnificent views don’t want to block them with shades or blinds. SPD-SmartGlass allows you to tune the amount of light coming in from clear to blocking 99.5% of the light, making them very effective shading devices and saving energy. In some cases, homeowners saw a 20% reduction in electricity usage in areas of the home that use just SPD-Smart skylights. And let’s further talk about skylights for a moment. They are typically hard to shade and quite expensive to shade. At the national home builders show about a week ago, I saw skylight shades add about $500 to $700 to the cost of a skylight. Add the contractor markup and it’s even higher. So we’re quite cost effective in that market and can eliminate the space, mechanical systems that can break, and of course, the cost and maintenance that skylight shades require.

Next, let’s talk about architectural government building upgrades. There are GSA government mandates for upgrading non-energy efficient glass in government buildings with more efficient energy efficient glass. Some of our key licensees are already approved and on the GSA list, and supplying advanced window products to the U.S. and state and local governments, including embassies, courthouses, schools, prisons, and other facilities. This is a large and natural near-term customer for SPD-Smart windows. The GSA is actually, I think, the largest customer in the world. And with the new retrofit applications for SPD-SmartGlass, the broader market for homes, office buildings, and apartments now becomes wide open. And with government incentives such as the investment tax credit introduced by the Dynamic Glass Act that gives a 30% to 50% tax credit to users and similar incentives around the world by other governments, the economics behind introducing smart glass as a result of all these factors have become much better as governments have begun to financially support this with various incentives.

We’ve spoken about cost reductions through streamlined implementation techniques such as the retrofit applications and government incentives. Another factor that has reduced costs is the production efficiencies in the way that SPD film is made and distributed throughout the world. We are fortunate to have the leadership and vision of our licensee, strategic investor and partner, Gauzy, in this area. We have had a very strong working relationship with Gauzy from day one and this past year, their business expansion, along with very positive developments in our industry, have both significantly increased the frequency in which we meet and collaborate. We’re working with them in Israel, Germany, France, China, South Korea, and of course, throughout the United States.

And just this week alone, we introduced a new automotive project to Gauzy in Asia. Returning back to automotive for a moment, let’s look at the numbers there. It is clearly our largest market now, but it may be supplanted in the medium term by architectural or information display applications such as augmented reality. We had an overall increase in royalty income in 2023 compared to 2022 of 69%, which is in itself a quite healthy growth rate. Even more dramatic, automotive royalties were up by triple digits, 178% between 2023 and 2022, and even within 2023, automotive royalty income more than doubled between the third and fourth quarters of this year. As many of you know, Ferrari introduced an all glass roof in their new sold out four-door Purosangue.

If you want a glass roof on this car, it must have SPD-SmartGlass in it. You don’t have a choice. Sales started in Q1 2023 for our licensees supplying Ferrari, and more than tripled between the first and third quarter of this year, and then unit volumes more than doubled again between the third quarter and the more recently reported fourth quarter. And we expect continued growth in the Ferrari program based on this trend and also based upon higher SPD film orders at Gauzy for 2024 from our licensee that’s supplying Ferrari. We also expect higher automotive royalties in 2024 based upon new products and models, including the one from Asia and some new models to be produced in Europe. With that, I look forward to answering your questions, and we’ll take some of the ones that have been emailed to us first.

First of all, thank you Jared A. Jeff K, Jeff H, Chuck M, Bob P, Robert B, Steve A, and John Nelson for your questions, and also thank you for your kind words about the safety of Gauzy, whose operations have thankfully not been disrupted by the war in Israel and are all safe. To save time and to be able to cover more ground here today. I’ve answered many of these questions in my presentation. I will address some of them further in my closing remarks, and of course, if I don’t fully answer them in the interest of time, please follow up with me by email. So here are some of the additional questions that were emailed to us, and in some cases, I’m combining several related questions into one. Joe, can you comment on the lawsuit that was brought against Research Frontiers, Gauzy, and Vision Systems in Florida?

Well, this was recently resolved, and it was a total victory for us. The Federal Court threw out all the claims against our companies. However, even prior to this filing, we have always maintained that it was a lawsuit that never should have been brought, and that this was because there was, of course, no infringing or other improper activity. But more significantly for the future was the fact that the court agreed with us as to the effect and validity of the provision that is in all of our license agreements in one form or another, that gives us a license back in the smart glass related intellectual property of our licensees when their license terminates or expires. The fact that this provision was blessed by the court is a significant precedent.

This provision basically says that if a license agreement ends for any reason, Research Frontiers and through us, our licensees gets the right to use the invention and improvements developed by our licensees relating to smart glass. This has resulted in the expansion of our intellectual property portfolio. And from an economic standpoint, this ruling also has significance because the court awarded us sanctions against the attorney and law firm that brought the suit for their conduct in this case. Our recently filed proof of damages puts this amount at over $600,000 currently. Another question, we’ve heard nothing on the development of black particles. Is this still a possibility, and does it offer a greater opportunity? Thanks, Jeff [ph].

Well, thanks, Jeff, for the question. We, as well as Gauzy have been actively working throughout the years to develop a more color neutral form of SPD besides the current blue particle. And we have achieved this in the way that existing materials are fabricated. But we’d love to also change the particles themselves used in our SPD film to do this. And we’ve made great progress at Research Frontiers. And I can’t speak for Gauzy, but our progress will certainly benefit them. So stay tuned on that. And to answer your other question, when we are successful with a new particle, it certainly would further enhance the markets and opportunities for our SPD-SmartGlass. New product improvements always do that. However, you can see from our results of operations reported for 2023 that the existing blue colored SPD is also gaining great traction across multiple industries and for new uses.

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

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Q&A Session

Operator: Thank you, Mr. Harary. [Operator Instructions] And our first question comes from Ted Campbell, a Private Investor. Your line is open.

Ted Campbell: Hey, Joe, how are you?

Joe Harary: Ted, it’s great to hear from you. I hope you’ve been well.

Ted Campbell: I’ve been well. Thanks for asking. It’s always a pleasure talking with you. And I just wanted to congratulate you on a nice fourth quarter, a really nice fourth quarter, and an improved 2023. It’s great to see the increase in revenues for both of those, but especially this fourth quarter. Is that something you think we’re going to…

Joe Harary: Yes. I mean thank you, Ted. I can’t take full credit though. It’s a team effort among us and our licensees, but we’ve all worked hard, and I’m really pleased with it as well. But thank you for that.

Ted Campbell: I know that. I appreciate everybody’s hard work. But is this increase in revenues, especially in the fourth quarter? You think that’s something we can build on in the 2024, or was this like a one-time event in the fourth quarter?

Joe Harary: I think based on the trends that we’re seeing, I mean a lot of that was due to Ferrari coming on Board with their all glass roof, using our technology. And based on the film orders for 2024 by the licensee that’s supplying Ferrari, I expect that to actually grow quite a bit in the coming year. So yes, I don’t think it’s a one-time event.

Ted Campbell: So you think this…

Joe Harary: It’s not a one-time event. Yeah, definitely. We’ll build on it. Plus, we have a car coming on Board from Asia that everybody’s quite excited about that’s more of a medium sized car. And then also a couple more cars that are being produced in Europe that will be new introductions for SPD. So, yes, I think that we’re going to do quite well in the coming year.

Ted Campbell: Yes. I’m excited about the upcoming models. But I also liked your comments on the retrofit market. I’m really looking forward to revenues coming from that.

Joe Harary: I think it’s a game changer, and I appreciate you picking up on that. Right now, if you wanted to put a smart window in a building, you got to take out the glass. And if you’re on a building that has more than one or two floors, you have to put up scaffolding, which is very expensive and disruptive to the retail stores on the ground floor and things like that. So this retrofit solution allows you actually to install smart windows from the inside of the building. And you don’t have to put up scaffolding, you don’t have to get landlord approval. You don’t have to do a lot of things that can either add to the cost or increase the delays in getting a system in. And we’ve seen installations of this system where you come in over the weekend and do it, so you’re probably not even disrupting the workflow in an existing office.

Ted Campbell: All right. Well, I don’t want to hog anybody else’s time asking questions, but it’s always good talking to you. And thanks again and to everybody at Research Frontiers and Gauzy for all the hard work you put in.

Joe Harary: Thank you, Ted. Appreciate it very much.

Ted Campbell: All right. Have a good one.

Joe Harary: You, too.

Operator: Thank you. Our next question comes from Alan Ginsberg, Private Investor. Your line is open.

Alan Ginsberg: Yes. Hi, Joe, how are you?

Joe Harary: Hey Alan, how are you?

Alan Ginsberg: I’m fine. Last call, you mentioned Hitachi in passing, but I’ve heard nothing since then. Is there anything going on there, which might lead us to believe that they might again be part of the manufacturing process here?

Joe Harary: I think you haven’t seen the last of Hitachi’s technology. I think that part of this I have to defer until a time when that could be more fully announced. But it’s good for the industry.

Alan Ginsberg: So you think there’s a chance that they’re going to be reintroducing different products?

Joe Harary: I think you’re going to see their technology come into the marketplace, perhaps from different paths than you would expect, but significant for us.

Alan Ginsberg: And today still – obviously they still have a license even though they still…

Joe Harary: Right. They still have a license. They still have a license. Even though the company itself was sold to Showa Denko and then renamed itself. The license still is intact.

Alan Ginsberg: Okay. Thanks. That’s all I wanted to ask.

Joe Harary: Thank you.

Alan Ginsberg: You’re welcome.

Operator: Our next question comes from Gerald Sherman of Strategic Planning Group. Your line is open.

Gerald Sherman: Thank you. Hi, Joe, question for you on the cash flow situation and the current cash you guys have in the bank. I was kind of under the impression from the last couple of calls that we had, like a four-year running room. And now after reading this last financial that came out, it looks like you got a negative cash flow of about $1 million for next year. Are you…

Joe Harary: What – yes, we actually have a five-year runway. We put that in the press release. The – what you’re seeing is kind of an accounting way of expressing it, which the way they test things is, do you have enough cash to last you at least 12 months from the filing date. But if you look at our MD&A section or in the press release that came out, it’s about a five-year runway. Now, some of that is cash on hand. We had $2.5 million at the end of the year and much lower burn rate as we approach breakeven, and then also anticipated revenues from the existing project. So I don’t know if we’re going to raise money or not. Mercedes or Ferrari or McLaren wants to make a strategic investment, I might say, yes, that’s always good. Gauzy has a strategic investment from Hyundai, and that’s been very helpful for their business. So you never know where those things can lead you. But I don’t anticipate doing an offering.