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Research Frontiers Incorporated (NASDAQ:REFR)

Q4 2013 Earnings Conference Call

March 13, 2014 04:30 PM ET

Executives

Joseph Harary - President and CEO

Seth Van Voorhees - CFO and VP of Business Development

Analysts

Steve Dyer - Craig-Hallum

David DeWitt - DeWitt Capital Management

Rick Naff - Merrill Lynch

Anthony Schuman - Corporate Financial Advisors

Michael Kaye - Kaye Associates

Operator

Good afternoon, ladies and gentlemen. Welcome to Research Frontiers’ Investor Conference Call to discuss results for 2013. During today’s presentation, all participants will be in listen-only mode. (Operator Instructions) This conference is being recorded today. A replay of this conference call will be available starting at 12:00 PM on March 14, 2014, 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 to differ -- 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. (Operator Instructions).

I would now like to turn the conference over to Mr. Joseph Harary, President and Chief Executive Officer of Research Frontiers. Please go ahead, sir.

Joseph Harary

Thank you, Laura. Good afternoon everyone. Thanks for joining us and thanks also to everyone who already emailed us their questions. We’ll try to cover them in today’s presentation; we will also have an opportunity at the end for people to ask any questions that we did not cover. Joining me today is our CFO and Vice President of Business Development, Seth Van Voorhees. There’s a lot of ground to cover because it has certainly been a busy year for us and our licensees and I also want to speak about the year ahead and also have time to answer any questions, but first I’d like to ask Seth to go deeper into the numbers, Seth.

Seth Van Voorhees

Thank you Joe, good afternoon everyone and thank you for joining us today, as always, I’ll discuss the financial results in approximate terms and cover some highlights from fiscal year 2013. For more details please see our financial statements that we filed with our Form 10-K with the SEC. The company’s fee income from licensing activities for the 2013 fiscal year increased 10% to $2.2 million as compared to under $2 million for fiscal year 2012. Most of the increase in fee income during this period was a result of higher product sales and minimum annual royalty and other payments from licensees in the automotive sector.

Operating expenses increased by $1.8 million for fiscal year 2013 to $5.8 million from $4.0 million in fiscal year 2012. This increase was principally the result of $1.2 million of higher, non-cash compensation charges related to common stock and options grants to employees and directors. Common stock and option grants to directors and employees have typically been granted in January by the company as was done in January 2013. In December 2013 the company elected to issue options to directors and employees instead of its typical practice of issuing them in January of 2014.

The change in timing related to the issuance of equity compensation led to higher reported non-cash compensation charges for all fiscal year 2013. Research and development expenditures increased by a $0.5 million to $2.2 million for fiscal year 2013 from $1.7 million for fiscal year 2012. This increase was a result of a $0.5 million of higher non-cash compensation charges again related to the common stock and option grants to employees. Our total expenses for 2013 was approximately $8 million which was 2.4 more than fiscal year 2012.

However if you adjust for the non-cash timing issues that we discussed relating to equity compensation and a onetime research tax credit recovery that we achieved in 2012. The cash component of total expenses for 2013 was slightly less than that for fiscal year 2012.

Moving to our cash flow and balance sheet, at the end of the fiscal year 2013, we had current assets of approximately $11.9 million with current liabilities of approximately $0.2 million, resulting in $11.7 million of net current assets. For fiscal year 2013 we used approximately $3.2 million of cash from operating activities. Based on our fiscal year 2013 cash burn rate, our net current assets will last approximately three to four years. However these assets should actually last longer as a result of higher revenues in the future reducing the cash, the company’s cash burn rate.

In the IR front we completed several stock offerings as many of you are aware in late -- in the second half of 2012. As discussed previously we took this action for two reasons, one to strengthen our balance sheet and two to increase institutional participation in our company. By increasing our ownership base we believe there could be a significant improvement in trading liquidity for investors.

Our institutional ownership increased from about 7% prior to the offering to over three times that today. We are pleased to report that the trading volume of Research Frontiers has indeed shown significant improvement. For fiscal year 2013 trading volume increased by 126% versus fiscal year 2012 levels, from an average of 40,000 shares a day in 2012 to 91,000 shares a trading day in 2013. This positive trend is continuing this year with the average trading volume in fiscal year 2014 increasing by 81% versus that of fiscal year 2013 levels, from an average of 91,000 in fiscal year 2013 to 165,000 shares traded on every trading day so far this year. This higher level of trading volume is helpful in providing current shareholders with more liquidity and attracting institutional ownership into our company.

Over the past year we know based on filings with the SEC that two investors Kevin Douglas and Goldman Capital have established significant ownership positions in Research Frontiers of over 11% and 5% respectively.

I’ll be pleased to answer any of your questions about these matters or any other issues at the conclusion of this presentation. Joe?

Joseph Harary

Thanks Seth. It’s certainly been a busy year for us and our licensees and now we’ll take a look at some of the events underlying our numbers. Since our last conference call on November 7, accolades for the new Falcon 5X jet with an SPD skylight started rolling in across the aircraft industry.

We also added a new licensee for architectural glass in Brazil, our VariGuard division signed industry leader Omega Molding as a distributor for frames and display cases to protect artwork and light sensitive documents, and the biggest news of all, the new S-class, S-600 offering Magic Sky controllers and option appeared at the Detroit Auto Show in January and the S-class Coupe made its world premiere at the Geneva Auto Show that we attended last week.

Fee income for 2013 is up 10.4% versus 2012. You’ll see from the activities of our licensees where this revenue is coming from and also that in each industry this year has built that activity into a crescendo, resulting in some major announcements. Let’s take a more detailed look at all of the activity in each of the industries that our SPD-SmartGlass technology is used in.

About 80% of our revenue in 2013 came from the automotive sector and 10% came from Aerospace. So we’ll take these industries in order. First, automotive, our automotive business can be divided into three main areas, OEM, aftermarket and the specialty vehicles. Automotive fee income is up from the prior year in each year for the past three years. This is also true with respect to fee income for aerospace, architecture and marine. However, none of our reported numbers shows fee income yet for the S-class, so in terms of OEM activity this is just the SLK and the SL-Roadsters.

As we’ve already announced the S-class is coming out during the second half of 2014 so our first quarter or two of numbers is expected to reflect little or no royalty income from the S-class especially since the minimum annual royalties from the supplying licensees need to be exceeded before new revenues appear on our tip line. But to quote Frank Sinatra and I won’t sing it, ‘the best is yet to come’.

This result regarding increased automotive revenues is remarkable since 2013 was the first year since 2010 that there was no new car with Magic Sky controller available in the showrooms. Even more remarkable is that this is the second and third calendar years for the SL and SLK respectively. Typically total car volumes for a model drop off in years two and beyond.

So implicit in this is some very good news. An increased overall take rate for the Magic Sky control option, in other words, more dealers and customers are ordering these cars with our technology on it. Automotive accolades continue to be glowing and with thousands and thousands of cars on the road, some for years now, as of last week I met with Mercedes in Germany and there was not even one reported problem with Magic Sky control. Think about how many car components you know of, that can say that.

For 2014 our fee income will depend upon the launch dates for the S-class Coupe and the S-class Sedan and dealers around the around, and the take rate for the Magic Sky control option on these cars and on the SL and the SLK roadsters and the total number of cars sold by Mercedes. Because Magic Sky Control has already been fully developed as a product and proven by Mercedes, we can’t do anything about vehicle launch dates, those are established years before a new car comes out but we can do something about the other two factors, the take rates and the total number of cars sold.

During the past year we’ve been working closely with Mercedes to put programs in place to promote awareness of what SPD-SmartGlass can do and its benefits with the goal of selling even more cars with the Magic Sky control option. In Europe the focus is on the end customer, because they can tick off a box and choose which options they want and which ones they don’t want and it is relatively quickly delivered to them since production of the SLK, SL, and S-Classes are all done in Germany.

But for the major markets for the SL-Roadster which is the US and for the S-Class which is China and the United States, the focus is different. In those markets it is the dealers that primarily decide which options to put on cars they order. Obviously with an eye towards which options the customer is likely to want and which ones will result in sales of more cars and higher profits.

Mercedes in Germany, Mercedes Benz USA and Mercedes Benz China have all been very receptive to our efforts and we’ve been working closely with them. They’ve been very cooperative and they’ve shared data with us so that we can target the key dealers for the SLK, SL and S-Class in the relevant markets. Already we’ve had dealers indicate to us after our outreach that they will be ordering Magic Sky control on all of the Roadsters for the coming year and our plan is to duplicate this success with the S-Class Coupe and Sedans.

In May, Mercedes launched the S-Class at a special gala event at the Airbus delivery facility in Germany. In July the international press got to do an extended test drive of the car in Canada and the big news came for us in August when it was announced that the Mercedes Benz S-Class which is the world’s best-selling luxury car will offer Research Frontiers SPD-SmartGlass technology and the Magic Sky control panoramic roof.

This was confirmed again by Mercedes at their press conference at the Frankfurt Auto Show in September. In an extravaganza of light, sound and cars, Mercedes noted there that for those magic moments, Magic Sky Control. Also at the Frankfurt Auto Show was Webasto’s Panoramic Roof of the Future exhibit using SPD-SmartGlass.

In January the production version of the new Mercedes Benz S-600 offering a Magic Sky Control roof using SPD Smart technology debuted at the Detroit Auto Show, that was about two months ago, in February at a special press event, Mercedes introduced their new S-Class Coupe which is the successor to the Mercedes CL that has been rebranded the S-Class Coupe so in effect it’s the fourth model within Mercedes to use SPD. This car offers the world’s largest single piece SPD-SmartGlass panoramic roof totalling 1.32 square meters or about 14 square feet of SPD-SmartGlass. This car made its world premiere last week at the press conference which we attended at the 2014 Geneva Motor Show.

We expect more variants to come out later this year, while we do not know the specifics of what will be shown, the major international auto shows for the rest of the year or the New York Auto Show, April 16 to 27, the Beijing Auto Show, April 20 through 29, the Paris Auto Show, October 2 through 19 and the Los Angeles Auto Show, November 21 through 30.

I mentioned automotive is divided into three areas, the second area is specialty vehicles in the automotive aftermarket, we’ll talk about those two now. In March of this year we announced that we have licensed two companies, ADB Nanotech and [indiscernible] for automotive aftermarket and architectural glass SPD Smart products in Russia, in June ADB exhibited SPD-SmartGlass at Moscow’s World of Glass Expo and in August they showcased in Moscow a Mercedes Benz G-400 with an upgraded SPD Smart windows at Automechanica 2013.

Also for the aftermarket in early September, our licensee [indiscernible] exhibited an SPD Smart door for a Rolls Royce Phantom at DSEI which is a defence and security exhibition. Also after two years of testing with a truck OEM, Vision Systems revealed an aftermarket automatic SPD Smart sun visor at Busworld in Belgium in late October. This product is now being developed for both the truck and passenger car markets and we’re quite excited about its potential.

Many of you may recall also that SPD Smart Skylights is standard equipment on the Notin Motor Home. In late September in a joint exhibition by another RV OEM Pilote and Le Voyageur, there was a new model of the Le Voyageur recreational vehicle with an SPD Smart Skylight exhibited at the leisure vehicles exhibition in Paris. Other activity in the specialty market is coming and we look forward to sharing it with you as soon as it is announced.

Moving now to our next market in terms of revenue size, aircraft, it’s also been a busy year. SPD Smart Aircraft products dominated the category as the two biggest European and the two biggest American aircraft shows this past year. At the Hamburg Air Show in April, Vision Systems debuted SPD Smart electronically dimmable aircraft window with ultrathin glass that made the window even lighter than plastic and remember weight is always a factor on aircraft. It also integrated electronics and controls that allow you to simply touch the window to adjust it.

ATG, the largest supplier of motorized treated window shades has partnered with our licensee Inspectech and this year introduced two products, the first, Panacea which is an SPD and motorized treated shade combine was launched in April at the Hamburg Air Show, then in June in a first for ATG, they launched an SPD only window shade, Tranquility. In May [indiscernible] in Geneva, Vision Systems and Eurocopter featured an SPD Smart integrated window and cabin partition system on a special mark-up of the Eurocopter EC175 VIP helicopter.

In June at the Paris Air Show, Vision Systems announced their $1.2 million investment in a new factory in Melbourne, Florida at an awards ceremony by Florida Governor Rick Scott. This new facility is partially staffed already and in addition to its manufacturing facility also has a product showroom showcasing Nuance and [indiscernible] SPD Smart products. Vision Systems will probably release more details later this year about their factory.

Activity in aircraft also accelerated at the US based major aircraft shows. In early October, four different companies were all at Aircraft Interiors Americas show in Seattle with SPD Smart aircraft products. ATG introduced their Boeing 777 mark up with the Panacea window shade as well as showing their SPD only Tranquility shade system.

At the same show Vision Systems and their partner Vopel jointly exhibited a SPD Smart window system for the 737. Boeing is a major customer of Vopel since Boeing started in business so that’s been a strong and helpful relationship as well.

Inspectech also featured SPD Smart aircraft windows at this show but there was even more activity by our licensees and their partners later that month at the NBAA Aircraft Show in Las Vegas as the world’s best-selling Smart window technology continued to dominate the show with seven companies exhibiting SPD Smart aircraft products.

Let’s start with Vision Systems, at the NBAA, they introduced the world’s first photovoltaic smart electronically dimmable aircraft window which they call Energia. By the way, this was launched the same week as they showed their aftermarket automatic sun visor at Busworld in Belgium so that was a busy week for the Vision Systems’ team.

Apart from the introduction of Energia, the other star at the NBAA show also involved SPD Smart technology. After much anticipation, Dassault unveiled their Falcon 5X with an SPD Skylight called the Zenith Window which will be standard equipment. This blocks 99.9975% of the light and has received universal accolades from the aircraft industry. To quote Aviation International News to sell Falcon 5X skylight to Clear Window and Business Jet Interiors International called it a headline innovation. This Falcon 5X jet is scheduled to deliver to customers beginning in 2017.

Moving from Dassault to another OEM Honda Jet, which featured SPD Smart cabin windows, once again standard equipment and this will be in production this year for delivery as soon as certification of the aircraft happens which is expected in early 2015.

Also at the NBAA, ATG exhibited their Tranquility and the Panacea shade systems and there was also a presence in force for SPD with GKN, Inspectech, [indiscernible] and Associates and MSA. This is representative of the high level of activity surrounding our technology in the aircraft industry. As a result, we are now standard equipment on the new Honda Jets and Falcon 5Xs, as well as being used on over 30 models of aftermarket aircraft and we’re in development with OEMs on a number of other new and current fixed wing and VIP helicopters.

We’ve also been on every Qantas Airline A-380 delivered by Airbus since October 2008. This and our being on the Learjet put in service in August 2001 which still has the same SPD Smart windows in them today makes SPD Smart windows the longest flying and most reliable electronically dimmable window in the industry.

This activity has continued into 2014 with Vision Systems exhibiting at the prestigious Dubai Air Show in February and being selected last week as a finalist for the coveted Crystal Cabin award which will be awarded in April at the upcoming Hamburg Air Show. As far as other shows in the aircraft market for 2014, you can expect SPD at all of the major shows which we spoke about today, was also a very strong showing.

Moving to architectural which right now is the third biggest contributor to revenue for us, but since architectural glass represents about 60% of the world’s glass, this has the potential over time to be our largest source of revenue. We’ll talk a little about this market.

Last February our licensee Isoclima launched their VebLite brand of virtual Venetian blinds which can be used primarily in the architectural, marine and mass transit market. This allows individual segments within the glass to be controlled individually or in tandem. In March we announced license agreements covering aftermarket and architectural glass with two companies in Russia, ADV and Tint-it and in November we added MDV glass as a new licensee in Brazil for the SPD Smart architectural market.

In March and April we presented at SmartGlass conferences at IBA, Buildings New York and at The Society of Vacuum Coaters and our licensee innovative glass also exhibited at Glass Expo Northeast and at the American Institute of Architects Long Island Product Fair.

Last week we visited the CERN Globe of Science in Switzerland where SPD-SmartGlass is extensively used throughout the dome and we’re greeted with recognition from everyone from the receptionist to the head of the facility and even random physicists walking across the CERN campus.

In a few weeks on April 2, I will be the keynote speaker at the SmartGlass conference being held in Berlin. So it seems as if awareness of SPD-SmartGlass is growing and we now have been acknowledged by IDTechEx and other market research frontiers as the best-selling smart window in the world with projections that this leadership role will continue. Moving to the marine market, our licensees Diamond Sea Glaze in Canada, Isoclima in Italy and Vision Systems in Europe and now Florida have been spearheading the activity for SPD-SmartGlass in the marine industry.

As mentioned earlier, Isoclima introduced their VebLite SPD smart virtual Venetian blind at Sea Tech in February 2013 in Italy and also display their SPD Smart marine windows at the [indiscernible] show in September in St. Petersburg, Russia. Both Vision Systems and Isoclima exhibited their SPD Smart products in November at the Marine Equipment Trade Show in Amsterdam. The year before, Vision Systems won the coveted DAME award at METS for their SPD marine window system.

In November [indiscernible] unveiled their new 100 foot yacht at the Fort Lauderdale Boat Show, it features dual SPD Smart galley skylights once again, as standard equipment for the key management and better navigation of the boat at night and also at the Fort Lauderdale Boat Show yacht maker Cheoy Lee featured approximately a 150 square feet of SPD-SmartGlass on the windows and skylights of their Alpha 76 production yacht and on the Alpha 76 Flybridge yacht. This glass is supplied to Cheoy Lee by our licensee Diamond Sea Glaze.

Moving now to a new market for us, the museum market. In May we launched our VariGuard division which Seth has, its SPD-SmartGlass product enables museums and private collectors to protect valuable artwork and documents from degradation from visible light. In May we kicked off this business by exhibiting a museum expo in Baltimore and in June we announced that SPD-SmartGlass was protecting the Treaty of Paris in Boston and the Denver Diorama from light damage. Various display cases at the Brooklyn Museum also are protecting priceless artifacts, some of which would never be exhibited to the public because of their age and sensitivity to light damage. Now private collectors are also beginning to use VariGuard’s SPD-SmartGlass to protect their own priceless documents and artwork, and other types of customers are also buying products from VariGuard and we view this business as just beginning. And in January of 2014 industry leader Omega Molding became a distributor for VariGuard’s SmartGlass products for frame and display cases and Seth will answer any questions about the VariGuard division during the Q&A segment later on in this conference call.

Moving to something that’s not an industry for us or for other companies that have a product is litigation, however sometimes it does become necessary to enforce your intellectual property rights and in July 2013, Research Frontiers initiated a patent infringement lawsuit against E Ink and Amazon, Barnes and Noble and Sony regarding the displays used in their e-book readers. The initial complaint alleged that they infringed on two of Research Frontiers’ patents and in early December we amended our complaint to add a third patent. This litigation is being done on a contingency basis by one of the top patent litigation firms in the country and more details about this litigation are included in our 10-K.

So far nothing unexpected has occurred and patent litigation is typically a slow and meticulous process but certainly one with potentially large rewards for you and your company if we’re successful which brings me to a question that we got about dividends. We’ve been asked by several shareholders about, if we do have some extraordinary results in this litigation, what do we plan on doing with the money and well, I could only speak for myself because the declaration of a dividend is up to the entire board of directors at the time. I think at least a majority, if not all of our directors would like to see dividends being paid to shareholders and this might be a very good opportunity to start that practice.

Talk about some other developments, in June we launched our new website, our smartglass.com website and we’re getting more new visitors to our redesigned website than our old own. We also increased our use of social media, social media is a very cost effective way and with the right expertise, there’s the ability to target some very specific geographic and other demographics. Since July we’ve seen almost a six fold increase in our social media fans and more importantly they’re more engaged. In the last six months for example, we've gotten between two to five times the amount of interaction with our social media fans than the normal Facebook page we get and in the last few months it’s been double even that. So these are pretty remarkable success results in the areas of social media.

Our focus in social media was first on targeting a more general population through Facebook and Twitter and now we’re targeting more specific areas such as Europe, Asia and more specialized users such as those on LinkedIn. Not only are we reaching more people and are interacting with them more but through social media we are also staying in the loop, in the conversations out there regarding SmartGlass in general and SPD in particular.

And in addition to our in-house efforts, we are working directly in China with a media firm there, since social media in China is different and segregated from Facebook, Twitter and YouTube which are the standards in social media outside of China.

Now before we open up the floor to questions, I would like to address some of the questions that were emailed to us, that Seth and I did not yet cover in our presentation. I’ve been asked about the BMW Active Tourer which had SPD-Glass in the roof of the concept vehicle shown by BMW at various auto shows, but which was not offered on the final version.

The guidance that we have given people is that one can expect that SPD technology initially on cars above $45,000 in MSRP. Active Tourer came in at two low of a price point. But just like Mercedes used some misdirection by first putting SPD on the shooting break, and six months later revealed it on the SLK Roadster, perhaps BMW is also doing a little of the same.

Why tip off competitors prematurely when you could still do the glass and electrical development work needed to put the cool shade, which is what they call SPD-SmartGlass and also get customer reactions from the public. Similarly, I was asked by Renault on the new Mercedes V-Class van. Mercedes backed away from a premium in-house van with the V-Class being a more standard and lower price point ran than the Viano Vision Pearl and Diamond that was shown with our glass in concept form.

Mercedes is apparently leaving the upgrades to the current performance to news around the world such as Brabus. Since the way that these brands are being upgraded, its highly customised so one size doesn’t fit all, and it’s really dictated by individual markets and tastes.

We've been asked when will the automatic SPD Sunvisor come out to the aftermarket and will it just be for trucks. This refers to the Sunvisor that we have launched in Belgium by Vision Systems in October. Finishing touches and some further performance improvements are being worked on. And by the way these improvements are not from the SPD side, which has been fully developed. And the target is not only for aftermarket trucks, but also passenger cars as well.

I personally am very excited about this because it not only could be a very large business, but it also expands the universe of people exposed to our technology and its benefits. We’ll have the ability to touch and feel it and really experience what SPD-SmartGlass is all about.

Another question is Research Frontiers any closer at this time to having another leading luxury automobile manufacturer, i.e. BMW, Audi, Lexus et cetera; planning to incorporate or starting to incorporate their SPD-SmartGlass sunroofs in one of those company’s production vehicles?

The answer to that is, yes, we are much closer. But I can't comment, the question was framed in terms of sunroofs and among the different automakers, there are of course sunroofs which I consider the lower hanging fruit in this market but also other applications for our technology as well. And we're working with almost every premium carmaker in the world right now and some have already completed the basic development work to put SPD into their vehicles. Sometimes it’s simply a matter for the rest of the car being ready for launch that determines the timing, especially now that at least two of our licensees have developed SPD for the automotive mass production market.

Similarly we had a question, do you have an approximate idea or a rough estimate of the royalty figure or fee that Research Frontiers will be receiving for each Mercedes Benz S-Class model vehicle that Mercedes sells?

Just like in the case of the SL and SLK, we can’t give an exact number without revealing what Mercedes will be paying our licensees for the glass. But we can give a range. And remember, we get a 10% royalty, and estimated it should be between $150 and $250 per car. And it will vary with different S-Class variants because the different variants have different amounts of SmartGlass in the roofs, from the Coupe which has 1.32 square meters to the standard sedan which has 1.5, and then the long wheelbase models which have 1.7 square metres of glass.

Another question, in the annual report it mentioned the markets and market study that projects architectural SmartGlass market at 3.87 billion by 2017. Do you concur with that figure, and if so, what dollar figure do you think could equate that SPD film, thanking you in advance for your answers.

As a policy, public companies in general do not comment on analyst reports. However, I think when you exclude electrochromic mirrors, what’s left for architectural automotive marine and aircraft, probably comprises about $1 billion, I’m sorry, what’s left other than those comprises about $1 billion. Another study predicts that electrochromic mirrors account for 90% of the Smart auto glass revenues today but this percentage is expected to have dropped to 67% by 2019.

So basically what I think everyone is saying is that electrochromic mirrors are a mature market and that the growth in this industry will be from the markets that we’re pursuing. Research Frontiers through our licensees is currently the industry leader in sales of smart windows and we aim to always be the dominant player in terms of sales. And looking at some of these market reports, we’re projected to continue to be the market leader at least for the near future and I expect it to be longer than that.

Another question we’ve got. I’d like to know why fees were down so much year-over-year in fourth quarter 2013? Mercedes seemed to have solid sales. Was it lower take rates? If so, do we know why? Thanks. [Steve Shawn]. Take rates, they were defiantly not down, in fact they were rising. Fourth quarter income was down a little bit from 2013 versus 2012 and this was from a combination of factors. One relates to the number of SLKs and SL produced by Mercedes and especially as one moves further away from the date of new model introduction, those numbers tend to decline a little bit.

Another factor is that there is normally a scheduled factory shutdown during the second half of December and the first half of January at Mercedes Bremen plant where both the SL and SLK are produced. This year there was a longer shutdown than normal since the two production lines for both these vehicles were now combined into one. And also, there was just some difference that were simply timing issues.

So if Laura, if you could open up the floor to any questions that might be in the queue?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from Steve Dyer of Craig-Hallum.

Steve Dyer - Craig-Hallum

You had talked a little bit about the royalty per S-Class that you anticipate a $150 to $250. So kind of given that times I don’t know just assume the same take rate as the previous models although I would think it could be a little bit better given the price point of the car.

And then looking at the anticipated volumes, how should we ballpark sort of revenue that can be thrown off of -- I mean may be even a range of the S-Class in the early days?

Joseph Harary

Okay, sure, that’s a great question, Steve and we can tell you follow the automotive industry by the way you asked it. The S-Class is estimated to produce, depending on who you speak to, over the next couple of years between 80 and may be even up to 130,000 or more cars per year. It’s the world’s best-selling luxury car and this last variant of it, the new S-Class that came out, is just an amazing car that has just received phenomenal acclaim. So I think everyone including two people at Mercedes are expecting the upper end of that range.

But let’s just use a round number of 100,000 units as a good benchmark and it’s also math that I could do. If we also take the mid-point of the range that I gave $150 to $250 per car you're talking about $200 royalty per car for a $20 million royalty opportunity if we had a 100% take rates.

You mentioned the price point of the car being a positive factor and it certainly is. The S-Class is very close in price at the entry level to the SL which has very high take rates of our Magic Sky Control group and things like the Cooper are even more expensive, so we expect a higher percentage. So this could be a significant money maker for Research Frontier as the different variants have rolled out. So we’re pretty excited about this.

The other thing that I think is a factor here that I think is going to resonate with the key Mercedes dealers, most of them tend to be in very nice climates, warmer weather climates and the S-Class comes with a panoramic roof standard. So if you consider the fact that Magic Sky Control can reduce the temperature inside of vehicle according to Mercedes' test on the SLK by 18 degrees Fahrenheit or the difference between the car being 90 degrees when you get in it and 72 degrees when you get in it, I think that with even more glass in the SL -- I’m sorry with in the S-Class and it’s about three times as much glass, you’re going to see a noticeable reduction in temperature inside the vehicle and I think that’s going to be something that makes this an extremely popular option especially in the warmer climates, Middle East, China, Florida, Arizona, California, Texas, pretty much where the key dealers are right now.

Steve Dyer - Craig-Hallum

So on a $20 million opportunity and I don’t want to put numbers or words in your mouth, but I mean is a 50% take rate outlandish? I mean is this $10 million your first full year out of the gate or is that too aggressive?

Joseph Harary

Based on our experience with the SL, I don’t think 50% take rate is outlandish, but it’s something that Mercedes guards very carefully and I have to continue to do that. So, and remember if you look at how the S-Class is being rolled out, there are a number of variants. Right now you’re seeing some of the more expensive ones like the Coupe that came out at Geneva last week, I think at New York the automotive press is expecting an AMG version to come out. So you are seeing some of the more expensive lower volume S-Class is coming out earlier in the year and then the higher volume ones coming out later on. And that’s going to be true for the next couple of years, you have the [indiscernible] you have the long wheelbase, you have just a number of different variants that are going to be rolled out.

So it’s going to take a little time for Mercedes to get up to that on that magic number where they are really setting records in terms of volumes of cars S-Classes sold. But they think they’re going to do it and I agree with them, who am I to disagree with them, they have been selling luxury cars better than anyone in the world.

Steve Dyer - Craig-Hallum

So what is your sense as to when they will actually go in to production the first variants and what is your sense as to what timeframe they'll pretty much be producing every term level that they are offering?

Joseph Harary

What we’ve said publicly is that the variants with Magic Sky Control are going to come out in the second half of this year. At this point I don’t want to put too fine a date on it. Production obviously starts before these cars are available in showrooms, so we're pretty excited about the very near term for us.

Steve Dyer - Craig-Hallum

Another question as you look outside of auto and certainly you've been working hard in other areas, I have been on these calls for three years and there is obviously a lot of activity and announcements in aerospace and others. And yet we’re sitting here with not a lot to show forth in terms of fee income yet. What is your sense as to the impediment or the push back, is it price or in the case of airlines is it just never going to be a big enough volume area or because it means it certainly seems like there is a lot of activity a lot going on, I know what architectural certainly the price point maybe doesn’t work exactly right yet. But any colour you could give as sort of what you think what the road blocks are to taking this from sort of activity and awareness to profits.

Joseph Harary

There is a lot of similarities between automotive and aircraft in that. If we’re talking about the OEM business, you’re talking about waiting for a particular jet to come online and Honda jets are perfect example, SPD windows have been ready for a while for the new Honda jet, but the entire aircraft hasn’t received its FAA certification yet. So they can’t deliver to customers until early 2015 is the estimate.

The Falcon comes out in 2017, once again, the Skylight is ready; it’s the jet itself that needs to go through the normal procedures. And it’s similar in automotive, the S-Class was going to come out when the S-Class was going to come out. Even though SPD has been proven and development has been finished by Mercedes long before the S-Class started production.

So those are the gating issues is really when the vehicles come out. It’s a little bit different I guess in aircraft in that you also have another feature which is airlines are constantly bringing their fleet in for upgrades. They do the major checks every couple of years and those are good opportunities for us to have the airline upgrade the windows with SPD smart window shades. And there is a lot of interest, and you see it’s growing, I mean it’s percolating. You go to a show and people know us, like I said [NBAA] there are seven different companies showing SPD, so it’s not really a question of what technology do you out on, it’s who do you used to supply it and luckily we get the same royalty from everybody, so we’re relatively agnostic about that.

So I don’t think cost is an issue, I think it’s really just the matter of just taking it’s natural course and time and development of the general aircraft happening, but I am very optimistic about it and this year I had even renewed optimism because we really saw this becoming a standard in the industry and standard equipment even. So there is a great level of confidence as well in this -- in our technology.

So I think if you compare the markets, I think automotive will always be bigger than aircraft in terms of square footage, in terms of revenue I also think that automotive is going to dwarf the aircraft market. But we also have some developments happening in the architectural market which puts us in good shape and the recognition and the awareness is certainly very high. So I am pretty excited about all of our markets.

Steve Dyer - Craig-Hallum

Last question for me, as you begin to ramp revenues more meaningfully with the S, et cetera, should we see an increase of much at all in the operating expenses, in other words R&D, I mean my guess is the R&D is pretty much done other than tweaks here and there? And I mean do I need to model in additional expenses I guess is what I am saying as…

Joseph Harary

Not anything considerable Steve. I think that one of the nice things about having a licensing business where the product has already been developed and it’s already been licensed to 41 companies is that you get very predictable expenses both on the operating and on the R&D side. Obviously having more resources makes us a lot more comfortable in staying ahead of the R&D curve and developing new refinements to the technology and things like that. So, we're certainly not planning on closing R&D down and resting on our laurels especially since every time we issue a new patent, our patent estate and our licensing revenues gets extended because our licenses are all geared towards the last expire of our patents. But I think it’s a pretty safe bet to say that you're not going to see anything more than a modest plus or minus on R&D.

Steve Dyer - Craig-Hallum

All right. Thank you.

Joseph Harary

You are welcome. Thanks for the questions. By the w ay Steve Dyer is from Craig-Hallum and he said he's been on these calls for a couple of years I think he was, started being on our calls before he started covering our company and was the first analyst to cover Research Frontiers. So, we have a very warm place in our heart for you Steve. Thank you. Next question.

Operator

Yes. The next question is from David DeWitt of DeWitt Capital Management.

David DeWitt - DeWitt Capital Management

Two questions, one is, when I look at the Tesla and it’s all electric, I was wondering how much that would benefit, SmartGlass sunroof would benefit the Tesla?

Joseph Harary

Okay. Let me answer that first, one of the things that was inadvertently omitted from this year’s 10-K is the fact that Audi had the A2 with an all-electric, it’s an all-electric vehicle concept that had an all glass SPD roof and it just illustrates what SPD-SmartGlass could do. You think about driving in an electric vehicle, you want as much power as you can going towards driving range and as little needed to cooling the car. And when you consider that the Tesla is a remarkably stunningly beautiful car, I have driven in one. There is a lot of glass and with a lot of glass you run into solar heat gain issues if you are not paying attention to the details. So, electric vehicles in general and certainly Tesla, because of the price point it's at, in particular can benefit greatly from SPD-SmartGlass because it would increase the driving range. And also if you notice what they are putting inside the Tesla, it's the best of everything, to quote I guess Mercedes tagline The Best or Nothing.

So, these are the right kind of cars to expect SPD glass to be on and they could only enhance the performance of these cars, so we're excited that electric vehicles are no longer science fiction, but beginning to become a bit more mainstream.

Operator

Okay. And our next question comes from [Rick Naff] of Merrill Lynch. Mr. Naff, your line is open.

Unidentified Analyst

I have a question, I tried to order an S600 Mercedes and pick it up overseas and I went to a dealer in Massachusetts, the leading one in New England and the person who was in-charge of this had told me that the SPD-SmartGlass would not be available in the 2015 cars.

Joseph Harary

That’s not correct. The dealer ordering guys all have it available later this year.

Unidentified Analyst

Well, he said that they got a memo from Daimler in Germany three weeks ago and that they said specifically that this has been cancelled. I checked with another dealer in Florida and he said the same thing. They said Mercedes have moved up the date for delivery to 2015 to April from the third quarter and the supplier could meet the demand, so they sent the memo out to the dealers. They said it'll still be available in the SL and the SLK but not in the S600 and he said it’s most likely that he never sees memos that come out with a rescinded, but it could happen this time. And I have been concerned because I have owned the stock for three years and I wanted to pick a S600, so…

Joseph Harary

Well, it’s kind of strange because I was in [indiscernible] where the Mercedes development work is all going on four days ago, five days ago and it wasn’t cancelled there. So I’m not really sure what you’re saying but coming out of Germany, they’re not seeing anything like that. So, I’m not sure the information is valid.

Unidentified Analyst

Okay. Well, I talked to Mercedes because they sent blast email obviously because I’ve checked with a few dealers.

Joseph Harary

Like I said I was actually at Mercedes on Thursday and -- this past Thursday and it hasn’t been cancelled.

Unidentified Analyst

Okay. Thank you.

Joseph Harary

But thanks. Anyway, good luck for getting it. I think you will get a car with the Magic Sky Control, it's going to be little later in this year.

Unidentified Analyst

Okay. Thank you.

Joseph Harary

Thanks a lot.

Operator

And next we have a question from Anthony Schuman of Corporate Financial Advisors.

Anthony Schuman - Corporate Financial Advisors

Good afternoon. I’d like to go into a little bit more depth on the aircraft replacement windows, some of the Boeings. Can you -- please correct me if I’m wrong. I know you’ve been approved -- are you FAA certified now for the OEM Boeing stuff that they come on new products?

Joseph Harary

We don’t have an SCC yet on aftermarket with the Boeing aircraft. We have it for King Airs and the General Aviation market and our licensees obviously are mindful of the certification requirements. Since we’ve already passed pretty much everything that FAA can ask [indiscernible] we’re not concerned that about certification.

Anthony Schuman - Corporate Financial Advisors

All right, do you have any timeframe, when you expect that to change?

Joseph Harary

Basically, it’s going to be driven by customer orders, but the licensees will do whatever is necessary to make sure that the customer gets everything on time and in place.

Anthony Schuman - Corporate Financial Advisors

So in order words, if I call one of my contacts and they start pushing for an order for that, will that help you or that…

Joseph Harary

That always helps because in the airline business and the aircraft business as you know, it’s the airline customer that’s king and what they tell Airbus and Boeing is what Airbus and Boeing does.

Anthony Schuman -- Corporate Financial Advisors

I understand that too, but I also understand that the last thing you want to do is piss off a regulator.

Joseph Harary

No, we’re not going to do that either. Like I said we…

Anthony Schuman - Corporate Financial Advisors

I don’t want to do something that's going to screw it up everything for you guys either.

Joseph Harary

No, I appreciate that. No, customer demand pull is always a good thing because it tends to get decisions that are going to be made, made a lot faster. So, that’s only is helpful.

Anthony Schuman - Corporate Financial Advisors

Okay. So, I can…

Joseph Harary

And you won't be stepping on the toes of any of our licensees. They kind of have the same strategy which is obviously they talk to the OEMs directly about the product development but they’re also talking to the OEMs customers about the benefits that SPD smart windows.

Anthony Schuman - Corporate Financial Advisors

Basically as I still understand that they last longer -- replacements last longer than traditional glass.

Joseph Harary

Right, and they switch faster than what's in the current 787 right now. I mean considerably faster.

Anthony Schuman - Corporate Financial Advisors

I’m sorry. What was that last point?

Joseph Harary

The switch, they change tint in two to three seconds versus 90 seconds. So, you have a performance cost in a way benefit by putting this in aircraft.

Anthony Schuman - Corporate Financial Advisors

So, until the airline start ordering more that stuff, the FAA is going to just sit on their…

Joseph Harary

Well, it's really a matter of the licensees getting either a supplemental type certificate or the OEM getting a type certificate that includes the SPD window shades. For example HondaJet has a type certificate, so is the Falcon whereas aftermarket King Air is all STCs but they’re all basically FAA approvals, it just, it depends if it’s the entire aircraft or just the aftermarket component.

Anthony Schuman - Corporate Financial Advisors

Understand. Thank you very much for your…

Joseph Harary

Appreciate your interest and your help.

Operator

And the next question is a follow up from David DeWitt of DeWitt Capital Management.

David DeWitt - DeWitt Capital Management

Good, good. Second question is and this I don’t know where this comes in but as a home owner and having skylights in my kitchen which are 2 feet by 4 feet, they are in the summer when the sun is shining straight down, it's like an oven. And I was wondering are there any plans by any glass manufactures to make a standard 2x4 skylight that you can put at the end because it would be a relatively small installation, but it could have a huge benefit to home owners.

Joseph Harary

Yes. There are a lot of skylights and you know the studies we’ve done Dave shows that 20% reduction in zoned electrical usage and I’ve been in the kitchen where the granite tops, you can touch them before SPD and they were cooler to touch after. So, it can make a demonstrable difference and I think skylights are a natural for the architecture market.

As far as standard 2x4s I don’t know. I mean there is a lot of different variants that they may want to make standard including square and rectangular.

Unidentified Analyst

Well, if anybody makes one, I’ll be the first customer.

Joseph Harary

You can be the second.

Unidentified Analyst

Second customer, then okay.

Operator

And our next question is from Michael Kaye of Kaye Associates.

Michael Kaye - Kaye Associates

Just a few ones. I’ve been on these conference calls and at annual meetings in person many-many more years than Steve Dyer, so I think you’ll accommodate my questions. I’ll make it kind of a bullet bite-size, bullet so to speak, I am very curious as to why you think that even though SPD has been so successful in terms of Mercedes and they’re incorporating it in more and more models, why in the world do you think not one U.S. auto company has adopted SPD?

Joe Harary

Well, part of it is numbers, if you look at the market share of the 45,000 and above market that is occupied by the U.S. automakers; believe it or not it's just a sliver. I mean Cadillac and Lincoln are really not that big of a factor in terms of worldwide numbers in unit volumes? So that maybe one thing is that they just don’t have as many cars as the others to go across. The others may just be a mentality. A lot of the luxury premium car makers like Mercedes or Audi think of themselves as standalone luxury brands and there may be a mentality within the luxury divisions that the U.S. companies are not being a standalone luxury brand.

I know Lincoln for example, spends hundreds of millions of dollars in marketing to try to overcome that so far unsuccessfully, but the perception is that it's just a luxury it up in a normal car and because of that I think there is a mentality that needs to be overcome within the manufacturers here in the U.S. I’ll probably get in trouble next time I go with the GM or Ford or Chrysler, but it’ll be it.

Michael Kaye - Kaye Associates

But you have said that they’re aware of it and it would seem to me that especially if of course SPD film comes down if that’s the factor that they would be more amenable to adopting it given the success with other -- with Mercedes.

Joseph Harary

Yes.

Michael Kaye - Kaye Associates

Is it?

Joseph Harary

Everybody comes around eventually.

Michael Kaye - Kaye Associates

And anyhow is there any -- are you prohibited from Mercedes to give absolute take rate numbers as you know I’m working on a project that taper dealing with what makes innovations successful or unsuccessful and I’m using SPD as a case study and the review…

Joseph Harary

Hopefully, we’re on the successful side I hope.

Michael Kaye - Kaye Associates

Yes but the reviews of the paper say, I need hard data to indicate that my hypothesis regarding the explanatory model I developed is accurate and so are your prohibited from announcing publically like out of 1,000 cars that could have the options of SPD exactly how many were selected by customers to have the MS Magic Sky control?

Joseph Harary

Michael the longest discussion we had about our agreement with Daimler involved the nondisclosure and short answer to your question is yes, I’m completely prohibited from revealing something as sensitive as a take rate and I’ve made the point that we’re a public company that has an obligation to our shareholders to report as much information as we can. And there was a lot of discussion back and forth, but that’s one thing that we just can’t -- we can’t give.

Michael Kaye - Kaye Associates

So if you can just say like you have been in general terms this is more than they expect all of the take rate they could without giving…

Joseph Harary

Right, I could give qualitative not quantitative.

Michael Kaye - Kaye Associates

Right and do you envision a time when it will be standard that the SPD features will be standard in the models of Mercedes and other manufacturers?

Joseph Harary

It’s a natural tendency and we’re starting to see it in other industries, so why not. I think in the interest of time, I'd like conclude here so.

Michael Kaye - Kaye Associates

Okay. Thank you.

Joseph Harary

But thanks Michael, it's good talking to you and make sure you come by when you’re in town.

So just to conclude, your company is in the strongest shape that it's ever been in. We have the resources and active licensees and together we’ve planted seed that are growing into mighty oaks out there in all of our industries. And I’d like to conclude by summarizing what we can all expect for the balance of this year, first and foremost the visibility in revenues from the S-Class Coupe and the Sedans. This is something that we expect to be a very-very public expression of our technology. As mentioned in our last conference call, these cars will use three times the amount of glass of the SL and SLK and are expected to sell three times the volume of the SL and SLK combined and even higher take rates are expected.

Second, I think you could expect the ramp up of projects in the pipeline which we’ve talked about earlier.

Third, we plan to continue to open up new markets both by geographic area and product application area, and we’ve already opened up Russia and Brazil and we like to see a controlled entry into the Chinese market which represents about half of the world’s construction activity by value and it's also the largest market for premium cars such as the S-Class.

For us, OEMs in the automotive specialty vehicle market and the aircraft to marine market has slated SPD to be standard equipment during the past year. I'd like to see this trend continue to grow to higher volume application.

And in addition to what we spoke about today, there are quite a few projects in the pipeline in all of our major markets including automotive, mass transit aircraft, architecture and marine.

Our licensees are working hard to land this business and also as you can tell from some of the product lines that they've telegraphed this past year to introduce new products into the market using our SPD-SmartGlass technology.

So in conclusion SPD-SmartGlass has become the best-selling and as of recently, the most visible and commercially viable smart window technology in the world and we continue to focus on revenue growth and opening up new markets.

In reflecting upon the successes of this past year in particular, I must thank you our talented and hardworking colleagues at Research Frontiers, our shareholders who have provided us with the support and resources to bring this revolutionary product to market and thanks to the thousands of drivers out there who bought cars with Magic Sky Control as well as the owners of homes and offices, planes, helicopters and yachts that have incorporated SPD-SmartGlass into them and enjoy the benefits every day. And of course thanks to our licensees who like us have invested millions of dollars and put together talented teams of hardworking people to make it market SPD smart products.

With that I'd like to thank everyone for their participation today on the conference call. I look forward to further updates as to developments and hopefully in June many of you will be able to attend our annual meeting here in New York. Thanks again and there will be a replay of the conference call I think available by noon tomorrow.

Operator

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.

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