Research Frontiers Incorporated (NASDAQ:REFR) Q4 2017 Earnings Conference Call March 8, 2018 4:30 PM ET
Joseph Harary - President and CEO
Ishfaque Faruk - WestPark Capital
Michael Kay - Kay Associates
Good afternoon, ladies and gentlemen. Welcome to Research Frontiers Investor Conference Call to discuss the Fourth Quarter of 2017 Results and Recent Developments. During today's presentation, all parties will be in a listen-only mode and following the presentation the conference will be open for questions [Operator Instructions]
This conference is being recorded today. A replay of this conference call will be available starting later today in the Investors section of Research Frontiers website at www.SmartGlass.com and will be available for replay for the next 90 days.
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 emailed to it prior to this conference call, either in their presentation or as part of the Q&A session at the end. In some cases, the company has responded directly to email questions prior to 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 question brief in the interest of time.
I would now like to turn the conference over to Joseph Harary, President and Chief Executive Officer of Research Frontiers. Please go ahead, sir.
Thank you, Rachel and good afternoon, everyone. And joining me today is Seth Van Voorhees, who many of know as our Chief Financial Officer and also the head of our VariGuard division. We are going to get right into the numbers and we wanted to share the financial results as soon as we could because they were very positive this year.
Our net loss this year was down so the fifth year in a row and is basically one third of where it was at the beginning of that period. Our loss was lower by over 1.8 million or by more than 43%. They were $0.10 per common share versus $0.18 per common share last year. This reduction in the loss came from both revenue growth and expense reduction.
In terms of revenue growth revenues were up over 22% in 2017 as compared to the prior year. These increased revenues mostly came from increases in the automotive, marine, display and architectural industries with overall only a slight decrease in revenues from the aircraft industry. And this decrease in aircraft came from some temporary changes in the timing of deliveries of new aircraft windows to customers in the fourth quarter of this year.
We outlined in detail our clear strategy for growing revenues and in all four of our last quarterly conference calls for investors. That is: continue to develop new licensees, continue to grow each of the five markets that our technology is used in, and develop new uses for our SPD-SmartGlass technology and reduced the cost of our technology to the final customer. You can see the result of these efforts begin to show up in our growing revenue numbers. I think more significantly to people is that we expect continued revenue growth from these efforts in 2018 as well.
In terms of expense reduction, expenses in 2017 were down about $1.6 million or 29% compared to the prior year. And what makes these numbers even more significant besides their magnitude is that they are coming off of already $826,000 lowered expenses in 2016 versus 2015, so that’s over $2.4 million in expense reductions from just the level that existed two years ago.
Moving toward balance sheet, our current assets at the end of the year were 2.4 million versus 4.6 million last year. Our receivables were about $500,000 lower than last year and our burn rate is about $400,000 per quarter and we expect that this will last us well into 2019 and could last even longer with higher revenue, continued cost reductions and collection of additional receivables. So, we made good progress by reducing our cash burn without compromising operating results.
Economic activity was up in all markets other than the temporary inflight [ph] reduction in aircraft windows that I mentioned earlier. Most significantly automotive was up nicely and this was due to increases primarily by the size of the S class, we gave reports about twice a week from glamour and there was a noticeable up take in the take rate of the magic sky control option from the S class.
Let's take a look at the broader macro trend going on in automotive. First the premium market will primarily focused on doing well. Last Thursday automotive news reported that premium brands are outpacing the broad automotive market. Electric vehicles are also a major production focus by the automotive industry and we focus our efforts here as well.
There are clear directions in the automotive industry and they all benefit research frontiers, these initiative by all the major automakers involve reducing CO2 emissions, increased energy-efficiency, electrification and autonomous vehicles. This is also the clear focus of the Geneva Auto Show which I just returned from about 15 minutes ago.
Internal combustion engines are certainly not dead but they have begun to become affected by electric vehicles and the emissions regulations and companies like Daimler and Toyota are working to make internal combustion engines better.
We can help with internal combustion engine vehicles our glass increases of fuel efficiency according to our colleagues at Continental Automotive by 5.5%. Also emissions are a big issue. Starting in 2021 automakers will have in Europe and €95 per gram penalty per car sold in their fleet if targets are not met by that 2021 date. Most auto companies face stiff penalties as they abandon their previous plans to comply by using diesel engines. We can help these automakers here in the emission compliance in two ways, first we can make electric vehicle more desirable by increasing their driving range by 5.5%. This alleviates range anxiety that some people have in terms of whether they do buy an electric vehicle, or stick with an internal combustion engine.
We and our licensees are working with the major and well-known electric vehicle manufacturers. And of course, helping them understand and quantify the benefits of using SmartGlass in electric vehicles.
We can also help by reducing CO2 emissions by 4 grams per kilometer, once again according to Continental Automotive’s calculations. When we take into the account the penalties that of EUR95 per gram, this can avoid penalties of EUR380 so about $471 per car. This is a big issue for the automakers. At the Geneva Auto Show, all of the major OEMs spoke about it in their press conferences on Tuesday and Wednesday of this week.
Also, only about three of the top of the world's top 11 volume automakers can probably comply with these new regulations in Europe. The other eight automakers face penalties of between $100 million to $1.6 billion according to industry reports that I have seen.
We have been talking about this over the past two years at automotive conferences and directly with the OEMs. And now that diesel has been taken off the table, the analyses has been published as to the exposure that the OEMs face and what we can do to help. This is another area where we and our licensees can quantify the benefits of SPD-SmartGlass.
Moving back to specifics in the automotive industry. The uptick in royalties from the S-Class and the revenue from AGC's business from SPD more than offset the lower total volumes that S-Classes typically produced in later years. So basically, this shows that the take rate of the Magic Sky Control option using our technology is going up and this last year AGC hit some quarterly record sales and number of vehicles using our technology and we are now on 14 different model variants within Mercedes.
Because of the overall weakness in the roadster market where we first started out with the SLK and the SL Roadsters throughout the automotive industry, our focus is on sedans and coupes. And in coupes there's some really important benefit because there you can't open the roof or retract it into the trunk. And our focus is also on the growing electric vehicle and autonomously driven vehicle markets. We believe that this focus will continue to bear excellent results for us in the automotive market, and that our shareholders will see good growth in this market.
Beside automotive there were some other notable developments in other markets this past year. In May our licensee Vision Systems and PPG joined forces to offer SPD-Smart electronically dimmable windows to the aircraft industry. This is a powerful combination that has already resulted in a new aircraft, the Eclipse 700 jet using SPD.
Also, fee income from Textron's King Air as well as the HondaJet is also up this year compared to last year. Revenue from the train market and the marine markets are also up this year as compared to last year. As many of you know SPD technology is not only being used in custom yachts but in high end production yachts as well as the Mercedes Silver Arrow Marine yacht, and the Hatteras yachts. Other major yacht makers are coming on board too.
Our licensees Asahi, Saint-Gobain and Vision systems have been very active in the train market. Asahi won the contracts for the Skihi-Shimi luxury train project to supply SPD windows and this train is fully in service and is quite popular within Japan.
Also, the CEO of our licensee Vision Systems announced a new train project for a different customer in Japan that they just won, it's to supply a large number of SPD-SmartGlass windows for the first and business class sections for a number of special edition bullet trains for the 2020 Tokyo Olympics.
I think also maybe new to people is that there are other being completed now for the North American market as well.
In architecture there have been a number of interesting projects this year including for celebrities, government buildings, homes and offices.
Interest in SPD-SmartGlass expands internationally. So, business is improving nicely and we reduced the expense while growing revenues.
Now let's talk about what to expect as we continue to move forward with our plan.
I received a number of questions about our newest licensee in Israel Gauzy who we licensed this past October. A key strategy for us is to bring cost down and enter into agreements with new licensees and enter into new markets. Gauzy is a Tel Aviv-based based material sciences company. They have a broad license to develop, produce and sell products and components using our SPD smart light control technology. Gauzy is already a leader in making PDLC or Polymer Dispersed Liquid Crystal film. This is mostly used for privacy and image projection. They make an excellent product. SPD technology now allows Gauzy to expand their already growing revenues with a shading product.
Most market experts agree that the shading market on the outside of buildings can be an order of magnitude bigger than the privacy market for interiors which is where PDLC is mostly used in.
Gauzy is a focused and aggressive company and their PDLC technology is used in architectural projects in hotels, buildings and hospitals. They have also established a growing network of over 50 certified glass fabricators worldwide. This brings additional synergies and infrastructure and growth opportunities to both of our company's and because of these companies have already been trained and certified in working with Gauzy's PDLC film product, they should have the ability and experience to quickly incorporate SPD Smart technology which is also a film-based technology with similar handling, lamination and other fabrication characteristics.
Steve Slovak, our CTO, and I recently visited their growing facility in Israel and a number of people from Gauzy, have visited our facility here in Woodbury. We are very actively working together. They have the potential to transform and accelerate the adoption of SPD technology. They are refer to themselves as a start-up but this is just their cultural makeup. They actually employ over 60 people, and since becoming a licensee have hired additional people specifically for their SPD business unit. We believe that our work with Gauzy will benefit the entire SPD industry and help us achieve our stated objectives. I look forward to sharing additional news about Gauzy later this year.
Now I'm now going to turn to some of the emails we received with the questions from investors and we address many of the general topics in our presentation today.
I've been asked for an update on our patent litigation. Companies typically do not comment on litigation outside of the court room. Also in the interest of time and so we can cover other areas relating to our core markets and businesses, for an update on our patent litigation against E-Ink I refer to you to the court docket which is available online.
Now I'm going to turn to some of the other questions that we received from emails.
Chuck Michael's asks: Is Research Frontiers stuck with absorbing the loss from non-payment for the World's Fair smart windows? Basically, the U.S.A. Pavilion filed for bankruptcy protection. They didn’t raise the money that they anticipated and a number of creditors were left with outstanding claims, some much larger than ours. We've filed proof of claims and we expect some, maybe albeit a small, recovery.
In a related question Neil Levin asked, can you quantify the financial benefit from SPD panels exhibited at the 2015 World's Fair.
Neil, over 6 million people saw what it is like to have SPD-SmartGlass over their heads. It was the most visited pavilion in all the World's Fair. We had congressional delegations, the First Lady came with her delegation, architects from the AIA in the United States and similar groups in Europe visited while I was there and I was able to personally lead them through the benefits of SmartGlass. And major architects primarily in Europe and US saw firsthand and had the ability to speak to us about our SmartGlass. These have resulted in more projects for SPD-SmartGlass, especially in the architectural field.
Now [Mr. Berman] asks about Hanamac International. Could you provide an update, its been about a year now and still there is nothing about this aftermarket product and you spent some time on the conference call discussing this as a big opportunity? They are now at the finishing touches of preparing their aftermarket kits for the automotive market. Hanamac has been very innovative in making this not only user-friendly in terms of ease of installation, but also the attention of quality and detail. We been giving them a lot of technical support to help speed them along.
Another question by Mr. Berman. Regarding Panasonic, you said during the third quarter conference call that they would enter the U.S within a few months. Yes, they are in the process of entering the North American market this year.
From McLaren have you been able to confirm that they're using SPD and can you approve a fully announcing it in public. It is SPD, it is being supplied by our licensees and we don’t have permission yet from McLaren to give more disclosure, but it is something that is going to use our technology.
Another question by Mr. Berman. AGP has a product called Varioplus. When watching their video, it would appear the glass is a shade of grey. Are they using SPD or is this liquid crystal? It is SPD and they've done a great job of incorporating this into other types of innovative glass, large pieces of glass, highly bend glass, thin glass, and very innovative systems like a capacitive touch system that was demonstrated at the Consumer Electronics Show, and they are becoming a lot more active.
Jeff Harvey asked: Given the easy adaptability to retrofit existing airplanes, why have major airlines not put this on their agenda when their planes are going for retrofit as they all do at some point in their cycle? Jeff you’re exactly right that every several years planes coming for major maintenance checks where you also upgrade the interiors and this is a logical time to upgrade the planes windows, as well as the entertainment system and other things. And there are actually some developments that are going on with some major airlines.
And Jeff also asked if there are any major revenue markets that you’ve not tapped. The answer is yes, I just can't comment that on publicly, but I think that you will be seeing very soon some nontraditional but potentially high-volume applications by major companies, and they are probably talking with a month or so that that will come out.
Mr. Clair Hutton asked: With Research Frontier stock under a $1, has the NASDAQ or any other exchange requested the stock to be increased above the $1, if so what will you do and what are you contemplating -- when are you contemplating such as move?
Well first, no notice has been received by NASDAQ where we are listed, and if we ever did receive a notice about our listing that's based on stock prices, usually there is a six-month period to come into compliance with the stock price. A lot can happen in six months that is very positive for our company.
In addition, other companies, when faced with a stock price issue, sometimes will do a reverse stock split and if we simply reversed our previous stock dividends then we would clearly be in compliance.
Mr. Evan Klingmann asks: What are the key factors that have resulted in almost no use of SmartGlass in office buildings and luxury apartments in the Mideast, Indonesia, USA, etc.? As I said in my presentation, there actually have been SPD-SmartGlass use in homes, offices and these projects have been focused in the U.S. Middle East and Europe, so I guess I'll disagree with the statement that there has almost been no use of SmartGlass. We basically have about the same number of projects as our competitors in the architectural market, View and Sage. However at least one of them is losing about a $100 million a year to do that. But also, we could do better if we had a wider and cheaper SPD film. Hitachi's coating line is over 10 years old and was commissioned when other SmartGlass films like PDLC were coated at 1-meter width or about 39 inches. The architectural industry ideally needs 60 inches wide film, and we are working on this.
At this point I'd like to ask our operator Rachel to open up the floor for any live questions that anybody on the call might have right now.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ishfaque Faruk with WestPark Capital. Please go ahead.
A couple of quick questions for me. So Joe you mentioned that architectural market was better and you also mentioned Gauzy, do you have a sense for if there's like any sizeable order or consumer adoption for the architectural market for some of your major licenses, not just Gauzy or Asahi?
I think that Gauzy is going to start to be generating revenues for their SPD business, later on this year. I think that we are going to start to see some revenue starts pretty quickly, especially when you consider that they were only licensed in October, and trained in October, November, December and part of January. So, they've been working very hard. As I mentioned earlier they have a lot of resources. They refer themselves as a startup but they really have 60 people that work as a company and hired people especially for the SPD business. So, we are very excited about that and I think that people will see the benefit of that.
In terms of any similar uptick from Asahi or Saint Gobain?
Well, I mentioned that in Asahi's case the take rates, they hit some records this past year in 2017 and regarding the take rates, we've noticed an uptick. We get reports from the licensees but we also get reports from Daimler on how many cars are coming off the production line each day with our technology on it and we've notice that market has firmed-up. And if we continue with our cost reduction, Mercedes said that the revenues could be multiples of what they are right now. So it's a very big effort on our part and something where we are making good progress, and Mercedes is seeing that progress.
And I think the most important thing is Mercedes is seeing that progress in terms of cost reductions across the supply chain and maybe that's why they are turning up the volume a bit because they can see that this is going to be an ever increasing and more profitable item for them.
Okay, so sticking to the cost cutting side of things while you mentioned that you are cutting cost and your burn rate is down to around like $400,000 per quarter. Is that really helpful in terms of driving your top line growth and for…
We've been able to and I do want to distinguish something here, and I think your question is a good one to help me to do that. I want to distinguish between internal cost and cost to the customers. When I refer to increased revenues from companies like Mercedes, that's from reducing the cost of the technology itself, coming up with lower cost to Mercedes to adopt and incorporate this into more and more vehicles. When I talk about internal cost reduction, that's just operational efficiencies. We're trying to achieve cash flow positive and profitability and the two ways you do that are increasing revenues and decreasing expenses. Our revenue this year increased by over 22% and our expenses decreased by over 29% so the combination of the two resulted in a 1.6 million swing in a positive direction. And it's always good to have a highly efficient company. We all work pretty hard but we also try to keep focused and smart in how we work and I think the revenue growth this year is an example of that.
Joe, any updates on the automotive market in terms of adding OEMs etcetera like making public announcements regarding that?
I'm going to actually touch on that in my closing remarks, but I do want to talk about it. I think you will be pleased. In a few minutes you will have the answer.
The next question will come from Thomas McCarthy with Raymond James Financial. Please go ahead.
But let me focus on the internal expense reduction. Congratulations on that first of all. What more do you expect to do in that area? It must be getting pretty darn low.
We’re always working. Two years ago, in 2016, we had reduced cost by $860,000, something which is a fairly large percentage change, and this year the expense reduction was much higher. So I can't promise that next year the cost reduction can be higher than this year but because we did pretty well in 2017. But we’re always trying to be as efficient as possible.
We are a licensing company. That gives us some inherent advantages over the manufacturing competitors that we have, especially View and Sage and they are losing more in a month than we do in many years. But part of that is because our licensees are doing the heavy lifting. They have the manufacturing and marketing teams and large payrolls to pay for those teams. We’re helping to manage those teams but they’re just not our payroll. So, we have this inherent advantage in general being a licensing company and having that as a business model. But also, we really like to run as lean a ship as possible. If you consider the job at hand and the ground we have to cover, we do it fairly efficiently I would say. And we will keep looking for other areas.
An obvious, the point from wanting to run an efficient operation: the better we have in terms of revenue growth and cost reduction, the quicker we will become a profitable company and that’s something that we been working very hard towards.
Sure, I know you have, can you speak to the delay for the second auto OEM which.
I’m going to talk about the second and other automakers in a few minutes in my closing remarks.
The next question will come from Alan Ginsberg, a private Investor. Please go ahead.
Just have one question, when Gauzy starts production, will they be using Hitachi film or their own film?
They have a pretty broad license and I think we have to wait to answer your question on that.
The next question comes from John Nelson a Private Investor. Please go ahead.
One of the things that was missing from the press release with fourth-quarter detail. Can you supply us...
Basically, revenue was up in all of our markets except as I mentioned, there was a slight decrease in aircraft, you will see the quarterly results, when we file our 10-K which is coming up.
Okay great, we’ve recommend in the future that you supply the Q4 details in your press release, it's kind of standard operating procedure.
Usually John we do. We usually file the 10-K right before the conference call so people have that data, and this year we wanted to share the results around the same time that we normally do, so we scheduled the call for today.
Okay and then on the $1.25 million loan in February. Could you supply us with stock conversion price alone and conversion price on the warrants?
I can say that it's around the current market price, and for the conversion and the warrants are at a premium.
The next question will come from Michael Kay with Kay Associates. Please go ahead.
You emphasize the importance of reaching that sweet spot in terms of the cost of SPD film. How much longer did you think you'd have to go until you reach that sweet spot, so that Mercedes and the other OEMs would be very happy?
In my last in-person meeting with Mercedes, they smiled and looked at me and said that they've heard the confirmation from the supply chain that we have hit that sweet spot. Now they're just working to validate it and work that through in their supply contracts.
Do you think that would result into good increases in the integration of SPD and their different models?
Sure, you make it as profitable as other items and you hit that sweet spot and it becomes something that even if you don’t check the box and order the option, you find it on your car anyway, just like aluminum allow wheels.
In the news every day you read about smart this, Alexa and smart that -- smart shopping, any news to report with your partnership with that what the Zuli company in California?
Zuli had changed direction and they're working a lot more closely now with Google but all of the things that Google does with their smart home automation and Zuli, and Amazon's Alexa, all works very well with our stuff.
In the beginning we thought that that was the way to get into those markets faster. Now what we are finding is that all of the major smart home systems have vastly simplified their interface with devices. So, they all work with our stuff, quite well. So, we're not dependent on any one of them.We can work with all of them, and if you come out to Woodberry I'll show you an Alexa operating some of our smart windows, and some other smart devices operating others. It is kind of fun to talk to our windows abd have them react.
The next question comes from Allan Denser with Stifel. Please go ahead.
A question on the financing of 1.25 million in non-interest bonds or is something...?
Not bonds -- yes, it's basically a non-interest loan that converts into equity automatically.
Are you at liberty to say who they are -- the investors, the long-term investors...?
I could give you the -- yes Allan I can give you a general sense. These are long term investors, some I've known since the early 1990s that have been supportive of our company. It was meant to be a very small focused offering and we are very pleased with their participation. These are very long-term supporters of our company.
And I think we would have been pleased if we had heard about it at the time of the offering, I mean a lot of investors are quite concerned about the financial condition of the company, which is what I suppose has driven the stock down to $1.00 and it seems reluctant to want to go higher than that…
Now that the news that we have financing that will carry us even without anticipated revenue increases and further cost reductions and receivable collection. Even without all that we are talking about something that takes us into the fourth quarter of 2019 so.
So why didn’t you make the announcement in February why do you wait until now?
Basically there are couple of things that need to be done including we wanted our the total picture including our balance sheet results and everything to be able to be included in that so that would give people a meaningful information of how long the capital would last. And it was meant to be a very private small select group of people that would participate because general offerings tend to have a life of its own and that's a different type of financing.
The next question comes from Randy [Lambarto] with South Construction. Please go ahead.
You had mentioned earlier you talked a little bit about the possibility as becoming current with NASDAQ and did you say that they could in order to become compliant that one of the options was to do a reverse split is that an option?
I want to be clear about what I said. I said that we have not received any kind of notification from NASDAQ about our stock price. What I also said is usually when a company has a stock price below a $1 and they get a notice they usually have six months to bring themselves into compliance. As I said earlier, a lot can happen with our company in six months that I think is very positive that would make that a non-issue. And then what I said is that what a lot of other companies have done is they've done reverse stock splits, and if we did a reverse stock split just to reverse if you will the stock dividends that we've given to shareholders, we would be in compliance. But we haven't received any kind of notice so it’s not something that we are having any current discussions about.
This concludes our question-and-answer session. I would like to…
Yes, I would like to make a couple of closing remarks now if I could.
It's been a year of hard work. 20-hour days, but it's been a labor of love for all of us.
Our focus has been on developing markets and businesses and our revenues grew over 22% from last year.
Our focus has also been on operational efficiency and our expenses this year went down by 29% or $1.6 million after significant cost reductions in the year before.
Because of revenue growth and cost reductions in each of the past five years our net loss has been lower than the year before.
In the early years, our hard work was focused on getting our SPD-Smart light control technology to work.
Then our hard work was focused on moving it from the lab to commercial scale. And as many of you know who have experience investing in technology-based companies like Research Frontiers, for every company that makes it into the real world, there are thousands of others that never graduate from the lab to the marketplace.
This hard work continued with growing the markets and opening up new markets for our technology.
And now the work continues in expanding these markets, establishing new product areas and reducing the cost of our technology to end-user.
Make no mistake, the hard work continues.
I typically travel 100,000 to 150,000 miles per year for your company. Our other department heads, Michael LaPointe, Seth Van Voorhees and Steve Slovak have also been traveling more and working hard. This call I’m actually conducting immediately after just getting off of a plane from Europe. We try to make ourselves as accessible as possible and appreciate your patience during this time of opportunity, and I appreciate also the fact that I’m doing this from a cell phone and hopefully the connection at least is fairly clear.
Our technology is used by world-class Global 100 companies. Our job now is clear. Expand the market make it good accessible for more and more people in industry to grow revenues.
And we’re not doing that alone, our licensees and their customers are also working hard. The SPD industry has expanded in 2017 with new customers, new uses, larger teams of people devoted to our technology and increased economic activity. Very large electronics companies like Continental Automotive, Panasonic and Texas Instruments and others, have even developed product lines and business units based on our technology. It's not just the glass but the entire system that makes us the smartest glass on the planet.
I was asked about the second OEM for automotive and happy to say that it's not just one. There are now multiple OEMs that have developed vehicles that are coming out using SPD-SmartGlass technology. And with respect to additional business beyond those that I just mentioned, the number of RFQs that we and our licensees are working on, especially in automotive, is quite large.
We will continue to work hard to do this and we look forward to sharing the result of this hard work with you, our investors.
Thank you very much for your support and participating in today's conference call. Thank you.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.