Research Frontiers Incorporated

Good afternoon, ladies and gentlemen. Welcome to Research Frontier's investor conference call to discuss the first quarter of 2024 results of operations 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 by pressing star then the number one. This conference is being recorded today. A replay of this conference call will be available starting later today in the Investors section of Research Frontier's 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, forecast, 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. If you find that your question has been substantially answered as a courtesy, and to allow time for other shareholders to ask their questions, please remove yourself from the queue by pressing star and the number one. Also, we ask that you keep your questions brief in the interest of time. I would now like to turn the conference over to Joe Harari, President and Chief Executive Officer of Research Frontiers. Please go ahead, sir.

Thanks, Morgan, and welcome to the team. And hello, everyone, and welcome to our investor conference call to discuss the first quarter of 2024. Just nine weeks since our last call, we've already witnessed significant developments and progress, which I'm eager to share with you today. And in the interest of time and covering as much ground as possible, I've taken a number of the questions that we've received by email and have incorporated them into my presentation today. We'll start with the numbers. I'm pleased to report that Research Frontier has continued its revenue growth momentum in the first quarter of 2024. Our royalty revenues in Q1 2024 were up over 26% from the same quarter last year to $313,378, driven by robust double-digit percentage gains in our two largest markets, automotive and aircraft. This revenue growth is on top of strong revenue growth from 2023. Fee income during 2023 increased by 69% over 2022. And overall revenue last year was up 109% from the prior year. All of these increases in fee income were primarily the result of higher royalties from the automotive market. And this past quarter, we also had increases in the aircraft royalties. The first quarter of 2023 actually marked the beginning of five consecutive quarters so far. of revenue growth from the prior year. Looking ahead, although we're not even halfway through the second quarter, we already expect higher royalty income in the second quarter. In fact, we also expect higher royalties primarily in automotive in the third quarter and beyond. This is based upon revenues already booked and expected revenues yet to be reported. How do we know this? Remember, our main market, automotive, is more predictable than our other markets. And as a former Federal Reserve economist, I always look for leading indicators of future activity. Our best leading indicator of our future royalty revenues is our present SPD film sales. We expect our growth this year will come from growth in our existing markets and from new product introductions. We continue to be debt-free and are in strong financial shape. As of March 31st, 2024, the company had cash and cash equivalents of approximately 2.1 million and working capital of 2.7 million and no debt. Our cash burn rate is approximately $200,000 to $250,000 per quarter. However, based upon projected revenue growth, I still do not think we'll need to raise additional capital in the foreseeable future unless there's a strategic reason to do so. So let's talk about other exciting things happening this year. At CES this past January, in addition to the automotive sunroofs, side windows, sun visors built into the front windshield, and other SPD smart glass products, there was a potentially high unit volume specialty vehicle for the construction industry. It had an augmented reality windshield that was made possible because of the combination of SPD film from Gauzy and the transparent OLED technology by LG Group. It was extremely well done. You could see the vibrancy that happened with the augmented reality display by using SPD film in the windshield. This product got a lot of attention in general, and it even made the show newsletter as the What's Hot at CES product on day two of the show. New uses for SPD smart glass such as this and dynamic headlights and heads-up displays are quite exciting. Growth in the traditional areas such as sunroofs and windows is also exciting. and to some extent much more predictable. We are also very excited about the successful movement forward through the development process of another car in Asia. That project is very much on track, and as I noted in our last conference call, was going through its final development stages prior to launch. What's particularly exciting for all of us, and also for the automotive industry in general, is that the cost to manufacture of our technology has come down so much as to make it feasible for inclusion in a relatively moderately priced vehicle. And that, of course, bodes well for the SPD Smart technology being incorporated in much higher volumes across middle market cars throughout the world. Let's now talk about the architectural smart glass market. One thing that we're all looking forward to is the launch of the retrofit application that I had discussed in some detail on our last conference call in March. Gauzy and another licensee of ours are each exhibiting at the AIA Architectural Glass Conference in Washington, D.C. in early June. This conference is important in the architectural world because it is sponsored by the AIA, the American Institute of Architects, and it's also being held in the heart of the federal government in Washington, D.C. The federal GSA is the largest customer in the world for many things, including energy-efficient glass, and recent mandates and programs to upgrade government buildings for energy efficiency and security are very positive drivers for our business. Apart from the public sector, the Dynamic Glass Act gives substantial 30% to 50% tax credits to private individuals and businesses for adopting smart glass. This has a dramatic impact on the economics to encourage adoption of smart glass in all types of buildings and homes. And we've seen similar benefits from regulation cause the robust adoption of energy-efficient glass, starting with low-E glass in the 1970s, which had some initial trouble getting off the ground until government regulation made it a no-brainer. Now, a substantial part of all new glass installation is low-e glass. It's pretty much a cost-effective and standard feature in all new construction or window replacement. The volumes that can occur from this typically have the effect of driving down the price of new technologies, assuming that inherent in those technologies are cost reductions with volume. If you read some of the technical analysis of electrochromic companies, they all promise substantial cost reductions, if only. If only they could have a bigger factory. If only they could invest in new equipment. If only, if only, if only. All of these companies over the many decades that have tried have not begun to see these economies of scale and production efficiencies. We have. Let me highlight how we were able to achieve these things. One of the strategies early on at Research Frontiers was to focus on businesses with predictable volumes that could support substantial usage of spd film everything else in our supply chain is basically already mass produced whether it be the glass or the interlayers or the edge seals or the aluminum framing or the electronics so the missing element in cost reduction could we get the cost of down for the spd film we did this came focusing on markets such as automotive with very predictable volumes and large usage in terms of surface area of SPD film that allowed all of our licensees to plan, to build, and to supply their customers. Over time, as you would imagine, they got better and better at this, and the customers became more and more comfortable. Another early strategy was to focus on our launch customer, Mercedes. Their reputation for quality assurance and innovation and reliability was respected and followed quickly not only in the automotive industry, but also in the aircraft industry, the design industry, and many other places. Our job was to make Mercedes happy, and we did. There still has not been one reported problem with our SPD's smart glass since its introduction by Mercedes in 2011 in the first SLK Roadster. Since then, tens of thousands of cars are on the road with our glass, some for over a dozen years. Once introduction by Mercedes was announced, we saw an uptick in aircraft industry interest, which is part of the follow-on strategy, and also automakers following Mercedes' lead and also adopting SPD's smart glass. McLaren has very, very high take rates. Ferrari also has very, very high take rates. We saw McLaren migrate from one initial relatively low-volume model to many more models. There is talk of the same thing happening at Ferrari. We also have Cadillac with their Celestic flagship, which is just starting production now. I look forward to SPD Smart Glass following a similar migration pattern within General Motors. And, of course, we have other car makers that have not yet announced that should have the same results, that is, where it starts in one car model and quickly migrates to other models within that automaker. Another nice thing about our business in automotive is that they tend to be very long-term contracts. the same in aircraft. Once you're specced in, you're in for years. And of course, that's assuming you have a good product. We do. With the background and context of Gauzy's pending IPO, growing revenues in the automotive and aircraft industry this past quarter, and with the new markets such as augmented reality, windshields, and other displays, as well as nontraditional uses besides sunroofs and vehicles, and homes, and in retail environments and other buildings, and the introduction of retrofit solutions, I'd like to now open the conference call up to questions. First, I'll read and answer some of the questions we received by email, and I encourage people to email in their questions before each conference call so we can tailor our presentation to cover the most ground for the benefit of all shareholders. Here are some of the additional questions that were emailed to us, and in some cases, I'm going to be combining several related questions into one. During only the past two months since our last conference call in March, some fairly substantial developments in the smart glass industry. Our largest competitor Vue filed for bankruptcy, and they were also delisted from trading on NASDAQ. I will hardly spend any time on them. This was probably not a surprise to anyone who has listened to our calls over the last couple of years. as they have had substantial cash burn problems and limited access to new capital. Another public competitor, after years of promises of imminent production, has not produced even their first commercial switchable tin product and is resorting to digging ditches and laying cable to pay their bills. These developments in companies are, in my opinion, insignificant. There is another, much more positive development for us in our industry. This is something we got a lot of questions about. Our SPD film producing licensee, Gauzy, filed for their initial public offering. Many people have carefully reviewed their F-1 registration statement, which gives a lot more detail to many of the things we've been talking about on these conference calls over the past 18 to 24 months. To answer another shareholder question that I received, we believe that Gauzy's IPO filing will greatly benefit our SPD smart glass industry and RFI and our shareholders. And our shareholders, incidentally, includes Gauzy as their strategic investor in us. First, you should know that an IPO is something that I've been encouraging Gauzy to do since we first met. To do the smart glass industry correctly, if you're a manufacturer or a marketer, and Gauzy is both, You need production capacity, factories, people, and a diverse geographic footprint to cover the world and the industries that SPD Smart Glass serves. They do a great job with this. This takes financial resources, and they also have great access to capital. I'm told that one of their directors, a good and successful businessman who I've had lunch with, recently committed $60 million of his personal funds to Gauzy. A strong Gauzy is good for our industry, and it is good for research frontiers. You can see that Gauzy has deployed their resources to substantially grow their businesses around SPD, have hired people around the world to manage and implement the various projects they have for SPD, have built factories, have expanded production capacity, and have large marketing and business development teams throughout the world. There is also a unique openness and candor in our relationship that allows us to collaborate well in all of these areas. You are seeing a company that has grown from 55 people when Yalpeso and I first met to more than 600 people worldwide, and they are growing in all areas. I have not encountered after this growth an area of the world where our two companies cannot arrange an in-person meeting or product demonstration with a customer, no matter where that customer is. Having a diversified and local presence is a key to winning the business because it allows for a much more thorough education of the customer as to the benefits of SPD's smart glass. Matter of fact, in about two hours, we're having a meeting with a customer in Southeast Asia. And with the data and education, there's just no comparison. In terms of performance, proven reliability, And now we're also beginning to see price. And if you want to invest in the top two companies in the smart glass industry, you would invest in research frontiers and you'd invest in calcium. Also, I think for the first time, actually, you're beginning to see how a vertically integrated company in the smart glass industry implements best practices and a focused and sensible business approach. We have had positive gross margins in our industry consistently. Not having this and trying to, quote, buy market share has really hurt our competitors. View, and now we see the end results with the bankruptcy, is but one example. Gauzy's IPO also creates better transparency in the industry because now there are two public companies focused on SPD and more disclosure of our collective activities. This should give everyone on our call a better insight and more details into your investment and research frontiers. We also believe that the market valuation that Gauzy is expected to go public at, along with the fact that they are a sensibly and well-run company, and they strategically deploy their resources to achieve results, will better demonstrate the value of SPD smart glass in the world economy. So that answers the comments I've had about asking me to reflect on Gauzy's IPO. And Eyal Peso and his entire team are working quite hard on the IPO and roadshows relating to it. And I hope after things settle down for them and they're out of their quiet period, we can have Eyal join us on a future call. I received a related shareholder question about the SEC filing process. Since Gauzy had originally filed their F1 registration statements on a confidential basis, these registration statements only became publicly available to all of us in April. After which, Jared, another shareholder, asked me, are there any non-obvious parts of the F1 that you would like to point REFR shareholders' attention to? Well, these are great questions all around. And with Gauzy's initial public offering in the process, you can go back and see how the registration statement has evolved over time. And many of the things you see reflected in the registration statement are things we've touched upon in past conference calls. And if you think about it, it's obvious there is such a very strong correlation between their business activities and ours. Their business is basically built on ours. This is not a surprise to us because we work very closely with them on a daily or weekly basis on various projects throughout the world. Sharing information and ideas and business development opportunities makes both of our companies much stronger. Also, please keep in mind that as a public company, most of the detailed communications with shareholders occurs in our quarterly reports and our quarterly conference calls. You're now going to see the same thing happen with Gauzy as they emerge as a public company. There will be a lot more good and meaningful information to digest, and I believe you'll really like what you see from both of our companies. Gauzy and Research Frontiers are both well-diversified and well-managed companies. Gauzy is diversified across two types of smart class, PDLC for privacy and SPD for everything else. They even combine the two as well as give the benefits of both security to customers. Gauzy also has other business units, such as Safety Tech, with various driver assistance technologies. Sometimes these are quite separate offerings, but also only takes a little imagination to figure out that they're synergistic and complementary to each other. For example, the ability to detect things happening outside the vehicle from the Safety Tech division products can be fed to make the glass even smarter inside the vehicle. Also, there's synergistic relationships because the customers for both are often the same. Here are some more questions that were emailed to us. Alan Yubikoff, Yakuboff, sorry. At which revenue run rate would the company be EPS profitable, and what would be your best guess estimate when that could be achieved? Well, Alan, with stable to lower expenses, yes. and now entering our fifth consecutive quarterly growth on a year-over-year basis, we're well on our way and can be quite close to becoming cash flow positive and profitable. Jared Albert, how concerned should research frontier shareholders be that Gauzy's SPD Black development leads to a product not subject to RAF4E royalty contracts? Well, I think Jared is picking up on something in the F1 where they mentioned their SPD Black program, where they're trying to develop a black or color-neutral particle. And first, understand that both of our companies are working on a black or color-neutral particle. And of course, we're going to share what we develop with Gauzy because we want them to put it into a film. It's not necessary for our success, but would, in my opinion, greatly expand the potential for some markets outside of sunroofs. Now, to directly answer your question about... about whether we should be concerned. Our license agreements, including the one with Gauzy, are set up to prevent workarounds of our IP without us getting paid. Also, as the Florida Federal Court and the GGT litigation confirmed, we also actually get the IP of our licensees if their license agreements expire or terminate. David asks, would you provide an update during Thursday's call on the current status of REFR's poison pill? David's referring to the rights plan, which was readopted and extended in December 22 until February 11, 2033. So we have plenty of time on that. And it's triggered if any unwanted hostile takeover is started by someone acquiring 15% or more of our stock. Everyone should understand, though, that under Delaware law, our directors have a fiduciary duty to redeem the poison pill if our shareholders are offered fair value for their shares. So it is meant to prevent abusive tactics in takeovers that are often used to pressure shareholders, but it's not designed to totally prevent a takeover. Jay Moskovitz asks, RFI's competitors have all focused on the architectural market. Architectural glass is perhaps 70% of the market, whereas automotive glass is around 30%. What are the major licensees doing to have a showcased architectural project to show against all of the existing competitors' smart glass projects? Well, thanks, Shane. They're working on commercial and government projects in this area, and we touched on some of this earlier today and on prior conference calls. I think the main difference between what we are doing, we and our licensees are doing, is that all the projects that we're working on have positive gross margins. We're all in business to make money and not just buy market share. Jay's other question, does Gauzy have a control system that is capable of operating a large commercial building or a skyscraper of SPD windows, or are they thinking of employing a Lutron or GE lighting control system to operate such buildings, as was done in Milan, Italy in 2015 at the World's Fair? Thanks, Jay. Electronics is something you know something quite a bit about. Yes, all of our licensees have access to the extensive IP in this area. Also, I point out that Gauzy itself not only makes smart film, but also the electronics to control it. In fact, the founders of Gauzy came out of one of Israel's leading telecom companies, and Gauzy first started as a company asked to make electronics for the PDLC smart glass industry. So their roots are in the electronics. Chuck, I think I've answered your questions, but if not, feel free to email me, especially if you need more detail. I answered Steve's question about, do we expect Gauzy going public to be beneficial to REFR? And if so, what are the positives? Steve's other question, also the annual shareholders meeting in June, will this be an attending event? And if not, why? Well, shareholders are welcome to attend. These meetings are now mostly administrative corporate housekeeping. In the past, we used to have one big report on operations or annual meetings. Now we have moved these detailed reports to be more frequent, four times per year instead of just once. Of course, as a long-term shareholder, you're welcome to attend. It will be at 11 a.m. on June 13th here at our corporate headquarters in Woodbury, Long Island. But if last year is any guide, it would be simply administrative housekeeping. reelection of directors, ratification of accountants, et cetera. John Nelson writes, hope all the gals here are well and safe. They are, John, and thanks for asking. Both of our companies really appreciate the question. His next question, any significant changes in the competitive landscape for SPD products? Well, yes. We are stronger and stronger and stronger as we move forward. Costs are coming down, performance is moving up, and new uses are being developed for our technology. On the competition side, there continues to be a lot of wannabes, as SPD has really become a badge of honor. There have been companies trying to use either decades-old versions of the technology that are off-patent, and those have high HAVES levels and limited ranges of light transmission variability, and some are even calling things SPD that are not SPD. I don't worry about these wannabes because the customer usually will discover the difference. Some even put SPD on their website with no ability to sell it just to attract customers or give them the impression about having cutting edge technology. John's other question, what are the implications of Gauzy buying Resinax, formerly Hitachi Chemicals, full SPD intellectual property portfolio and anything related to manufacturing facilities and capacity potential for SPD film production? Without going into the details, John, these are somewhat related questions. And this was a substantial multimillion-dollar investment by Gauzy, which we encouraged them, really, for the good of the industry and our licensees and their customers to make that investment. It is up to Gauzy to discuss and disclose more details of their deal, but it is mentioned in their F-1 registration statement. John's other question, any progress on black SPD program that you can discuss? Well, RFI has made tremendous progress here and is a sustained and focused development effort. And this has been the holy grail for decades in our industry, and I think we're going to achieve it. Okay. Well, we've discussed a lot of exciting topics so far today, and I'll now ask our operator, Morgan, to open up the conference to additional questions. questions people participating today might have that we've not already covered. Our largest shareholders, though, several of them suggested that we also try to keep our conference calls shorter, so I ask your assistance with this. If your question was substantially answered on this call or can be answered by direct e-mail or a call, please feel free to e-mail or call us. And many of you have done this in the past, and we've had a very productive conversation as a result. And remember, please keep your questions short and focused and try to limit them to matters of general shareholder interest, specific questions such as, you know, is SPD Smart Glass available in, you know, Cleveland, Ohio? You know, you could do that by email. Anyway, let's open up the call for questions.

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