Research Frontiers Inc (REFR) 2011 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to Research Frontiers' third quarter 2011 investor conference call. (Operator Instructions).

This conference is being recorded today. A replay of this conference call will be available for 60 days beginning November 15, 2011 in the Investor section of Research Frontiers' website at www.smartglass.com.

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 filed with the Securities and 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 undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

The Company will be answering many of the questions that were e-mailed in prior to the conference call either in the presentation or as part of the Q&A session at the end. (Operator Instructions). I would now like to turn the conference call over to Mr. Joseph Harary, President and Chief Executive Officer of Research Frontiers. Please go ahead, sir.

Thank you and welcome all to Research Frontiers' conference call to discuss recent developments in the four main industries using our SPD-Smart technology, and also Research Frontiers' financial results for the third quarter ending September 30, 2011. We are pleased that you are taking the time to be with us today, and thank you for your continuing support of Research Frontiers.

Joining me today is our CFO and Vice President of Business Development, Seth Van Voorhees. I also want to thank all the investors who e-mailed in their questions. This is has allowed Seth and I to incorporate some of the recurring questions, primarily ones about our stock price and production questions about the SLK and other vehicles into our presentation. There will also be an opportunity later on in the conference call for participants to ask additional questions. Now I would like to ask Seth to discuss our third quarter financial results.

Thank you, Joe. I would like to start the financial discussion with some comments regarding our business model. As you are aware our revenues are primarily derived from licensing our patented SPD light-control technology to our licensees. These licenses can be generally characterized as those that make end product SPD products and those that make the intermediate products such as SPD emulsion or film, which is then used by the end product licensees.

We collect a royalty between 5% and 15% of SPD end products sold in the marketplace, and not on the intermediate SPD products used to make these end products. Certain minimum annual royalty fees typically referred to as MARs, paid to the Company in the beginning of the calendar year regardless of the sales level result in the recognition of deferred revenue, which is recognized as fee income over the year in the absence of any other royalty generating activity from that licensee. Research Frontiers will recognize additional revenue above these MARs to extent that royalty payments from the SPD sales exceed the MAR fees from these licensees.

Moving on to fee income. As always I will discuss the financial results in approximate terms. For more details please see the financial statements along with the notes thereto.

Fee income increased for the nine ended September 30, 2011 from $425,942 to $492,048. For the three months ended September 30, 2011 fee income increased by approximately 50% from $137,702 to $207,200.

A major factor for the increase in the fee income during both the three month and nine month periods that ended September 30, 2011 was higher product sales in the automotive market from one of our licensees. This licensee sales level exceeded it's minimum annual royalty level under it's license agreement there by resulting in the amount of royalty fee income in excess of the minimum annual royalty being recognized as additional fee income. It is important to highlight that this is the first time that this licensee has exceeded it's annual MAR.

Moving on to operating expenses. This year we expanded our Board of Directors, and also hired new people and expanded our business development staff. As a result of this expansion and higher patent expenses, operating expenses increased for the first nine months of 2011 to $2.741042 million from $2.47649 million for the first nine months of 2010. Operating expenses increased for the three months ended September 30, 2011 to $678,640 from $585,506 for the three months ended September 30, 2010.

Moving on to R&D expenses. Even though our technology is now in mass production we believe that the continued improvement of our SPD technology will expand its use even further. Two main areas of expenditures relating to SPD development are research and development and patent expenses. From an accounting perspective patent costs are immediately expensed and included in our operating expense and not our research and development expenses.

Research and development expenditures remained essentially flat over the first nine months of 2011 and 2010. They were $1.08002 million for the first nine months of 2011 and $1.099693 million for the first nine months of 2010. Research and development expenditures increased to $340,960 for three months ended September 30, from $305,532 for the three months ended September 30, 2010.

Moving to net loss calculations. The Company's net loss was $3.310243 million or approximately $0.18 per common share for the first nine months of 2011, and compared to $3.138810 or $0.18 per common share for the first nine months of 2010. The Company's net loss was $801,840 or $0.04 per common share for the three months ended September 30, 2011 as compared to $749,391 or $0.04 per common share for the three months ended September 30, 2010.

In terms of liquidity and capital resources your Company has remained essentially debt free for the past 25 years. As of September 30, 2011 we had working capital of $4.8 million consisting mostly of cash and CDs. Last year for all of 2010 we used $3.2 million in cash to fund our operation, and this year for the first nine months of the year we used $2.3 million in cash to fund our operations. We feel that we are in good financial condition, and even though we expect higher revenues next year, we may raise additional capital at some point during the year to maintain a conservative financial structure.

Thank you, Seth. In our last investor conference call in February we discussed one of the most important milestones in our Company's history. The introduction of the first serial production vehicle offering our SPD-Smart glass technologies and [on] option. This is of course the Mercedes-Benz SLK roadster with the MAGIC SKY CONTROL roof option.

This was a tipping point for our Company and since then things have accelerated. This past year SPD-Smart technology has been offered for sale at some of industry's most important events. Household names such as Daimler and their Mercedes-Benz line, Audi, Bombardier, and Honda Jet have directly demonstrated their own cars and aircraft with SPD-SmartGlass technology.

In our first two quarterly financial reports this year we had indicated that we had expected sales of the MAGIC SKY CONTROL SPD-SmartGlass Roof to possibly exceed minimum royalty amounts in the fourth quarter of this year. This timing estimate was based upon Mercedes originally scheduled sales estimates and vehicle introduction date. I'm happy to note that as indicated in our most recent quarterly report filed this past Thursday, we achieved the sales level one quarter earlier than expected. We all worked hard and I want to congratulate our licensees, Daimler, Hitachi Chemical, Nippon Sheet Glass and Pilkington for this achievement.

The SLK has one of Mercedes-Benz best selling roadsters since it was introduced in the 1990s. Since the announcement about the SLK offering MAGIC SKY CONTROL, the automotive press reviews have been extremely favorable, nothing short of glowing. Motor trend magazine and Car and Driver have even said that the MAGIC SKY CONTROL feature using our SPD technology is the highlight of the new SLK.

And Mercedes has not been shy about the SLK and this innovative feature. The celebrated it's launch at their 125th anniversary party in late January along with German Chancellor, Angela Merckel, and other VIPs. In early February they gave the world it's first glimpse of the SLK in a fourth quarter Super Bowl ad. Daimler's first ever.

The celebration continues with Research Frontiers ringing the closing buzzer on NASDAQ in mid February with images of the SLK with MAGIC SKY CONTROL displayed hundreds of times larger than life in Times Square. In March, the SLK made its official world debut at the Geneva Auto Show followed by appearances at the New York Auto Show in April. In May, it was awarded Germany's most beautiful car award, and in September, MAGIC SKY CONTROL appeared in additional SLK models launched at the important Frankfurt Auto Show. This month, the SLK received a prestigious golden steering wheel award and the accolades for it continue.

Most importantly, however, the SLK with MAGIC SKY CONTROL is now available for purchase, although you might see more of them in Europe, since historically the SLK predominantly sells in the German market. I even saw them on the road in September when I was there for the Frankfurt Auto Show. Google MAGIC SKY CONTROL and there are now over 1.8 million hits making your Company's SPD-SmartGlass technology the most referenced SmartGlass product on the planet.

One of the nice things about the new Research Frontiers is that when our technology was in development there was sporadic appearances of it around the world at various industry trade shows. Now our licensees are taking the lead and making sustained investments to showcase their SPD-Smart products to the world. This year so far SPD-Smart technology appeared ten times at architectural industry events, 14 times at aircraft events, 12 times at automotive events, and for the first time a few weeks ago at the Fort Lauderdale International Boat Show in the Cheoy Lee Alpha 76 production yacht.

In total trade show activity is up 65% so far this year over the entire last year, with aerospace up roughly 75% and automotive up 140%. While we are excited about the progress being made in the architectural aircraft and marine markets, I will spend more time today on the market that is our bread and butter, the automotive market. I will also help some of you that ask for more guidance on how to model our Company's sales in this important market.

In our conference call in February we gave a royalty per car estimate of between $100 to $150 per vehicle. IHS, which is a leading provider of production forecast for the automotive industry, estimates between about 42,000 to 44,000 SLKs being produced in the coming year.

Since the MAGIC SKY CONTROL SPD-SmartGlass Roof is an option on the SLK our total royalties from next year from this vehicle will depend upon the percent of vehicles that have this feature on it. However, neither Mercedes nor Pilkington, which is our licensee supplying the SPD roof glass to Mercedes would like us to disclose the actual take rates for the vehicle. You're beginning to see, however, the data for this vehicle which is appearing for the first time in our third quarter 2011 royalty numbers that Seth spoke about earlier.

What does the future bring for Research Frontiers and our shareholders? First, it's important to understand that Daimler did not make the substantial investment to develop the MAGIC SKY CONTROL roof feature for just one vehicle. I think it's reasonable to assume that other vehicles within the Daimler model line will also offer this feature. And the automotive press has already begun to speculate on models being introduced as early as 2012 with the MAGIC SKY CONTROL feature. Of course, confirmation from this initially must come from Daimler before we could say anything more about this in more detail.

Second, in addition to extension of the Daimler product line to additional models, and think it's also important to understand that we do not believe that Daimler will be the only auto manufacturer to use SPD-Smart technology. We have licensed approximately 75% of the world's automotive glass producers. These are companies that currently supply the world's auto makers. We and they are currently directly working with a number of different auto makers, and the future looks operate bright, and might I say dimmable as well.

Concept cars can be an important leading indicator of an auto maker's plans for high production vehicles. When Mercedes introduced the idea of the MAGIC SKY CONTROL it did it in a concept car at the Beijing Auto Show in April of 2010. It wasn't until October of 2010 that it revealed that in fact it was putting MAGIC SKY CONTROL on a serial production vehicle, the new SLK.

More recently at the Frankfurt Auto Show in September, Daimler also showed a totally different new concept car. The Viano Vision Pearl. It had a total of eight SPD-Smart panels in it. Three in the roof, but indicating yet another area of the car that SPD-SmartGlass can be used, Mercedes also had four side windows as well as SPD in the rear glass.

Moving now from Mercedes to other OEMs. Another concept car was introduced by another automotive technology leader, Audi, which exhibited their A2 electric vehicle concept at the Frankfurt Auto Show. Besides these auto makers there are others as well, and as you can tell, efforts are accelerating nicely.

Given that neither we nor our licensees will be aisle to disclose specifics before their auto maker customers make their official announcements, how can our shareholders estimate which vehicles might incorporate SPD-SmartGlass, and when will that happen. That's the question we're frequently asked which I'm going to address right now.

There are almost 60 million light vehicles estimated to be produced worldwide in 2011. If you assume that for the initial years SPD will primarily be used on premium vehicles, there are over 2.5 million premium vehicles with MSRPs over $40,000 that are estimated by IHS to be produced this year.

The premium market is also a highly concentrated market with the top five auto makers in this segment accounting for 78% of production, and a very high percentage of these newly produced vehicles have sunroofs. This is a large and concentrated target market for us and our licensees. And the information is out there.

Another important thing to note in terms of timing, a typical car model gets totally redesigned every seven to eight years, and roughly midway through this process there is usually a major refresh of the model. We believe that it is reasonable to assume that OEMs will wait for a model redesign or refresh event to introduce SPD technology, although it can occur sooner. Therefore, given the large number of car models out there in any given calendar year there are many good candidates for SPD being introduced. We and our licensees are very much attuned to this development and introduction cycle.

Recall once again that with the SLK Research Frontiers will get an estimated $100 to $150 per vehicle royalty based on the size of the SPD-SmartGlass Roof. However, this number can be even greater on some vehicles which have either larger roof areas or which use our SPD-SmartGlass on the side and rear glass as was recently demonstrated by Daimler's Viano Vision Pearl concept at the Frankfurt Auto Show, or in parts of the windshield such as the windshield with the built in sun visor.

It's been an exciting year from an operation standpoint. We and our licensees have expanded our resources. Households names have thrown their production and marketing muscle into the mix. Honda Jet, Bombardier, Daimler and Audi are just some of these companies that have publicly announced this year. Others will follow.

We are expanding our outreach to bring the exciting details about Research Frontiers both as a world changing technology and as an investment to a growing number of people. We are on a firm path with a deep and meaningful product and revenue pipeline. Our technology is being introduced in all four major industries that we serve; architectural, aircraft, marine, and of course, automotive. With SPD- Smart technology in the air, on the sea and on the ground, this year we have begun to live up to our tag line, "the view of the future everywhere you look."

Once again, I want to thank those of you that already e-mailed or called in your questions, and we would be happy to answer them and also open up the floor for questions. What I would like to do now is read some of the questions that we received that we will answer.

We received questions from [Bill Burg], [Robert Shoren], [Jared Albert], [Steve Azure] and [Rich Cutter] relating to our disappointing stock price performance this year and what actions we are taking to address this situation. Regarding our stock price, if you told me at the beginning of the year that Daimler, Honda Jet, Bombardier, and Audi would have publicly incorporated our technology into their vehicles; that Mercedes would have published in great detail the extent of testing and development that they put our technology through and its successful passing of those tests and that independent test studies from other parties would be published showing the many environmentally friendly benefits of SPD-Smart technology; and that a car would come out by Mercedes for mass production that is not only hitting people's driveways now, but also that received the most glowing reviews and accolades from the automotive press; and you told me that our stock price was below where we started this year; I would have thought that you were either crazy or that our stock price was being manipulated. More on this in a few minutes.

Regarding insider buying, I strongly believe that insider buying is a clear and desirable signal of confidence in the Company and its future. We strongly encourage our officers, board members and employees to purchase shares in our Company. From time to time there may be regulatory restrictions in place that will limit these opportunities, but ultimately whether to buy stock is a personal decision made by our officers, directors and employees. I will let Seth discuss this now further. Seth.

Thank you, Joe. We have been disappointed by our stock price performance this year. Year-to-date our stock price has declined 34% compared to a decline of approximately 10% for the Russell [Michael] Cap Index during this period. This under performance relative to the Russell Michael Cap Index was especially disappointing given the amount of positive developments that have occurred for the Company during the year, including the Daimler SLK announcement as well as other developments that Joe discussed. As of our last proxy statement, management and insiders owned approximately 15% of the Company's shares, and we understand that at a personal level that this is an important issue.

The best thing that we can do to improve our stock price perform is to successfully execute our business plan and convert the great potential of SPD technology into revenues and profits for our shareholders. We believe that the commercialization of the SLK will make an excellent start to achieving this objective starting with our third quarter report during which one of our automotive licensees exceed their MAR for the first time. As Joe discussed, we see additional opportunities to accelerate this trend with other licensees in the automotive and none automotive markets in the future.

Another factor that we believe impacts our share price performance is our limited daily trading volume. This makes it easier for our stock price to be manipulated. During the three month period ending September 30, 2011, the average trading volume in our stock was approximately 29,223 shares per day.

During 2011 we initiated an outreach campaign to broaden the universe of potential investors in Research Frontiers. As a consequence of this outreach effort we were invited to present at two highly regarded investor conferences, the Cowen and Company Technology Conference in June and the Craig-Hallum Alpha Select Conference in October.

We were pleased to have the opportunity to meet with and discuss the Research Frontiers story with potential new investors at these conferences. We are especially pleased that an analyst as highly regarded as Steve Dyer from Craig-Hallum, who also covers other large automotive companies such as Ford, elected to initiate coverage on Research Frontiers with a buy rating in October.

Seth, Darryl Dagel and others asked similar questions relating to why there's not been insider buying at these low prices if the future is so bright. Seth, you want to address some of that?

Certainly. As discussed in my response to our stock price performance, Research Frontiers' management and other insiders have substantial ownership stakes in the Company. Many times the lack of insider buying can be attributed to various blackout periods that are in effect at the Company.

For example, this year so far Research Frontiers had multiple announcements made in every month other than August. In August we are aware of major product launches at the Frankfurt Auto Show and at other scheduled events. When events like these were pending blackout periods were in force.

In addition when such buying restrictions are not in effect, whether to buy are not is a personal decision by officers, directors and employees. Speaking for myself, I purchased $250,000 in REFR shares earlier this year. Joe.

I got this question from Jared Albert. "Are you committed to not selling the Company just as things get going?" Absolutely committed to building shareholder value. We believe that Research Frontiers is entering an exciting phase in its development of its technology as it's commercialized in a number of markets by a number of licensees, and this effort is accelerating and growing. As a public company our Board Members would evaluate a potential offer and determine whether to accept such an offer if it was in the best interests of the shareholders given these both prospects. But this isn't a decision not only for the Board, but for our shareholders as well. However, my personal view is that our Company is worth far in excess of today's value and we are committed to building shareholder value to reflect our true potential.

Darryl had also asked, "can you share any timetable for additional production cars to have SPD?" A noted earlier in the automotive industry, it's the auto manufacturers and not their suppliers that make such disclosures. A key milestone for our business plan during the next 12 months will be the introduction of our SPD technology on at least one other OEM production platform. This development will demonstrate to our shareholders and customers that SPD is not a, if you will a one trick pony, and we're very excited about the future and expect that the investment community will begin to understand and share this enthusiasm with us.

We also got the question from [Claire Hauten], [Jeff Nickerson] and [Harvey Weiss], similar questions about when will there be broad availability of the 2012 SLK with MAGIC SKY CONTROL in Mercedes-Benz dealerships across the US? As I the noted, the SLK is already on the road in Germany and some dealers here in the US have already received limited supplies of the 2012 SLK with MAGIC SKY CONTROL, but it's predominantly a German sold car. There are other cars within the Daimler line that are predominantly sold here in the US and we expect that those will start to appear here in more force as well. Based on the production volumes we're seeing from Pilkington we certainly expect broader availability during the remaining six weeks of this year and even more in 2012.

We have been asked also, what percentage of the SLK market has been captured so far and where geographically is the greatest demand? Once again, the SLK is predominantly a German sold car so the greatest demand has been coming in Europe, mostly in Germany. And it's too early to know what the take rate is for the MSC option on the 2012 SLK. Mercedes and Pilkington, which have considerable experience in this area, have indicated that even they will not know precisely what the take rate will be until at least the middle of 2012.

Moving to another question we received in the architecture industry. We received a question from [Michael Collins] regarding the architecture market as follows. "It's my understanding that to have SPD technology considered by the major window companies it has to be approved by the National Fenestration Rating Council or NFRC, but the rating can only be given in a completed product including frames, et cetera. Have there been any discussions with the major window manufacturers?" And Jared Alberta, a shareholder, also asked, "what is the outlook for architecture near-term in the next six to 12 months? Seth, is in charge of the architectural market, so I'm going to let Seth answer these questions.

Thank you, Joe. Receiving approval by the National Fenestration Rating Council is not necessary, but would be helpful from a marketing perspective. NFRC's rating system sets forth procedures to determine the energy performance of windows and other fenestration products. In most cases a completed window assembly including a frame, for example, is required to receive an NFRC rating.

This is not a chicken and egg situation. The NFRC doesn't approve windows, but rather sets forth consistent approaches to evaluate them and thus certify their performance through a rating system.

Research Frontiers already has done some independent testing of SPD-SmartGlass IGUs. Since NFRC ratings are product specific, licensees would have to submit their final SPD window products for testing and some of our licensees are currently evaluating such an initiative.

Claire Hauten had asked whether either Boeing or Airbus use our SPD-Smart technology on their aircraft? Right now Airbus currently use SPD-Smart window shades on every Airbus A380 that's been delivered to Qantas Airlines.

Boeing currently uses a different window shade technology, but several of our aircraft licensees are working to change this. And I might add that some of the recent developments with Bombardier, which is a transport category jet, and Honda Jet, which is very well respected in the aircraft industry, has certainly caused the larger transport category aircraft manufacturers to take concrete notice of what's going on. So we and our licensees have been very active in that area.

[John Stroble] asks for an update on production. "What are Hitachi's current production numbers on SPD films? What other companies are producing SPD films, where are these companies located and what are their current and predicted production numbers? And what other companies are planning to build production facilities for SPD film?" I will answer what I can.

Hitachi Chemical so far is the only licensee that is in commercial production of SPD film. It has the world's largest capacity, 4.3 million square feet to produce SPD-SmartGlass film.

In addition to Hitachi Chemicals, companies such as DIC, DuPont, Isoclima and iGlass are also licensed by us to manufacture and sell SPD film. So far the only public announcement from a second source of the SPD film has come from iGlass in Australia, which indicated in 2010 that they have been working directly with customers, including those in the automotive industry, and received an investment of $1.5 million from the government of Victoria to upgrade and modify their existing liquid crystal factory to produce SPD light-control film. This film could be ready as early as next year. As far as other companies, we can't comment on licensees who have not yet publicly announced their film production timetable, but it's very much our goal and strategy to have multiple sources of film for our licensees and their customers.

[James Ashley] had asked, "can you tell us what progress, if any, is being made to reduce the cost to end users, and why is it so expense to make? Is it the materials, time or lamination?"

Some of the materials used to make SPD film are expensive, including the plastic film with the conductive coatings. And we continue to work with our licensees to reduce material and other production costs, and of course their yields go up as well which will reduce their costs. SPD film costs are also likely to decline with higher capacity utilization.

Let me take a moment to maybe give you a little bit more color on that issue as well. For those of us old enough to remember pocket calculators that were three hundred dollars when they first came out and all they did is add, subtract, multiply and divide. And now you get them for under a buck, and you can find them in cereal boxes and kids' watches and all sorts of things.

What typically happens with most technology products, and this is true with almost every technology product that they have looked at since 1900, is as your production experience doubles your value-added costs will decline by about 20%. This is the so-called experience curve. And that's why products you see every day whether they're cell phones, computers, things that are common place nowadays have come down substantially in price. And some of our licensees, especially companies like Hitachi Chemical, are very much in tune to the experience curve. Most of their products are either in the consumer electronics industry or the automotive industry, and these things are fairly common. So there's a very predictable path, Jim, that these technologies will follow as time progresses, and we expect the same to happen with SPD.

Jared Albert had asked, "if you were to hire in the next 12 months what job description would you be hiring for?" Well, Jared, we're beginning to see increased activity in all four major industries; architectural, automotive, aircraft and marine, and these have presented great opportunities for Research Frontiers. Some of these industries are very well served by our licensees and they have growing staff that can accommodate those markets. So we don't need to hire for all four of the industries.

At the same time we do want to accelerate efforts and while much of the production sales and marketing efforts are done using resources by our licensees, we also plan on hiring additional people in this area. Also in the advertising area, you can see advertising campaigns by Daimler and Pilkington for example, and the people and factory resources that our licensees and their customers have devoted is growing. So if we're going to hire additional people, it would be to leverage these opportunities, and also to continue to help our licensees in all areas of their business.

So basically we're looking to hire bright, hard-working, results oriented and innovative people. And we have added some this year, and if you know of anyone who want to join our team, I would be delighted to hear from you. I think if I could maybe get a message to the operator that time permitting we would like to open the floor up to other questions from the floor.

And at this time we'll begin the audio question-and-answer session. (Operator Instructions). Our first question comes from Steve Dyer from Craig-Hallum. Please go ahead with your question.

Thank you. Good afternoon, guys.

Good afternoon, Steve.

The e-mailed questions were obviously, many of them were very good, very thorough, so a lot of mine have been answered. And I know you can't give an exact take rate, but would you say sort of very early days of the SLK -- as a take rate the info that your licensees are getting is, it meeting your expectations going in, is it better, worse how would you describe it?

Steve, I'm happy to say that the take rate is certainly met the expectations of, and in some cases maybe even exceeded the expectations, of Daimler and Pilkington who are involved with that project. Like I said earlier, it's too early to tell what the exact take rates will be, and in the initial introduction of any product companies like Mercedes want to make sure they have plenty of product on hand to satisfy demand.

They told me the story once of another option that where the supplier couldn't meet the actual demand which was underestimated internally, and people stopped buying the car all together until they were able to get this option on the car. So once bitten, twice shy. Mercedes said that they would never, ever be in a situation again where suppliers wouldn't be able to meet anticipated volumes.

And if you look at the deep bench that we have between Hitachi, Nippon Sheet Glass and Pilkington, I think we have a very strong supply chain for the SLK. And I think anything that customers want they will be able to get.

Okay. And as far as you know the projected production of this vehicle seems to be on pace with what you have been told, kind of the low 40,000s?

Yes. The total reduction pace for the SLK has been confirmed to us as recently as last week as being on the same numbers as the IHS numbers which are in the 40,000 to 44,000 unit a year range. And as you could probably gather from things happening in the third quarter versus the fourth quarter, things are going nicely there.

So given that you guys recognize revenue a quarter in arrears, in a situation like this would you expect Q4 as the first quarter where we see, I don't want too say a hockey stick, but the first material revenue above the minimums, a number that's notably better than most of the others here that we have seen?

Steve, this is Seth Van Voorhees. We are actually not trailing our reporting results. We in the third quarter we were able to capture the results from all our licensees in terms of their economic activity and captured that into our third quarter report. So in the fourth quarter our 10-K will be reporting for the full fiscal year for activity during that period.

If I do maybe also expand a little bit, as we noted in my presentation, we do expect additional vehicles in 2012. So I think you will start to see a ramp-up in not only the SLK production numbers, but also as these new vehicles are ready to be introduced, also that glass working into our royalty mix as well. So we're quite excited about things.

Would you expect we could see an announcement of the second vehicle yet this year, or is that a 2012 occurrence?

Steve, I'm somewhat restricted by what I can say. We certainly have some pretty good idea as to when things are going to happen and we're looking forward to a good year coming up.

Okay. Understand. And then last question and I'll hop back in the queue. When would you expect will be the first time that you will have another licensee exceed the minimum annual royalty? I mean does that happen next year? How do you look at that?

I think it really depends -- well, the most predictable market for us, Steve, is automotive. And whether new business is awarded to other licensees or whether more business is awarded to Pilkington would be a large factor in answering that question, so I'm going to have to defer on that until Daimler and the other auto makers that we have been working with announce who's supplying them with their SPD glass.

Okay. Very well. Thanks, guys.

Thank you.

Thank you.

And our next question comes from Joe Kennedy from Wells Fargo.

Hey Joe.

Yes. Good afternoon. My question is the royalty amount that you received similar on the marine use side on the SPD-SmartGlass from Diamond Sea Glaze, is it similar to the royalties on the automotive side?

Joe.

Similar percentage?

Some markets like aircraft and marine we get a 15% royalty, and right now across-the-board in automotive we're getting a 10% royalty.

Okay. I mean I can see a lot more like this Cheoy Lee yacht, I can see a lot more windows being used for this type of situation, so I can see where it would be a big deal. But I am very excited about the automotive also.

Right. Right. Well, all these markets that we're beginning to penetrate are really nice markets and they're great marketing tools as well because these markets tends to be very highly visible, and in some cases dominated by marketing giants like Mercedes that certainly help us.

Very good. Thank you very much.

Thank you.

Our next question comes from Thomas McCarthy from Raymond James Financial. Please go ahead with your question.

Hi there.

Hi.

What can you tell us about Isoclima, as a filmmaker haven't they been demonstrating their film at trade shows and so forth? And then I have another question.

Sure. Tom, Isoclima has become more active this year. They certainly are continuing the development work that they have on SPD film, and you will see them appearing more and more on various projects. So they're beginning to hit their stride on that, but we can't say anything more about their timetable until they do.

Okay. Question number two. You often talk about the automobile sector, airplanes, yachts, architectural. What can you say about the feasibility of trains, light rail, ocean liners; and is there any activity in that regard?

Yes. Actually you will see -- and that's a great question, and I apologize for not addressing some of the sub segments of the transport category market. If you look at Vision Systems, they are a world leader in transit vehicles. In October they actually had a bus that was done by a company called SAFRA SAS in France which had enormous SPD panels throughout the roof of the bus. And if you think about where the trends are going in public transit, they're going to hybrids and electric vehicles. While what Audi did with the A2 concept car is certainly a reason why you would use SPD-Smart technology in an electric vehicle because you can have more of your power go towards the driving range, and less towards cooling the vehicle because as Mercedes data indicates, you can block about 95% of the heat with SPD-SmartGlass.

In the transit market you have even more glass and it becomes even more of an issue. And as they move more towards electric and hybrid vehicles, use of SPD-SmartGlass becomes more and more important. So the public transit market, whether it's trains or buses, is certainly an important market and Vision Systems has been highly active in those areas.

If you have a chance you should visit the Vision Systems website. They have some beautiful pictures of the bus that they did for SAFRA, and they really are very excited about that. They just continuously are appearing at various events around the world for that.

Another market which is similar to that is the leisure and recreational vehicle market. This can range from RVs that you see on the road, to motor homes, to custom trailers that look like they're luxury homes. So quite a large number of opportunities there as well.

Anything to say about ocean liners?

Ocean liners just like yachts are very important because if you think about your home, your home probably has one side that probably gets a lot of sun, and that's the one you really want to concentrate your shading strategies on. On an ocean liner or a yacht the boat is constantly moving in many different directions, and also the glare is compounded because it's reflecting off the water. So you have even a more exacerbated problem of heat, light and glare on an ocean liner on a yacht than you would in your home.

So it's a very important market, and on ocean liners especially and yachts you're trying to preserve views. One of the things that happened with the Cheoy Lee yacht, for example, is we met with the yacht designer, the interior designer. And the key to him above everything else, was he didn't want it put shades or blinds in that yacht. It just totally would ruin the interior design and the lines of the inside cabin. And also they rattle and shake and they need a lot of maintenance and they need dusting. And instead of that having sleek SPD glass was all he really needed to do.

And on our website you will start to see more and more images and videos of exactly that application and others. So it's definitely a prime market for that. As both get built, of course, they can incorporate SmartGlass, but we also have retrofit solutions as well.

Thank you.

Thanks a lot, Tom.

And our next question comes from David DeWitt from DeWitt Capital Management. Please go ahead with your question.

Hi, David.

Mr. DeWitt, is it possible your phone is on mute?

Oh, is it better now?

Yes.

Oh, sorry about that. It was on mute. Anyways, it's great to see the revenue line starting to move from the result of one of your automobile manufacturers. My question is how is the high-end of the automobile market holding up in these uncertain economic times?

It's holding up very well. One of the nice things about all of the markets that we're in is that the premium markets tend to be a little bit more recession resistance than the other markets. And if you look at for example the last couple of years when the general automobile market really hit the skids big time and suppliers were filing for bankruptcy and OEMs were running to their governments for money, Daimler for example, had very strong positive results and other licensees as well had strong results. So it tends to prove the point that the premium market tends to be a good market, especially in uncertain economic times.

And one follow-up question. Hitachi's capacity is 4.3 million square feet.

Right.

I thought I heard that their target to get to that level was 2012. I don't know from your comment if you had put that into any kind of perspective, and I may have missed it.

Well, the 2012 sales target for them is not 4.3 million square feet. They didn't disclose what capacity utilization rate they were targeting for that. When they made that prediction, which I believe was in 2009 or 2010, a large part of that relied on the very important automotive market. So like I said things are going well there, and we'll see what happens in terms of their production numbers, and we get a royalty by the way based on a multiple of that number.

Right.

Because it's the film that gets incorporated into an end product that gets sold to the customer, and it's also that number that we get a 10% to 15% royalty.

David, if I could just add a little more color. The 4.2 million square feet if you think of an average -- obviously, our SPD film can be used in a number of different applications, not just automotive. But if you were just to translate that into an automotive product, a typical sunroof is about five to ten square feet per unit. So at 4.2 million square feet of capacity you're talking about something in the neighborhood of 400,000 to 800,000 sunroofs if that's what the entire capacity was used for. The SLK production volume as Joe has indicated, is probably on the order of 42,000 to 44,000 units if we got 100% take rate. So it would just be a fraction of what's Hitachi's capacity.

Okay. Thank you.

Thank you.

(Operator Instructions). And in showing no additional questions this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Harary for any closing remarks.

Once again, I want to thank you our shareholders for their participation today and also for sending their questions in advance. We're available not just on conference calls, but any time to answer questions that we can about things. We are very excited about the future and this last quarterly report I think shows a glimpse of what can happen when things start to take off, and I'm glad that we've had the support of our shareholders as we reach this milestone and we look forward to sharing many other milestones with everyone as they occur.

Your conference is now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.