Research Frontiers Inc (REFR) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Research Frontiers 2011 Year-End Investor Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, March 15, 2012. A replay of this conference will also be available for 60 days beginning March 16, 2012, in the Investors section of Research Frontiers' website at www.smartglass.com.

Please note that some of the comments made today may contain forward-looking information. Those 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 provision that are part of the Securities Litigation Reform Act of 1995.

These statements reflect the Company's current belief, 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 e-mailed to it prior to this conference call, either in the presentation, or as part of the Q&A session at the end.

(Operator Instructions)

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

Thank you, Sylvie. Welcome to Research Frontiers' Conference Call to discuss recent developments in the four main industries using our SPD-Smart technology, and Mercedes-Benz launch last week of the special limited edition Viano Pearl luxury van, which features our SPD-SmartGlass technology as standard equipment, and also to discuss Research Frontiers' financial results for fiscal year 2011.

We're pleased that you're 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 of the investors who e-mailed in their questions. We have tried to answer them in the body of our presentation, and to the extent that we haven't, or there are additional questions, there will be also an opportunity later on in the conference call for participants to ask additional questions.

2011 was a milestone year for your Company in many important respects. It was also a year of growth, growth in terms of adding people, both internally and externally; growth in terms of licensee resources, including much larger licensees getting involved with various aspects of the SPD industry. There was growth in customer resources, and growth in the adoption, use, and visibility of our SPD-SmartGlass technology.

Many of the initiatives that we and our licensees started implementing in prior years have begun to bear fruit, and we are successfully achieving our objectives. We will get into the details of this and what is happening in each of our markets a little later on in this call.

Now, I'd like to ask Seth to discuss our financial results for the year.

Thank you, Joe. Good afternoon, everyone, and thank you for joining us on this call.

I would first like to share some thoughts regarding our financial goals, and then provide some color on our financial performance in the fourth quarter of fiscal year 2011, and for the full year. Research Frontiers is a Company undergoing an exciting transition. In fiscal year 2011, we made significant progress in completing the first phase of this financial transformation. Historically, our Company could be classified as a pre-revenue entity, with modest revenues generated by the economic activity of our licensees. However, in fiscal year 2011, we are starting to generate meaningful revenues from the economic activity of our licensees. However, this transition is in its earliest stages.

The second phase of our financial development will be to accelerate the revenues generated from the economic activity of our licensees so that we are no longer reporting operating losses. Based on fiscal year 2011 operating expenses, we would need to report approximately $5 million in fee income to achieve this break-even goal.

The third phase of our financial development will be to accelerate the revenues generated from the economic activity of our licensees so that we're generating profits and positive free cash flow. We believe that given the size of the potential market opportunity and strength of SPD technology, achieving our key financial milestones is possible. While we're not in a position to provide guidance as to when or if these results may be achieved, we've made excellent progress in fiscal year 2011, and are working hard to achieve these goals as quickly as possible.

Moving on to fiscal year 2011 financial results. As always, I'll discuss the financial results in approximate terms. For more details, please see the financial statements, along with the notes thereto. For the full year, fee income increased by 10.2% between fiscal year 2010 and 2011, from $767,522 to $845,982. For the three months ended December 31, 2011, fee income increased by approximately 70.8%, from $207,200 to $353,934. This was after the 47.6% increase in fee income between the second quarter and third quarter in fiscal year 2011.

While these percentage increases are off a very small revenue base, the trends are very encouraging. When you back out one-time or non-recurring license fees in fiscal year 2010, almost all the revenue growth this past year came from earned royalties from product sales in the automotive market.

A major factor for the increase in fee income during both the three-month and 12-month periods was higher product sales in the automotive market from one of our licensees, starting in the third quarter of fiscal year 2011. This licensee's sales level exceeded its minimum annual royalty level under its license agreement, thereby resulting in the amount in excess of the minimum annual royalty being recognized as additional fee income.

Operating expenses increased by 11.2% between 2010 and 2011, from $3,253,250 to $3,618,635. This increase was principally the result of increased payroll and related costs of $235,000, as well as higher director fees and expenses of $70,000, and higher insurance costs of $48,000. Differences in the amounts of director fees are the results of the addition of two new directors in 2011. We also added additional personnel in 2011, and have already or expect to hire additional people, either as employees or independent contractors and consultants this year.

Moving on to R&D expenses. Even though our technology is now in mass production, we believe that continued improvement in 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. We spent more on patents this year, and are increasing our activity in this area. Research and development expenditures were $1,390,689 and $1,404,654 in fiscal year 2011 and fiscal year 2010, respectively. This level of expenditures is approximately 30% of our total.

In terms of investment income and ultimately net income, investment income in 2011 was $29,274, as compared to $15,517 in fiscal year 2010. This difference was due to higher cash balances available for investment, which was invested in certificates of deposits bearing somewhat higher interest rates. Our net loss for 2011 was $4,134,068 or $0.22 a share, as compared to a loss of $3,874,865, or $0.22 a share, in fiscal year 2010.

Your Company has remained debt-free for the past 25 years. As of December 31, 2011, we have approximately $3.7 million of cash, cash equivalents, and short-term investments. In fiscal year 2011, we used approximately $3.4 million in cash to fund our operations, in comparison to $3.2 million in cash for fiscal year 2010.

We feel that we're in good financial condition, and even though we expect higher revenues in fiscal year 2012, we may raise additional capital at some point during the year to maintain a conservative financial structure and also to expand our ownership base to include more institutional investors. To be prepared in the event we elect to raise this additional capital, we filed a shelf registration with the SEC on January 19 of this year, which was declared effective on February 14, 2012.

I will be happy to answer any questions you may have regarding our financial results later in this conference call. Joe?

Thank you, Seth, and thank you all once again, for participating in today's conference call.

As I noted earlier, 2011 was a milestone year for your Company and also a year of growth, growth in terms of adding people and resources. We hired new people, our licensees hired new people, and their customers also added personnel specifically for SPD products. New divisions at some companies were even formed as a result of this customer activity.

Also, the characteristics sum of these new people have changed. In the past, most of the work was done by research scientists, engineers, and technicians. The process control engineers were added to introduce new efficiencies into the process. Now, it is being done not only by those types of people, but also factory assembly line production workers, and sales and marketing personnel. The results are growth in terms of licensee resources, including much larger licensees getting involved with various aspects of the SPD industry, and major launch customers such a Daimler, Bombardier, HondaJet, Cheoy Lee Shipyards and others.

Overall, there was growth in the adoption, use, and visibility of our SPD-SmartGlass technology, and as Seth noted before, there was some high percentage growth quarter-over-quarter in our fee income once the first product came out for the automotive market. I believe that apart from being extremely important from an operations standpoint, sustained revenue growth is also important from an investment standpoint, as well.

We've been asked about our stock value and what we are doing to address building shareholder value. How the market values Research Frontiers, quite frankly, is a mystery to us. Sometimes our stock price seems to have a mind of its own, even when we announce irrefutably good news. I believe that our stock price is down for several main reasons. Number one, individual investors are parking their money in index and other money market funds, rather than the normal situation where part of their portfolio, especially in the growth area, is devoted to individual stocks.

Two, if individual stocks are picked, these tend to be large-cap or mid-cap companies with much larger market values than Research Frontiers. This is where new investment dollars are flowing today. However, with the increased visibility of our products, combined with the high percentage revenue growth, more new investment dollars should flow to our Company on the retail side. Also, with some of our initiatives to increase institutional ownership, this should also help in this respect.

Now, moving to our operations. If you simply count the number of news items on our website, there were a total of 66 individual news items since the beginning of 2011. I'll try to highlight some specific and important aspects of our Business, and the results achieved during the past year. I think you will see a clear pattern developing.

First, automotive. Our largest and most important near-term market is the automotive market. After years of testing in some of the most extreme conditions on earth, ranging from Death Valley to the Arctic Circle. Mercedes-Benz launched the first-ever serial production vehicle using SPD-SmartGlass technology, and I highly recommend the video that's on our website where they show some of this durability testing going on. It's quite amazing.

This was first announced as being our technology in February 2011, and the SLK Roadster made its world debut at the Geneva auto show in March 2011, one year ago. The SPD-SmartGlass for the SLK, and also now for the SL Roadster, is made but our licensee Pilkington using Hitachi SPD film in Pilkington's factory in Witten, Germany. During the late summer, cars using our SPD-SmartGlass technology, which Mercedes refers to as Magic Sky Control, started leaving the SLK factory in Bremen, Germany. This is also where the SL is produced. While still very early in the roughly 7- to 8-year program cycle lifetime for this car, early sales figures for the Magic Sky SPD-SmartGlass roof on this car are very encouraging. As a matter of fact, early on, the entire SPD supply chain had to increase production levels beyond original projections in order to meet customer requirements.

While all of this is very encouraging, as I had said in the last conference call, it will not be at least until the middle of this year that even Mercedes can more reliably predict what the customer take-rate is for this option on the SLK, but so far, so good. Based on this activity with the SLK, in the third quarter of 2011 our licensee Pilkington exceeded their MARs for the entire year. This was one quarter ahead of the projected schedule for this happening.

Three months ago in December, once again ahead of the initial timetables, Mercedes-Benz launched a second serial production vehicle with a Magic Sky Control SPD-SmartGlass roof. Known internally as the R231, this is the big brother to the SLK and it's the Mercedes flagship roadster, the Mercedes-Benz SL. This car made its world debut a few week later at the Detroit auto show in early January. While typically, new car models come out every seven to eight years, a new SL model comes out approximately once every 11 years.

There is a longer program cycle with this car. To quote the Chairman and CEO of Daimler, Dieter Zetsche, and his comments at the Detroit auto show about why it takes longer to introduce a new SL he says, quote, because we want to make sure it's absolutely perfect, and it is, if you've seen it.

This car will be available in a month or so, with US deliveries in time for the spring convertible buying season. While there may be some early inventory-building activity between Pilkington and Mercedes, most of what you see reported in the growth of our earned royalties from the automotive market is coming strictly from the success of the SLK, and these numbers do not really reflect the later cars introduced by Mercedes, namely the SL, and the Viano.

While the SLK is predominantly sold outside of the US market, the primary market for the SL is in the US, so in addition to higher take rates for this vehicle, we also expect to see higher visibility here in the US for the SL. As we have noted in the case of the SLK in prior conference calls, the royalty guidance per vehicle that we have given investors is between $100 and $150 per vehicle. That's true for the SLK and it's similar for the new SL.

Which brings us to last week's announcement. Some very important things happened last Tuesday. My wife and I became grandparents for the third time, and Mercedes-Benz launched their third vehicle using Magic Sky Control with their SPD-SmartGlass technology. Good things seemed to come in threes that day. By way of background, the Mercedes Viano is a very popular van internationally to be upgraded into a custom VIP vehicle. We have seen this van upgraded by a number of the performance tuners around the world.

In September at the Frankfurt auto show, Mercedes-Benz exhibited a concept luxury van called the Viano Vision Pearl. It had SPD-SmartGlass in eight different locations on the vehicle, the four side windows, the rear window, and the van's three sun roofs. The quote Vision in this concept car's name became a reality last Tuesday when the Viano Pearl made its world debut at the Geneva auto show, six months after the concept was originally shown to the public. As Mercedes notes in their press release, this was because of the extremely favorable reaction from customers to the concept vehicle that they saw in Frankfurt.

According to Mercedes, this limited edition version of the Viano can be ordered in April for delivery to customers starting in July of this year. Notably, while it is a limited edition vehicle, it offers SPD-SmartGlass as a standard feature for the first time. All four windows for the rear passengers are Chromalight brand SPD-SmartGlass, produced by our licensee Isoclima in Italy.

Also notable is that this marks an expansion from the current car and SUV division of Daimler to an entirely different and distinct business unit within Daimler. Also, because of the much larger amounts of SPD-SmartGlass being used on the Viano compared to the SLK and SL, our royalty per vehicle is estimated to be around eight times what it is for the SLK and SL. However, the expected volumes for this limited edition are unknown, and can be lower than the potentially higher volumes for the SLK and SL and other per Mercedes vehicles.

Moving beyond these three vehicles, we and Mercedes currently expect additional vehicles within the Mercedes-Benz product line to use SPD-SmartGlass technology. In addition, other OEMs are also working with us and our licensees to use SPD-SmartGlass on their own production vehicles. There are many benefits to doing so from a functional standpoint and an environmental one.

We saw public glimpses of these other OEMs with the Audi A2 electric concept vehicle, which was shown at the Frankfurt auto show. It had an all-glass panoramic SPD-SmartGlass roof in it. Apart from the other benefits, this reduces cooling requirements inside the vehicle, so that more of the car's electric power can go towards that all important driving range.

This Audi was a concept vehicle. We also had another concept vehicle, the Toyota Sentry luxury sedan with side SPD-SmartGlass appear at the most recent Tokyo motor show in late November. As we have seen so far twice with Mercedes, concept vehicles using our SPD-SmartGlass do make it into production.

One question we're constantly getting is who will be the second OEM beyond Daimler to incorporate SPD into serial production vehicle and when will that happen? I'm happy to say what I can about that at this point. We've discussed concept cars already from Audi and Toyota, but there are a number of other premium OEMs that we and a number of our licensees are also working directly with that have not yet been made public.

As those familiar not only with our licensing business model but also the standard way that automotive suppliers must behave in dealing with the OEMs, neither we nor our production licensees can give you specifics before their customers, the auto makers, make their announcements and introduce their vehicles to the public. However, at any given time, there are a significant number of car models out there that are being either refreshed or totally redesigned. As we have noted in the past, this is the logical time to expect SPD-SmartGlass technology to be introduced on a vehicle.

As you also might imagine, some automotive OEMs are being more aggressive than others with their development efforts, resources, and timetables. We and our licensees have a pretty detailed and growing schedule of which other vehicles want SPD, and the date for start of production and anticipated date of introduction to customers.

You could already see the beneficial impact that even one car model, the SLK, has had on our revenues, and how these revenues can quickly ramp up. Now add this to the cars that are coming on-line that have already been announced, the SL and in the spring, and the Viano in July, and you can get an idea of what is to come with just these already announced vehicles. Add to this the number of other OEMs, and you will see that we are at a very exciting time, with great prospects and a strong pipeline of products coming out in the near future.

I'll touch briefly on other industries, because time is short and I also want to leave time for your questions. In the aircraft industry, SPD-Smart technology is gaining increased acceptance and visibility, both in the after market and in the OEM segment of this industry. SPD technology is now on approximately 25 different aircraft models in the after market. Our nearest competitor only has two aircraft.

We are also the first switchable technology to specifically receive FAA approval, and the first one to fly on any commercial airline. Every Qantas A380 that has been delivered by Airbus has had SPD windows in its lavs, and these have reliably flown for several years now without any issues.

Also, in the transport category aircraft, Bombardier has featured SPD aircraft window shades supplied by our licensee Vision Systems at all of this year's major aircraft shows on their new C series jet, currently scheduled to come out in 2013. This jet is the one that is slated to compete with Boeing 737 and the Airbus A320. Similarly, in the general aviation market, HondaJet has also publicly shown at major air shows SPD-Smart windows on its new HondaJet, currently scheduled for delivery to customers in 2013. If you look on our website, there's a nice video that HondaJet actually did featuring our SPD-Smart windows in their HondaJet.

There are also initiatives in place with other aircraft OEMs and with various airlines. These can result in substantial near- to intermediate-term revenue to Research Frontiers. Of course, like in automotive, neither we now or licensees can publicly discuss these ahead of the OEM customer. Besides Bombardier and HondaJet as launch customers, in other industries there have also been notable SPD product introductions this year by large and respected launch customers. For example, Cheoy Lee Shipyards used SPD glass on their new Alpha 76 production yacht, which debuted at the recent Fort Lauderdale boat show. This glass was supplied by our licensee, Diamond Sea Glaze, and the windows are controlled using an iPad. If you want to see that in operation, check out the video on our website, as well.

Our licensee Vision Systems is supplying SPD-SmartGlass sky domes as standard equipment on the Notin Angara production motor home, and they have also made good inroads with other potential launch customers in the luxury bus and coach market, and in the mass transit market. I'll I think you'll see other motor home and luxury coach manufacturers also adopt SPD technology in the near future, based on reports that we've been getting.

In the architectural market, both SmartGlass International and Innovative Glass Corp. report a growing number of projects. Recently, a major product at CERN in Switzerland featured large amounts of SPD-SmartGlass in a highly visible globe. Also, ITV in London and the public continue to rave about how nice their SPD-SmartGlass panels are in the television studio environment. For more details, I refer you all to the videos and news items on our website, where we have more details, including some case studies.

Moving to a different area of our supply chain, we've been asked if the fact that there is only one SPD film supplier, is that holding back any market introduction? The answer is no. Hitachi Chemicals continues to be the main supplier of SPD-Smart film to most of the various industries that use SPD-Smart technology. Their facility has the capacity to produce 4.3 million square feet of film per year. This translates into roughly 800,000 SLK and SL roofs, so production capacity is not currently an issue.

However, there are other reasons besides production capacity where it is advantageous to have multiple sources of SPD film supply. We have several other licensees working to develop their own SPD film, and increased progress and resources are being applied by these resources. This year there's been a lot more aggressive efforts in this area by our licensees, and we hope to share additional information about this as the year progresses. Our strategy has always been to have multiple sources of supply in all areas of our supply chain, and I'm very happy with the recent developments in this area.

We are also confident that the best thing we can do to build shareholder value is to add resources internally and throughout the supply chain, and that is what we have done and will continue to do. As our success from these efforts becomes better known, not only throughout the various industries that we serve, something that the past year shows is successfully happening, but throughout the investment world as well. You also see that we are constantly striving to share as much information as possible with our investors through the introduction of more frequent conference calls like this one, greater transparency, and frequent public announcements as soon as we're able to do so.

In conclusion, I want to thank everyone for their support of your Company. This past year has shown a number of key successes, but I want to emphasize that this is only the beginning of a major expansion and transformation of the entire industry. You can see a number of household names such as launch customers, and increased number of products being sold using our SPD-Smart technology, with growing visibility and growing revenues.

We will now answer some of the additional questions that were e-mailed to us, and that we were not able to cover, and also to take questions for participants. While I'm going through some of the questions that we've received by e-mail, if you'd like to queue up, I'd like the operator to open the queue for questions.

(Operator Instructions)

Okay. In some cases, we received multiple questions from a shareholder, and I've tried to answer as many as possible, but sometimes I've had to limit to one or two to leave time for other shareholders. One question is, what type of sales initiatives are being used by the glass companies to generate more sales of SPD? Our glass licensees are some of the largest in the world. Some of these sales initiatives are private. Sometimes these are directly related to existing customers, especially in the automotive and aircraft industry. You'll see some of the activities, such as Pilkington creating their own website and producing a video that was devoted to its automotive SPD products, and you can find this website by searching Pilkington and SPD.

We have a number of other initiatives, focused efforts with various licensees, especially in the architectural market. We participate in public conferences and you'll see us at additional conferences in the coming year. A lot these are centering on the building industry, especially the green building movement, and the environmental benefits of using SPD-Smart technology. There are also licensees that have expanded, as I mentioned earlier, their own personnel in this area, so an increased number of feet on the ground. I think you're beginning to see the fruits of that success with increased architectural projects coming out.

Another question from the same shareholder is -- relates to the cost of SPD-Smart products as it relates to the automotive industry especially, and what is the plan to make this a more viable option for larger serial production? We certainly recognize that to achieve greater market penetration, the cost of SPD products will need to decline from current levels. There's a number of factors that go into cost reductions. Number one, you have the very-well-known relationship between cost and production experience, known as the experience curve. That's why most high-tech products come down in price to become affordable fairly quickly. We expect that same type of phenomenon to apply to us as it did to pocket calculators, cell phones, computers, and other technology-based products.

Another key factor to reducing cost is production volume. As volumes increase, capacity utilization increases, the costs from using coating machinery and other things comes down. We're also working with our licensees and their customers to reduce our product costs and expand market penetration in other areas as well. We've already seen cost reductions in the automotive market by our licensees, so these things are beginning to happen even early on in the process.

Another question was from a different shareholder. How can you determine if proper royalties are being paid? Well, we have a unique situation in that we've licensed various levels of the supply chain, from emulsion makers, film makers and end-product makers. In the automotive area, we have an even increased visibility, because we also get monthly reports with daily production volumes from Mercedes, so we have very good visibility as to what's coming off the production line to the end consumer. We also have reports from our end product licensees that are supplying the customers, such as Daimler, with their glass, and also we're getting film reports from the film makers and emulsion reports as well. We could track through with probably a much higher degree of precision than most licensing companies if a proper royalty is being paid to us, and, obviously, it's something we pay close attention to.

I mentioned earlier this is the second question from the same shareholder, but I got a similar question from another shareholder, if I know if the Toyota Century concept is going to be a production model? To some extent, it's already been answered by the fact that usually car companies don't put out production concepts without an intention of putting it eventually into production on some model. We've seen in the case of the first Mercedes concept, it coming out on a totally different, but much higher volume production car, which was a happy surprise for people. We've also seen a second instance of that within Mercedes with the Viano. Toyota has not made any public announcement about their intentions, so for now, we have to leave this as a concept car, but you can see that they've had various concepts introduced over the years, so I think it indicates a sustained interest in SPD-Smart technology.

There was a question about our fee income. I think Seth answered that, but if there's any remaining questions about that, and why it's higher and basically the answer is from the automotive market in the fourth quarter of 2011, please feel free to chime in at the Q&A session.

Okay. There was another question answered. I think this came off of a recent registration statement that was filed with the SEC that we've never declared a cash dividend and do not intend to declare a cash dividend in the foreseeable future. When we talk about foreseeable future, what does this mean? First of all, this is fairly standard language that most companies that have not paid a dividend put in their SEC filings. However, I've said on prior occasions and I maintain today that, personally, we have the ability to become a dividend-paying, royalty-collecting machine, and I still believe that, especially with the products in our pipeline.

Right now it's an academic issue. We're not profitable. We don't have free cash flow to devote towards paying a cash dividend, but at some point I'd like to see us do that, and I think there are other members of our Board who share that view, so I look forward to the day when we all get a nice income check every quarter from Research Frontiers.

Got another question, the Company's recent 10-K reports that SPD-SmartGlass used in the Mercedes Viano Pearl luxury van will be manufactured by licensee Isoclima. Will Isoclima initially use Hitachi Chemical-supplied SPD film, their own film, or film from another supplier? We've been specifically asked by Isoclima not to release this information yet. I think with the fullness of a short period of time, you might have a better idea as to alternative source supplies that becomes public. A related question was, it's been quite a while since the Australian government issued a grant to help upgrade the manufacturing plant for the purpose of SPD film production. What is the status of the plant now, and when is it expected to go into production? How much annual production capacity will it have at the outset?

There was a press release when, shortly around the time when our licensee, ID Research, also known as iGlass, took their license, and the government of Melbourne in Victoria has funded part of the upgrades of their existing liquid crystal factory to handle SPD technology, and there's also been private money injected into that. I think there's been additional capital infusions there. Right now they're right on schedule for introduction of the film in the -- along the schedule outlined in their press release. As far as I know, their production capacity is still fairly substantial at about what, 500,000 sunroofs.

Another question was, please discuss sales efforts with Boeing and Airbus? Our approach is to directly work with these and other aircraft OEMs and also with their airline customers, and that effort is not only conducted by us but in coordination with our licensees, and in some cases you have multiple licensees bidding on the same projects within these companies. We seem to be benefiting from a growing awareness of SPD technology, and also the limitations of the existing electrochromic technology that's on the Boeing 787 Dreamliner.

Address some of the other questions, I'm just paging through some of the other ones we've received. We received a question, how is the Viano Pearl a game changer compared to the SLK and SL? First of all, it's the first production vehicle to use our technology in side windows. It's standard equipment, and I think it's the first time that you have a vehicle that is being targeted by a different division within Daimler than the passenger car SUV division, which is the one that handles the SLK and SL.

Also, I've been asked to address activity in the R&D lab as it relates to extending our technology in meaningful ways. We've continued to develop SPD technology and file and receive patents on the inventions that come out of our very talented and hard-working R&D group. Part of this is with a goal towards extending the life of our patent portfolio, which extends our revenue stream under our license agreements, but also significantly improves the performance of our products in many different ways. Also, some of this effort is focused on us and our licensees reducing costs to help increase the value penetration and the value proposition and the market penetration.

Another question we've received, we have indicated that we believe that our stock price may be due to certain manipulation. The shareholder is fairly astute, he says, please address the stock recently being traded in fractions of $0.00001or $0.000001. This is something that really only market makers can do, and when you see that, it's certainly a questionable practice, which we've pointed out to the regulatory authorities. They've investigated further, they have access to more direct information as to who's initiating these transactions.

To date, they haven't done much about it, but you can't have a crooked casino for too long and not have action taken. I remember years ago when the SEC and the NASD told me with a straight face that there was no such thing as naked shorting, and then they came out with rules about a year and a half later specifically designed to stop naked shorting. They live and learn too, I guess, and they can't let some of the stuff go on forever.

Then the related question was, does the apparent stock manipulation hurt our efforts to attract new investments? We don't believe that there's any negative impact on our ability to attract new investors to the stock by any of this. Large institutions have significant buying power, and as they start to see ever- increasing gains in revenue, I think more and more of them will feel more comfortably -- comfortable making larger and larger investments in Research Frontiers.

The last question by e-mail, and then we'll open it up to other questions is how does the pricing of SmartGlass for cars compare with traditional glass or plastic roof tops with sliding plastic Shields underneath the glass? Can you see SmartGlass to ultimately go mass market rather than just luxury cars? Well, let me answer the second question first, because I think that's the most significant from the standpoint of volume.

If you look at our experience or the experience with introducing new technology into the automotive market, a prime example is Gentex with electrochromic self-dimming rear-view mirrors, cameras and other innovative features. Typically these start at the very-high-end premium luxury vehicles, but relatively quickly go down to the mid -market at least, and if you look at some of the things that used to account for 20% of the car's value, like anti-lock brakes when they first came out, now you seen it on even mass-market and low-end cars. Things like air bags and anti-lock brakes are good examples of expensive technology coming down very quickly. One of the nice things we like about the automotive industry is that it seems to do this repeatedly, and we hope that it does it with our technology.

The more specific part of the question was how does the pricing of SmartGlass for cars compare with traditional glass or plastic roof tops with sliding plastic shields underneath the glass? Very astute question. First of all, with our glass, you don't need the sliding shades, so there is a cost avoided by the car manufacturer by using our technology, and that they don't have to build in the sliding shade. Not only is there a cost avoided, but there's increased head room and other benefits that you get from not having a shade.

Let's take a couple of examples. A typical sunroof on let's say a Mercedes vehicle costs about $1,200 to $1,400. The Magic Sky Control roof on the SLK, which is about a $55,000 car, and the SL, which is about a $105,000 car, is $2,500. Roughly double the price of a standard sunroof for the Magic Sky Control feature, and that represents between 4% of the SLK cost and about 2% of the SL cost, but even those numbers have not slowed down introduction, as you can see from the initial sales results. I think it gives you an idea of the price of that.

If I move to something that I'm also familiar with. I drive a Ford Mustang that happens to be part of a market test that has SPD-SmartGlass in the roof and the windshield and some of the windows. In production, without SPD technology, that roof option costs $2,000 at retail. If you compare that with a $2,500 for the SLK or the SL, you're seeing a very comparably priced glass item, but something that does quite a bit more for the vehicle and for the occupant.

I think now we'd like to open the floor up to questions.

[Neal Chowdhary]

This is Neal with Craig-Hallum, I'm actually calling in for Steve Stier. A couple questions.

Hi, Neal.

A couple questions I had, and I know you've touched on this a little bit, so any additional color you can provide would be helpful. I think you said that Mercedes probably won't give some commentary on take rates until mid-year?

I don't think they're going to comment, Neal, on take rates ever. My point was is that even they don't know what the take rates are with just a few data points. Like I said, we get daily production figures from them, and the numbers are higher than what's being indicated on the Internet chat boards, so I'm happy to see that there's a good response from customers there. The fact that early on in the process they asked their supply chain to increase their production volumes beyond the initial production projections, I think is a very good sign.

I'm sorry so that last point, was they're planning on increasing the estimate for production?

No they've already done that.

Which was about 40 to 44, before?

They've already increased it. Initially the way it works in the automotive industry is, the OEM will give its supply chain some preliminary indications of what they think the take rates will be on an option, and ask them to be geared up to meet those take rates. Very early on in that process, Mercedes told Pilkington and others in the supply chain, we're going to need more than we originally told you about, so I think that's always a positive sign once you start getting things in production and you start increasing the numbers.

Okay. Then second question, in relation to Viano, I think you might have said the production volumes might be unknown at this point. If you can add any color on that? I mean, in terms of magnitude for the SL and the Viano, relative to the SLK, what kind of productions or volumes are we expecting?

It's hard to say. I'm not sure that Mercedes has publicly released what their estimates are, nor do I think they know. Their initial approach to the Viano is, this is -- they've done this a couple times in their history. An early example is AMG, which is now owned by Mercedes, used to be a performance upgrader, and they saw that the performance upgrade market, where people will take $100,000 car or so, and add another $100,000 to $150,000 of improvements to it, was a very profitable business. They ended up buying AMG.

They certainly see, I think, the value and the profit in being in the very high end upgrade area of the market. They also have a specific division, for example, that does armored glass, even though there are third parties that will armor your vehicle, as well. There's these areas where they are somewhat competing with the after market upgraders in these areas.

With the Viano, I think it's very similar. The Viano is a luxury van that we saw a number of different upgraders use as the platform for VIP vehicles at various auto shows that we attended in the past year, and it wasn't any real surprise when Mercedes said we should be in that business as well. You take a vehicle that has a roughly EUR100,000 upgraded price, and there's a VIP market in China, there's a VIP market in the Middle East, there's a VIP market in US, and a VIP market in Europe, and in South America where these vehicles they think are going to be very popular. They have an initial production run in mind. It's a limited edition. Based on the response to that, I'm sure that a good response will cause them to just keep producing these things, because the high end tends to be the profitable end of most OEMs' business.

Okay. Well, that's it for me. Thanks.

Okay, thank you. We'll take the next question.

Ralph Sutcliffe.

Yes, hi, it's Ralph Sutcliffe, I'm a private investor.

Hi Ralph.

Joe, how are you, bud?

Doing great.

Good. This is, I think, just a clarification, because I think you tried to answer this, but I didn't quite catch it. The Dreamliner does have the instantly dimmable windows, but is that your technology or is it someone else's?

The Dreamliner currently uses electrochromic technology, similar to the technology, but not exactly the same technology used in rear-view mirrors for cars. The two main concerns that have been expressed to us by people in a position to know are switching speed. Despite what you see on the Internet, the switching speed is between 1.5 and 2 minutes between when you press the switch and when it fully clears or when it fully darkens. If you look at some of the videos that are out there, most passengers don't wait for it to go fully either way because they get a bit frustrated waiting.

The other issue is darkness, doesn't get dark enough to provide cabin darkening to sufficient level that they'd like. Those are areas where SPD technology has very strong performance advantages. Regardless of the window size, whether it's small like a aircraft window, or bigger like the 787 window, or as big as the windows in your office or in a car sunroof, we're going to switch in two to three seconds, roughly. You get instant response time, which allows much better control over the glass. Also, either with Hitachi film alone, which blocks 99.5% of the light in the ultra-dark state, and other films coming on-line, or combinations of film with other materials or with itself, we could achieve dark states that block 99.99999% -- add a couple more nines, percent of the light. You're talking about substantial light reduction because of our technology.

The two main issues that seem to be plaguing the Dreamliner, we can easily solve. The third benefit also is that we're a plastic film as opposed to glass, and that is really a -- glass poses certain safety and other problems in an aircraft environment and requires things like containment shrouds and can add weight and other things to the aircraft. Now to maybe take the point a little bit further, will the Dreamliner be the first aircraft to adopt SPD technology within Boeing? I don't know. Human nature being what it is, they'll probably put it on a different aircraft, and hopefully one with much greater production volumes also. We're very. I guess, encouraged by some of the recent developments in that area.

So you're still in the hunt for Boeing?

We're in the hunt for everybody that's out there, because we believe that our technology offers significant performance advantages over what they're using now. If we didn't believe that, we wouldn't be pursuing it.

All right. Well, thank you very much.

Thanks, Ralph. Is there another -- I think there's one other question in the queue, which we'd like to take.

Michael Kay.

Kay Associates. Yes, thank you. Just a few short ones. It seems to me, what's really holding back the mass production of SPD film from some of the other licensees? It seems to me when we heard we had this earthquake in Japan, we had a recent one in Tokyo, that this really, I would think, would make some companies cautious, because you know that's the only supply of film. I think shareholders and company --potential company OEMs -- would feel much better if there was more than just one source of the film even though Hitachi could mass produce large quantities. The other thing has to do with sun roofs, it seems to me that's -- how come that market hasn't been penetrated as rapidly as some of the others?

Thanks, Michael, for your questions. Sun roofs, are you talking about sun roofs or skylights?

I mean -- no, not sun roofs, excuse me. I mean sun visors.

Sun visors.

Yes

Well, I think probably the most demonstrable -- I'll answer your second question first. The most demonstrable, I think, energy gain and wellness gain that you see in a vehicle comes from putting our technology in the sunroof. If you've ever sat in an SPD-equipped car, and I think you have sat in several now, you can actually feel the difference of the heat, whether it's on or off, and you get this open-air feeling, even with the roof completely unopened, in a convertible like the SLK or the SL. It allows you to take a car that typically people drive for two months out of the year and enjoy, and turn it into a car that you can drive 12 months out of the year and enjoy.

Sun visors is certainly a very good market, and there are companies developing that right now as we speak. Some of the challenges with the sun visor market is that you can only go down right now for regulatory reasons to what they call the AS line, which is typically where that blue band on the top of your windshield is right now. Which is fine, because that blocks a substantial amount of the sun, but we even have some projects underway where we're working on increased use of the SPD film in the wind screen, in the windshield itself. I think the first market is going to be the roof, just because of the heat benefits and the open-air feeling, but you'll get other penetrations, as the Viano shows. I mean, they moved from the roof to the side windows, and then you've seen that also in things like the Sentry concept from Toyota.

Your second question was about a single source of film? Of course, all of us saw the news footage of what was happening in Japan, and our hearts sank for personal, as well as business reasons at the time. You can't see a tragedy of that magnitude and not be moved by it, and fortunately, the SPD operations through great wisdom by our licensees was moved well out of anywhere where they would be affected by a tsunami or an earthquake. Now you never say never, but also having multiple sources of supply is a key part of our strategy. As I mentioned earlier, that's well under way with encouraging results.

Having geographic diversity is a good thing. For that reason, it's also a good thing from a exchange rate reason, and it's a good thing because of a competitive scenario. If you have companies competing with each other for the market's business, usually everybody wins. That's very much a top priority and, as I said, I'm very happy with the developments in that area.

Yes, thanks. One more thing. Since the architectural market it seems to me probably has the greatest potential, especially in the fact that most of the energy used in buildings has to do with the heating and lighting, and now the fact that Mercedes adopted SPD, what do you think is holding back more market penetration by architects? I myself have done various surveys and indicate that, which indicate that architects really would love what SPD has to offer, and I would think that by now they would be running to the doors in order to incorporate it into new buildings?

You're starting to see that, Michael, in certain things. If you look back on the past year, you've seen projects from SmartGlass International, and Innovative Glass that are focusing on high-visibility projects like Fort Knox or CERN. The Cambridge study of energy efficiency that SmartGlass International sponsored were all very good, and that's gotten a lot of attention by the architects. We have gotten a very warm reception from some of the major builders out there. We've gotten a very favorable reaction from some of the world's most prestigious building clad architects. We're working closely with them to get this adopted as broadly as possible in the architectural market.

Now one of the things, to be quite frank, is a -- always a problem with new technologies in the architectural market is the architects expect a certain lifetime, and you need to be able to demonstrate that lifetime, especially with an expensive glass product. Right now, if you think about it, though, our licensees are offering basically the same warranty that architects get on any piece of laminated glass. Remember, this is a new product, it hasn't been tried, and there's some architects that like to be on the leading edge. Some will be willing to go on the bleeding edge, but I think that as you get more and more of these projects out in the market place, people become more and more comfortable. Certainly, the extensive testing that Mercedes did in Death Valley and in the Arctic Circle, I think, has made everyone a lot more comfortable about things.

Yes, let me ask you. Do you think I need a psychiatrist, Joe, because for the last 15 to 18 years, any time there's a conference call and you speak, I'm right away for the next day impelled to purchase more shares every time there's a press release out. I'm impelled to purchase more shares. In terms of material growth, there's not too much to show for it. I have that same feeling after this conference call, and I was wondering if you'd recommend a psychiatrist or a good broker to buy more shares?

Well, I'm pleased that you thought this was a good conference call, and I appreciate the compliment. Like I said, the thing that moves our stock is a mystery to us. Until we become a Company with a little bit more history in terms of revenue generation, it's hard to say what the market is going to do, but we are very optimistic about where the market, the stock price is going, where shareholder value is going.

Quite frankly, don't listen to what I say, look at what the smart money is doing. Look at what Mercedes is doing. They've now put this in three vehicles with plans for more. Look at what other companies are doing. Look at what Hitachi has done in terms of the investment they've made to build a factory. Look at what iGlass has done in Australia to build more production capacity. Look at the millions of dollars that Daimler has spent to develop Magic Sky Control. Look at the millions of Euros that have been spent from licensees such as Pilkington and others, and I think that's where the money, the smart money should be telling you where you should be placing your money, not what Joe Harary says.

I'm flattered that you think I can induce an investment decision, but quite frankly, it's -- there's much more compelling reasons than -- if you can look past the daily stock price, I think you'll see where the smart money is placing their bets. It's where you're placing your bets, so I don't think any of your investments were misplaced.

Thank you very much.

[Brian Mulvy]

Brian Mulvy, individual investor. I agree, great conference call. Maybe you just answered the question, but you brought it up, and I'll ask it, the infamous Internet chat room chatter, and your feelings on the disparaging words about 40-year stock scam, and never a profitable entity going forward?

Well Brian, thanks, I appreciate actually you asking the question, because when you've done something for as long as we have, people stop believing that you can do it, and I think part of this last year is people still don't believe that what they're reading about Mercedes and Audi and HondaJet and Bombardier and Cheoy Lee and others is really happening. In fact, it is. I get the sales reports every quarter or every month or every day, sometimes, showing exactly the economic activity that's going on out there in the world.

I think people are rightly skeptical. It took 60 years to develop the light bulb. Someone finally did it. It took a long time to develop the photo copier. Someone finally did it. It took a long time to develop SPD technology. But if you look at where the smart money is putting their bets, the Daimlers of the world are certainly betting on our technology. I think that should tell you that we're not a 40-year stock scam, but a very persistent Company that sees the value in what we're doing, and have now achieved, begun to achieve, some of the potential here.

Very good. I appreciate that.

Well, if there's no more questions, I'd like to thank everyone for their participation today. As you know, we try to be as accessible as possible by e-mail and phone, and although our time has become very scarce lately, and I was in Germany and Geneva, I think it was last week, and I'm going back to Germany again in a week or two. Feel free to e-mail in your questions, and we'd be happy to do what we can to answer them. Of course, throughout the year we plan on continuing to have as much information flowed to shareholders as possible, whether it's investor conference calls or other venues as well. Thanks again for your participation, and your support of the Company.

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, we'd like to thank you for attending, and at this time we ask that you please disconnect your lines. Have yourselves a good evening.