Smart light control yields high revenues for Research Frontiers Incorporated
(RFI) develops and licenses suspended particle device (SPD) technology used to power SPD-Smart™ light-control glass and plastic products.
URL: smartglass.com
Phone: 516-364-1902.
Joseph M. Harary, President and Chief Operating Officer, spoke with Wall Street Reporter Magazine on November 20, 2002.
WSR:To start, could you give us an overview of the company?
REFR: Research Frontiers holds over 365 patents and patent applications on suspended particle device or SPD light control technology. To date, we’ve spent over $45 million to develop this technology. Basically, what we’ve invented is a film that allows you to control how dark or light the film is using standard controls such as a dimmer switch, a photocell or some other off-the-shelf sensing device. This film gets applied to various products. Current products include aircraft and architectural windows for homes and offices and various automotive applications also under development in partnerships between our licensees and many of the world’s various automakers. In the future, you can also expect to see our technology in eyewear such as ski goggles and sunglasses, and flat panel displays such as computer screens, cell phones, beepers, Palm Pilots and advertising signs. We were formed in 1965 to continue on some of the original work in the area of SPDs that was started by Dr. Edwin Land who later went on to found Polaroid. After investing his own money as well as investments by family members, our chairman Bob Saxe then raised venture capital money and we went public in 1986, which is when I got involved in Research Frontiers. For many years we traded on the NASDAQ small cap system and in 1997 we were elevated to the NASDAQ national market system. In 2000, we were included in the Russell 2000 Index.
WSR: Can you give us a little background on your product offerings, their applications and the market potential?
REFR: There are many different product applications for our technology but the largest by far is what we call SPD-Smart™ windows, which are windows that you can automatically or manually control how dark or light they are. As far as market size, the Fredonia Group, which does the leading market forecast for the glass industry, estimates that there were about 40 billion square feet of glass that was produced in 2001. So a one-percent market penetration of this market would equal about 400 million square feet of SPD-Smart™Windows. At the low end of our royalty scale, because it depends on the product application and we get between five and 10 percent of our licensees’ net sales of licensed products, we estimate that we will receive revenues from sales of SPD-Smart products on the low end of between $1.00 and $1.50 per square foot on the Smart Window application. For Research Frontiers this translates into about $400 million to $600 million in revenues and just as an aside, revenues basically are also our profits because as the licensing company we have fixed costs of about $3.5 to $4 million per year, regardless of the sales levels by our licensees. Therefore, for one percent of the market penetrated we expect to earn between $400 million and $600 million. When we asked ourselves how realistic would it be for our licensees to penetrate one percent of the market, we commissioned the Townsend Research Group to do a market study on Smart Windows in general during the summer of 2000. They interviewed decisionmaking executives at the largest window companies in the U.S. One of the conclusions of the study was that the window industry expected 3.6 percent of all residential windows and 6.2 percent of all commercial windows to be Smart Windows by 2005, which was in excess of the one-percent market penetration assumption that we originally were working with. Add to that the other markets, which include rearview mirrors for cars, sunroofs, sun visors, aircraft windows and partitions. Also flat panel displays for products such as computers, laptops, beepers, cell phones, PDAs and advertising signs, and eyewear such as ski goggles and sunglasses, and you have some fairly large markets that our technology can be used in.
WSR: Can you give us an example of an existing customer and the value proposition that they see in choosing your products?
REFR: There is a variety of different end users or types of end users that can benefit from SPD-Smart technology. Homeowners and offices can use SPD-Smart Windows because they offer energy efficiency, aesthetics, and more control over their environment. For example, right now with ordinary shading systems, if you want to reduce the amount of light in your office or home by 50 percent, you pull your shade down half way but you’ve blocked half your view, or you can turn your verticals at a 45 degree angle and you’ve blocked your entire view. A lot of people don’t like to install shades if they have a spectacular view. If you have a house on the lake or a house on the ocean or a high rise apartment or a house on a mountain, you’ve paid a premium for that view. If you go into some of these upscale homes you’ll see that often they don’t put any shades or curtains or blinds in front of those windows because they don’t want to block the view. But that also means that for several hours during the day, you can’t use certain rooms in your house because of the glare problem. With SPD-Smart Windows you can tune how dark or light the window is without blocking your visibility. So that traditional trade off between glare control and visibility is eliminated. Architects and designers like the technology also, because it allows them to better use day lighting. They can better control energy usage and do things with glass that they could never do before, such as turning a window into a wall. If we move to the aircraft application, owners like it because SPD Windows are energy efficient, not only because of the reduction and solar gain inside the aircraft cabin but also through weight savings. In a plane, the rule of thumb is for every pound of weight you save on an aircraft you save about $1,500 a year in fuel. That also increases the flying range of these planes and also gives better control over the cabin environment by passengers and by flight crews. Flight attendants no longer have to wake you up to tell you to close your shade so they can show a movie or during takeoff and landing when you want your shades open. The flight crew can press a switch and achieve these conditions without disturbing passengers. Yet each passenger will have individual controls. And the government likes the technology, especially for automotive applications because it can substantially reduce this country’s dependence on fossil fuels, reduce emissions and improve driver comfort and safety.
WSR: Obviously, a lot of markets to target and a lot of outlets for your technology. What is so unique about your products and technology that give you a competitive advantage within those market spaces?
REFR: It’s simple. SPD technology works better and it’s cheaper than the other smart light control technologies, so that’s the main advantage, performance and price.
WSR: Can you give us some background on some of the strategic partnerships you’ve been able to forge and the underlying strategy behind them?
REFR: We have 21 companies currently licensed to work with our SPD technology and this list is growing. We basically target industry leaders to work with and we’ve been very successful at attracting the world’s top glass and other companies. Each company focuses on what they do best. For example, Hitachi Chemical and Dainippon Ink and Chemicals focus on their core competency, which is the large scale production of specialty chemicals and they’re licensed by us to make the SPD emulsions, which is the basic chemistry that eventually gets coated into our films. We’ve also licensed some of the largest film coaters in the world to take those emulsions and coat them into SPD film and at the final stage of our supply chain, we’ve licensed leading product manufacturers to incorporate these SPD films into a variety of end products.
WSR: What is your outlook for the remaining fiscal year?
REFR: Well, since this is the first real year that SPD film has been in mass production, sales really only began to start in the second quarter of this year and in the third quarter we experienced higher sales levels by our licensees, and so far, even through the fourth quarter, which is only really about half over, sales have already outpaced the second quarter. We expect this trend to continue next year as more and more licensees join on and the marketing programs that our licensees started during the second half of this year bear fruit.
WSR: What are some of the key goals and strategies that you’re focusing on to ensure the future success of the company and improve long-term shareholder value?
REFR: Now that production is under way we’re focusing on helping our licensees market SPD-Smart Products. This is being done in a variety of ways. First, last Monday we launched our SmartGlass.com Web site. Basically it’s a very interactive Web site that allows users to see what Smart Windows look like and they can actually control them online. There is also a link directly to the various licensees that are currently offering SPD-Smart Products, so people can order these products directly from our licensees. We’re now also launching a television advertising campaign that’s targeted to reach about 1.6 million upscale households in various markets here in the U.S. There are five different commercials, four 15-second spots and one 30-second spot. They’re designed to increase awareness of SPD technology and then drive consumers, architects and manufacturers to our Web site, where we can direct them to the appropriate licensee to handle their needs.
WSR: Based on your vision, how would you categorize the next two to three years as a successful period for your company?
REFR: We expect ever-increasing revenue growth as SPD-Smart Products penetrate the seven main markets for the technology.
WSR: What are some of the misconceptions that you see out there about your company that investors may have, that you’d like to put to rest at this time? And do you think the investment community fully understands the potential that your company has to offer?
REFR: Once the investment community recognizes that we license our technology to major corporations around the world, rather than being a manufacturer, I think that many things about our business model make sense. With fixed expenses at around $3.5 to $4 million a year, most future revenues should flow to the bottom line as profits for Research Frontiers, once our basic overhead for our 13 employees is met. Patent protection is going on at least until 2020, and as a result of new patents coming online that period should constantly be extended. With the business model that we have, we expect to become a royalty- collecting, dividend paying machine in the years to come. Our stock has outperformed the major market indices for the past several years and we look forward to rewarding our shareholders now that SPD-Smart Products are in production.
WSR: What would you give as the best reason for a potential investor to get involved in REFR as a long-term investment opportunity?
REFR: First and foremost, our business model as a licensor of SPD technology leverages our relative strengths with those of our licensees and it also minimizes our risks and capital requirements. We don’t have to reinvent the wheel, we’ve attracted World Class licensees that have the manufacturing and marketing capability and can do the “heavy lifting. ” We also supplement that by an extensive patent portfolio, we’re in strong financial condition, we have plenty of cash and no debt and we have a technology that’s versatile and outperforms competitors and costs less. So I think investors are starting to realize the potential here and maybe one indication of that is that historically our level of institutional ownership was around three percent and that stayed steady for quite a long time. It has been rising steadily for the last year-and-a-half as more and more signs of production and commercialization and sales of products have been occurring and now institutional ownership is about 11.8 percent. We’ve gone from three percent to 11.8 percent. Now that SPD products are in production and our visibility is being increased through various methods, I think that trend will continue as well. |
