Resonant Inc.
Q1 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Greetings and welcome to the Resonant’s Second Quarter 2018 Corporate Update Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Moriah Shilton Senior Vice President of LHA Partners, Resonant’s Investor Relations firm. Thank you. You may begin.

[Moriah Shilton:]

Thank you, operator. On the call today are Resonant’s CEO, George Holmes; and CFO, Jeff Killian. Earlier this afternoon, Resonant released financial results for the second quarter of 2018 ended June 30, 2018. The earnings release that accompanies this call is available on the Investors section of the company's website at www.resonant.com. Additionally, some of the information on this conference call contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan and anticipate and similar variations identify forward-looking statements, but their absence does not mean that the statements not forward-looking. Such forward-looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Resonant's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this call and the Company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this call. With that, it is my pleasure to turn the call over to you George.

[George Holmes:]

Great. Thank you, Moriah. And good afternoon to everyone joining us on today’s call. The second quarter was exciting for Resonant as our customer engagements accelerated. During the last week of the quarter, I was an agent met with several of our key customers who validated that we continue to gain momentum with our customers, our foundry program and our ISM software platform. Combined with the fact that filter market continues to grow at staggering rates, we believe that we are on track in our ability to execute and deliver advance filter solutions for our customers and half the time and half the cost to traditional approaches. The milestones hit this quarter, support this belief. We secured two additional customer engagements and now have reached another significant milestone of 10 customers, a record for us. Our customer expansion includes a new Tier 1 filter manufacturer, increasing the number of Tier 1 vertically integrated customers to 50% of our total customer base. Our second new customer is a $1 billion materials company based in China. They plan to develop their own filter fab that will integrate with their existing packaging capabilities. Signing them is particularly exciting as it demonstrates our ability to enable new companies to rapidly enter the filter market. These new engagements for complex filters, duplexers and quadplexers, bring the total number of devices contracted to over 60, another record for the company. We now estimate the approximate gross filter sales of our customers share of market for Resonant designs under contract has grown to be greater than 475 annually. And based on our current forecast, we should have over 20 devices in qualification by the end of the year, or about 200 million of our customers’ estimated share of market. And the anticipated contracted royalty rates range from typically 10% to now as high as 20%, which is another new high. We continue to enhance our capabilities of our foundry program, which supports 50% of our total customer base. Enables customers not burden with the cost and complexities we’re running a fab to deliver products through their existing channel. We believe this will allow them to address the rapidly changing handset market with even faster time to market and lower cost, giving them the ability to be extremely competitive. In Q2, we also significant advancements with our ISN software platform accentuated by a major milestone. We deployed a valuation model of our ISN platform to one of our largest Asian customers. This software module was developed to help our customers with a process control and the fabrication of complex filters, significantly improving design, fabrication turn times with the potential to enhance yield and give significant cost improvements. We believe the filter market is in our inflection point of increased growth and it’s through these types of developments of tools and novel structures and building blocks that we will continue to enable our customers to leapfrog their competition. We continue to focus on broadening or IP footprint through both traditional patent expansion and more importantly, through our extensive use of trade secrets. I also want to highlight that we ended the quarter with more than $31 million in cash, than we had previously forecasted. Fundamentally we believe we are on track as quarterly billings are both up sequentially and year-over-year. For devices shift in the second quarter of 2018 our average royalty rates have doubled and ASPs have increased over 20% even though revenues were down sequentially due primarily to the timing of revenue recognition from design services. And volumes were impacted by a low value filter design in a short life cycle Whitebox phone application delivered in Middle East, as planned. I’d now like to have our CFO, Jeff Killian to provide details on our accomplishments we have made this quarter in the three key segments of our business. Jeff?

[Jeff Killian:]

Thank you, George. As many of you know, there are three important segments of our business, tools, technology and team. I first like to discuss our tools and significant achievements with our ISM software platform this quarter. First, customer deployment. As George mentioned, Resonant hit a major milestone in the development of our ISM platform by deploying a cloud-based module of the tool to our first external customer. This ISM software module enables customers to turn information obtained in the manufacturing process into process control parameters in real time, whereas other control methods are slow, expensive and not in real time at all. We believe this ISM module has the ability to drastically reduce fabrication cost and the number of turns for our customers, making them more competitive. Second, expansion of our technology platform. Currently, our ISM platform supports both less complex, lower margin SAW and TC-SAW process technologies and our roadmap includes the higher margin, higher frequency BAW and FBAR solutions. In the second quarter Resonant developed and patented a novel BAW structure, which in simulations outperforms best-in-class FBAR resonators. In order to validate this new technology, we are prototyping test wafers. These developments are expected to produce results in late 2019. And if successful, should enable design in a 3 GHz to 5 GHz range or the 5G band with better insertion laws, rejection levels, higher power handling and wider pass bands then anything currently available in the market today regardless of process technology. If successful, this novel BAW structure could become the best performing well as COG solution on the market. Third, reduced dependency on expensive third-party solution. Part of our headcount expansion bolstered our ISN software development team. As such, we assembled a world-class team specializing in computational electromagnetics or CEM. We have begun developing solutions to address the largest design time bottleneck we face today, design and simulation times. We are engaged with multiple third-party vendors in parallel with our internal modeling and simulation work to dramatically shorten the electromagnetic simulation time and lower design and license cost. This enables us to design more parts in parallel and to optimize parts and package designs to match specific modules and phone boards faster and more cost effectively that what is the state-of-the-art today. These efforts created a roadmap to increase design efficiency into the double digit designs, per designer, per year in the future. On to our technology. In Q2, we continue to expand our IP portfolio. We received seven new patents and filed for seven more, bringing our total to 155 issued and pending patents. Further, as George noted, we also devoted a large part of our IP team's focus to the documentation of our trade secrets which we believe to be a strategic importance. Finally, our team. We have continued to expand our core development team. We have a focused hiring effort to expand our ISN development team led by Dan Nenov, our VP of Software Engineering. We also continue to expand our applications and testing resources as this has been critical in shortening the time to royalty revenue by helping our customers with reliability and OEM handset testing requirements. We ended the second quarter with a total of 60 people, 12 Ph.D.s and a total of 43 who are part of the technical staff. We will selectively bring in quality employees to support our ramp. Lastly, I want to remind everyone of our model of development timelines and the time it takes to convert finished designs into royalty revenue. Simply put, there are three buckets, first, Resonant’s filter development; second, our customers’ test and qualification; and that third bucket, the handset OEM's qualification and ramp. Our development time from signed contract to design qualification can range from nine months to greater than 36 months depending on the complexity of the design. Our customers’ test and qualification time typically ranges from three to six months. That handset OEM’s qualification time typically ranges from three to six months. The combined totals range from the low end of 15 months to the high end of 48 months. The big takeaway is the designs identified using our technology in Tier 1 phones set records by going from signing contracts to phone on the shelf and available to consumers in less than 12 months. While we are very proud of the breakneck speed that we see as contracted designs made it into the market and demonstrated the power of working with Resonate, we expect more typical design to product launch times in line with our model, which we believe represents a fraction of the typical time to market in the industry. I’d now like to discuss our financials. Second quarter of 2018, billings which include deferred revenues were $228,000 up 32.5% year-over-year and 14% quarter-over-quarter. Revenue for the second quarter of 2018 was $124,000, down 44% year-over-year and down 21% quarter-over-quarter. As of January 1, 2018 we adopted the new Revenue Recognition Standard ASC 606 on a modified, retrospective approach whereby we recorded the impact of the adoption as cumulative adjustments to retained earnings. Consequently, financial results have not been restated for competitive purposes. Please refer to our 10-Qs for further details. Our royalty revenues were basically flat quarter-over-quarter, however, for devices shipped in the second quarter of 2018 average royalty rates doubled from 4.4% to 9.2% and average sale prices increased by over 20% as we transitioned from our first proof-of-concept devices to higher value devices that will drive royalty growth in the second half. We expect 2018 annual revenues to trend towards the low end of the mid seven-digit. Research and development expenses for both the first and second quarter of 2018 were $3.3 million. General and administrative expenses were $2.8 million, up from $2.7 million in Q1 of 2018 due primarily to increases in head count and related expenses. The net loss for the second quarter of 2018 was $6 million or a loss of $0.22 per fully diluted share based on 26.7 million shares outstanding. Non-GAAP adjusted EBITDA in the second quarter of 2018 was a loss of $4.2 million or a loss of $0.16 per fully diluted share, compared to a loss of $4.6 million or a loss of $0.23 per fully diluted share in Q1 of 2018. The improvement in EBITDA quarter-on-quarter was due primarily to lower expenses which were partially offset by increased stock based compensation. Cash, cash equivalents and investments at June 30, 2018 totaled $31.1 million, compared to $32.9 million at March 31, 2018. In April of 2018 the over allotment from our March 2018 capital raise was funded providing $2.8 million in capital. Excluding the proceeds from capital raising activities in the second quarter of 2018 we use $4.6 million down from $5.2 million dollars in Q1 of 2018. I now like to turn the call back over to George.

[George Holmes:]

Thank you, Jeff. Let’s spend a few minutes focusing on what feels our excitement and confidence in our long-term growth opportunity and the inevitability of our success. As we've discussed in the past, the sheer size and growth in the filter market is staggering. For example, you will estimate it will grow from about $4 billion in 2015 to more than $27 billion by 2025, representing a CAGR of 21%, or over six times the initial market. Navigate and mobile experts identified some factors driving filter growth. First, band proliferation, currently, up to 40 bands are supported by high-end smartphones, which requires more filters. Second, carrier aggregation, over 25 billion RF paths that include downlink carrier aggregation are predicted to be shipped by 2022. With up to five carriers aggregated at the time RF running complexity and cost will increase, which requires more filters, which is good for Resonant. And then finally, the proliferation of 5G. 5G includes high speed mobile networking for video streaming, which requires a dramatically increased data rate. To enable this increased data rate you need more RF path, MIMO and multiplexers, which equates to more complexity, which requires more filters. Further, the IoT and secured reliable segments of the 5G mobile network which includes applications such as mobile payments, medical and government applications are driving these networks to elsewhere. This means more wireless devices which require more filters. Much of this projected growth is fueled by Chinese manufactures. It's important to note that our business model and current customer engagements lead us to believe we have minimal if any exposure to macroeconomic trade discussions. In fact, when I was in China a few weeks ago, I had a number of discussions with our customers that suggest future field [ph] events could actually shift business towards Resonant. Our overall confidence is bolstered, but the continued validation of our technology and business model to customer acquisition and the prolific expansion of our contracted devices. This quarter was just another good example. As I shared in my opening comments, we exited the second quarter with a total of 10 customers and over 60 devices contracted, new record highs on both fronts. I also want to highlight a foundry program. We have continued engagements with fabulous customers, which we believe will start generating royalties in the fourth quarter. We are expanding our foundry program with new engagements with fabs and packaging company, expect to expand the already robust footprint in the second half. Market opportunity enabled by our foundry program has heightened the [indiscernible] handset OEMs, which could lead to directing engagements with them in the future. Let me provide some specifics on our royalty ramp and potential. As previously noted, by year end 2018 we expect to be approaching 10 devices shipping and delivering seven digits in revenue on a quarterly basis. With over 60 devices contracted, this represents roughly 475 million in filter, duplexer and quadplexer Product sales potential annually, based on our customer share of market. At the end of Q2, we had 14 devices that are in qualification and/or sampling today. And our current forecast suggest we'll have as many as 20 devices qualified and available for sale by year end. These 20 devices, which represent over 40% of our contracted current customer share of market or approximately $210 million in annual sales value. We have historically been conservative and said we don't expect one hundred percent of these to convert in royalty revenue. We have focused on models that range from 30% to 70% of design conversions. We expect sockets to reach production, will continue to generate royalty revenues for 2.5 years and have a very long tail once they go into production. A further [indiscernible] news of the last two devices that passed customer qualification, both were developed by fabs new to our foundry program, of even greater significance there were qualified after a single manufacturing spend. As we've noted, we believe our technology is revolutionary and transformative to the market. Admittedly, our business model is also unique in our industry. With this comes great opportunity, but also some risk. I’d like to take a minute to share with you what we are doing to mitigate that risk and best our company to capitalize on the significant opportunity ahead. First, with our technology, we leverage our ISM platform to help our customers manufacture their products more cost effectively. As Jeff noted, three, very significant milestones this quarter, which deserves some additional comment. We have now deployed an ISN at one of our customer locations that is specifically designed to help increase their yield. We have filed patent and want test wafers to validate our ISN solution for bio applications. And we have successfully launched in effort to develop a SEM modeling tool to reduce our dependency on third-party add-ins that aren’t specifically designed to enhance the development of RF components. Our business model, our business model is licensing on a per unit royalty basis. We're focused on companies that we believe have a shortest time to revenue, whether it be those vertically integrated companies that are more nimble, that are trying to capture share by being more aggressive or by leveraging our foundry model to enable an entirely, new segment of the filter market. The fabulous filter companies want to move more quickly to enter the filter market. These elements combined, enhance predictability and reduce risk and create tremendous opportunities for Resonant. Before we jump into Q&A though, I just like to say a few more words. I'd like to inform you that Jeff has asked for my support with his plans to announce his retirement from his role as CFO later this year. We are pleased Jeff will remain involved with the company, first as a consultant and then leading our advisory board. Jeff has been my business partner and friend since he joined the company in 2016. I will very much miss his daily advice and friendship. We all wish him well and best of luck in his retirement. We have retained the search firm to identify a suitable replacement and expect to conclude this process in the third quarter, as we have identified and met with a number of extremely qualified candidates. Now let me hand it over the operator for Q&A. Operator?

[Operator:]

Thank you. Ladies and gentlemen we’ll now be conducting a question-and-answer session. [Operator Instructions] One moment please while we pole for questions. Our first question comes from the line of Anthony Stoss with Craig-Hallum. Please proceed with your questions.

[Anthony Stoss:]

Congrats on the two million customers. I have a two-part question George. Can you maybe help us better understand the new Tier 1 innovative filter maker, the timing of that and how long that's been underway and maybe where they are in the cycle for you guys when you think you might have product launches with them? And then secondly, is the delay if you will or what's taking a bit longer is that the testing on your customer side or the ultimate smartphone customer side? Thanks.

[George Holmes:]

Great questions Tony and thank you. So first, let's talk about the Tier 1 customer. I think as many of you probably know and I know you know Tony is Tier 1 customers take a long time. Typically what Tier 1 customer can take as much as 24 months from the time you first meet them and start talking about your technology to the time you get your first opportunity for an engagement and then that engagement could either be JDA or JDA LA, which we've been successful in doing many times before. This customer has been engaged for a relatively short period of time. We got involved with them in the middle part of last year. And since that point in time this first agreement is a JDA for the development of a duplexer, which they will evaluate against their own internal capabilities. And as we look at those things over the course of the next, I think, it's less than 12 months as we develop that part and provide that two down from a simulation perspective and then as we ramp very quickly through their process, we hope to get that to a point where we can actually start delivering parts and transition that from JDA to LA.

[Anthony Stoss:]

And then it’s like a fall for Jeff, I’m sad to see you retire. But nonetheless, I wanted to be clear did you say that your full year 2018 guide is trending towards the lower end of what was tending towards the mid-range? And then just to clarify the statement in the press releases where George talked about seven digit revenues, million revenues for Q4, because it seems like the math might be a little bit less if you're going to only hit a $1 million in revenues in Q4.

[Jeff Killian:]

Great a multi-part question. So let me tackle the first one about my retirement. And thanks for asking. So for personal reasons I need to spend more time at home up in Portland. And supporting that family there’s some changes and some support requirements up there. That being said, George is supporting me in the transition and he's allowed me to continue in a mode to help participate with the company, and advisory boards and consulting role. And he's also allowed me to help support him in the CFO replacement search and recruiting process. And from a transition perspective I believe that our balance sheet has never been stronger. You can see over $30 million for the last two quarters and we've been continuing to execute to our strategy with customers’ license agreements. And I'm getting more of our designs into qualifications and into the market for placement in, in socket. So thanks George for your support and that's what's going on behind the scenes with my early retirement. And so again thanks for asking. The second part of your question was, I think, really trying to focus on some of the information that George has put out there in the press release and in his comments and our prepared comments about where are we with the mid-to-low, as well as a seven-digit type of figures. And so George do you want to jump in on that one with the color of the background?

[George Holmes:]

Yes. Let me give you a little bit of background on the statement that we've made in previous quarters. Our original guidance back in February said we thought we would reach a minimum of seven digit on a quarterly basis by year end. We have reemphasized that guidance, we believe we will get there as previously noted. In our Q1 call, we said we'd trend towards the mid-seven digits on annual revenue basis. And when we talk about trend that says we're moving up into the right obviously and we're hoping to get into that middle range. I think where we find ourselves today as we look at where costumers are and as we're going through the qualification process which allows me to come back and touch on your second question for me. When we started it is if you look at where we are, our qualifications are we have 14 devices that have been qualified by our customer and are currently in the sampling process. I think where they are, is they're in the process of sampling those devices to OEMs. And they're in the qualification on the back half of the process and that's what takes time. We've done a lot to try to shorten that time by helping our customers with our reliability testing with what we call, set testing, which is what when they get us a handset from a OEM and they have to actually drop the filters into that handset, test them over temperature, they have to match them to make sure they get the actual performance they need. And we have a method to actually do that in software whether in the old fashioned way that requires the guy to sit in front of a test bench and actually test individual parts and do that over a several week timeframe. We’re doing that in less than a day to day leveraging our ASM platform. So I think a majority of the timing that is really kind of stacking up on us right now is the qualification timing of our customer with their customer, because we've actually put in our products into qualification to represent that number that we talked about earlier, which is ramping towards at the end the year about $200 million worth of end product revenue under contract that will be out there and available for our customers to sell into the marketplace in the fourth – late part of third quarter, fourth quarter and 2019 and beyond.

[Anthony Stoss:]

Understood, again on the two million customers.

[George Holmes:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Quinn Bolton with Needham and Company. Please proceed with your questions and it's a question.

[Quinn Bolton:]

Hey guys just wanted to sort of follow-up on that last question just about the revenue ramp. And congratulations on the nice customer traction and the growing number of designs under the contract the increase in the number of customers. You kind of look at the revenue ramp, especially at the royalty side in the second quarter looks like it came in a little bit lite at least relative to the Street consensus. Do you think that that’s really more a function of it just taking longer to get these designs qualified at OEM level and shipping, in phones or is it that the phone volumes for those designs die to perhaps come in lower than expected. Can you just give us a little bit more color on why that royalty seems to be tracking a little bit behind some of the prior expectations? And then I have a follow-up question. Thanks.

[George Holmes:]

Okay, we’ve got two things that I’ll touch on there and then I’ll let Jeff add some additional color there as well. So a couple things happen in the second quarter, clearly that I think are extremely positive. Obviously, we saw 20% uplift in the ASPs of the devices. We had under contract and we saw a doubling of the royalty rate. So we got two of the major milestones to hit in the second quarter. The third one was ramping volume that we had talked about should hit in the second quarter. And what we saw happen is that tailing off of one of the very early designs that we did that shipped in high volume last year and that was one of the designs that was – a design made up of three low value filters that were being shipped into a Middle Eastern market application. It was a stiff that was being done or a promotion that was being done in a – and one of those Middle East markets that had a pretty high uptake, high volume, drove a lot of our volume last year that that stiff went away in the first quarter. So we started seeing volumes trail off and they didn't get into the next generation of that bit phone for 2018. Not a big deal I don't think from an overall perspective. As we have said previously we thought the first half would be nominal. The big moniker that we're kind of tying to and that we’re excited about is these key indicators on higher value and higher royalty rates. We think that's going to put us in a good shape for the second half of the year. The challenge you have – when you're a – the optionality that you have when you're a royalty based company is you get real high margins, but you’re not the ones that are actually selling the device, we’ve got to wait until those device manufacturers actually sell them into the OEMs. We think we're getting good traction there and we're doing a lot of things as we've talked about on this call and previous call to kind of collapse that backend process, but we can only do so much is being a guy that does design work. Jeff what have I missed on that?

[Jeff Killian:]

And I think you've recapped that well and I think that’s Quinn not to put words in your mouth, but what you're kind of asking is that and Tony handed out too is that from the press release that we’re confident that we will achieve the seven digits on a quarterly basis in 2018 and then we’ve also talked about ramping to the low mid seven digit figures. And so what we have decided is a number of scenarios plan against the over 60 designs that we currently have in contract. We've focused on those extensively. And we've assumed in our conservative look forward that we don't ever get another license agreement what do we generate from that. And so – and looking at that you could say that in scenario planning that George talked about from 30% success or conversion rate to 70% for the 2019 consensus that’s out there in the analyst world is that clearly 2019 consensus splits within that modeling and again we've said it’s about – one it's going to hit does not hit, it’s going to hit. And so we're watching closely a quarter in and a quarter out how we align with 2019. And if you want to talk about looking at the – what does low to mid mean? So we're talking about that in seven digit framework that could be from 1.5 million to 4 million. It could be something that a midpoint around plus or minus 2 million as we look at the annual seven digits that we're talking about moving in 2018 and building to 2019 ramp.

[Quinn Bolton:]

Got it, got it. And then I might have missed this and I apologize if I did. I think in the end of the first quarter, you guys had four devices shipping for volume production or royalty revenue three, which were the very early designs. Did you give us an update on the number of devices shipping for production and royalty in the second quarter?

[George Holmes:]

We didn’t give an update on what that number would be. We said that if we expect to have as many as ten shipping in volume by the end of the year as we go through the qualification. I think what you'd find today is we've got those four devices now in multiple sockets that are making up the royalty revenue in Q2. And now we see an expansion as we go through and continue to put more devices into qualification. We expect to see that pick up in the second half.

[Quinn Bolton:]

Got it. Okay, and then a little bit further out in terms of revenue impact, but you guys talked about the BAW process and the BAW design that you're currently undertaking. It sounds like the performance you've modeled is pretty impressive relative to what’s out there from competitors. I guess my question for you is historically I believe your foundry partners have mostly been SAW or TC-SAW manufacturers. And so, can you give us any insight on to your BAW manufacturing partnerships? Have you signed new foundries that that bring you that BAW process technology to address the 3 gigahertz to 5 gigahertz band in the future? Thanks.

[George Holmes:]

Okay, great. I mean, Quinn, great question and you’re teeing off on something that I'm very excited about. We’re significantly earlier than we thought we would be in a position to actually be doing test wafers. I thought this was probably more like going to be a Q1 2019 type of effort. The team has moved very aggressively but actually filed a number of provisional patents this past quarter because of how novel this approach is. The good news is if you look at what we're doing and the creation of this foundry program, we have foundry partners now that are already identified on our website that are have the capability to actually do some of this work already as you know the BAW process is very semiconductor ask we're actually. This isn't a straight BAW type structure. Obviously, we're not trying to reinvent the wheel. The guys that have gone before us have done very successfully. We're trying to use novel approaches to have equal to or better performance with very cost effective structures. What I can tell you today without getting too far out over my skis is this leverage is a little bit of both and we already have partners today that can build these devices. Does that answer your question?

[Quinn Bolton:]

Great, thank you.

[George Holmes:]

Okay, great.

[Operator:]

Thank you. Our next question comes from the line of Kevin Dede with HCW. Please proceed with your questions.

[Kevin Dede:]

George, Jeff…

[George Holmes:]

Hi, Kevin. How are you?

[Kevin Dede:]

I am good. I am good. Good to catch-up with you guys again. Sorry to the news, Jeff. I will definitely miss you. It’s been a real pleasure. Portland is not far away me though. So stay in touch.

[Jeff Killian:]

Great. You will be in touch. Thank you. Thanks for the kind words.

[Kevin Dede:]

Yeah, sure, sure, sure. George, did you guys work through any tear downs this past quarter? Anything come up through that? Can you give us some insight and how you think your customers are treating you and they confirm the data you've offered?

[Jeff Killian:]

So let me see if I can address that Kevin. It is clearly we're in a position today where we continue to see our customers lean in and to do more work with us. The activities that we undertook this past quarter, whether it would be expanding the customer base, which we are very excited about with both of these new customers. These things don't happen overnight, but we've got one Tier 1 and one up and comer that is going to move very, very aggressively into the space in particular to support the Chinese market. This is a company that we started working with two years ago. They made a statement to us at that point time that they were going to get into the business and a lot of folks do that. Well, they've got a backend capability already in place that are already packaging parts. And they're moving very aggressively to get the front end done here probably in the next quarter or so. So very exciting time for us – for a customer that is going to be new and moving aggressively into that China market. I think what you'd also see is the fact that we're continuing to extend our relationships with our current customers. We're going after new sockets with them. Clearly having one of our largest customers deploy a piece of our software is into their manufacturing process and allow us to get in and work with them to understand what that software does, refine it, tweak it and help them make better parts. It’s a pretty significant move. I think it's significant for them. It's significant for us because it shortens the time to revenue. And more importantly what it is it allows us to validate our software platform, which is clearly a future roadmap item for us having the ability to really have an end to end EDA software suite enabled for the RF front end market, which will obviously be a first of its type if we decide to commercialize that. The other thing that Jeff noted and obviously we're getting inputs from our customers is that we have embarked on computational electromagnetic modeling that is a very big deal. It's typically done by very, very large companies. They tend to have software platforms that sell from a $150,000 to $500,000 at Street, but they're generic. They're designed to work on a variety of different products and they are designed specifically for the problem we have at hand. We’re designing a solution specific for the problem and because we’re designing a solution specific for the problem, we think it will do a better job of what we're trying to do. It will allow us to design parts faster, which is one of our key value propositions. I mean I think you've heard us talk about design efficiency in the past where we believe we're at least three times as efficient in designing filters than the biggest players on the market. We think this is only going to make us better, that help.

[Kevin Dede:]

Yeah, a little bit. I was just wondering if you had actually had some of your people tear down some of your customers’ – customers’ product.

[George Holmes:]

Well, yeah, Kevin as we've talked in the past we do that on a regular basis. Unfortunately, we can't share that data.

[Kevin Dede:]

Yeah, I just…

[George Holmes:]

I guess when you guess for…

[Kevin Dede:]

I guess what I was wondering is whether or not you’re stuck to that this past quarter and if anything interesting is popped up in your investigations.

[George Holmes:]

We continue to do this on a regular basis. I wouldn't say that it's something that is episodic. It's something that happens regularly as we identify new devices in the marketplace as we're working with our customers. And they identify products that they believe are going into the market and share that with us. We in turn go in and start looking for those devices, so that we can validate that they were out there in the marketplace. That's an ongoing thing for us. It doesn't mean that the big teardown companies are going to find it’s interesting as we do, but we do find that interesting and it's something we're doing on a continual basis.

[Kevin Dede:]

So – and with specific – I mean great progress on BAW, now – are using the CM modeling approach there? Or are you using your standard process?

[George Holmes:]

That levers some the compositional electromagnetic modeling as well.

[Kevin Dede:]

Okay then given the progress in BAW. How are you doing with F bar and what's the plan there?

[George Holmes:]

Well BAW and F are similar structures as you know. And so the actual simulations that we've done internally actually have best-in-class performance against both of those process technologies where there would be the proprietary process technology that one of the larger players has or one of the more standard process technologies that many other players have with BAW. We believe that the resonators that we are currently working on are best-in-class, hands down best-in-class for those high frequency applications and we will be able to do them much more cost effectively.

[Kevin Dede:]

Okay. Last question for me George, well, actually I have one for Jeff too, but on the module that helps one of your key customers monitor and improve their process on site. How does that work from a business perspective? Is it still standard royalty? Or did you guys workout some other deal?

[George Holmes:]

Now that’s a great question, Kevin. I mean we are not licensing that on a per unit royalty basis to them today. That's an evaluation platform. We’re validating. I mean it began as a hey can we try it in your process to see that we get the kind of data that we think we're going to get and then now we've leaned forward now that we've validated that and we're gathering data with them over the course of the next several months. After we get through the evaluation phase that it will be a commercial discussion, but that's premature to talk about at this time.

[Kevin Dede:]

Okay, fair enough. Jeff vis-à-vis what you're suggesting about the top-line? Can you speak to your cash usage, given the great balance I was just wondering if you could point to where you think you might fall out at year-end. Or what you think you might burn in this quarter?

[Jeff Killian:]

Sure. Well thanks for asking actually, so from our perspective on a cash burn basis we burnt $4.6 million in Q2 which was down from $5.2 million in Q1. And so if you take that $4.6 million and start as a leverage point and go forward, and you can see in the last quarter-on-quarter we increased headcount to eight, at this rate we're going to be shy, I think we mentioned on the Q4 call that in 2018 that we will continue to support the ramp and with key hires, it's hard to find the skill sets often, and so sometimes we're training them from inside, but it's not like they will be bumping up against that mid-80 numbers for our employees by the end of the year, just due to finding the right candidate, to fill a very critical role. So that being said, take your four, six and we're going to be inching it up, as we continue with the key hires going forward. Also note that in the third quarter in our releases, that we've been talking about our lease has expired for existing facility and the next facility we will be moving into in Q3 and there's a bit more cash just to establish some additional seats over there in our next base. It’s not a significant investment, it’s a few hundred thousand, but you can see us hovering in this range and growing modestly as we get beyond and move to the new facility, and we continue to invest in the headcounts moving forward.

[Kevin Dede:]

When do you think your move will be complete, Jeff?

[Jeff Killian:]

Well we will be complete in the third quarter, is the current schedule we have with the landlords if you will. And we will do our best to continue to drive that cash out into the fourth quarter. So that's how these things roll.

[Kevin Dede:]

Right, right. Okay. Thank you gentleman.

[Jeff Killian:]

Thanks Kevin.

[George Holmes:]

Thanks Kevin.

[Operator:]

Our next question comes from the line of Leo Gresoski [ph] with National Securities. Please proceed with your question.

[Unidentified Analyst:]

Hi, thanks. And Jeff also sorry to see you go. My question and I apologize if you guys said it, I jumped on late, but what were the units shipped in the quarter?

[George Holmes:]

We didn't highlight the number of units that were shipped in this quarter earlier.

[Unidentified Analyst:]

Okay. Are you guys no longer disclosing that number or is that just an omission?

[George Holmes:]

No, so what we're talking about in the second quarter and we went through the script and let me just kind of paraphrase it again, is that, in the quarter we continue to execute on increasing our average royalty rates they are more than doubled in the quarter with the mix as we continue to move away from low value into the higher value filter agreements we have. The low values were signed early in 2016, there were proof-of-concept and we're executing it to get a higher percentage of the higher value filter agreements with higher ASP and higher royalty rates. And also the average ASP went up 20% in the quarter. That being said, we talked about the volume that we had in 2017 and in the first quarter was primarily relegated to what we call is a Whitebox bump. And that Whitebox bump has short life and is dwindled off. So that did bump into our volume, and we'll continue to keep on, I think, our forecast of talking about milestones as we break those milestones and when we reach the next inflection point for volume we’ll be sure to get out there on our quarterly calls.

[Unidentified Analyst:]

Okay, great. Thank you guys.

[Operator:]

Thank you. Ladies and gentlemen, our next question comes from the line of Cody Acree with Loop Capital. Please proceed with your question.

[Cody Acree:]

Yes, thanks guys for taking my questions. George, or maybe Jeff, the doubling of the royalty rates and the increase in ASPs, can you just give me expectations on what it takes to get to your revenue targets at the end of the year. What kind of ASP and royalty rates would that entail? And what are your expectations for either the trend into the next year or where those start to stabilize?

[Jeff Killian:]

And that’s a great question. And again with our scenario planning based upon this license agreement hitting, this month or waiting until the next month it moves. So you can appreciate with 50 different strong license agreements in hand, how that modeling and scenario planning is developed out in a trend. That being said, to get back to your question, as you know we announced in 2017 that the average royalty rate, of course we have the proof-of-concept, the strategic ones that were very low, but we've been talking a lot about the range being from 7% to 12%. And on this call and in our prepared remarks George was very specific saying that, we've moved up into the right and often these agreements are coming in at 10%, and we actually have agreements now with a 20% royalty. So that being said, the average has moved up into the right. And you saw that as we announced in my section of the prepared remarks. The Q1 average royalty rate was 4.4% and has jumped up to 9.2%. So throughout the rest of 2018, as we began to get the mix with the penetration into our portfolio, you'll see that to move up into the weighted average rates of the 10% range. And even slightly below that, our kicks in to support the consensus of 2019. Revenue up there in primer world. And so I mean that kind of give you some color where we're at. The ASP range all over the place from a $0.05 to nearly $1 and those are the ones that will continue to help that move up. They moved little up quarter-on-quarter sequentially over 20% which is a big driver for us to get into our success that we're talking about in the near term in the fourth quarter of 2018.

[George Holmes:]

And I think Cody, as you know I mean for companies that typically license their technology as a big players are getting in the 1% to 1.5% range so us having a six times royalty rate is pretty significant. We are working really hard to start driving that and I think this is kind of the first milestone that gets us there.

[Cody Acree:]

And thanks for that. And George, with 60 plus sockets now under contract, are you shifting any of your focus from customer acquisition to focusing more on monetization of the designs you have in hand?

[George Holmes:]

No, absolutely Cody I mean you'll see, I mean clearly we are much more selective on the customers we acquire this time, in 2018 versus where we were in 2016 when we started the year with no customers, right. Anybody that had heart beat look back at customer then we got lucky and got a Tier 1 out of the box that’s very unusual. But we feel really good about the customers we got in 2016, but we may have been not as selective as we are today. Today, we have a great group of customers, we have a great group of partners in our foundry program. I think you hit the nail on head we’re being more selective, and we are spending a lot of time building out our team as we noted in the previous two calls. In large part one of the areas that we're spending a fair amount of time is on applications and customer engineering. And that is around making sure that we understand the qualification cycles of guys that are on the backend, what happens when you come out of fab? What do you have to do for extended life testing, so that these devices as they go into the Tier 1 handset OEMs can get qualified and qualified quickly, it's all about data we're doing, a lot to help them gather data. In addition, we're doing a lot as we've talked about, and really helping them understand what it takes to actually qualify a device in a handset, and matching is one of the areas where we're spending a lot of time because historically that takes a week to a month to match the device, if quadplexer it's more like month, if it's a simple filter, it's more like a week in duplexers are somewhere in the middle. We are able to do quadplexers in a day, we're doing duplexers in a couple of hours, filters are very, very quick. And because we're doing it all in software now, we go and we characterize the board, compared to the characterization of the filter and then we match in software. So it's making our life a lot easier. And we believe that we’ll be hoping to accelerate the trajectory of us in the second half.

[Cody Acree:]

Thank you for that. And Jeff, just lastly you gave other than the couple of hundred thousand dollars few hundred more the lease moves. What are your thoughts for OpEx in the second half?

[Jeff Killian:]

I think, let me start with that 46 and cash burn, and we inch up based upon headcount. We don’t add some revenue guidance on a quarterly basis, we don't give GAAP or non-GAAP OpEx either. But I think our trending cash shows that we are very conscientious in using our cash and deploying it to support our ramps. So I’ll start with 46 and build on the model from a cash perspective.

[Cody Acree:]

Alright, great thank you.

[Operator:]

Thank you. Ladies and gentlemen, at this time I would like to turn the conference over to George Holmes.

[George Holmes:]

Great, thank you. And before we close I want to thank all of the employees at Resonant and family, the work they do tirelessly to ensure that we continue to meet our milestones. I also want to thank our investors both new and old, they continue to believe in and support the company. Now in closing, I want to highlight the excitement that I have with the progress we’ve made in the last 2.5 years. We expect the developments in software and IP to yield significant opportunities that will continue to help us transform the industry. Notably, advancements in our ISM platform that if successful, should enable designs in the three to five gigahertz range with better insertion lines, injection levels and higher power handling, and wider pass downs and everything currently available in the market. Cutting edge development of electromagnetic modeling techniques developed specifically for our filter design that will further enhance design speed and reduce cost will be another significant advancement in our ISN platform. 14 designs that are in qualification, sampling and in many cases available set up for sale. And the fact that we expect to grow that number to 20 by year-end will continue we believe to help us approach 10 devices shipping by the end of the year. We highlighted increasing ASPs and the doubling of royalty rates which we believe increasingly indicates our customers’ view Resonant’s perceive value as high, and which should fuel the total market view of the value being created by Resonant. Our team will continue to deliver cutting edge designs, faster, better and cheaper than the market. And we remain on track to deliver seven-digit revenues on a quarterly basis by the end of the year. This achievement should put us in a great position to start 2019. Again, I want to thank everybody for your participation in today's call. And we look forward to seeing you at the upcoming H.C. Wainwright Conference in New York in early September. Thanks again.

[Operator:]

Thank you. Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.