Resonant Inc.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Greetings and welcome to the Resonant Q1 2016 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 your host, Ms. Ina McGuinness. Thank you. You may begin.

[Ina McGuinness:]

Thank you, Operator. Earlier this afternoon, Resonant released financial results for the first quarter ended March 31, 2016. The release is available on the Investor Relations section of the Company’s Web site at www.resonant.com. Additionally, some of the information in this news release and on this conference call contains forward-looking statements that involve risk, uncertainties and assumptions that are difficult to predict. Words or expressions 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 statement is 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 forward 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 release 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 release. I’ll turn the call now over to CEO -- Resonant's CEO, Terry Lingren.

[Terry Lingren:]

Thank you, Ina, and good afternoon to everyone joining us live on today’s call. Joining me today are George Holmes, our new President and Chief Commercial Officer and John Philpott, our Chief Financial Officer. George, Ina and I are in New York for the Drexel Micro-Cap Conference tomorrow, and John joins us via phone from our offices in California. 2016 has been a transformational year for us to date. We’ve signed MoUs with two customers for five separate duplexer designs. These MoUs also included our first upfront payments, which we recorded pro rata during the quarter. We signed our first licensing agreement in April with one of these customers that have a large base of existing customers and strong channels to market. Our customers have realized significant cost and performance advantages from our designs, which they can pass on to their OEM customers, creating dramatic positive impacts on both their margins. As a result, we remain optimistic about the possibility of seeing the start of recurring licensing revenues in this project before the year is up. We’ve stated in recent calls and press releases that we believe we can deliver designs for about half the price and in half the development time for difficult bands and complex designs. Looking back on our trajectory, in 2014 we were able to deliver designs to our partners’ foundry in about 12 months for a single design. This is where the temperature compensated SAW duplexers to replace the BAW. Most recently we delivered the first turn of all five duplexer design required by the two MoUs in fewer than two months. These have all been SAW designs not TC-SAW and many of these were for traditionally BAW bands. This progress has been due to the greatly improved capabilities of our tools and models and to the deepened experience of our technical staff and we believe this progress will continue to improve. As a licensing company, Resonant continues to be keenly focused on building upon and expanding our IP portfolio. I’m pleased to report we now have more than 85 patent issued and pending, further strengthening our intellectual property rights and showing the depth and value of our technology and tools. The last piece of good news is that we completed a private placement on April 25, in which we raised $5.2 million net after fees in an above market transaction. These funds allow to continue to build our technical and support teams to deliver product designs to our customers. Of note, this raise included participation by several of our existing shareholders, board members, and senior executives including myself. We think these additional investments are a strong enforcement of our progress and show a high-level of confidence in our future. Now I’d like to turn the call over to George.

[George Holmes:]

Thanks, Terry. These pass over months have been pivotal for us as we demonstrated the power of our technology through building our customer base. Our progress makes it clear, how we can make the transition from being a technology company to a licensing company. As with every new company in technology, the most difficult challenge is closing at first customer. We think the path to breaking into new and different customers will become easier now that we’ve closed these first two customer engagements. We also report to expanding those relationships with additional projects. With respect to our targeted customer, we’ve identified them as pure-play SAW foundries, filter manufacturers, or a funding module manufacturers, transceiver and reference design suppliers, handset and IoT OEMs. We are prioritizing these target customers by identifying those with an immediate need. We are highlighting our capabilities to filter manufacturers and SAW foundries as the first priority. This is followed by the module manufacturers, transceivers, and base band design suppliers, are marketing our capabilities through the OEMs and carriers. We expect to leverage our capabilities for hard band duplexers with both existing and new customers. We’re also seeing strong interest in more complex designs such as quadplexers, as well as our advanced development projects including the ongoing work on our reconfigurable or tunable filter designs. Looking a bit more closely at where we stand today, Terry has outlined our first licensing agreement, which includes a great fund transfer design, acceptance payment, royalties, but as you know we cannot disclose this information. We can say that this customer or licensee is targeting new handset for design with these filters. Our second development agreement is for the design of three SAW duplexers for three separate bands. This customer has excellent process capability and is an upcoming competitor in this market with a customer base that is complimentary to that of our first customer. We believe that these designs will help accelerate this customer’s growth and will create additional opportunities for both companies. Our next step will discuss on the redesign of licensing agreement. And with that, I’ll turn the call over to John, for the financial report. John?

[John Philpott:]

Thank you, George. While we’re summarizing our first quarter 2016 results compared to our first quarter 2015 results unless otherwise stated. For the first three months ended March 31, 2016, we recognized $27,000 of revenue, which represents the ratable amount of the upfront non-refundable payments we received from our two customers discussed previously. The remaining balance of $53,000 was recorded as deferred revenue to be recognized in the second quarter. Research and development expenses totaled $1 million compared with $746,000 for the first quarter of 2015. The increase was the result of the increased payroll and benefit costs, consulting work and travel and development costs incurred due to the increased activity on our various filter designs under development. General and administrative expenses totaled $1.6 million compared with $870,000 a year-ago. The increase is due primarily to increased legal fees, the hiring of two executives which resulted in increased hiring payroll and related benefit costs and an increase in accounting expenses associated with operating as a public company. On a non-GAAP basis, adjusted EBITDA for the first quarter of 2016 which excludes non-cash charges for stock-based compensation and depreciation, amortization with a loss of $2.6 million or $0.35 per fully diluted share. This compared with a non-GAAP adjusted EBITDA for the first quarter of 2015, of a loss of $1.6 million or $0.23 per fully diluted share. The GAAP net loss for the first quarter of 2016 totaled $3.1 million or $0.42 per fully diluted share compared with a net loss of $2.2 million or $0.31 per fully diluted share for the same quarter last year. We had cash at March 31, 2016 of $3.1 million. This excludes the approximate $5.2 million in net proceeds we received from a private placement we completed in April -- on April 25. At December 31, 2015 we had $2.5 million of cash and investments of $3 million. There are no investments at March 31, 2016. Let me now turn the call back to the operator for Q&A.

[Operator:]

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Cody Acree from Drexel Hamilton. Please go ahead.

[Cody Acree:]

Hey, guys. Thanks. Let me ask few question and congratulations on the progress. Maybe Terry and George, to the extend that you can, I know there is only so much you can say, but if you can talk about the process, I guess, as you move for MoU to signing of the licensing agreement. What were some of the milestones or some of the -- maybe the thresholds or evaluation? What was that your customer needed to go through that allow them and kept them comfortable to sign this license agreement?

[Terry Lingren:]

Cody, it’s always varying customers and of course this is our first time through this. That said, we’re very pleased at how quickly we transitioned from the MoU to a -- the fully binding and licensing agreement. I think that shows their faith in what we’re doing and frankly their pleasure, the progress we’ve made on the designs. That said, it could vary by every single customer we deal with and even by product, depending on how close we get to production. It could be in lots of cases more time between the MoU and the license agreement and for existing customers we may go straight to license agreement for future products. George you want to …?

[George Holmes:]

Yes. I think that’s a good point. You have a couple of good points there, Terry. I think one of the things Cody for you is, we did make sure that there is no typical. I think we feel very fortunate this customer has a lot of faith in what it is that we’re doing, sees the power of our design that’s a [indiscernible] in our design tools and the simulations they got. So they want to move forward quickly. This could have easily waited until after they saw first designs come in. Each deal as Terry described could be different. And I think we’re going to be optimistic to try obviously drive these thing to closer early, but every deal will be different, every customer will be different, and every follow on deal will be different, at least that to our expectation to that.

[Cody Acree:]

And George think so that, the clarity. Sorry, I missed the first just minute or so of the call. Did you give any more color on when you expect those first designs?

[George Holmes:]

We did not give any more color on that. The most we were saying is that we are still hopeful that we will have revenue before the end of this year, recurring revenue from [indiscernible] these filters, duplexers.

[Cody Acree:]

Well, and Terry, I guess maybe if you could then kind of talk about what that means, because your customer has to -- somebody has got to go get a phone for these two eventually end up and whether that is a combination of them or you? Is it a matter of filling a manufacturing supply chain? Is it signing that customer up, I guess, they start manufacturing, you get revenue, but they’ve also kind of do [indiscernible] some place for those products to go?

[Terry Lingren:]

Sure. And they will only manufacture when they have one design flaws at their phone OEM customers. So that’s what they’re doing now and what we’re team up with these designs is a meeting of set of specifications that allow them to go win these design slots at their customers, their phone customers product [indiscernible]. So that will vary depending on which customers. As we’ve said, this is a Tier 1 filter manufacturer. They have a large interesting customer base and so they’re all -- they already have their sales force engaged and they’re looking at where to place these products.

[George Holmes:]

They’re broad based customer base. That’s the key thing for us. They’re not a cartridge supplier. They don’t have one single customer that makes up over 50% of their revenue stream. And I think that’s one of the things that we find very, very exciting about all the customers we have today is they’re not anchored to a single customer. They have a good mix of customers and that gives them greater stability. I think the other thing Cody to keep in mind is while today we’re talking about phone OEMs is that end market for filter designs. I mean, as I noted in my comments, we do see an expansion into other markets over time for these filter designs and IoT is one of them. And we do have partners who are [indiscernible] of them are used with that have those markets in mind.

[Cody Acree:]

I see and maybe if you could also just talk about your customers’ customers. I guess there's a lot of ways to get to the handset. One of them of course would be through a traditional front-end module manufacture and another we go directly to the OEM. Is there a preferred way or more likely way for your products to end up finally starting to see volumes that would generate royalty?

[Terry Lingren:]

Through other channels? We kind of refer to [technical difficulty] product is going, our customers’ customer being the phone OEM. There are other path to market these filters can go into module suppliers. Some of those name as well as potentially other routes to market. Reference designs for instance is a way to get into the phone OEMs eventually. So, there are multiple paths to market. We kind of always talk about our customers’ customer being the phone OEM, because that’s a pretty easy model to understand.

[Cody Acree:]

But Terry is that the most likely half is directly into the phone OEM? Knowing -- I guess just knowing that RF architectures are getting increasingly complex and more of the phone OEMs are trying more that work over to the module manufacturers. And so, is that the most likely path for you to first real volumes is direct into OEM?

[Terry Lingren:]

I think that’s the most realistic path, but first volumes. I think that’s a quicker time-to-market and going into modules that then have to get qualified into phones that then have to be sold to the end consumers. That makes sense?

[Cody Acree:]

Yes, it does. And I guess as you’re working with your first customer, your first two customers, how much in tandem work is there then with their customers? I know you've been given specs and you’re designing too those and so they can then go out and find customers, but are you working hand-in-hand to try to do these things in tandem, so that once you delivered and you’re qualified at the foundry that it's a much shorter window to the next stage whether that be a handset OEM around?

[George Holmes:]

I think our focus right now is on our customer and we’re working with them. Obviously, the closer we work with them, we do get some insight into their customers. But right now our focus is on delivering to what our customers need to succeed in the market.

[Cody Acree:]

Okay. And then, maybe one last thing on that, I guess, when with the signing of the first licensing agreement, I guess how much technical evaluation is there that went into the comfort with going ahead and signing this? I think, you said that they could've waited for the first product. I think all of us are or obviously the entire market is still trying to make up a determination of, of course the attractiveness of your technology, the long-term applicability and we’ve only got a certain amount of third-party evidence I guess to go by right now. And so with the signing of this licensing agreement, is it too much to say that that at least this is the first volatility from a player that’s been able to independently fully evaluate and get some stamp of approval of that technology or am I making too much of that?

[Terry Lingren:]

So, I think that certainly signing a binding license agreement is a validation of what we’re doing. And it has to come through the -- their analysis of our design capabilities, our tools and the help that we’ve been able to provide them through this process. We are in the process of making first parts and seeing the results of those, and so this license is happening concurrently with that. So, sure, yes that’s based on their look into our technology and as I said we’re pleased at how quickly it happened.

[Cody Acree:]

And then, I guess as we -- maybe shift gears just a little bit. George, if you could maybe just -- you’ve now had a full quarter here to get fully involved and I’m sure most all areas of the business, I guess, what has been your key focus for these this first quarter and maybe what's been positive surprise in any -- what do you see as your biggest challenges right now?

[George Holmes:]

Yes, I think the biggest positive surprise is just the power of the tool set, right. I mean, if you look at what it is that we’re doing or representing tomorrow, if you know, we ended designing kind of a look and feel into what our tool set does and its pretty exciting. I think that we see a real ah-ah moment when they get out in front of customers and they can actually see they were actually simulating actual devices and then when they can actually see that those simulations likely turn into actual real devices that come out of the fab, nobody else can do that at the level which we can do. So, it’s a tremendous validation I think of the work that Terry and guys have been doing for last several years. And it’s continuing to move in the right directions. Every customer that -- I’ve been [indiscernible] so far which is a number of them really seeing the ah-ah moment when they comes to looking at the capabilities of our design tools and what we’re able to actually do. But Cody, I want to make sure [indiscernible] let’s take one last quick question and then we need to move on if you don’t mind.

[Cody Acree:]

Yes, of course. The only other thing I wanted to talk to is -- was really John and your level of OpEx going forward. I know that with the number of engagements that you're taking on, do you feel like you have the staff in place and the OpEx structure is for them

[Terry Lingren:]

Yes. I think our cash burn if that’s what you’re kind of alluding to still stand around -- it’s about $2.4 million a quarter right now. So that’s kind of where we’re at and then that excludes any assets or patent investments we make which kind of fluctuate quarter-to-quarter.

[Cody Acree:]

Okay. Thanks, guys. Good luck.

[Terry Lingren:]

Thanks, Cody.

[Operator:]

Our next question comes from Quinn Bolton from Needham & Company. Please go ahead.

[Quinn Bolton:]

Hey guys congratulations on both the recent financing, as well as your first licensing agreement. Terry, I just wanted to come back, you now have two MoUs that cover five different duplexer designs. Wondering if you might be willing to comment whether those are sort of five exclusive frequency bands or whether there maybe some commonality between the five different designs just to try and get a sense of how many BAW bands you may currently be working on? And then I was wondering, you in the script talked about some of that quadplexer interest and wondering where you guys may be in terms of progressing with quadplexer designs? And then I’ve got a couple of follow-on questions.

[Terry Lingren:]

Sure. The first question, these are five separate duplexer designs. So they’re all different. A few of those are traditionally BAW band. A couple as we said before are more straightforward designs. Our second customer is a smaller customer, but is making great strides and this kind of helps them build out a complete portfolio of products. Quadplexers we’re seeing a huge amount of interest in, and we had been very encouraged, in fact our customers and particular customers are very encouraged by the simulations that we’ve shown to date. So we are proceeding on the early development of a couple of different quadplexers.

[Quinn Bolton:]

Just maybe -- just a clarification. On the two different MoUs, could you for instance be working on a band three design or band two design with both parties, or are you working on five separate frequency bands? I don’t know if you’re willing to comment, but that was kind of [indiscernible] to my question.

[Terry Lingren:]

Right, yes, that’s what I thought I said. Five separate bands.

[Quinn Bolton:]

Five separate bands. Okay, prefect. Thank you. And then, a question just on the license agreement. I know it’s for the two products that were for subject to the MoU, and you’ve now turned that into a license agreement. I guess, my question would be, you continue to hopefully engage with this customer and expand the number of products that you may work on in the future, would that require new MoUs and a new license agreement for a third product or fourth product? Or have you now signed sort of a license agreement that would incorporate any future projects you may engage with that customer?

[George Holmes:]

So let me take that. I think we’re going with the original MoU. We now have a fabric in place that we can build upon, so we don’t have to start from ground zero each time we go with a new design. Those new designs will be individual agreements, but they really will look more like a [indiscernible] individual baseline agreement. So for example, we take on a different whether it be a quadplexer or another duplexer for that customer, we’d have a very almost like a one pager that would say, we’re under the same trends that we have with the MoU. We’re going to do this design, and then it would callout the business particulars for that specific design. That would include, if there were repayments, what the royalty rates would be, what the timeline would be, what the specifications would be. But it would really shorten the time to agreement, because we already had that first agreement in place. Does that answer the question?

[Quinn Bolton:]

That does, yes, That’s very helpful. And then, just last question probably, maybe for John, I think you had mentioned some uptick in the litigation or not litigation, sorry legal expenses. Just wondering is that sort of patent filing expenses? Or are there litigation or other legal expenses, just maybe a little bit more color on that increase in the legal fees.

[John Philpott:]

It’s been related to the securities litigation that was filed a year ago. And so as we go through the different processes, and there is an update in our 10-K on it, and so, but we still have to do responses or response to response, and that’s kind of in the genesis of those cog.

[Quinn Bolton:]

Got it. Okay, great. Thank you.

[Operator:]

[Operator Instructions] And our next question comes from Lou Basenese from Disruptive Tech Research. Please go ahead.

[Lou Basenese:]

Hi, George, hi, Terry, congrats on the progress. Thanks for taking my questions.

[Terry Lingren:]

Thanks, Lou.

[Lou Basenese:]

I think in the prepared remarks you mentioned that you’ve delivered all five duplexers under the MoUs, is that correct? The first turn.

[Terry Lingren:]

We’ve delivered first turns, yes on all five to the customers.

[Lou Basenese:]

Okay. And then on the last call I think you mentioned that it might only for a customer under MoU number one that there might only be one or two more turns required. Can you give us any updates on expectations now that you’re through that first turn?

[Terry Lingren:]

We’re still along that same timeline. Still expecting that kind of a number of turns, and there’s nothing in these first parts to deflate it from that path, from that belief. So we have said in a number of formats recently that we think it will take about half the number of turns to get a design done. What we hear and then the industry is somewhere along the lines of 7 to 10 turns, to get a design done, and we think we’re still on the path to do these in three turns, four turns, maybe even five at the most. But really about half the time it takes to typical [indiscernible] to get these done.

[Lou Basenese:]

Okay. So it still could be several more turns from here, is what you’re saying for MoU number one. I’m just trying to judge things up with last call to currently.

[Terry Lingren:]

It could be.

[Lou Basenese:]

Okay. And another question, coming out of the gates, your guys revenue model was based upon a percentage of enabled margin, is that -- now that you actually have a licensing agreement in hand. Is that model still the same and if it’s changed, can you share how so?

[Terry Lingren:]

Its essentially still the same model. We are enabling higher gross margins -- higher margins for our customers. We retain a portion of that as our royalty. And these are actually the kinds of discussions we have with our customers.

[Lou Basenese:]

Okay. So similar, I think before the ranges was somewhere around the line of 15% to 25% of enabled margins. So is that still an accurate guidance?

[John Philpott:]

We’re not going to quote numbers. Its -- we look at the margins that we can enable for our customers, what typical pricing bar or what their costs are, and it results in an equitable split of the margins.

[Lou Basenese:]

Okay. And then maybe just with these five projects that you have under MoU right now, do you believe the volumes associated with them could get you to profitability, if -- again I know there are some assumptions embedded in that question as far as design acceptance.

[Terry Lingren:]

Well we’re not going to give -- we don’t even give revenue guidance at this point. So we’re not going to try to set a horizon for when we’ll get to profitability.

[Lou Basenese:]

Okay.

[Terry Lingren:]

One of the things that we look at certainly when we take on designs is the potential for each individual design and the potential for any given customer.

[George Holmes:]

I think, maybe if I had my [indiscernible], I think one of the things it’s pretty interesting and I think was pretty compelling that we learned through this process with the first two customers is that, some of these customers that are trying to get in the market place have fairly low margins. And by us working with them, we are able to double, triple, quadruple the margins that they make while taking our own licensing fee out of that. So it’s pretty interesting. I mean, we have a couple of models where we’re working with different -- these two different partners where they’re in the sub-teen gross margin level prior to working with us. And now post us, working with them and us getting our royalty embedded in their cost structure, they’re able to give a price delta i.e. a better price to the end customer of 10% to 15%, and still increase their gross margins from that low sub-teens to as high as 30% to 60% in some cases. So its -- I think we’re going to see that this model is going to really prove out well for us over the long-term, especially if we’re looking at very complicated designs. And clearly there was complicated designs where we’re enabling customers to get into markets quickly with some rough complicated designs, the market is not as good but clearly on some of these, well in most of the designs that we work on which were the complicated designs have a great [indiscernible] problem not only for us, but for the end customer.

[Lou Basenese:]

Okay. I appreciate. That’s great clarity, George. I mean, with that in mind, given that they can give discounts to the end customer but there’s plenty of enabled margin there. What do you see is the challenges? I mean is it purely technical at this point, just finalizing the specs and hitting those specs?

[George Holmes:]

Well, Lou, I mean and Terry can chime in on this, because he’s been doing this a lot longer than I have. But I mean, if you sit -- if you sit back and kind of look at the process that we’re going through, and you look at kind of where they’ve been over the last few years. We took the first designs that we did and it took X amount of time. Now you look at the designs we just got their doing five designs concurrently and we did it in 60 days. That is a pretty tremendous achievement in and off itself. I think one of the things that we’re seeing as we go through this process is that, getting lots of great validation. Once these companies get into the market place with those products, I think its going to be a game changer out there. But for us, we’re being very measured throughout the front end going after a class of customers as I described in my remarks that is kind of what we believe is a little hanging fruit, the shortest time to revenue which are those customer that are doing pure-play filters and [indiscernible]. And for us we go after those, we close those deals first. It’s a prior up run as we move up the food chain and get to partners with greater enabled margin that we can get a bigger piece of. But I think first things first. Let’s win, be successful with these first customers. I think we’re well on our way to do that.

[Terry Lingren:]

I agree. I don’t know if I have anything to add to that. Thank you, George.

[George Holmes:]

Lou, did that answer your question?

[Lou Basenese:]

Yes, that answered my question. And the last thing is, just curious; you mentioned that the license agreement is a binding agreement. Just curious, I mean, again this is a naïve question from the standpoint of, what makes it binding in terms of you get to the point where they want to accept the design, or just how are they bound into those terms?

[George Holmes:]

I simply mean it’s a legal contract, as opposed with MoU which a non-binding contract, albeit there were dollars of cash to these MoUs, which is a little bit unusual in itself. But this is the contract, if they go sell these parts then we know the royalty payments we’re going to get from those. And [indiscernible] terms to go with it. We have some audit rights and so forth, but that’s what I mean. It’s a contract between the two of us. [Multiple speakers] this helps them as much or more than us.

[Lou Basenese:]

Okay. So, if they go forward with the design that’s the royalty rates -- say the rates are set.

[George Holmes:]

Correct.

[Lou Basenese:]

Okay. great. Thanks guys.

[George Holmes:]

Thank you, Lou.

[Operator:]

Thank you. I’d now like to turn the floor back over to management for any closing remarks.

[Terry Lingren:]

Thank you. This is, Terry. In closing today, Q1 was a transformative quarter for Resonant, and the opportunities remain more compelling than ever. We signed two MoUs and our first licensing agreement, and we recorded our first revenue. Looking ahead, the demand for wireless data continues to grow at a phenomenal rate and the [indiscernible] market and those especially filter demand is the fastest growing area of the mobile device industry. The growth we’re seeing in unit volumes, sales and complexity all play to our strength. We believe 2016 will continue to be a pivotal year for us, and will ignite our future growth. Thank you all for your attention.

[Operator:]

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