Resonant Inc.
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Greetings and welcome to the Resonant Fourth Quarter and Full Year 2017 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 Greg Falesnik, Managing Director for MZ North America, Resonant's Investor Relations Firm. Thank you. You may begin.

[Greg Falesnik:]

Thank you, operator. Earlier this afternoon, Resonant released financial results for the fourth quarter and full year ended December 31, 2017. The earnings release and the presentation that accompanies this call are available on the Investors section of the company’s website at www.resonant.com. Additionally, some of this information in the 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 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 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. Resonant’s CEO, George Holmes, is your host today and he will introduce the rest of the team joining him on the call. With that, I will turn the call over to you George.

[George Holmes:]

Thank you, Greg and good afternoon to everyone joining us on today’s call. With me today is Jeff Killian, our Chief Financial Officer. For those of you following along, we are in Slide 3. We have continued our momentum in the fourth quarter as we demonstrated eight straight quarters of execution, which we believe has made Resonant a significantly more valuable company. Today, we are in a stronger position than ever before. Most importantly, we transform from a purely development stage company to one with multiple customers engaged over 50 devices under contract and designs that have been commercialized. Part and parcel with our execution has been the massive disruption and transformation of the filter supply chain that Resonant is helping to enable. In 2017, we enabled an entirely new segment of the market, which we have characterized as established filter companies. In many cases, these are key component providers to the RF front-end markets who do not have their own filter foundry, but want to participate in the rapidly growing market and as such have engaged Resonant to create designs by utilizing our ISM platform and IP and having our foundry partners actually create the filters. We then took it one step further and opened up another segment of the market by approaching pure-play foundries and offering them the ability to enter the filter market by leveraging our technology and IP. By creating this ecosystem we are supporting numerous new entrants into the filter supply chain that can effectively compete in the market that has been dominated by only a few key players historically. It is worth noting that a similar model was introduced and proven to be very successful many years ago in the semiconductor industry. In fact, this fabless model was critical to the success and expansion of the semiconductor market. We believe that Resonant is the only company positioned the tools and IP necessary to provide a parallel model for the mobile filter industry. While we believe the disruption and transformation we started in 2017 is in and itself a noteworthy achievement, let me give you a few more facts. 8 customers working with Resonant up from zero, 2 years ago, over 50 designs from increasing complexity that we have been contracted for, up from zero nearly 2 years ago, more than 10 designs that our customers have qualified and are currently sampling to OEMs, up from virtually zero a year ago. And finally, as we have previously announced, over 7.5 million units shipped in 2017 which contributed to our first commercial royalty revenues and again this was virtually nonexistent a year ago. Clearly, we continue to make tremendous progress and we have demonstrated the fact that this team will not be distracted and we will continue to have laser focus on execution and delivering shareholder value. Fueled by our execution, we are already building on our successes. 2018, we expect to be a breakout year for Resonant. And I will touch on these later in my remarks. Before going in further and for those that are new to the Resonant story, I am going to things over to Jeff, to let him briefly touch on who Resonant is and what we do. Jeff?

[Jeff Killian:]

Thank you, George. As noted in George’s opening remarks, we did continued to retire risk with eight straight quarters of execution. This begins with strengthening of the three legs of our stool which are our tools, technology and team. Let me touch on each of these. We are now on Slide 4 for those of you following along. Tools, we have continued to develop our Infinite Synthesized Network or ISN platform to address the increasingly complex design challenges in the RF front end. These enhancements include process design kits or PDKs for the filter foundries to enable a seamless interface with the Resonant tool set. TC SAW or Temperature Compensated Surface Acoustic Wave. This design capability takes advantage of the improved temperature performance available on the TC SAW process. Module interface design capability, Resonant can now work with the module designers to optimize a complete subsystem performance. We have also added the capability to support our customers with OEM qualifications, by adding the capabilities to perform OEM handset tests and related quality and reliability test. It is these capabilities we believe support our mission of shortening the time it takes OEMs to qualify devices and as a result shorten the time for Resonant. Technology, we have continued to invest in expanding our IP footprint, growing the number of patents both domestically and internationally with the keen eye to the competitive landscape for our technology as well as investigating adjacent markets and opportunities that will continue to have the strategic asset be a critical component as we leverage towards increasing shareholder value. Team, we continued to add team members to our team with deep industry experience. Today, we have 53 employees of which 40 are technical. Since this time last year, we added 16 new employees, 13 of which are part of the technical team. We plan to establish presence in China to support our many customers there. A key part of our global expansion has been to bring on team members who have the capabilities to support our customers along with the necessary experience required by the handset OEMs to get parts qualified. So essentially, we have been adding to our capabilities which will ensure a shorter time to overall revenues. As George noted we ended 2016 with zero customers under contract, no development agreements and no licensing agreements. Today, we have eight customers, four of them fabless and in addition five members of our family program. We have contracted developments for over 50 devices, made up of complex filters, duplexers and quadplexers with an approximate market potential of over $469 million in gross filter sales. To help to simplify this story, we also created a series of animated videos that you can view on our website under the Videos tab of the Investor website section. Worth nothing on this front is the fact that in the fourth quarter, we were honored to win the Platinum MarCom Award for these explainer videos describing our business and technology. Now before wrapping up, I will walk through some financials for 2017 which appear on Slide 5 and Slide 6. Revenue for the year ended December 31, 2017 was $653,000 and was primarily related to upfront payments from contacts with customers and modest royalty revenues, this compared to $302,000 of revenue for 2016. Revenue for the fourth quarter of 2017 was $171,000 compared to $187,000 in the same quarter of 2016. Research and development expenses for 2017 totaled approximately $10 million compared with $6.9 million for 2016. And the increase was primarily due to higher costs associated with an increase in the headcount, consulting costs, travel and development costs related to increased activities on the company’s filter designs under development. Research and development expenses for the fourth quarter of 2017 were $3.1 million compared to $2.6 million for the same quarter of 2016. General and administrative expense for 2017 totaled approximately $9.6 million compared with $8.7 million in 2016. The increase was primarily due to increased payroll and stock compensation expenses associated with increased headcount. Travel expenses associated with business development efforts and increased rent expenses in connection with the expansion of Resonant’s facilities to accommodate the company’s growth. This increase was partially offset by decreases related to certain expenses, which incurred in 2015, but not in 2017, including $500,000 of expenses related to legal proceedings, $295,000 of senior executive transition costs, and $92,000 of business acquisition costs. General and administrative expenses for the fourth quarter of 2017 were $2.7 million compared to $2.8 million for the same quarter of 2016. Operating loss in 2017 totaled $19 million compares to a net loss of $15.3 million in 2016. This increase was primarily due to higher G&A expense and R&D cost associated with the growth of the company’s business. Operating loss in the fourth quarter of 2017 totaled $5.6 million compared to an operating loss of $5.2 million in the same quarter of 2016. During the fourth quarter of 2017, Resonant raised net proceeds of $8.9 million from induced warrant exercises. A $2.7 million net expense was recorded related to the transaction. The expense was a result of $7 million paid as an inducement payment to the warrant holders offset by $4.3 million recognized due to the change in fair value of the modified warrants. Net loss in 2017 was $21.7 million compared with a net loss of $15.2 million in 2016. Net loss per share in 2017 was $1.44 and was based on 15 million diluted shares outstanding. Net loss per share in 2016 was $1.57 and was based on 9.7 million diluted shares outstanding. The net loss for the fourth quarter of 2017 was $8.3 million or $0.48 per diluted share based on 17.3 million shares outstanding and was a net loss of $5.2 million or $0.42 per diluted share based on 12.4 million shares outstanding for the same quarter in 2016. On a non-GAAP basis, adjusted EBITDA in 2017 which excludes non-cash charges for stock-based compensation, depreciation, amortization and warrant inducement expenses was $14.2 million or $0.95 per fully diluted share. This compares with non-GAAP adjusted EBITDA in 2016 of $11.9 million or $1.23 per fully diluted share. Non-GAAP adjusted EBITDA for the fourth quarter of 2017 was $3.4 million or $0.19 per fully diluted share compared to $3.7 million or $0.30 per fully diluted share for the same quarter in 2016. Stock-based compensation for 2017 totaled $4.1 million compared to $2.7 million for 2016. Stock-based compensation for the fourth quarter 2017 was $2.1 million compared to $1.3 million in the same quarter of 2016. Cash and investments at December 31, 2017 totaled $19.5 million compared with $9.8 million at December 31, 2016. Excluding proceeds from the capital raising activities in the fourth quarter of 2017, the company used $4.2 million in cash during the quarter, which is up from the $3.1 million used in the third quarter of 2017 due primarily to increase in headcount, compensation expense and purchases of property, plant and equipment. We believe we have sufficient cash to support our planned operations into the second half of 2018 assuming no revenue. And lastly, I wanted to touch based on our share count as it stands today. We currently have 19.9 million shares outstanding. With that, let me hand it back over to George to discuss notable accomplishments throughout the year as well as our outlook for 2018 and beyond. George?

[George Holmes:]

Thanks, Jeff. As noted in my opening remarks, 2017 was truly a validation year for Resonant. As we entered 2017, it quickly became clear that we are on the right track for continued validation and execution based on the accomplishments of 2016. We are now on Slide 7. In Q1 of 2017, I stepped in as the new CEO with focus on working with our partners to commercialize the technology and generate early royalty revenues, which could continue to retire risk and offset cash burn. Shortly after I stepped into this role in February of 2017, we announced that one of our early customers delivered preproduction samples over 1 million units of three designs to multiple OEMs in China. These parts were delivered earlier than expected validating our technology and business model. These shipments validated our capabilities, convert the designs and have our partnership limited into production within 9 to 12 months of signing a licensing agreement. In Q2 of 2017 realizing that our technology had to be in OEM handsets, we began conducting teardowns of number of devices. It was through this process that we are able to verify that our technology was in fact incorporated into at least one OEM handset that was generally available in the market, which validated our technology and business model in a most significant way. And while we cannot teardown on every new handset, it allows us to confirm royalties and in some cases validate the timing to convert designs. We also continue to invest in our core infrastructure and expand our IP portfolio in Q2 as we announced the achievements and attainment of our 125th patent milestone. As part of these core investments, we also bolstered our team with addition of Andrew Kay as Jeff mentioned who has over 15 years of relevant management experience in RF filter engineering and packaging, most recently with Skyworks. Building on the credibility we established early with our customers in the second quarter of 2017, we secured our 7th customer, an established provider of key components for the RF front-end market in China. This customer immediately start leveraging the fabless model, which is as we have described has the potential to transform the entire filter and module market by brining new low-cost entrants into the market. Many of our fabless customers will leverage existing filter foundry partners as well as our back-end and packaging partners capitalizing on our transformative position in enabling established filter supply chain to provide an alternative, stable and secure supply chain for the emerging module market in China. We are now on Slide 8. In Q3 2017, we continue to add to our technical team with the addition of Sohrab Samadian, who has nearly 20 years of IC development experience in the RF and analog design area and most recently from Microchip and MaxLinear. We also appointed Jangwon Jung as our Country Sales Manager for Korea and concurrently opened an office in South Korea. Additionally, we added Jean Rankin to our Board of Directors. Jean has over 25 years of relevant licensing intellectual property, governance, compliance and regulatory experience in the semiconductor industry. During the third quarter, we also learned of a third-party validation of our commercialization by a company specializing in firm teardowns of owning that our technology was identified in the filter design within its Tier 1 niche application phone. It was also noted that the filter was designed into a module delivered by a Tier 1 filter manufacturer that replaced the design from a competitive Tier 1 filter manufacturer. It’s true that part would have needed to be designed by the OEM approximately 6 months from the signing of the licensing agreement with Resonant, meaning a filter design containing our technology took less than 12 months from the signing of a licensing agreement to commercial availability in a Tier 1 phone. This type of speed is unprecedented in the filter industry. In addition, this filter that the teardown company identified was created in SAW as compared to the more expensive bar process that has typically been used for the spend. This again we believe was unprecedented and an industry first. Also in Q3, we presented several very significant technical papers, which detailed novel design methods applied to clinical problems in the RF front-end. These papers were co-authored with Resonant and the Tier 1 filter manufacturer, outlining the ability to address the opposing filter drivers of high power and reduced footprint at high and low temperatures. A few weeks after this event, we signed our first ISN foundry engagement agreement with the Tier 1 component vendor and saw a foundry. Yet again, we believe this de-risked our go to market strategy providing – by providing alternatives in mobile filter supply chain. This agreement with a leading foundry who has also qualified our Tier 1 vendors help to extend our fables filter model ecosystem and offers yet another choice to our fables model customers. Working jointly with key partners, who are already engaged in supporting the massive filter market will provide yet another significant competitive advantage to our customers. In Q4, as we head towards the end of 2017, it became clear that we are gaining even more traction. We started up strong starting three additional foundry partners as well as our 8th customer. We are now on Slide 9. As we have highlighting that during the fourth quarter one of our licensees produced a state-of-the-art full Band 41 TDD filter. That is required for all handset vendors addressing the China market. Using a Resonant surface acoustic wave design not only where we are able to create this very complex Band 41 filter design unless than our stated timeframe of 12 months to 18 months for an ISN Pilot design, but we also did so using a thought process platform. This design has what we believe to be equal to or better performance than many of the bar and FR solutions currently that are on the market. We expect this to be a high volume filter with the potential for rapid growth due to its use in Asia for LTE. Only one month later in November, we announced that a state-of-the-art full Band 41 compatible filter of extremely high power operation was also available for sampling. This design was a complement to the previously announced full Band 41 filter that was designed to address the challenging requirements of the Chinese market. This one was specific to applications utilizing high power and low loss where these elements are extremely critical. The new Band 41 high-power trademark design delivers significantly enhanced power performance over the Band 41 TDD design we announced at the end of October providing a single worldwide SKU for OEMs. Our licensee announced a build of these Band 41 designs were available for sale and they are currently sampling these to multiple OEMs around the world. We believe that our customers are happy with the work we are doing. As we have not only significantly broadened, but deepened our relationships with them in a meaningful way with the increased volume and the complexity of designs. One key touch point is a significant number of quadplexers, we have contracted that are under development currently for difficult bands. As we have noted on past calls, we are doing quadplexer designs in SAW/SAW, SAW/TC SAW and TC SAW/TC SAW and we believe that not only with our partners have the shortest development times for these products leveraging our ISN platform, but also have the greatest pricing and competitive flexibility because of the process technologies that we are able to execute these complex designs in. Representative with speed and positioning of these factors, our first established filter company began sampling our SAW/SAW quadplexers to Tier 1 OEMs in China in the fourth quarter, which has competitive industry performance to other higher costs quadplexers in the market. We are now on Slide 10, as we wrapped out the year, we yet again experienced noteworthy traction announcing a record quarter for selling contracts for new designs in Q4. Agreements signed during the quarter with existing customers, resulted in 16 new designs under contract. The highest tally ever recorded for Resonant during the single quarter. These contracts included wafer level packaging module designs, discrete chip scale packaging designs for the Chinese market, WiFi co-existence designs and a design for a new spectrum, which is – which was recently auctioned. In early January, we announced approximately 7.5 million units were shipped in 2017. Clearly, this was a significant increase from previous reports and shows that our designs are gaining traction as a result of our ability to sign the best-in-class parts more cost effectively than we believe any other player in the filter market today. As the recap for 2017, we successfully closed the year with 8 customers in over 50 contracted designs. We have 10 of our designs qualified by our customers and being sampled by OEMs and we shipped more than 7.5 million units. We consider 2017 a year of validation. I would now like to spend a few minutes accommodating what has been accomplished already in 2018 and part of these remarks which where we think we are headed for the remainder of the year and beyond. As we moved into 2018, our momentum continued as we are informed by our customers that 5 million units were shipped for royalty revenue in January, up from 7.5 million units for the entire year in 2017, a very significant achievement to start 2018. We are now on Slide 11. In mid-January, we produced our fourth video of our ISN foundry program in which we announced the names of our foundry partners. This was the first time that we have been able to disclose partner names, which today includes SAWNICS, NDK, and JRC, Wavetek and Tong Hsing. Later in January, we added an industry veteran, Dejan Nenov to our engineering team. He comes to Resonant with over 30 years of software engineering and executive management experience. His primary responsibility will be to lead the continued expansion of our ISN platform. February marked the expansion of our license agreement with our largest Tier 1 customer. This announcement was significant. In fact that we believe that our confidence to expand this agreement was driven by their increased traction with phone OEMs, which also reflects our continued interest in Resonant’s platform of ISN tools, RF front-end technology and our team, are showcasing our ability to deliver solutions with more demanding filter structures. Also during February, we conducted a number of internal teardowns from devices that became available since beginning of the year. It was through these activities that we identified a new commercially available phone that contains our technology, which is another exciting and significant validation for Resonant. I would now like to speak a bit on our path going forward and the outlook for 2018, which includes several milestones to track as we continue to execute going forward. We expect to ramp royalty billings, beginning with Monness royalties in Q1 and ramping quarter-over-quarter throughout the year. An example of this growth is the ramp in reported shipment milestone of 1 million units in Q1 2017 ending with over 7.5 million units shipped through the year and now starting 2018 with 5 million units shipped in January providing a trajectory of designs with higher ASPs and anticipated higher royalties. As we committed on our last call, we want to be in a position to provide some insight as to royalty trajectory for 2018 and beyond. Today, I am pleased to share that our expectation is by the end of 2018 we should be receiving royalty revenues in the 7 figures on a quarterly basis. This is based in part upon the forecast provided by our customers for design conversions and royalty ramps over the course of the year. We expect to add more devices and phones. We continue to work with teardown companies to help them identify our technology in phones and expect more teardowns providing further validation that our designs have successfully been included in a broader range of phones. These are expected not only to be in Tier 1 phones, but also in other key manufacturers across the globe. We expect continued traction with our current customers expanding the devices we currently have under contract as we continue to execute and deliver parts ready to go to market. We expect to continue growing our customer base. These include vertically integrated customers, fabless customers and foundry partners. We will continue to expand our ISM platform. This expansion of platform entails first making overall platform more robust; second, targeting moving more of the application into a SaaS implementation based on the technology validation we performed in 2017 and finally adding new capabilities as the go-to-design bar filters as well. As we continue to acquire more customers expand the agreements with existing customers, improve our ISN platforms will expand – we plan to expand our team from roughly 50 people today to more than 80 by year end. Directionally, I would also like to touch on the market an opportunity at hand today. The filter market continues to grow at an exponential rate, despite slowing handset growth. We expect the filter market to grow and will continue to be driven by high data rate application, which in turn drives increasing complexity of our front end. We are now on Slide 11. Some of these driving factors include band proliferation up to 40 bands are currently supported by high end smartphones, carrier aggregation, mobile experts predict that over 25 billion RF pass will be shipped that include downlink carrier aggregation by 2022. This will include up to five carriers aggregated to the single band. The proliferation of 5G, let’s talk about what it means specifically. As I am sure you all have heard a lot about it. 5G comprises mobile broadband such as high speed mobile network for video streaming, mobile broadband requires dramatically increased data rates, which equals more RF pass, MIMO and multiplexers, which equates to more complexity and more filters. The IoT and secured reliable networks for things like mobile payments, medical, government applications, these networks will require more wireless devices, which equals again more filters. As we have discussed in the past, the sure size and growth of the market is staggering. For example, your estimate that in 2015 the filter market was 4 billion, the same market is expected to exceed 28 billion by 2025, representing a CAGR of over 21%. Now, before providing my closing remarks, I would like to open the lines for Q&A. I will turn it back over to the operator. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Cody Acree with Drexel Hamilton. Please proceed with your question.

[Cody Acree:]

Yes. Thanks guys for taking my questions and congratulations on the progress. George if you could just go back to and thank you for providing the revenue at least trajectory visibility that you have promised, could you go back to maybe a derivation of some of that just your degree of visibility, you have shipped 5 million units here in January, if you can maybe talk about the level of revenue that may be associated with those 5 million units and then how do you get from here to the seven figures of royalty that you expect by the end of the year?

[George Holmes:]

Well, that’s a great question, Cody. And you have got Jeff looking at me over the top of glasses for that question.

[Jeff Killian:]

Thank you. Well, let me tell you what I think about that and give you some color behind where we see the revenue ramp going. Clearly, when we looked at what transpired in 2017, we had roughly four devices that were generating royalty revenues that were modest. And we identified in particular one commercially available phone in the marketplace that had one of our designs in it, where we now have noted that we have identified the second commercially available phone and we are starting to see per unit royalties ramp as it relates to those increase in unit volumes. And obviously January was a great example of a great up-tick in unit volumes. Now we would expect is as you might with the typical seasonality that happens in Q1 with Chinese New Year and mobile world Congress typically in February and March are a little bit lower. But we expect that January and the first quarter to be a pretty significant bump, overall to our actual run rate. However, as you might expect, the devices that we have under contract that are generating royalties already are the ones that we designed at the very beginning, which were lower value and ultimately, because they were lower value do not have is larger growth royalty potential as devices we contracted either late in 2016 or all of 2017. We also noted during the call and in our press releases that we have had since the beginning of year that and when we started 2017 we had virtually no devices that were qualified by our customers that were sampling and being delivered in volume to OEMs. And when we started this year, we actually had 10 devices. So, I think one the site here is getting better clearly as these things start to ramp, we will start to be able to provide greater resolution into the details by which these forecasts builds up. But again as we have said in the past, we want to see predictability and credibility on our quarter-to-quarter and month-to-month basis before we get out of our squeeze and we really start talking about that in too much detail. Hope that answers your question.

[Cody Acree:]

It did George. Thank you. And if I go back to your grid, your slide that talks about customer enabled margins in your annual volumes and kind of your plots of design activity, if I look at those in the top left that has an ASP that might be as much as $0.50 some odd in the high growth and high margins, under what kind of timeline would those have – those design wins have been earned. And then can you just walk us through the I think you talked about the first kind of the six month window to get from design win to actually designing into a phone for one of your designs, what’s the linear progression from some of those high margin, high growth design wins to when you might expect first revenue for those?

[George Holmes:]

Okay. First let me let Jeff take the first piece of that which is addressing the chart, it’s is on Slide 9 that’s currently up on the webcast. Jeff, I will let you address that as it relates to kind of the proliferate designs that we have gotten. And then also on with the last piece of your question Cody, go ahead Jeff.

[Jeff Killian:]

So as that our ISN platform has been enhanced and developed over time on this chart we started in the lower left and that’s the – we are talking about those now generating royalty and we moved up the chart. As a matter of fact, I think the first time we produced this chart was February of ‘17 and we had about 13 represented dots on there. Since that time there has been no dots added in the strategic box, because that provided us proof of concepts. And we have been – the new designs that we are talking about are those designs like the very difficult Band 41 and quadplexers and the ones that have the higher ASP. And again ASP is average some of those ASPs individually are much higher than that in the $0.54, but it’s a representative sample. And so this chart aligns with our representative designs and we are moving up the chart in value and also in royalty revenue that will come into a resident with there are qualifications that we have in place today and that we plan to execute on tomorrow.

[George Holmes:]

Great. And now let me pickup from there Cody. I mean if you recall we have the four different categories that we classify these parts in ISN Ready, ISN Pilot, ISN Advanced and then ISN Development and those were kind of the different development categories that we put new designs in ranging from 9 months to 12 months all the way up to greater than 36 months for development timeframes. Once we get those products developed, we typically say three months to six months for our customers to take, sample those products and get them qualified at the end to OEM. So if you look at the parts that we ended the fourth quarter with and are starting Q1 with the 10 designs that are in – or completed qualification are in OEM sampling. Currently, we would expect those things to be in a position to start generating revenue in the second half. We do think there is a potential to get lucky a couple of those because as we noted in our last call one of the things that we have done in the second half of 2017 is we have broadened our ISN platform to allow us to use our software capabilities in the design qualification stage between the customers that we have and their end OEM allowing us to do things like matching and doing it very, very efficiently which is typically a very difficult and very time consuming thing to do in the qualification process. So we are doing everything we can to shorten that time to qualification, openly shorten that time to revenue, currently we are gauging that at three months to six months and working really hard to kind of pull that in. So back closing out the question you asked how long it’s going to take for those designs to convert, clearly my expectation is the second half of this year kind of from a worst case perspective and we are working really hard to start making some of that happen in Q2.

[Cody Acree:]

Alright, good. And then lastly, Jeff, you said you ended the year with about $19 million in cash, I think your EBITDA was around $3.5 million in burn, but you had some CapEx that took it a bit higher. If you are only expecting, I know, maybe conservatively into the second half, are you expecting that CapEx to increase or materially increase in your EBITDA cash burn?

[Jeff Killian:]

No, our equipment piece in the capital will be up from year-on-year. I think we are just under $1 million on our cash flow there as forecasted. So, that will go up this year strategically, but we had some key designers coming on board. Each one is equipped with a very, very powerful PC to manage your ISN platform together with the software developed internally and obtained externally. So, it’s really – it’s kind headcount – it’s all headcount based going forward and George gave you include that and maybe up to from our 50 inching up to 80 employees by the end of the year. So, it will be a linear, no big pops along the way, but that cash – the $19.5 million that we ended the year with I think is our strongest cash position we have had in the company for my review of the records. And that being said, we continue to lean forward and do a very conservative forecast with no revenue and how long will it last with our aggressive ramp in new customers, new designs, new designers and so we have got cash clearly well into the second half of ‘18 absent any revenue and it’s a very conservative forecast. It’s a forecast we view consistently each quarter to give an update to our audience.

[Cody Acree:]

And I guess just to be clear what do you expect your cash burn to look like in Q2?

[Jeff Killian:]

We added a number of strategic headcounts in the fourth quarter. We will begin to get the full effect of each one of those headcounts moving into Q1 and so we could see it move from that 4.2 to the upper 4s. It wouldn’t surprise me with timing that you may see a 5 from time to time on a quarter going forward.

[Cody Acree:]

Okay, thank you guys. Congrats on the partners.

[Jeff Killian:]

Thanks.

[George Holmes:]

Thanks very much, Cody.

[Operator:]

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

[Unidentified Analyst:]

Thanks, guys. Just kind of following up on the last question in terms of the cash, Jeff, I think you said in your prepared remarks that you guys feel like you have adequate cash for me to get through to the second half of 2018. Did I hear that correctly?

[Jeff Killian:]

Yes. Absent any revenue and with the cash burn we just talked about, we are well into the second half of ‘18.

[Unidentified Analyst:]

Right, okay. So, well into I think that’s being fairly aggressive, because if you guys ended December at 19, $20ish million in cash even without any revenues even at that 4 or 5 cash burn that you are talking about, you are pretty much well into the fourth quarter and that’s assuming no revenues which we know is not a safe assumption, because you have revenues?

[Jeff Killian:]

Yes, absolutely. I mean, if you just took the 4.3 from the fourth quarter of ‘17 the cash burn with our capital spend and to discuss here just into 2019, we took a very conservative approach. We have got a number of critical headcount and we will continue to add to the group and so we use a very wide range and fit well into the second half of 2018.

[Unidentified Analyst:]

Okay, got it.

[George Holmes:]

Let me first come on top of that too. I think that we have been consistent and being conservative, because we always think it’s better for us to beat expectation rather than fall behind. So, I think that’s kind of the basis and starting point. When we talk about revenue, so it’s another area where we are being very conservative. And the reason we are very conservative is we know what those first devices yield as it relates to early royalty revenue if they were modest. And as we look at things going forward, well, we are positively encouraged by the fact we had a great January. We will positively encourage that we started 2018 with 10 devices qualified, many of which are high-value devices. We don’t have the repeatability yet to sit back and give a predictable long-term forecast until we get several months and hopefully several quarters under your belt, so we can sit back and give you good predictions. So, I hope that helps and kind of give you a line of the sight of how we are thinking. Our goal is to always deliver and beat expectation and that’s what we hope we have been doing so far.

[Unidentified Analyst:]

Great. And then just second question in terms of this first quarter the March quarter, how many customers do you think are going to contribute to your revenues?

[George Holmes:]

Man, that’s a great question. I would say, when we think about the standby doing math is a little heavier. I would say clearly the first two that we have had will continue to contribute royalty revenues in the first quarter. I think that could potentially expand to a couple of more if they have shorter qualification cycles on the shorter side of the 3 to 6 month. So, we could see as many as 4 contributing to the royalty revenues in Q1.

[Unidentified Analyst:]

Great. Okay, thanks a lot. I will pass it along.

[George Holmes:]

Thanks.

[Operator:]

[Operator Instructions] Our next question comes from the line of Kevin Dede with H.C. Wainright. Please proceed with your question.

[Kevin Dede:]

Hey, guys. Thanks for taking the call. I am little curious, Jeff, could you just review the assumptions that you use to build up your 469 addressable market number, $469 million?

[Jeff Killian:]

Yes, that’s a great question. I am happy to jump on that and that’s one of the slides in the deck, I think its Slide 9. And so we used those designs from our customers, we first start with the designs that we have contracted. We add to our customer’s market share today. And we also know the market size of each band. So, applying the market size of the band, applying our customer’s market share and assuming that they continue with their market share as we help develop that design for them they would be generating $469 million of gross revenue from the sale of those designs for those bands at that customer market share.

[Kevin Dede:]

Okay, alright. Are you assuming any particular length of time in the market and a cumulative number based on the I guess the market length of the phone?

[Jeff Killian:]

Yes. So, this would be an annualized number for each band and each band clearly has a product lifecycle of its own that lasts much longer than the annual number that we generate here. This annual number is generated from the Navient reports and other reports that we look at. So, clearly, once you get into a band and that band has a phone lifecycle that’s typical, you can get 2 to 3 years of that band and that phone, but that band also has the opportunity to be in other models to go forward. So, there is a lot of opportunity, but this is an annual shot from Navient reports.

[Kevin Dede:]

Okay. George, you mentioned the ISN foundry partnerships, can you just add a little more color on how that’s boosting your brand?

[George Holmes:]

Well, I think its couple of things, Kevin. I mean, it literally has created a lot more opportunity for us and if you look at Slide 10 or talk about transforming your RF supply chain that really is kind of indicative of how this market opportunity is growing. As we look at the market for filter designs back when we got engaged into this market initially, there are primarily about 10 players in the marketplace that you could literally go license designs to and of which 3 of them dominant. Now, with the advent of our fabless model and our foundry model, we have now taken that number of potential customers and multiplied it out by at least 5, so that’s at least 50 guys that we are currently actively engaged with and many of which want to figure out ways to enter the market. And we are working on different types of engagements with those companies to expand our market opportunity. So, as we do that and get engaged with those companies, there is especially – with the foundry model not only are we selling our capabilities to the foundry players and the fabless players, but they are actually selling our capabilities on our behalf – on their behalf as well. So, this is now not only our team out there working and engaging with customers. We now have foundry partners they are engaging with customers and talking to people that actually could be users of our IP and of our support design platforms on a go forward basis. So we actually have kind of expanded our sales force just by enabling this new category of potential partners as they get out there and work with those in the market. Did that makes sense?

[Kevin Dede:]

Yes. I guess I have – I just wanted to know if you thought there might be a multiplier effect, right…

[George Holmes:]

Okay. So let me make it a little bit plainer for you. Yes, there is a multiplier effect, when you sit back and you look at a foundry player, one of our foundry partners, whether it would be NDK or Wavetek or others. I mean those companies already have large numbers of customers. Now that we are engaged with them, they actually take our capabilities, our filters designs are actually teaching them to their customers in addition to us identifying new customers as well. So the multiplying effect is not only are we expanding the potential market opportunity for us by adding the number of customers that we can engage with, but now we have a whole new sales force that’s actually out there selling on our behalf. So the balance here is if we get five that’s the number of customers and now we have 5x the number of players out there trying to sell our products and capabilities to other customers. So absolutely there is a multiplier effect and we are seeing that right now with our current engagement.

[Kevin Dede:]

Okay. So we talked a lot about the headcount on the engineering development side, but you haven’t really spoken to headcount and resources focused on sales and marketing, if you go back to the beginning of last year, when you came in George, I don’t think there was any thinking that your cash balance would be close to $20 million as you left – as you exited the year, so given that – I think the accelerated level that you have been able to generate these foundry relationships and the higher cash balance what’s your thinking on sales and marketing?

[George Holmes:]

Well, that’s a great question, Kevin. The good news is that we get a tremendous amount of leverage from our sales and marketing team that we have right now. The good news is the team we have with Barry Waxman and Mike Eddy, the two guys that lead that effort for us both on the sales and product marketing side, tremendous relationships in the industry, very deep wide relationships with lots of different customers. You add to that the relationships that I bring to the party and then couple that with the fact that we do have a new member of our team that I spoke about on this call and we spoke about previously, JJ that’s in our Korean office and the fact that as Jeff described we are going to be opening an office in China. We are expanding that effort, but we don’t have to go that deep, because as I described not only do we have the engagements ourselves and we have got a good footprint with the customers that we have today, we now have our customers selling on our behalf as well, so there is not a big need to continue to increase the sales and marketing component of the – of that part of the team. So we are very well covered right now, I think we have got a great penetration in the available customers that we have out there in the market today. And I don’t see a big need to increase that other than we will be increasing some applications guys as we continue to work with customers on qualifications at the OEMs.

[Kevin Dede:]

Okay. So along those lines sort of, I guess on the cash, that cash cover basis, one of the slides talked to bar and I am just curious if you think that your cash balance has changed maybe your development thinking and your acceleration of spending on development, what sort of time constraints would you put around being able to address a bar design and how does it change your addressable market?

[George Holmes:]

Well, that’s a great question. So how does it change our addressable market, well if you look at the think process technologies, obviously you have got bar is the one area that we currently don’t address. When we first started we had SAW, in 2017, we added TC SAW and we started the development about late last year just with some initial investigations. We got the plan to get that done over the course of the next 18 months. And what we believe that does for us is it may basically enables everybody in our supply chain to be a potential customer and partner, where today the focus on the bar side are kind of left out. Yet, I think as we know and I think that if you go and do your own investigation is where you will find that it doesn’t matter if you a bar TC SAW or SAW manufacturer you have the same problem, you don’t have enough designers to get all the designs done that you need to get done and your design efficiency is based on historical tools. So the fact that we can bring new tools into the space created design efficiency that’s 5x to 10x what they currently have in-house. We can help all the different process technologies, do things faster, better and cheaper. It is when we get in and start enabling the TC SAW and the SAW boundaries to compete at the bar level that we get a multiplier effect and which is one we get great traction in that area. But it doesn’t mean we can’t add tremendous amount of value from a design efficiency standpoint which makes even that holds with bar foundries and F-bar foundries much more competitive. It doesn’t mean we can’t help in that area as well.

[Kevin Dede:]

Okay. Just sort of housekeeping question, you mentioned what, three devices contributing to royalties this quarter and perhaps 10 contributing to royalties by the end of the year, are those figures straight?

[George Holmes:]

Well, I am not sure that’s what we have said Kevin, let’s see if I can help you out here. Last year, we identified four devices that were contributing to royalty revenues albeit nominal last year. So as we stack up the numbers and let’s talk about this mix we don’t get them confused four devices in 2017 contributing royalty revenues, we talked about two customers. We talked about the fact that the two customers could expand to as many as four in the first quarter for sure by the end of the first half we will have more than two contributing to royalty revenues. When it comes to devices, we have 10 devices currently qualified by our customers and they are currently sampling to OEMs. We didn’t give line of sight of when those devices specifically will be adding to the royalty revenues except as to say that we expect them to convert in three months to six months. We didn’t give complete line of sight on when specifically each one of those devices will start adding to the royalty revenue.

[Kevin Dede:]

Okay. Didn’t mean to put words in your mouth, I just wanted to make sure I have the number straight?

[George Holmes:]

No, it’s having to help.

[Kevin Dede:]

Yes. I appreciate it. Thanks a lot for your attention guys.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to George Holmes, CEO of Resonant for closing remarks.

[George Holmes:]

Great. Thank you, operator. In closing I want to reaffirm the fact that this team will not be distracted and that our laser focus is on execution, not being distracted by events outside our control and really being focused on long-term value and that’s what we are here to be focused on and what we intend to continue to do through the balance of this year. We will continue to capitalize on Resonant’s exceptional technology and growing market opportunity that is in place that has attracted a world class team of engineers, key management and an exceptionally strong Board of Directors. I am extremely proud of the accomplishments that we have achieved to-date and strongly believe our technology, tools and team will bring a tremendous amount of value to the filter industry are resulting in predictable high margin recurring royalty revenues for the company which we believe will in turn generate tremendous value for our shareholders. In conclusion, we thank you for your ongoing support. Thank you, everyone.

[Operator:]

This concludes today’s conference. You may disconnect your lines. Thank you for your participation.