Resonant Inc.
Q3 2015 Earnings Call Transcript

Published: 11 Nov 2015

[Operator:]

Greetings and welcome to the Resonant Inc. Third Quarter Financial Results and Business Update Conference 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 would now like to turn the conference 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 third quarter ended September 30, 2015. The release is available on the Investor Relations section of company’s website at www.resonant.com. There is also a slide presentation to accompany this earnings call. If you like to view the slides during the call, you can access them via the link in today's press release or you can find tem posted on the IR section of the Resonant’s website. Lastly, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risk, 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 Form 10-K and 10-Q 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 publically update any forward-looking statements or supply new information regarding the circumstances after the date of this release. Participating on today's call from the company is Chief Executive Officer and Co-Founder, Terry Lingren; and Chief Financial Officer, John Philpott. And with that, I’ll turn the call over to Terry.

[Terry Lingren:]

Thank you, Ina. And welcome to everyone joining us today for a progress report on our business. I'm very pleased to be able to provide you with an update of the mini irons we have in the fire that have created a lot of excitement here at Resonant, specifically I'll give you an update on our growing sales funnel and provide as much as information as possibly about these projects. So you can hopefully in your enthusiasm for what we're building here and how large the opportunity could be. Please turn to slide three. Let's start with an update on what we've been going product one which is our single band design, temperature compensated or TC-SAW duplexer for Band 3. Band 3 is one of the major spectrum bands for 4G LTE and will be in use well into the future. Over 400 million of these duplexers were shipped in 2014 and this is expected to grow to over 50% to more than 600 million this year. The second generation of the product one filter design continues to be in the qualification process, which is a required step higher to design acceptance and entering into a licensing agreement with the Fab. I'd like to point out that many positive results has been through design that’s brought Resonant, a white paper which is available on our website discusses the performance we've achieved and has provided creditability to both potential customers and the financial community. We had received many positive comments about the quality and content of the paper. In addition, we sampled parts and/or data on this Band 3 duplexer which is our second generation design to several potential customers. This intern is open doors and led to subsequent discussions with the potential new customers, some of which I'll discuss today. Please turn to slide four. Our second product is a SAW duplexer for a large traditionally BAW only band. We remain on track to complete this design by the end of the first quarter 2016. As a reminder, this filter design is for a very difficult band and set of specifications, which is why we're asked to work on this project rather than the customer's own design team. Our customer for this design is a filter manufacturer or Fab and has significant existing marketing channels. We're making good progress and have completed our third Fab turn at this part. We expect a few more redesigns or Fab turns before completion, at which point we hope to commence negotiating licensing terms. Based on the current demand for this band and it's perhaps large existing customer base, we believe this filter design has meaningful sales potential. If the Fab makes a decision to move forward with commercialization which would likely be just after the qualification, we would expect first revenue from this product during the latter half of 2016. Please turn to slide five. I'm excited to announce that during Q3 we have initiated three new product designs for two potential customers. Neither of these customers is a SAW Fab but rather are consumers of SAW filters and their product offerings. For both of these potential customers we were utilizing a new third Fab, a manufacturer of SAW filters with significant experience and existing high volume production into cell phones. These new filter designs are in the early development stages and have not yet been committed by either of these customers. We continue to see these increasing opportunities because of band proliferation, phone skew splintering and industry wide constraints on both manufacturing and design capacity. Even more complex filter requirements such as multiplexing are coming because of the demands of LTE and LTE advanced which require the implementation of Carrier Aggregation and MIMO or Multiple-Input Multiple-Output to increase over their bandwidth. These new requirements provide increased data throughput that creating much more complex RF front-end, leaving the benefit from destroying complexity because of our unique RF design capability that enables us to create solutions that optimize the entire RF front-end system. In fact, this industry-wide constraints on design capacity is a significant driver of many of our new opportunities such as the latest three design projects. We've created an RF design capacity that is unique in this industry. We are the only independent design house in the RF front-end space that we are aware of, and significant players now understand this. We also have capabilities, the teams, tools and technology that are second to none as exhibited by the state-of-the-art performance we detailed in our white paper on the Band 3 duplexer earlier this year. This valuable design resource it's creating interest beyond the [indiscernible] SAW type filters and duplexers to TC-SAW to SAW filters and even just better SAWs. The interest from potential customers in these new projects, further validates our technology and increases our chances of generating multiple revenue streams from the diverse customer base. Early indications are that these projects could develop into memorandums of understanding, which would bring our product portfolio to five. Please turn to slide six. Turning to our tunable prototype project, our goal as you may know is to develop a three state filter prototype which does not exist in the RFFE industry today. As we've often stated, tunable design won the heart of Resonant's long-term vision for transforming RF front-ends for mobile devices. These products would replace the functionality of multiple filters and switches with a single tunable design, reducing both cost and size. This would allow the mobile device manufacturers to reduce the footprint of their RF front-end or add more bands in the same footprint. As you know, the real estate and phone is precious for several regions, so this strategy resonates with many of the industry players. On this slide, we show the output of one of our software design tools. These blue waves are a graphical way to show the goodness of many, many different filter – possible filter solutions on a single chart. I'm showing this mainly to try to give you an idea of the complexity of the task of designing a tunable filter. Each blue dot is a complete filter solution, so literally millions of potential designs can be quickly compared for various attributes and the best ones chosen for more detailed analysis. Since we already have the specs for a band five – band eight design, it made things for us to start the development process with these two brands. We began with this two state filter to address any potential fabrication, assembly or supply issues and to further develop our tools for tunable filters before we advance to building a more difficult three state design. I'm pleased to report that our ISN technology and tools along with the irreplaceable knowhow of our team have enabled us to produce working hardware in our lab, the first reconfigurable filter demonstration we are aware of. This was an important step in creating a truly tunable filter. While the two state filter is not yet up to the specs we've set for ourselves, it is the first physical demonstration of our capability to produce a multistate high performance filter. Due to our decision to allocate resources to a number of our newer projects that have been driven by customer interest, as well as our decisions to start with the two state versus three state filter. Our timelines were completing the tunable filter prototype has been pushed into the first half of 2016. I want to reiterate, we have made significant progress to date which increases our confidence in hitting the market. Again part of our decision to allocate some resources to our newer projects is that we believe they have the potential to expedite revenue and cash flow generation. As a reminder, once we have a prototype tunable filter to demonstrate, we would expect to then enter into discussions with potential customers for customized tunable filters. These customer specific designs would then kick off new product development projects, and ultimately license agreements with those customers. We've talked with several potential customers who shown a sincere interest in a tunable or reconfigurable design. Please turn to slide seven. Lastly on the design side, I want to tell you a little bit more about the early work we're doing for potential customers who are asking for expertise in the Internet Of Things space. IOT is generally aimed at connecting nearly everything from household devices to investor machines to the internet. These made the longer term projects particularly if they involve a tunable filter, but they have the potential to give us early entry into an extremely large in rapidly growing market. In addition, Resonant's implacable design methods and novel unconstrained approaches maybe able to solve some of the unique challenges of size and battery life posted by the small ubiquitous devices. At this point these discussions are invested in nature and are not consuming a much in the way of our resources. Please turn to slide eight. During the quarter we also formed an advisory board to aid and commercializing our designs. The interest for new potential projects has increased and the advisory board's extensive tenure and the industry experience is helping to accelerate these efforts. So far we've appointed industry veteran's Sean Curry, Chris Conlin and Barry Waxman. I invite you to review their bios on my company slides or at our website, but for a few quick highlights, this board now brings us experience from major RF module suppliers, manufacturing and fabrication houses, component suppliers and Tier 1 global phone OEMs. And with that, I'll turn the call over to John to review the financials.

[John Philpott:]

Thank you, Terry. Please turn to slide nine. I’m going to summarize our financial results for the third quarter of 2015 compared to the third quarter of 2014 unless otherwise stated. These results are included in the slide nine in today’s presentation. Research and development expenses totaled $1.2 million in the third quarter compared with $622,000 a year-ago. This increase is associated with the higher heavy account and the increased activity from our new duplexer design projects. The year-to-date R&D expense totaled $3.3 million, up from $2 million of a year ago. Our general and administrative expenses totaled $1.6 million in the third quarter compared with $760,000 from a year-ago. This increase is associated with the increased headcount, stock based compensation and cost associated with being a public company. Year-to-date G&A expenses totaled $3.7 million compared to $1.7 million in the first nine months of 2015. We reported an operating loss of $2.9 million for the third quarter. This compared with an operating loss of $1.5 million of a year-ago. The increase was primarily reflected the increase on the activities and G&A expenses consistent with plan growth and being a public company. Also included in this quarter's $2.9 million operating loss were non-cash expenses of $696,000 related to the stock based compensation and a $127,000 for depreciation and amortization cost. This compares with a $145,000 and $66,000 respectively for similar non-cash cost in the prior year quarters. Year-to-date the operating loss totaled approximately $7.3 million, up from $3.9 million a year-ago. The net loss for the third quarter totaled approximately $2.9 million or $0.40 per fully diluted share. For the same quarter of 2004, we reported a net loss of $1.5 million or $0.21 per fully diluted share. Year-to-date our net loss totaled $7.2 million or 1.1 per share based on 7.1 million shares outstanding. For the nine months of 2014, we reported a net loss of $7.6 million or $2.4 per share based on 3.7 million share outstanding. At September 30, 2015, we had cash, we shifted cash and investment type of maturity totaling $7.9 million. Consistent with previous quarters, our operating cash burn for the quarter with included fixed asset purchase and pattern investments with approximately $2 million. We'll see that move up slightly to around $2.3 million per quarter in the upcoming quarters, but this is as planned and is still consistent with our plan of sufficient cash to support our operation through the first half of 2016. And with that, please turn to slide 10 and I'll ask the operator to open up the call for question-and-answer session.

[Operator:]

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

[Cody Acree:]

Thanks for taking my questions, and guys, congrats on the engagement progress. Terry, if you could maybe talk about some of those new engagements how they came about and maybe compare those and any processes in any size comparison which might be able to your second product in the Fab engagement?

[Terry Lingren:]

Sure, thank you Cody. We – they came about – as we said, many of these new discussions and back with these new projects have come about directly from our white paper we published which provided credibility and validation for our technology, and these new projects are no exception. They are with players and I can't say too much about the myth because we don’t have memorandums of understanding in place yet, but we're devoting resources and working with them on these three new designs. With every new engagement, we judged upon potential sides and value. We're always making those kinds of judgments about new partners and new products that we met might be designing. So without going into the specifics for them, these have passed that test.

[Cody Acree:]

Terry, can you maybe rank order, are you more excited about maybe these new three projects than the first two that you've undertaken?

[Terry Lingren:]

I do the myth complimentary as a continuation of that. The first two really are bought a SAW replacement filters, they're very much in the mold of how we started. If I were to give any more color around some of these new projects, some continue in that band. Some are more an outgrowth of the limitation and design capacity in the industry. So, I'm excited about all of them, the fact that we chose to do them and I guess the best indicator of our excitement. We do think this is a great way to grow our product portfolio or sales tunnel, this is exactly what we set out to do was to increase the number of chances and the number of potential swings and that’s what we've done. In fact, the springs are total number of projects including the tunable to six as of right now which is what we set out to, kind of what we've said we would do is to get to five or more projects by the end of this year.

[John Philpott:]

And Terry also – but Cody, the other thing that I'd add to is, these are being done with the new Fab, so now we have a third Fab in the mix which I think is important and we really think this is a good Fab also and so we're kind of continuing with a very positive Fab and one that has a lot of experience.

[Cody Acree:]

And so these are all with that third Fab, is that correct?

[Terry Lingren:]

Correct, yes.

[Cody Acree:]

Is this Fab relationship likely to bring you any additional customers?

[Terry Lingren:]

It's possible. The Fab – these relationships are a little bit different. The other two – the first two products we've got, we'd really view the Fab as our customer in those cases. Here are the engagements have really been with the consumers of those products, the output of this Fab. It's possible that there could be more customers through the Fab itself, some of their end customers or we could be bringing more new customers to the Fab, kind of works both ways.

[Cody Acree:]

And given the nature of these new to three engagements, is the time to market any different, any faster?

[Terry Lingren:]

It'll be similar. We have gotten faster with these second product we forecast full year, started in Q1 of 2015, expect to be done in Q1 of 2016. There may be some acceleration, I would still judge it to be similar to what we've said on that. We have increased our bandwidth, so we're doing many more in parallel now than before, but I would expect them to be that much faster than what we've done in the past.

[Cody Acree:]

And then actually you have completed your first product, you've got testing deliverables, you kind of have – you know the process, is there anything about moving to these subsequent bands that doesn’t repeat that same process, I guess what I'm saying is, if you can do it for the first product is there any reason that you can't have similar success in subsequent products.

[Terry Lingren:]

No, there is no reason why we couldn’t have similar success. We get learning with every single project we do, and certainly we can apply what we learned with the first project to perhaps lubricate our path through qualification if you will, if you increase this a little bit. We know upfront where we may have had problems in the past and have concurred those and we can apply those learnings directly to these products.

[Cody Acree:]

And then John, SG&A jumps, maybe if you can talk about SG&A jump more than I would have expected. How much of that was stock comp so if you could repeat that? And then just talk about liquidity and are there any design or development constraints, engagement constraints with your liquidity and I guess what are your plans between now and the first half of 2016?

[John Philpott:]

That relates to the G&A increase, yes, it was mostly related to stock comp as I mentioned there was about $700,000 of stock comp in the quarter of loans. And that was just due to the issuance of some stock person consulting work and also for the typical employee stock options or issues. As it relates to constraints, I think our biggest challenge around constraints is just [indiscernible], and so we're still pursuing now, we have a handful or trying to get into the queue and through the process there. So there is really no constraints with the cash as providing until this point. And as we look forward we're just trying to kind of assess where our customers are at, whether these new projects might bring us and we'll just kind of explore our opportunities like I mentioned before we had cash to get us through to the end of Q2, if not, take longer of next year and we'll see what happens.

[Cody Acree:]

John, what do you think are your list of options right now for the cash race?

[John Philpott:]

I think they kind of range all over the place, it could be in equity race, it could be corporate partner financing or some sort, it could be something that’s associated with some of these relationships or it might get some funds upfront if it's possible. I think they really run the gambit. And also there is some opportunities there for some cash from revenue sometime in 2016, it's just a matter of trying to figure out what that timing is and we can win a design here that'll help us out quite a bit.

[Cody Acree:]

All right, congrats on the progress and good luck. Thank you.

[Terry Lingren:]

Thank you, Cody.

[Operator:]

Our next question comes from the Krishna Shankar with Roth Capital. Please state your question.

[Krishna Shankar:]

Yes, [indiscernible] technology milestones, with respect to product one, once the foundry has this product up and running, once a filter manufacturer has this product up and running, I guess they will find modular and phone companies. What is that process, how long will that take and can you sort of talk about the revenue ramp, what the cadence of that might be for the first product?

[Terry Lingren:]

Yeah, for product one we're still in the qualification process. It's chances are going to take a while. It's so different from every customer, I mean through the Fab and then for the Fab's customers and they're trying to engage that – it is difficult to give some insight into – some definitive insight into when that might occur. So sorry, I can't be more specific on that but…

[Krishna Shankar:]

But does this Fab already have some module and phone customers in mind with the use of technology?

[Terry Lingren:]

As we've mentioned before, this is a small Fab and so their customer base is not huge. This is a wafer level package design. So it's really meant to go into modules, so that can limit its ultimate customer applicability a little bit.

[Krishna Shankar:]

I see. Whereas the second product is – that’s with the new filter manufacturer and could that potentially get the revenues quicker?

[Terry Lingren:]

It is possible, yes. This one is done in a chip scale package, so it gets a little bit more and potentially in go faster, do the process. We're still early in that, we're not used to the end of the design yet, so it's difficult to tell but the Fab is much larger, so it has a larger customer base and we fully anticipate that it's possible this could generate revenues soon.

[Krishna Shankar:]

I see. And then for the premier potential products that you talked about with two potential customers, are they smartphone companies, module companies, what types of potential customers are those – the three new projects that you've started?

[Terry Lingren:]

All right. You know, there is so much in this industry, and we try to maintain that confidentiality of our customers, that’s a request. And frankly, we're not even to MLUs yet or for these customers. So, I'm hesitant to give any more color around the actual customers other than they say they did past our bar for engagement, meaning that they're large enough and the market potential is large enough for us to devote resources to them.

[Krishna Shankar:]

Okay. All right, thank you. Congratulations on your tech milestones.

[Terry Lingren:]

Thanks, Krishna. Thank you.

[Operator:]

Our next question is from Quinn Bolton with Needham & Company. Please state your question.

[Quinn Bolton:]

Hi Terry, I apologize I missed part of your opening script but I did hear you briefly mentioned of multiplexers. I just wanted to take a step back, I think your first five projects other than the tunable or all single band duplexers but I was wondering if you could confirm that? And then sort of bigger picture, as we see increased adoption of two and three tier aggregation, what do you think the opportunity for multiplexers is for Resonant and is that an opportunity you might see high the mainstream before some of the tunable designs you're working on? Thanks.

[Terry Lingren:]

Yeah. To answer to your first question, yeah these are all single bands, fixed duplexers that we're designed with these first five. And it's for multiplexers, yeah, it's very interesting. Many customers are turning to this to try to solve some of the Carrier Aggregation problems in the front-end. And we actually believe we've got some expertise that we can lend to that and in fact, from IP around some of these multiplexer issues. We've got experts in-house, we have very long history designing multiplexers. And so like I said, I think we along with our tools bring both – some capability, some design expertise as well as some design capability to the problem with multiplexers, they are different piece. The duplexer is kind of a subset of multiplexers in general. But I'm not sure how quickly this market develops, and I think it's starting to ramp right now as Carrier Aggregation is becoming more and more common in the high-end smartphone. So like any technology it'll probably progress down through the tiers and the lower end smartphone become more prevalent in the market.

[Quinn Bolton:]

Great. Thank you.

[Operator:]

Our next question is from Lou Basenese with Disruptive Technology Research. Please state your question.

[Lou Basenese:]

Thanks for taking my question guys. Just curious if you can give us some color, not what you're working on but just what type of work you're doing before advancing to a formal commitment with these new perspective customers, just trying to understand what type of commitments you're making from a resource side before they make any commitments?

[Terry Lingren:]

Yeah, thanks. Hi, Lou. The projects are different, every customer as I said before has it different, they're all kind of – there are all niche in this market place too. So it does vary from customer-to-customer. Some of the early work is maybe feasibility around – some early design work, to give our customers some idea of performance, maybe even some cost indicators and some of the other is, some actual early design work doing it turn, maybe even do in the Fab before completely engaging just to fully overcome any last bit of skepticism they might have on our ability to do this project.

[Lou Basenese:]

Okay, and then just along – just a follow-on to that, what would a formal commitment look like, I mean you talked about getting to an MLU but you're still discussing possible upfront payments. You mentioned in the prepared remarks that you guys are becoming recognized as the only independent design house with expertise. Seems to think in that situation you might be able to charge for design services or upfront for doing some of this work.

[Terry Lingren:]

Yeah, that’s always part of our goal. We also strive to see if there are – with licensees or upfront payments of some kind, prepaid royalty or other payment steps in with this customer. It's part of the negotiation too, it might be traded off against backend commitments, but yeah, it's always part of our strategy. And as our – I think as our credibility and our validation in the market place grows we have maybe a little bit more leverage to help strive some of this and when a customer who also know that we could use the cash now and it may help them on their negotiating side. So, it's always part of our strategy to look at that and see where it goes.

[Lou Basenese:]

Okay, and then just one last question just want to clarify, on product one I think in the slide you said you're also working on the Gen three of the band 3 duplexer. Is there any reason why you're moving forward on Gen three if it seems that Gen two is kind of hung up in qualification, I mean is there interest from other parties that might be more interested in that Gen three version?

[Terry Lingren:]

Well, part of it was we had momentum at that, it went straight into a version of Gen three, a smaller version. We did the first turn of that and have it pursued in great detail [indiscernible]. Gen two is going through call right now, so that’s really where our resources are being applied. This is a Gen two, we've got the other one, they're on the back burn and ready to go if necessary.

[Lou Basenese:]

Okay, make sense. Thanks again for taking my questions.

[Terry Lingren:]

Sure.

[Operator:]

[Operator Instructions] Mr. Lingren, there are no further questions at this time. Would you like to make any closing remarks?

[Terry Lingren:]

Please, thank you, operator. And if those [indiscernible], please turn to slide 11. I would like to reemphasize the credibility and the growing customer interest that are band 3 design in life they brought to us. We will continue to pursue those opportunities that bring most value to Resonant and shareholders and I look forward to providing you an update on our progress in the coming weeks and quarters. We will be presenting at the Drexel Hamilton Conference in New York City later this week, so I look forward to talking with some of you then. Thank you.

[Operator:]

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