Is An Equity Offering By Resonant Inc (RESN) On The Horizon? by Guest

On February 20th we highlighted several risks associated with an investment in Resonant Inc (“RESN”). Since then, the stock price is down approximately 20%%. Ironically, despite the drop in the stock price, we think the risks associated with an investment in the company are even greater now than they were before.

One of the reasons Resonant’s stock price has fallen is that on February 26th the company disclosed that “We have delivered a completed duplexer design for consideration to our first customer. Our design does not meet all the specifications in the development agreement, but we believe it delivers competitive performance, which we view as a major accomplishment,”

Many investors had expected this first customer to be a large source of revenue for RESN and it is now unclear if this customer will ever generate any revenue for Resonant. For more information on this point, you can refer to http://www.thestreetsweeper.org/undersurveillance/Resonant_Hypes_Phantom_Customer__Seriously_).

Resonant Inc Logo

Investors’ concern for Resonant’s equity offering

Another reason we believe the stock has traded down is that some investors are concerned that RESN will soon be doing an equity offering.

The company has made no secret that it may need additional capital. In its latest 10Q it states (note: we have added the bold italics for emphasis):

“We recently completed an initial public offering to raise additional capital.  There is no assurance that the proceeds will be sufficient to provide us with adequate resources to fund future operations, and we may need additional financing to continue with our plan of commercialization and for general working capital.  Further, if we are unable to complete the duplexer design under the development agreement or Skyworks declines to license the design, we will require additional financing.  No assurance can be given that any form of additional financing can be obtained, that the terms of such financing will be acceptable or that such financing would not be dilutive to existing shareholders.”

Some investors believe the company’s need to raise capital may have been exacerbated by the recent disclosure that the product Resonant had been developing for Skyworks “does not meet all the specifications in the development agreement.”

Concerns about a potential equity offering were also heightened in some investors’ minds by two additional facts: (1) There were a relatively large number of sell side analysts on RESN’s recent earnings call (none of whom currently publish on the stock according to Bloomberg) and (2) RESN is presenting at a number of investor conferences.

As some bulls have pointed out, in its last earnings release Resonant said it “believes it has sufficient cash to support planned operations into early 2016, even assuming no revenues.” However, it is important to focus on what the company did not say. It did not say it has no immediate plans to raise capital.

Investors should ask themselves a few basic questions: If Resonant expects to run out of money in early 2016:

1) At what point would it be prudent to raise capital?

2) Would waiting until later in 2015 to raise capital be wise considering at that point the company may have a far more pressing and obvious need to raise capital and thus might not be able to raise capital at prices even remotely close to today’s price?

3) If RESN was willing to sell equity at $6 per share less than a year ago, would they really hesitate to raise equity at today’s prices which are 100% higher than the last round?

We also remind investors that one of the lock ups that prevented insider selling expires in May.

For anyone interested in Resonant’s financials, Resonant ended 2014 with $13.8 million of cash. The company appears to burning approximately $2 million per quarter, so one can infer the company will end the March 2015 quarter (about 2 weeks away) with approximately $11.8 million of cash.

It is very hard to value Resonant since it has no revenue, no profits, and no visibility into if/when it will generate revenue. As a result, one way companies like this are often valued is as a multiple of cash. Assuming 8.7 million fully diluted shares (as per the company’s Roth presentation, which is significantly higher than the 6.9 million outstanding shares that many data bases use) and a $13 stock price, the company trades at 9.6x the $11.8 million cash balance. We think that’s a very high multiple for this kind of company.

Resonant is a very controversial name. Some bulls claim that its product is disruptive and worth significantly more than the current stock price. Other bulls have publicly suggested the company will be bought out by various acquirers. We are highly skeptical of both of these arguments and question if this management team can really succeed in such a highly competitive market.   However, as always, we encourage you to do your own research and reach your own conclusions.

Disclosure: The author of this article has a short position in RESN