Description

Resonant inc. ("RESN")  is a $145 million market cap Jobs Act IPO that is up 200% since its ipo last May, has no revenue, has no venture capital investors, has underwriters with questionable performance, has significant product risk and is cash flow negative and trades at 10X book value (which is mostly cash).  The stock is up due to Seeking Alpha articles and other promotional activity as well as buying from retail and momentum guys and excitement over the anticipated completion of Milestone 4 which “may” then lead to revenue generation in the second half of this year.  

Let me first say we are not tech investors and suspect there are many others on VIC who will have a more informed view about the technology and its market.  Considering the Company’s valuation, investors base (or more importantly who is not an investor) and who its underwriters are (and who did not underwrite the deal) and who management is, well that leads us to believe this might be an interesting short.

The company is a late stage development company that is creating filter designs for radio frequency, front-ends for the mobile device industry.  The product is unproven and it is unclear if it will become commercially viable or accepted among industry participants.  Some investors are excited about the name because the company is in advanced stages of developing a product that Skyworks Solution MAY elect to license.  (we emphasize “may” because there is no evidence that SKWS intends to license the product  or if it does, how much revenue it will generate and over what period of time).   RESN says it expects to commence generating revenue later this year but has not quantified anything.  Our conversations with SWKS did not help us assess their actual interest in the product.  RESN’s IPO doc (http://www.sec.gov/Archives/edgar/data/1579910/000104746914005225/a2220324z424b4.htm)

and investor presentation (http://ir.resonant.com/presentations) describe the company better than I can so I encourage you to review them. 

However, RESN expects to generate most of its income from this SKWS agreement, so if SKWS decides not to license the product, well…..

We have some other doubts about the stock including :

1. How likely is it that this technology will be accepted considering the numerous existing competing products and new products being developed by other companies (many of which are larger and more experienced).  Since we can’t assess the technology, we wonder…

2. If this technology is so good, why didn’t any traditional VCs invest in the company?  Instead, facing a going concern, the company raised money via an IPO with MDB Capital, which has a history of doing some deals that sky rocket and then collapse (EYES and WATT for examples).  MDB was also involved with UNXL (another VIC favorite) although I’m not sure how actively or recently.

3. SWKS is probably in the best position to assess the viability and value of this technology… if they thought the technology was so interesting, why haven’t they invested in the company.  This is an important question because one of the reasons RESN stock has shot up is that someone wrote on Seeking Alpha that SWKS will buy RESN.   

4. If the technology is so great, why didn’t more institutional investors buy in the IPO?

5. How likely is it that a company that had only raised $7.4mm prior to doing a $16 mm ipo should now be worth $145 mm (note most data services use 6.9 mm shares outstanding but ignore the 1 million in the money warrants).

6. How should one asses the CFO, John Philpott, whose last company (Select Staffing) went bankrupt and his previous company Kreido Biofuels (ticker KRBF) also didn’t perform very well.  NOTE: We do not know how much blame he should or should not get for any of this, but we do wonder why the company couldn’t attract a cfo with more relevant industry experience.

7. Besides its $15mm of cash (which it is burning) RESN’s only other assets are $0.7 mm PPE and $0.5 million of patents, etc…book value is $16 mm…..and a $145mm market cap.

8. Also, if this technology is so good, why wouldn’t a more reputable investment bank represent them (I realize it was a small deal, but more credible banks often do private placements for companies quality, growing companies).

    

Catalyst

Sunshine is the Best Disinfectant