The Street Sweeper

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Sonya Colberg joined TheStreetSweeper in early 2012 as a senior investigative reporter after racking up an impressive pile of journalism awards for her past work at two major daily newspapers. For example, Colberg recently won top honors – recognized by the Society of Professional Journalists and the Associated Press alike – for her performance in the tough investigative reporting field. During her long and decorated career, she has walked away with major prizes for her in-depth coverage of business and healthcare as well. A fearless reporter with incredible writing skills, Colberg has now teamed up with Melissa Davis – another award-winning journalist who serves as senior editor of TheStreetSweeper – to deliver hard-hitting coverage of risky stocks to the investment community.

Resonant Hypes Phantom Customer. Seriously?


This stock’s been jumping around like a youngster hyped up on sugar and now we’re sending Resonant Inc., (NASDAQ:RESN) to the time-out chair. And thanks to its latest press release flaunting a mystery customer, the Santa Barbara, Calif. filter company doesn’t get to go outside for a long, long time. Investors punished the company late last month for increased losses – and more importantly for its deficient product not meeting the standards of its Skyworks customer – sending shares to $15.33 then tumbling back down to $9.54 the next day. Corporal punishment ensued in the form of six law firms investigating possible securities violations and possible breaches of fiduciary duty regarding the deficient filter design geared to help cut unwanted frequencies in mobile devices. Ultimately, the only thing odder than the press release Resonant launched 10 minutes after the market closed Monday, March 9 was the reaction to it. Amid rumors that bull pieces or a leaked press release instigated buying, shares began rocketing, approached $12.99 around 11:30 a.m. and jumped more after hours to $14.40.
Resonant’s press release simply stated it “has engaged” with an unnamed second customer for an unnamed product.  “The customer has not committed to use the resulting design and terms for a license have not been finalized,” Resonant stated in the release. Meanwhile, Resonant’s mystery customer became a topic at the ongoing Roth Conference in Laguna Niguel, Calif. where the company is scheduled to present today, March 10.
“The way you look at these no-commitment type deals is that’s exactly what it means. No commitment. No risk,” an analyst attending the conference said Monday. “If Resonant came up to me and said, ‘Hey, I’m going to do a design for you for free.’ I’m like, ‘Sure, man, why the heck not? If you want to give away stuff for free, I’m taking it,’” he added. “So I don’t understand why the market got all excited about it.”
Skyworks: Substandard Resonant Product
The announced ghost customer and undefined project closely follows another big disappointment. After working about a year on a duplexer designed for Skyworks, Resonant executives stunned analysts with news that, though Resonant will try to bring the product up to expectations, the effort has apparently fallen apart. “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,” said CEO Terry Lingren. “Our customer’s decision whether to use our design is complex and based on a number of considerations, many of which are beyond our control,” he added. In the uncomfortable exchange during the Feb. 26 earnings call, analysts tried repeatedly to get more details.
Wall Street Capita Partners analyst Jeff Kone asked why Resonant wouldn’t just continue working on the design if they delivered it a month earlier and knew it wasn’t acceptable.  “… we thought that we had a design which was competitive. In addition our customer’s clock — they are getting anxious and so we felt we have a competitive product but we have submitted that for their consideration,” Mr. Lingren said.  “We thought we had a design that was competitive,” the CEO repeated. Yet, Skyworks considers the design defective. And the agreement spells out dire consequences due to the failure. “If Skyworks is unable to correct all such matters within thirty (30) business days following the Skyworks Defect Notice Date, Resonant’s sole remedy and recourse for such failure shall be to terminate this Agreement by delivering written notice to Skyworks, which shall become effective 30 days after delivery, or to waive the failure in writing and proceed with the Development Project.  Following any such termination, none of the parties shall have any further liability to the other and this Agreement, including all exclusivity provisions, shall terminate except for the confidentiality obligations of Section 6 which shall survive such a termination.” Investors may find other viewpoints on Resonant here.
Background: Superconductor Stepchild
Since Resonant is a late-stage development company with a dream in search of an acceptable product, we look to management’s actions for guidance. And that’s just about as unusual as its new press release and stock reaction.
Dr. Robert Hammond, a Cal-Tech gentleman with a 20-year-long affection for semiconductors, started Superconductor Technologies (SCON). Superconductor offered both wired semiconductor and wireless filters, with sales of wireless primarily to Verizon for old 2G. But when the time came in 2012, Superconductor preferred to stick with its non-commercial, ho-hum, expensive wired semiconductor. And it spun off its 2G wireless solution suitable for repurposing by Resonant.
What’s Resonant Worth? Founders Suggest Not So Much
And a funny thing happened on the way to the spin-off. Superconductor ultimately swapped its 30% equity interest in Resonate for a$2.4 million convertible note, suggesting a value of $8 million on Resonate.
Wait …. just $8 million? That’s right. The founders considered Resonant worth $8 million. But now Resonant has captured the market’s eye and has given it a nearly $100 million valuation.
So the folks who understand the technology and potential consider Resonant worth 14 times less than the market value. An analyst told TheStreetSweeper he thinks the stock is worth virtually nothing.
Who’s In?
So $100 million is an outlandish valuation ultimately handed out even though other red flags flew long before the odd press release – actually, during Resonant’s initial public offering. Saddled with going concern issues over liquidity and unable to attract a big venture capitalist, Resonant grabbed the arm of underwriter MDB Capital in May 2014 and stepped onto Wall Street. This association with MDB is considered a red flag because the investment firm has been the underwriter for various desperate companies. And those investors have found themselves holding stocks whose values have dropped from about 30 percent to 80 percent. These include stocks we’d love to forget, including Second Sight Medical (EYES then ~$24, now ~$17), Clearsign Combustion (CLIR then~$10, now ~$6) and Uni-Pixel (UNXL then split-adjusted $35, now $~7).
Who’s Out?
Bulls have argued that Resonant could get bought out. The majority of analysts we spoke with grumbled that the notion of Skyworks buying Resonant is unlikely. “If they were interested, why not buy 5-to-10 percent of the company at the offering?” said one analyst. Another analyst, Jake Dollarhide, CEO of Longbow Asset Management, said a buyout would not be unheard-of but suggests investors always consider a company’s fundamentals first and foremost. And he advised caution. “I would not recommend that someone buy this company in hopes that it gets bought out,” Dollarhide said. At Resonant’s $57 million IPO, Skyworks had $798 million in its pocket. So if it had been interested in Resonant’s technology, indeed, the company could have invested at the IPO. But no. Around that time, Skyworks chose instead to become a majority partner  in a joint venture with Panasonic Filter Solutions. A Seeking Alpha bullish article said that Skyworks preferred a licensing deal with Resonant simply to eliminate risk. “If Resonant does well, so does Skyworks, and if Resonant doesn’t do well, Skyworks gets a cheaper price on the company, and will buy it for its IP portfolio,” the author stated. But now that Resonant’s design has failed to meet standards, why on earth would Skyworks be interested in acquiring a portfolio of potential failures?
Besides, Resonant, with its “0” revenue and $13.8 million cash, faces many large competitors such as Avago (AVGO, $5billion revenue, $2.6 billion cash) and Qarvo (QRVO, $1.3b revenue, $297 million cash) already work within this space.
Material Weakness
Resonant is awfully good at sending out meaningless, hyped press releases but what about its internal controls issue showing a material weakness that was filed with the SEC on Oct. 2? The company indicates investors shouldn’t rely on previous consolidated financial statements for the 3 and 6 months ended June 30, 2014. Though the matter was later remediated, it also increased loss per share for that period. Still, the company failed to alert investors, except through an easy-to-overlook filing that wasn’t filed until months after the fact.
Shares Looming
And now, another significant negative catalyst is lurking just around the corner. Another 10 percent of the current 6.9 million outstanding shares loom over shareholders’ heads. A total of 700,000 shares from Superconductor Technologies’ $2.4 million subordinated convertible note have been locked up nearly a year. After the May 28th expiration – look out below – part or all of that flood of stock may be sold.
Conclusion
If Resonant’s new hyped deal is so good, nobody would be wondering about the mystery man in the bowler hat. That customer would be happy to let Resonant use its name and Resonant wouldn’t be embarrassing itself by issuing a ridiculous press release. Besides, if history repeats itself, the new deal will crack apart anyway, just like the Skyworks deal. A $100 million is a lot of money. And a $100 million company has to have something besides maybe one customer who’ll maybe pay a few dollars for what may be a product, in maybe a few years. A $100 million company has established products, typically many customers, many resources and cut-throat determination to beat out the competition and win more customers. Resonant is definitely not that company.
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