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Edited Transcript of RESN earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Resonant Inc Earnings Call

GOLETA Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Resonant Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George B. Holmes

Resonant Inc. - Chairman & CEO

* Martin S. McDermut

Resonant Inc. - CFO & Secretary

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Conference Call Participants

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* Cody Grant Acree

Loop Capital Markets LLC, Research Division - MD

* Gregory Huston;Oppenheimer & Co. Inc.;Financial Advisor, Executive Director of Investments

* Kevin Darryl Dede

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Rajvindra S. Gill

Needham & Company, LLC, Research Division - Senior Analyst

* Moriah Shilton

LHA Investor Relations - SVP

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Presentation

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Operator [1]

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And welcome to the Resonant Second Quarter 2019 Corporate Update Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Moriah Shilton, Senior Vice President of LHA Investor Relations, Resonant's Investor Relations firm. Thank you. You may begin.

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Moriah Shilton, LHA Investor Relations - SVP [2]

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Thank you, operator. On the call today are Resonant's Chairman and CEO, George Holmes; and CFO, Marty McDermut.

Earlier this afternoon, Resonant released financial results for the second quarter 2019. The earnings release that accompanies this call is available on the Investor section of the company's website at www.ir.resonant.com.

Additionally, some of the information in this 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 statements are 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.

With that, it is my pleasure to turn the call over to George.

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George B. Holmes, Resonant Inc. - Chairman & CEO [3]

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Thanks, Moriah. Good afternoon, and thank you for joining today's call. Joining me today is Marty McDermut, our CFO.

I'd like to begin this call by discussing the outstanding progress related to our 3 foundational pillars of Resonant: technology, tools and team. These are the drivers of customer acquisition, royalty revenue ramp and strategic interest in Resonant that continue to expand our opportunity to build scale and deliver long-term value for our shareholders. For the purposes of this call, I'll refer you to the major announcement we issued this morning.

We ended the first half with greater than 175 patents pending and issued, an increase of 7% over year-end 2018. Currently, 20 of them can be attributed to our XBAR technology. As noted on previous calls, we have a great deal of optimism surrounding our XBAR technology and its potential to dominate 5G handset applications.

As announced earlier today, we have received significant validation of the value of our technology through a pending investment by a Tier 1 filter manufacturer, the consummation of which is subject to regulatory approval and a successful execution of a commercial agreement. We also received commitments from additional current investors, and we expect to close their investments on or around August 12. The commercial agreement contemplates the development of a multiple of fixed number of devices over a maximum of 36 months in exchange for prepaid royalties of an additional $9 million.

In the second quarter, in support of significant advancements we've made with our technology, we began working with 2 new foundry partners to support our fabless program. In Europe, we targeted a high-quality, high-volume foundry to support our fabless customers and library products. We engaged with a U.S. foundry to develop a process for high-volume manufacturing of devices based on our high-frequency and high-performance resonators, both current and future technologies.

Through the first half of 2019, we continued to improve the speed and accuracy of Resonant Infinite Synthesized Networks, or ISN, platform, which resulted in substantial progress in high-frequency filters. The contemplated commercial agreement for our high-frequency filter solutions, which will be designed using ISN, demonstrates the significance of the capabilities of this tool.

Based on our ongoing and continued validation of the ISN platform, we believe ISN puts us in a very good position to help other Tier 1 companies as they strive to compete in an environment where 2G, 3G and 4G solutions have been commoditized, and speed and design precision are going to be key factors for their success. Second quarter, we worked with a Tier 1 design automation company to make Resonant's Filter IP Standard Library products accessible in their software, making our filter design capabilities of ISN and Resonant's standard products available to a broader range of customers.

Now I'd like to spend a little time talking about our team. We continue to build our team focused on developing the tools and IP to support complex filter designs for multiple technologies, front end and back end, and differentiated applications. We are aggressively expanding our relationships with targeted universities that have focused research and modeling, acoustics and RF design through specific collaborations with key faculty and their students.

We recently added a new member of our board, Rubén Caballero, most recently VP of Engineering at Apple. Ruben's strengths include his extensive practical knowledge of what's needed today and in the future for RF front ends and Tier 1 smartphones. He makes a great addition to our board. We have also added key leaders from the semiconductor, handset and financial services sector to our advisory team.

Now let me spend a little time talking about the balance of 2019. With the progress we made in the first half, what does the full year 2019 look like for Resonant? As we discussed in our last quarterly call, the 2019 RF filter market is in a year of anticipation as the market focuses on the transition to 5G. We believe that we have executed and capitalized as planned with our XBAR technology, which we believe is poised to compete effectively in the 5G RF filter market.

We are also moving aggressively to develop additional novel resonator structures and ancillary IP combined with significant enhancements to our ISN platform. As we've shared before, ISN enables our customers to design filters by simulation, which is quicker and more cost-effective than designing by iteration, the design standard for most RF companies today.

It is through these advancements that we have the ability to enable new markets for our design solutions. For example, markets such as the center market are in desperate need for -- of solutions like ISN. We anticipate many new partnerships and expansion of our current customer relationships as companies strive to operate profitably in the upcoming commoditization of the 2G, 3G and 4G filters by leveraging Resonant's IP Standard Library and the speed and position delivered by our ISN platform.

Let me spend a few minutes talking about our KPIs. As we previously stated, our goal in 2019 is to grow our key performance indicators, KPIs, on average of 40% year-over-year, mainly focusing on ramping royalty revenues, demonstrating the performance of and securing a customer for our new XBAR technology for 5G, and adding an OEM to our customer base. Our royalty revenue was impacted by the softness of the fourth quarter of 2018 and the first half of 2019. However, there are still new phones being developed and deployed, both requiring new RF front-end component.

While volumes of existing devices for 2G, 3G and 4G are expected to grow modestly, ASPs are being drastically reduced, in all cases, continuing to create new opportunities for Resonant. We have seen solid progress towards our goal with volumes of more than 1.5 million units in the first half of 2019. This volume is expected to grow significantly in the third quarter with over 400,000 units shipped in July.

We are encouraged by our customers' outlook of the 5 devices gaining traction today and approximately 5 more expected to gain traction this quarter. We are entering the second half with a high level of confidence, inevitability of our revenue ramp and ability to deliver long-term value to our shareholders.

Now let me spend a few minutes on our XBAR platform. We began the second quarter with a plan to validate our XBAR performance and to secure our partners drive the technology into the market in a dominant fashion.

Since our last quarter earnings call held on May 8, we've been successful on both fronts. First, we began the quarter with multiple trips to a third-party Tier 1 test facility, validate XBAR performance claims. The results beat our expectations for performance in 2 main performance parameters while continuing to demonstrate approximately 600 megahertz of bandwidth, which we believe is greater than 2x wider on a percentage of total bandwidth basis, which is the metric that matters to 5G more so than any other 5G acoustic filter that has been demonstrated to-date.

For power handling, we have increased the filter's power-handling performance to more than 31 dBm. This is greater than 1 watt, measured at the band edge with demonstrated low loss and uniform pass band performance. And for rejection, we demonstrated WiFi rejection at high frequency to eliminate interference and allow 5G and WiFi to coexist in phone.

Second, we secured a Tier 1 customer that has agreed to make an investment in Resonant upon signing a multiyear exclusive licensing agreement with us, as noted in today's press release.

Lastly, adding an OEM to our list of customers. We've had ongoing discussion with phone OEMs who are interested in the low-cost, faster time to market and design efficiency to support existing networks offered by our ISN platform. We expect to meet this milestone by year-end given our current customer traction.

Now let me hand it over to Marty for a discussion of our financials. Marty?

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Martin S. McDermut, Resonant Inc. - CFO & Secretary [4]

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Thank you, George, and good afternoon, everyone. The amounts I talk about are GAAP except where noted.

For the second quarter of 2019 as compared to the first quarter of 2019, billings, which include deferred revenues, were $51,000 as compared to $54,000 last quarter. Revenues totaled $63,000 compared to $134,000 last quarter. Research and development expenses of $4.6 million compared to $4.4 million last quarter. Sales, marketing and administration expenses of $3 million, comparable to last quarter.

Operating loss of $7.6 million compared to an operating loss of $7.2 million last quarter. Net loss of $7.5 million or a loss of $0.27 per share based on 28.2 million weighted average shares outstanding compared to a net loss of $7.1 million or a loss of $0.26 per share based on 27.5 million weighted average shares outstanding for the first quarter of 2019. Non-GAAP adjusted negative EBITDA of $5.9 million or negative $0.21 per share compared to a negative $5.6 million or negative $0.20 per share last quarter.

Cash, cash equivalents and investments of $10.5 million compared to $15.2 million at March 31, 2019. The decrease resulted from the $5.9 million negative adjusted EBITDA and $400,000 from capital expenditures, partially offset by $400,000 higher liabilities and $1 million from the exercise of warrants from Park City Capital, one of our largest shareholders. Excluding the higher liabilities, we expect amounts to be comparable in the coming quarters.

As George noted in his opening remarks, we expect to raise $10 million. The first closing is expected on or around August 12. Additionally, I want to remind everyone that we have 2.3 million warrants outstanding at an average exercise price of $4.76, which could generate an additional -- funds of over $10 million if exercised. And finally, we ended the second quarter with a total 73 employees, 18 of whom have a PhD and 54 of whom are part of the technical staff.

I'd now like to turn the call back to George. George?

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George B. Holmes, Resonant Inc. - Chairman & CEO [5]

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Great. Thank you, Marty. In closing, I'd like to highlight some of the key takeaways for our investors. We had 14 quarters of solid execution building our company. Today, we believe we're in the strongest position we've ever been in. Our business model is unchanged, and we have seen tremendous validation from key strategic customers.

We have great relationships with real customers. They sign contracts, write us checks, take our designs, and build and sell them to OEMs, ultimately delivering royalties to us.

As a royalty business, while we don't control the end conversion revenue, we do control getting more designs with current and new customers. Number of designs contracted to-date is 80. Our foundry partners provide more choices to our fabless customers and create options for our library products. Tier 1 partners are engaged, delivering on multiple technologies. We are aggressively developing new resonator structures with even greater possibilities.

The development of the ISN platform is expanding. Design efficiency, designs per designer per year, is approaching double digits. We've added new capabilities to the tool set to allow even greater precision during the design and design verification process. We're partnering with a Tier 1 design automation firm to create broader customer reach.

The investment and commercial agreement with a Tier 1 is the first of what we expect to be many of its kind as our business continues to mature and we get continued validation of our business model. We are asset-light, and there is great leverage in our patent and trade secret protected IP licensing model, and our IP portfolio contains greater than 175 patents pending and issued.

We are monetizing our investments through ramping revenues and strategic engagement. We are a strong team guided by a recently expanded and outstanding advisory team and corporate board.

Now I'd like to turn the call over to the operator for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Raji Gill from Needham & Company.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [2]

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I wanted to discuss a little bit about your traction in your standard IP library. I think the last couple quarters, you stated you had a licensing for this product, and additional customers, both existing and new, are expressing kind of great interest, and you kind of expect to convert them in coming quarters. Just wanted to get a sense of kind of the traction there and kind of what's -- how to think about the revenue opportunity you see from the IP Standard Library.

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George B. Holmes, Resonant Inc. - Chairman & CEO [3]

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Raji, great question. Here's what I'd say about that. Our IP Standard Library has got a shorter time to market, for sure. And what we saw this past quarter, even in the -- even during the time where the market is somewhat depressed, whether it be coming out of the fourth quarter or first quarter or even the second quarter with some of the things that were going on in the macro market, we saw that the -- our IP Standard Library was starting to gain traction. As we look in what happened in July, we feel real good the fact that we saw a very strong month as things started to ramp, a good portion of which are standard library products that are coming to fruition. So I think it's going to be one of the things that, as we look at the business over time, we're going to see a transition. Today, our IP Standard Library is a very significant opportunity for us, but customs are where the business was and where the business will be for the balance of this year.

I think you could see that, while in the macro sense, we hope to have a business that transitions to about 20% customs and about 80% standard library products, today, it's virtually the other way around is where the opportunity is just because of the near-term work that we have in front of us and executing on the contracts that we had over the first 2 years of our existence.

So the opportunity is great. I think we're seeing that we're getting great traction. We're seeing the guys wanting to move very, very quickly. I think it's going to be a bigger piece of our business in the long run. It's something that allows us to touch many more customers. And I think that now you see additional validation points by third-party Tier 1 EDA companies wanting to integrate our IP Standard Library into their offerings so that Tier 2, Tier 3 companies using their tools can actually drag and drop those designs right into their designs. It's going to make our footprint and our reach much greater. So we see that it's going to be a tremendous opportunity on a go-forward basis. Did that answer your question?

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [4]

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Yes. That was very helpful. And on the strategic investment with Murata -- congrats on that. That sounds like it's a great kind of an arrangement. Wondering if you could maybe elaborate on that agreement. What was kind of the rationale for both parties? How do you think about Murata as a partner going forward? Any kind of insight on the nature of this multiyear commercial agreement utilizing your technology?

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George B. Holmes, Resonant Inc. - Chairman & CEO [5]

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I think a fabulous question. Let's see if I can touch on a bunch of those topics. So I think the first thing that we want everybody to kind of keep in mind, there's a lot of work that goes on underneath the covers here at Resonant, lots of longstanding customer relationships that take a very long time to develop. And as they get to maturity, they end up in fantastic announcements, like the one we had today, relationships that started maybe 2 or 3 years ago. We've talked about that in the past of how long it takes to get engaged with a Tier 1. Lots of work goes on. We don't talk about our customers in advance. We don't talk about engagements. We don't talk about these kinds of deals until they come to fruition. And quite frankly, we don't like talking about the customer names. We like to keep those things tight and stay very closed lips about it because of the strategic nature of those engagements on a go-forward basis. So you will hear us from here on out talk about this customer as our Tier 1 or one of our Tier 1s that we have a strategic engagement with. But these are long time in the making.

That said, you want to talk about some specifics about this agreement in and of itself. Clearly, we had lots of opportunity in front of us after Mobile World Congress. 20-plus companies came to visit us, all very actively engaged since then and wanted to gain access to some cutting-edge technology specifically focused on 5G.

And we had to make some choices. I mean, obviously, not everybody that we met wanted to sign an agreement with us, but lots of them were very engaged, wanting to see and understand what the technology can do. And when you have an opportunity to deal with somebody that is as large as this Tier 1 is with greater than 30% market share on duplexers and, in some cases, greater than 75% market share on modules depending on the OEM, that makes you stand up and take notice.

They clearly understand this marketplace. They clearly have a trajectory into the major OEMs, and us having the good fortune to be a partner with them and have the opportunity to provide some of our technology is going to be key.

But here's the way I look at it. I mean I've been -- as you may remember, I've been a sales guy for a very long time. And so when I work with our team here and we engage OEMs, one of the things I really encourage them to do is we work to develop these relationships is use them as foundational. The hardest thing to do is to get that first order. We have a license to work with or what we like to say in sales speak, licensed to hunt here. We've got an engagement. We've got to capitalize. We've got to deliver. We've got to do what we said we're going to do. But as we do all of those things, I think this is going to be a tremendous opportunity for us. Does that help?

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Operator [6]

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The next question comes from Cody Acree with Loop Capital.

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [7]

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George, if you can just elaborate a little bit more on that last point. If you can maybe talk more about the specifics of the economics. I think you mentioned an additional royalty possibility of up to $9 million. Can you just talk about what kind of licensing fee might be associated with this engagement, timing of any kind of revenue streams that would be tied to this?

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George B. Holmes, Resonant Inc. - Chairman & CEO [8]

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Oh, all the good questions and all the ones that I don't want to answer today, but I'll do my best to try to give you the details of it. As you know, Cody, we're not giving long-term guidance yet until we have kind of predictable and credible performance underneath our belt, and we've got a way to do -- a little bit of work left to do there.

But here's what I can tell you about the agreement today. It is 2 parts, obviously, a strategic investment as well as a commercial agreement. We had the good fortune to also sign a side letter that defined the terms that we expect to close on in the commercial agreement. So I think that gives us a lot of confidence because we prenegotiated all the things that are typically very hard: royalty structures, payment terms, licensing fees, IP ownership and things of that nature. And I think we were able to do that satisfactorily to both companies. So that was very good.

There is a $9 million component attached to the commercial agreement that is associated with prepaid royalties for the devices that are under contract. Obviously, this is new technology, and we don't know what the volumes of those devices are going to be in the marketplace. So giving you a royalty rate is really, really hard to do. But as you might expect, if a company is going to give a prepay and an advanced payment in exchange for some discount, that's what you would expect on these kinds of deals. And it's usually a reasonable discount to get the money upfront.

We don't have to wait until they're successful in the marketplace, which we have to do on every other contract that we have. We get to hit milestones. When we hit those milestones, we get a check. And this has 4 equal milestones that start with the signing of the agreement.

So that is a fantastic opportunity for us. It's one of the things I've talked about in the last several calls. It's one of the opportunities that we're looking at because when you have average royalty rates at the level that we do, in the 7% to 15% range from an average royalty rate perspective, you can give up a little bit and still have a massive business opportunity by taking a prepay. And what we know, and I think everybody knows that's in the royalty business, the biggest challenge is you do all this work and then you have to wait for your customer to be successful. These deals, we don't have to.

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [9]

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Great. And then maybe just on similar topic but a different setting of the customers, obviously, one of the hardest things for us to explain to investors is your number of customers, your number of engagements and, yet, the very small level of revenue stream coming in. Some of that will be helped with this Murata engagement, it sounds like. And I understand from the beginning when you were trying to get your foot in the door, how you needed to give those discounts and you needed to work on with very minimal, if any, upfront fees. But we're now a few years past that time and your engagements have grown. You've proven yourselves. But it still feels like we're in those early days where you're not getting paid for the benefit that it sounds like we're bringing to customers.

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George B. Holmes, Resonant Inc. - Chairman & CEO [10]

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That's a great question, but it's one that I would actually point you back to previous calls because we've talked about some of this. And clearly, you sign an agreement early, and it takes 30 to 36 months to develop a product, plus our customers' qualification plus the end OEM's qualification to get these things into the marketplace. Those very early designs that we engaged in, we expect them to start shipping in the first half of this year. We tried to pull it in, as you know, in the last year. We were unsuccessful. We're starting to see a ramp now. It's not being helped by the macroeconomic environment, but it is ramping, and we are starting to see those volumes increase. We have great traction with 5 devices that are already out there, gaining traction and momentum. We think we'll get 5 more this quarter that will start converting and start really kind of building on that royalty stream that we believe will be the ongoing validation of what it is that we're trying to do.

As it relates to upfront and how do we make sure that all of our new agreements actually contributed to a level that we want them to and not have to wait, clearly, one of the things we can do is prepays, like we've done here. I think it's pretty significant that we have been able to secure prepay. You couldn't do that 3 years ago when we've never done a single design. Now we can. And it looks like this is going to be a tremendous opportunity for us.

We can do that for new designs potentially. I think that one of the things as we transition the business to a more heavily centric IP standard library set of products, we won't need those upfronts because those parts will be ready to go, and guys that are taking those parts will be ready to pop into the marketplace, and we'll shorten that time for revenue trajectory. I think that's going to be very, very good for us. I think the customs that we do will likely come with a higher price tag on a futures basis. And it's going to take us longer to negotiate those because once you ask for more money, guys tend to take a little bit more time, but we have the time. So I think we'll take it. Does that answer it

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [11]

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It does.

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Operator [12]

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(Operator Instructions) The next question comes from Kevin Dede with H.C. Wainwright.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [13]

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Well, apologies for dragging you back. Sometimes you cut in and out on me. So I'm sorry, I -- might be a lousy connection on my end, but try to bear with me a little bit on this, sorry. Just back to Murata, the 4 milestones, obviously, you don't want to offer, I guess, volume attachments there. Can you give us sort of your hope on when you think you might start ticking them off?

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George B. Holmes, Resonant Inc. - Chairman & CEO [14]

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Yes. I mean, I think we've already said that, Kevin, and I apologize if I wasn't clear enough. I think our goal is to have the commercial agreement done in very short order. We -- as we sit back and look at the typical things that would be ahead of us, we need to be able to knock down the regulatory requirements for this deal. I think we've got a good line of sight on that because of the work that we've done already, both ourselves and our Tier 1 customer. We've got great line of sight on converting that. I think it's going to be 45 days-ish until we can get that cleared. Once we get that cleared, we complete the negotiation of the commercial agreement, and here in 2 to 3 months, we'll have that paying down, and we will be off to the races and developing a handful of parts for them. So I think that is a -- how this thing starts to play out. And as I noted, it's got a 30-month duration on development, a 36-month duration on payment, and divide by 4, and you're going to get milestones. That's kind of a rough estimate for you on how you get milestones. And it's -- that's kind of how that whole thing plays out.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [15]

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Okay. That's really helpful, George. I couldn't do the math without your guidance. Apologies. Then what it seems to be a -- there seems to be an exclusivity attached to it. Can you offer some parameters -- or what those parameters are so it's clear how you're able to market XBAR to other potential customers?

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George B. Holmes, Resonant Inc. - Chairman & CEO [16]

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So we have -- there's a couple of things attributed to the agreement. There is a 30-month exclusivity period. We will continue developing XBAR. It's about a 30-month development to take it all the way to completion because, as you might imagine, part of what you have to do with the new technology basis, you have to qualify it. Part of qualification is reliability. There's a lot of work that goes on there.

I think what -- as you sit back and look at how this comes to play, clearly, our Tier 1 partner will be first into the market with the technology, which was our intent by this agreement. So we think we've put them and have negotiated with them in good faith to give them access to the technology early. And we're going to do everything we can to make them as successful as possible because the more successful they are with these devices, the greater the opportunity is for us.

And keep in mind, this company has greater than 30% market share. There is -- as you sit back and look at that -- I mean, you heard me talk about them anecdotally last quarter when I said companies like them that have 30% market share today on a market that has 54 billion units -- 15 billion units. And that market is now growing over the course of the next 5 years from 50 billion units to 200 billion-plus units. And they still want to keep their 30% market share. They're going to ultimately be growing the number of devices they have to deliver in the market from 60 billion to 75 billion, almost taking the number that they have today and basically having to deliver a greater number of units in the entire market today. I think that creates a tremendous amount of opportunity. And the fact that they tapped us to work with them on it, I think is huge.

And you've given -- if you sit back and look at this and look at the opportunity this has created, clearly, this Tier 1 has looked at every single technology that's out there in the marketplace, whether it's SAW, TC-SAW, BAW or some derivative thereof, they know what's going on. They have a finger on the pulse. They're touching everything. And they tapped us to help them.

Clearly, we're going to leverage a lot of their expertise. They're going to leverage our expertise. And we're going to get into the marketplace with some of the best devices on the planet and hopefully dominate this segment of the market. I think there's a tremendous opportunity for us. And it's a tremendous opportunity for them as well, I hope, because, if it is, that's going to be a real opportunity for us to expand that footprint with them as a customer. Does that help?

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [17]

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Yes -- no, that's great. One last question for me. Kind of your view, given your team's close touch with technology development in Asia and elsewhere around the world, I was hoping you could just sort of give me your view, the 20,000 foot view of 5G rollout where we are and when you see infrastructure going out and the demand for compliant handsets?

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George B. Holmes, Resonant Inc. - Chairman & CEO [18]

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Well, you know what, Kevin, you just -- you asked almost -- you've got a question that's so close to the one that answers it. Let me give you the answer that I think it is. I mean, we've had the very good fortune to add a member to our Board, Rubén Caballero. Rubén, he has this tremendous depth of experience in the marketplace. He started with arguably the premier handset manufacturer on the planet, building this anchor tenant device back in the mid-2000. He created the RF infrastructure for that company and the devices associated with it. He built the team from 0 to almost 1,000 people that actually delivers those devices into the marketplace.

He's got a touch on what's going on in the market, both historically, what's worked and what hasn't worked, and what's going to happen in the future. And he has a view. I think that augments our view. You get somebody that has now got a tremendous base of knowledge. Just macro, I'm not concerned at all about what's happening in that company, in particular. But in the macro sense, what are the macro trends and validating what's happening, whether it be in the North American market, in Europe, in Asia. I think he's got his finger on the pulse clearly much closer than anybody that we've ever come across. And that's including some of the big OEMs that we work with.

So I think this is a tremendous opportunity for us. And as such, having him come in and bounce ideas off of our guys and challenge us with the ways that we are thinking about how things are done and helping us focus on the right segments in the marketplace where we could be successful, I think, will be invaluable.

I mean, we've got a great Board already. We've added to the Board a tremendous advisory team. We don't talk about them a whole lot, but they are guys out of industry that are doing very interesting things or have done very interesting things at multibillion-dollar companies. And they're there helping us navigate not only where we are today but where we're going in the future.

And when it comes to 5G. This isn't something that's going to happen tomorrow. It's something that's going to roll out over the next several years. You've got to make the right choices. I mean, I think we're fortunate in the fact that we've got people helping us from a guidance perspective inside. We've got one of the largest players in the planet on the outside that we're supplying technology to. And I think, between those 2 coming together, we're putting ourselves in a position to dominate with basically a core technology that we've already validated at third-party Tier 1 labs that does what we said it would do. We're not 80% there, 70% there. We're there. We are actually beating the specs in most cases for what things people think are important. So I think when the market -- as the market evolves and guys start putting real 5G filters into devices, I think we're going to be right there supporting the people that are doing that work. And we think that person that's going to be doing that work more than anybody else is our partner. That helps?

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [19]

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George, I appreciate the additional color, and congrats on adding some great insight to your Board. It sounds like it will be very promising for you and your outlook.

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George B. Holmes, Resonant Inc. - Chairman & CEO [20]

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Yes. We're excited about it. Thank you, Kevin.

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Operator [21]

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The next question comes from Greg Huston with Oppenheimer.

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Gregory Huston;Oppenheimer & Co. Inc.;Financial Advisor, Executive Director of Investments, [22]

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Congratulation on all the progress between the strategic engagement and your new board member. The -- that validation is extremely comforting. So well done.

My question is that when you -- the second caller, in response to one of his questions, you said -- you talked about these things taking years from first contact to actually having the kind of engagement that you now have with the Tier 1 customer. And then you went on to say, others will take time, but now we know we have the time. Is that to suggest that, with the cash that you have on hand, the cash that you're raising, the prepaid royalties, and perhaps other things that you anticipate that you can now see a clear road to cash flow breakeven? And if you can, I know you're not going to put a time on it, but -- so I won't ask that part. But I mean, can you see that pathway at this point?

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George B. Holmes, Resonant Inc. - Chairman & CEO [23]

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Well, there's a couple things that you have there. And I'm going to let Marty chime in at the end and kind of answer your question. But a couple things I want to touch on first because, in case we haven't been clear up until this point, this raise is done. It hasn't been closed yet. But we're done. Murata came in as part of the announcement today and took down $7 million of the $10 million that we're raising. The balance of the $10 million was taken by a couple of our very long-term supportive investors that wanted to participate alongside that company. So it's done. It won't -- the first close is anticipated to happen with -- coming over the next 4 or 5 days, I think we've said the 12th. And then the second close will happen when the Tier 1's money comes in once we complete the commercial agreement. So that will take that stuff off the table.

And once we find the commercial agreement, we'll have another turn of the crank to get the first payment out of the prepaid royalty stream, and that will give us another chunk that will come in that we're pretty excited about that's significant. Additionally, we said we're focused in a couple areas to make sure that we are in a position to capitalize on the opportunities that we have in front of us. One of the things we've talked about, and Marty touched on it today, is converting the remaining warrants that we have, including at the cap table. That presents a fairly significant opportunity, which we'll take advantage of if the opportunity presents itself and give our shareholders that have been supporting us historically an opportunity to convert.

Additionally, we are looking at other strategic deals that we've had in the works for a number of years. These customers, when you're talking Tier 1s -- and this is what I was talking about. It's just more about the sales process. Sales process, when you're talking to a Tier 1 company, you don't show up even with the greatest technology on the planet and have them say, "Hey, I want to buy some today." It takes time.

Start-up companies, as you sit back and you look at taking a new piece of technology into a Tier 1 OEM, you might get to sample that product, and you feel very, very good about it, but that's when the work starts. We're fortunate that we licensed our devices to the Tier 1 OEMs and Tier 2 OEMs that actually have already been through factory qualifications, going through GPO or Global Purchasing Organizations, audit requirements. These things take -- in some cases, take 6 months to a year before you actually get a real production order.

I hate to be in a position to have a start-up that was doing all my own work, having to take my own products into a Tier 1 OEM and think that I've actually kind of won once I've actually gotten my first sample order. That's when the work starts because, if that sample works, then you've got 6 months, a year -- or to a year of hard work before you even know you're really going to get an order. Because you've got to go through that qualification. You've got to go through that global purchasing audit. And those things are hard.

And you talk about these Tier 1s. That can take easily 6 months to a year. And if you misstep during an audit, then you have to go through a reaudit, and that restarts the calendar. So I think we are in a much better position. And when I say, it takes time, it does. But we've had a full funnel since I walked in the door. And so different Tier 1 OEMs are in different stages of engagement, whether it's an OEM directly, handset manufacturer, or whether it's a Tier 1 component manufacturer, different stages of engagement.

What I -- the point that I was trying to make with Cody was these things are going on every day kind of under the surface. We don't get out and talk about them. We are not trying to give a look ahead and start talking about customers before their time. We're trying to get it done and bring it to the forefront when it actually converts and it actually happens. So that's really that kind of lead-up to kind of where we find ourselves today.

I'll tell you, we've got a lot of things in the funnel. There's a lot of hard work that's going on by our sales and marketing team and our engineering team to deliver on the promise. I mean, we talk about our XBAR technology and a lot of people think that, that's where it stops. I mean, I can tell you from a high-frequency resonator perspective, that isn't where it stops. There's other devices currently in development. We have also some very significant work that we're doing. They -- provides greater performance on some of the lower-frequency devices as well. And we've presented some papers in that area over the last several quarters.

So now let me end, and I'll hand it over to Marty to finish up on your last question is, do we have line of sight to what will get us to cash flow breakeven.

What I would tell you is we have a nice cash position once we get through completing the commercial agreement and getting the regulatory requirements off the table. We've got a -- we'll have a very nice cash position at that point in time. We have some opportunities that we're working on that we think can generate more cash. We have the warrants that we think will help us generate more cash. And we do have a revenue stream coming from this agreement and from the devices we currently have under contract.

We've still got work to do. But I think from my perspective, we know what it's going to take to get there. And we just got to do the work to get there at this point. Marty?

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Gregory Huston;Oppenheimer & Co. Inc.;Financial Advisor, Executive Director of Investments, [24]

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Well, the progress on the last quarters is very impressive.

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George B. Holmes, Resonant Inc. - Chairman & CEO [25]

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Marty, do you want to touch on real briefly the -- just kind of that last bit to, I think, finish off on Greg's question.

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Martin S. McDermut, Resonant Inc. - CFO & Secretary [26]

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Yes. I think with the current cash, the investment from the Tier 1, execution on the commercial agreement and some growth and revenues, we have cash to get us into the second half of 2020. That doesn't include all the other things that -- what George talked about, if the stock price moves to where the warrants [then] get exercised. It doesn't count any other strategic deals that we're going to work on and some other things that we're possibly -- that could generate additional cash. So I think we are in really good shape. We're executing. We said we were going to do this last quarter, and we're doing it. We're picking it off. And I think we're doing a pretty good job at getting there.

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Operator [27]

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(Operator Instructions) This concludes the question-and-answer session. I would like to turn the conference back over to George Holmes, Chairman and CEO, for any closing remarks.

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George B. Holmes, Resonant Inc. - Chairman & CEO [28]

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Great. Thank you, operator. Well, hopefully, for everybody on the call today, you'll see that the work we've done this past quarter provides tremendous validation to our business model, by a Tier 1 filter manufacturer coming in on a strategic investment of $7 million, the commercial agreement of $9 million. Clearly, we have some work to do to get those over the line. But it's all out in front of us. We know what has to get done. And we have a short time frame to get it done. And we believe we'll get those executed here in the next several months.

A Tier 1 EDA company, integrating our IP standard library of products, providing easy access to third-party OEMs to get our technology into their devices, ramping unit volumes of designs, first half, 1.5 million units shipped. And in July, over 400,000 shipped. We see this as kind of that first stage of getting back to the revenue and royalty ramp that we're looking for.

Let me close by thanking Murata for their confidence and validation of the technology and to our shareholders for their ongoing support. Thank you very much. Have a great day.

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Operator [29]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.