RESN Weakness is a Gift Horse: I Own Too Many RESN Gift Horses

Let’s start this blog with the conclusion: this financing in RESN is likely the low for the stock and it’s a screaming buy.

Now I’ll begin my rant…
What is the the board thinking? Having just listened to the Needham marketing call, you would think that Resonant is poised for huge success. And, they are! Revenues are going from basically next to nothing to well over $1M per quarter this year. It’s just the beginning. Design wins are coming through, in higher priced filters with higher margins. The company is at an inflection point.

Meanwhile, the balance sheet is not at all weak. They are burning over $4M per quarter, but that burn rate is going to stay flat or decrease in 2018 as revenues start to pick up simultaneous with their increased hiring. So, they have the funding to last through the year.

I’m a believer that you raise money at least six months from ground zero, so there was at least 4-5 months of leeway until they needed to do this financing. And, there is more good news coming in the meantime. Enough hints exist that you’d be crazy not to know that at least one Tier 1 phone tear down is coming. Plus, the number of design wins seems to be increasing. With revenues just starting to flow, more design wins in the near future, and a major tear down around the corner, don’t you think the board could have waited? Hell yes!

So, why are they doing this? There are three possible reasons. Let’s explore them in what I believe is the likelihood of them being the truth; let it be said that there is some chance that all three contain some kernels of truth.

  1. The board is taking the easy way out. Fear that the market sells off, that financing is not available, that they start becoming a ticking time bomb of needing a deal while shorts pummel them, caused management to blink. There is no doubt that Needham’s bankers probably played right into this fear. “If you don’t do it now, you might be doing it at $2,” or some such statement possibly caused the board to react. I think this is likely the case as, on the deal call that I just sat through, it really sounded like business wasn’t the issue. So, Resonant looked down the barrel of the gun and blinked. Sadly, the gun was pointed by bankers, not by investors, as the Company really didn’t need to do this deal now. That’s answer number one and most likely in my mind.
  2. Business really isn’t that good. Think about it, if everything they say is truthful, there is next to zero reason to do this financing. Wait for the tear down. Announce some deals. Investors will be happy, the stock will rally, you’ll win the shareholder vote AND price this transaction higher. Yet, here we are. I believe business is strong. I do think revenues are taking longer to materialize than they had hoped, but they are certainly coming. And, I’m convinced they are getting into large quantity phones in real time, so I don’t 100% buy this reasoning for a deal.
  3. This is an effort to deal with the dissident shareholder vote that’s coming up. If the dissident votes number close to half the shares outstanding, by adding 5-6 million more shares, they make it harder for Michael J. Fox et al to win this vote. If this is the case, then I’m really that much more upset at the board. Screwing shareholders with dilution to win a shareholder vote would be just plain wrong. I don’t think this is happening, but, then again, I didn’t think a deal was coming.

So, those are my three possible explanations for why this deal is taking place. I really believe that the first explanation is by far the most likely, but wouldn’t completely discount #2 at this time. Certainly, this deal is a sign of weakness not strength.

Conclusion
I think this issuance is going to be the low in the stock and Needham is going to come away looking like geniuses to their investors. Business at RESN is going to continue to ramp and a tear down of a Tier 1 phone awaits.

By funding the company through to cash flow positive, the majority of the risk in RESN is off the table and the stock will likely just move higher in a rational manner as design wins get announced and revenue starts to ramp.

Despite my reservations about George and his team’s capital markets’ strategy, I do think he’s an excellent manager. He is the hired gun you bring in to turn a company around, position it for success, and sell at a nice price. He will likely accomplish this here. I have little doubt about this.

In the meantime existing shareholders of RESN are in pain, scorched by a secondary offering that I think shouldn’t have occurred for several more months. If you can buy more, go for it. Sadly, my barn is full and I’ll have to look this gift horse in the mouth.

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2 COMMENTS

  1. This was a brutal raise at $3.50. Maybe we should support the activist. Raise money at a 52 week low! Need to ask those questions to management on the next earnings call. Hard to get behind this one.

    • Can’t disagree with your comments. I am still supportive of this story, but the board really seems to be out to lunch in terms of their capital markets strategy.

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