NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Overview

 

Resonant Inc. is a late-stage development company located in Santa Barbara, California.  We are the successor of Resonant LLC, a limited liability company formed on May 29, 2012 (our inception date).  We were incorporated on January 19, 2012 as a wholly-owned subsidiary of Superconductor Technologies Inc., or STI, and became an independent company on July 6, 2012.  As a result of an exchange transaction that occurred on June 17, 2013, the units of membership interest issued by Resonant LLC were exchanged for shares of our common stock, resulting in a change in the form of ownership of our Company.  The consolidated statements of operations presented in our consolidated financial statements represent the activities of Resonant LLC, as the predecessor company, for the periods from January 1, 2013 to June 16, 2013, and the activities of Resonant Inc., as the successor company, for the period from June 17, 2013 to December 31, 2013 and the year ended December 31, 2014. The consolidated balance sheets presented in the consolidated financial statements represent the activities of Resonant Inc., as the successor company, as of December 31, 2013 and December 31, 2014.

 

We are creating innovative filter designs for radio frequency, or RF, front-ends for the mobile device industry.  The RF front-end is the circuitry in a mobile device responsible for analog signal processing and is located between the device’s antenna and its digital baseband.  We use a fundamentally new technology called Infinite Synthesized Networks®, or ISN®, to configure and connect resonators, the building blocks of RF filters.  Filters are a critical component of the RF front-end used to select desired radio frequency signals and reject unwanted signals.  We are using ISN to develop new classes of filter designs.

 

We believe licensing our designs is the most direct and effective means of delivering our solutions to the market.  Our target customers make part or all of the RF front-end.  We intend to retain ownership of our designs, and we expect to be compensated through license fees and royalties based on sales of RF front-end modules that incorporate our designs.  We do not intend to manufacture or sell any physical products or operate as a contract design company developing designs for a fee.

 

We are currently developing our first design, a duplexer, for our first customer, a leading manufacturer of RF front-ends for mobile devices.  Duplexers are two filters combined into a single component which simultaneously selects both the transmit and receive signals.  Our customer has an option to license our duplexer design at already agreed-upon royalty rates upon completion.

 

We recently delivered a completed duplexer design to the customer for consideration.  Our design does not meet all the specifications in the development agreement; however we believe our design delivers competitive performance and is competing with other products.  The customer is evaluating our design, and there is no assurance that it has acceptable performance and therefore will be used.  Even if it has acceptable performance, there are a number of other considerations influencing the customer’s decision whether to use our design, many of which are beyond our control.  There is no assurance that our design will be selected by the customer for use in its products.

 

We were founded as Resonant LLC on May 29, 2012 (our inception date).  We commenced business on July 6, 2012 with initial contributions from our founders and Superconductor Technologies Inc., or STI.  The founders contributed $200,000 and agreed to work full-time without pay until we secured adequate funding. STI contributed a patent portfolio, software, equipment, temporary office space and an early version of the development agreement with our first customer.

 

The founders loaned us an aggregate of $200,000 during the first quarter of 2013, and we issued a series of warrants to the founders in connection with these loans.  We refer to the founder loans as Bridge Loans and the founder warrants as Bridge Loan Warrants.  We repaid the Bridge Loans in the second quarter of 2013.

 

We changed our form of ownership from a limited liability company to a corporation in an exchange transaction on June 17, 2013.  The founders exchanged all of their units and warrants of Resonant LLC for common stock and warrants of Resonant Inc.  STI exchanged all of its units of Resonant LLC for a $2.4 million subordinated convertible note of Resonant Inc., or Subordinated Convertible Note.  The Subordinated Convertible Note was scheduled to mature on September 17, 2014, was interest free, was secured by all of our assets and was subordinated to our senior convertible notes.  This note was converted into common stock in our initial public offering, or IPO.

 

We closed our first financing on June 17, 2013.  We issued $7.0 million of Senior Convertible Notes in a private placement.  The notes were to mature on September 17, 2014, bore interest at 6.0% per annum, were secured by all of our assets and would automatically convert into 2,087,667 shares of our common stock upon consummation of a qualified offering.  Interest was payable in cash or shares of common stock.  We paid a placement agent a commission of $700,000 and issued the agent warrants to purchase 208,763 shares of our common stock at an exercise price of $3.35 per share.  We also issued the placement agent a warrant to purchase 222,222 shares of our common stock for business consulting services at an exercise price of $0.01 per share. These notes were converted into common stock in our IPO.

 

Initial Public Offering

 

We closed an initial public offering, or IPO, of 3,105,000 shares of common stock (which includes the exercise in full by the underwriter of its over-allotment option) at a price of $6.00 per share on June 3, 2014.  We received aggregate net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses, of approximately $16.2 million.  Our common stock commenced trading on the Nasdaq Capital Market under the symbol “RESN” on May 29, 2014, or IPO Date.  The Securities and Exchange Commission declared effective a registration statement relating to these securities on May 28, 2014.

 

MDB Capital Group, LLC, or MDB, acted as the sole underwriter for our IPO.  Simultaneous with the funding of the IPO, we issued the underwriter a 5-year warrant to purchase 310,500 shares of common stock at an exercise price of $7.50 per share, which we refer to as the Underwriting Warrant.  The warrant was not exercisable until November 24, 2014 (180-days from the date of the underwriting agreement).

 

Our Senior Convertible Notes automatically converted into 2,087,667 shares of common stock effective upon the completion of the IPO.  We paid in cash the accrued interest of $403,667.  Similarly, our Subordinated Convertible Note automatically converted into 700,000 shares of common stock.  There was no accrued interest on this note.  The shares issued on conversion of the Senior Convertible Notes were subject to a 180-day lockup which expired November 24, 2014, and the shares issued on conversion of the Subordinated Convertible Note are subject to a 12-month lockup expiring May 28, 2015.

 

Capital Resources and Liquidity

 

We have earned no revenue since inception, and our operations have been funded with capital contributions and debt.  We have incurred accumulated losses totaling $21.2 million through December 30, 2014.  These losses are primarily the result of research and development costs associated with commercializing our technology, combined with start-up and financing costs.  We expect to continue to incur substantial costs for commercialization of our technology on a continuous basis because our business model involves developing and licensing custom filter designs.

 

Our consolidated financial statements contemplate the continuation of our business as a going concern.  However, we are subject to the risks and uncertainties associated with a new business.  We do not yet have the ability to earn revenue and have incurred significant losses from operations since inception.  At December 31, 2013 and December 31, 2014, we had an accumulated deficit of $11.5 million and $21.2 million, respectively, and cash and cash equivalents of $3.3 million and $5.8 million, respectively. Additionally, as of December 31, 2014, we had $8.0 million in short-term investments.

 

We completed an initial public offering in the second quarter of 2014 to raise additional capital.  Our principal sources of liquidity consist of existing cash balances and investments of $13.8 million.  We believe our current resources will provide sufficient funding for planned operations into the first half of 2016.  If we do not generate adequate cash from revenues in 2016 in order to reach positive cash flows, we likely will be required to obtain additional financing to continue with our plan of commercialization. There is no assurance that additional financing (public or private) will be available on acceptable terms or at all.  If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced.  New investors may demand rights, preferences or privileges senior to those of existing holders of common stock.  If we cannot raise any needed funds, we might be forced to make substantial reductions in our operating expenses, which could adversely affect our ability to implement our business plan and ultimately our viability as a company.