Ladies and gentlemen, thank you for standing by and welcome to the Atomera third quarter 2019 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference call is being recorded. It will be available for replay for approximately one week. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Mike Bishop. Please go ahead, sir.
Thank you, Sydney. Good afternoon. I'm Mike Bishop with the company's investor relations, and joining me on today's call is Scott Bibaud, Atomera's President and CEO, and Frank Laurencio, Atomera's CFO. If you are joining by telephone, please go to the Events section of our Investor Relations page on our website to follow a slide presentation that accompanies our remarks. That presentation will remain available on our website after the call. After prepared comments by Scott and Frank, we will open the call up for your questions. Before we begin, I would like to remind everyone that during today's call, we will make forward-looking statements. These forward-looking statements, whether in prepared remarks or during the Q&A session, are subject to inherent risks and uncertainties.
These risks and uncertainties are detailed in the Risk Factors section of our filings with the Securities and Exchange Commission, specifically in the company's perspective supplement filed with the SEC on May 30, 2019. Except as otherwise required by federal securities laws, Atomera disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions, and circumstances. Also, please note that during this call, we will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to meet the most directly comparable GAAP measures are included in today's press release, which is posted on our website. Now, I will turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott.
Thanks, Mike. Good afternoon, everyone, welcome to our third quarter update call. I will begin with some comments on our progress this quarter, and we'll discuss our recent announcements. After which, I'll turn the call over to Frank to review our financial results, and we'll open it up to questions. Over the last few quarters, we've been able to provide some detailed insight into the technical breakthroughs Atomera has been introducing into the market. I would like to focus this call more on our recent customer and market activity. It is certainly true that these last three months have been more consumed with customer engagement activity than earlier in the year when our R&D work was getting more of the focus.
Due to the demand generated as a result of that breakthrough R&D work, Atomera has been able to bring new high-potential customers into the fold, like the new licensee we announced today. We have also conducted a historic number of MST deposition sessions on customer wafers during the last three months, which allowed us to achieve a record revenue in the third quarter. We continue to be very busy working with customers on interpreting results, preparing for work on additional customer programs using MST, and planning next steps to get closer to production. As you know, Atomera illustrates our customer activities with the phases of engagement shown here. Phase one includes customers under NDA who are planning an evaluation of our technology. In phase two, we deposit MST film on customers' wafers and conduct physical characterization.
Phase 3 is where customers incorporate MST on their wafers during an R&D run in their fab and use the test results to justify licensing our technology. It is generally in Phase 3 that we are most likely to sign integration licenses with customers. Phase 4 is where customers execute a manufacturing license and install MST on an epi tool in their fab. In Phase 5, customers get a distribution license and transition to production. Atomera gets revenue from three sources. Engineering services revenue, which will grow as more customers pay us to conduct MST deposition runs. Upfront revenue for integration, manufacturing, and distribution licenses, which will increase as we sign more license deals, get into the later stages of licenses on existing deals, and license additional process nodes to existing customers.
Finally, customers will pay us royalties based on the sale of licensed MST wafers and chips when they get into production. During the last three months, our customer engagement process has been exhibiting consistent growth and phase advancement. We have succeeded in moving two engagements into phase 3 while conducting a number of other MST deposition sessions for customers already in phase 3. We have also added one new customer engagement and advanced another into phase 2. As a result, I'm pleased to report that we now have 19 customers with 25 engagements, meaning six customers are working on multiple process nodes with us. Our customer engagements continue to be skewed towards larger companies, with at least 50% of the world's top semiconductor companies engaged with Atomera. Our focus continues to be on advancing existing customers through the pipeline towards production.
That being said, we continue to get new opportunities as a result of the breakthrough work we've done earlier this year. We evaluate each of those and pursue opportunities that make sense. To continue to support this level of engagement growth, it will be necessary for us to increase engineering and deposition resources to keep up. A good problem to have. We are extremely pleased to announce the execution of a new integration license with a large fabless semiconductor company. They're working with MST to provide improved performance to RF devices designed using RFSOI technology. This is an excellent market opportunity for both of us as the 5G market starts to expand.
Research indicates that the 5G cellular market will grow significantly over the next five years to a point where over 50% of phones shipped in 2023 will include the RF devices required to support its new frequency bands and bandwidth. 5G technology will drive the RF content in cellular handsets to new levels, and it will also drive the development of a number of new high-performance, low-power devices using RF technology, and we believe that MST will make all of them perform better. This integration license gives our new customer the ability to develop these cutting-edge, next-generation RF devices for the mobile 5G market. This also marks our first license with a fabless semiconductor supplier. In this case, the company is large enough to have established its own proprietary manufacturing process with its foundry partners, and we are working with them on development of the next generation of that technology.
Although this is not the most common and typical relationship that fabless players have with their foundries, it's not that uncommon. Many of the world's largest fabless companies develop their own proprietary manufacturing technologies, which represents a very exciting growth area for Atomera. Of course, most fabless companies work directly on a manufacturing process owned by their foundry partner. They are strong influencers of the foundry's development roadmap, it's important that we engage with them. You can imagine that if an important customer requests their foundry to implement MST, we may immediately get higher priority than if we are trying to convince that fab on our own. Although this type of fabless company would not be an Atomera licensee, they would generate demand for licensed wafers. Both type of engagements with fabless companies are an excellent development for Atomera's future business.
Today's announcement of a license with our fabless partner also represents something else that we believe is a very good trend, faster time to revenue. Before I illustrate that, let me give you some more insight into the different flavors of MST technology. Since the early days of Atomera, we have had two different versions of our MST technology. MST1 was developed as a film that was applied to a brand-new wafer before any other processing was done. The industry calls that a blanket technology, and the great thing about a blanket technology is that it's very easy to integrate into a customer's manufacturing process. We typically work with them to understand their needs so that we can customize the cap layer on top of MST, and from there, deposition and integration is quite easily done.
The downside to MST1 as a blanket film is that it is applied right before the transistor building blocks called STI and well modules, which are the most challenging process steps from a time and temperature perspective, which we call DT. This protracted high-heat environment can have detrimental effects on the MST film's quality, which can negatively impact its performance. In order to bypass these early stages, Atomera created another version of our technology called MST2 that is applied after the STI and well modules, thereby avoiding the worst high-temperature steps. MST2 is what they call a selective process. Unlike a blanket process, it's only applied where it's needed on the wafer surface. Because the film is applied after the highest heat cycles, it generally retains its high performance through the whole manufacturing process.
Because we can deposit it only where needed on the wafer surface, it also allows our customers more flexibility in their designs. Maybe, for example, they want MST on some circuits, but not on others. MST2 can support that. MST2 does require a much higher level of integration than MST1, since it is applied right in the middle of our customer's manufacturing process, sometimes require a modification to their standard process steps just before and after the deposition of MST. Generally speaking, if a wafer can be manufactured using MST1, we believe it will be easier to integrate and will give Atomera faster time to revenue. MST1 will only be an option where the customer's process uses a lower DT regime. As a rule of thumb, newer process nodes generally use lower temperature profiles. 28 nanometer is usually manufactured at lower temperatures than 65 nanometer.
When we speak about Atomera advances in FinFET technologies, they are achieved using MST1 technology. The work we are doing in RFSOI also uses MST1, since most RFSOI tends to be manufactured at lower temperatures. It is our belief that customers using MST1, including in RFSOI, will be capable of getting to production sooner than those using MST2. This is very good news since our newest licensee is using MST1, and we have many other customers working on MST1 as well. Most of the work we are doing today with five-volt customers is using MST2 technology. Although the integration work is challenging, the potential upsides are obvious, and the breakthrough advances we have shown in prior calls are offering customer advantages that aren't available through any other method.
The use of MST1 and MST2 with different customers shows how Atomera is providing flexible solutions for many different process nodes and applications. Our engineering team continues to generate better films and integration techniques to provide compelling solutions to many problems the industry is facing. One way to gauge how much innovation is happening in Atomera is to look at our patent portfolio metrics. Over the last 12 months, Atomera has grown our patents granted and pending from 184 to 230. This is a 25% growth year-over-year and shows how we continue to build the value of our company in core MST patents, along with the devices and next generation architectures MST enables. Since our technology is discoverable in end customer chips, our patents can be defended, making them more valuable.
Since we also license knowhow, which has no expiration date, our licenses will have very long lives. The foundation of any great licensing business is their patent portfolio, and any semiconductor technologist can attest to the value of having over 200 patents in a company this size. Speaking of technologists, I'm pleased to welcome a pioneer of the semiconductor industry to our board of directors. Duy-Loan Le comes to us with a very impressive track record of leadership within her company, as well as deep experience assisting semiconductor companies at the board level. She was the first and only woman in the history of TI to be awarded their highest technical title of Senior Fellow, and has participated in all aspects of the business at TI, from development to running fabs to working with partners.
The contacts and experience she is bringing from the industry to our board will be very helpful. She currently sits on the board of directors of three multibillion-dollar companies, including National Instruments, Cree, and Ballard Power Systems. Zilong is joining our company at a very auspicious moment. We are engaged with an impressive cross-section of the industry with technology that can take advantage of some of the most important trends in the industry. With the slowdown in Moore's Law, semiconductor companies have fewer tools than before to bring new innovations to market. Atomera's MST is one of those rare tools that companies can use to continue to drive major performance enhancements. Best of all, this is not an exotic technology under development in a lab somewhere. It can be used today on tools that are available in our customer fabs right now.
Let me turn the call over to our CFO to discuss our financial results. Frank?
Thank you, Scott. At the close of the market today, we issued a press release announcing our operating and financial results for the third quarter of 2019. Our summary financial results are shown here, and I will review them now in more detail. Our GAAP net loss for the three months ended September 30, 2019, was $3.1 million, compared to a net loss of $3.4 million in the third quarter of 2018. Our lower net loss was primarily due to a $254,000 increase in revenue and lower operating expenses, which were $3.2 million in the third quarter of this year as compared to $3.5 million in the third quarter of 2018. Revenue of $254,000 consisted of $222,000 of engineering services revenue and $32,000 of license revenue. In Q3, we did not have any revenue, and in Q2 2019, we had $70,000 of revenue.
Gross margin of 20% in Q3 compares to 70% in Q2, due to the much higher mix of engineering services this quarter. On a per-share basis, our GAAP net loss in Q3 2019 was $0.19 per share, down from a loss of $0.28 per share in Q3 2018. This decline reflects a lower net loss, as well as an increase in weighted average shares outstanding to 16.6 million in Q3 2019 from 12.1 million shares in Q3 2018. Our press release and this slide contain a reconciliation between our GAAP and non-GAAP results. As you can see, the major difference between our GAAP and non-GAAP results is stock-based compensation expense, which is a non-cash item. Our stock compensation expense in Q3 2019 was $798,000 as compared to $630,000 in Q3 2018.
Non-GAAP adjusted EBITDA in the third quarter was a loss of $2.4 million, compared to a loss of $2.8 million in Q3 2018, reflecting the same factors that affected our GAAP results. I will now go into more detail on the components of our operating expenses. R&D expenses in Q3 2019 were $1.7 million. A decrease of approximately $176,000 from $1.9 million in Q3 2018, which reflected both a decline of outsourced fabrication and test expenses, as well as an allocation of more of our R&D expense to cost of revenue from engineering services, as that was a higher mix of our revenue. Our G&A expenses in Q3 2019 were $1.2 million, a decline of $85,000 from Q3 2018 G&A expenses of $1.3 million. This decline reflected lower professional fees and payroll costs, offset in part by higher non-cash stock compensation expense.
Looking at our results on a sequential quarterly basis, third quarter 2019 GAAP net loss was $3.1 million, compared to a net loss of $3.6 million in the second quarter. GAAP net loss per share in Q3 declined to $0.19 per share from $0.24 per share in Q2, reflecting the lower net loss, as well as the increase in weighted average shares outstanding as our most recent equity financing closed on May 30th, 2019. Those shares were only outstanding for one month of Q2. Non-GAAP adjusted EBITDA loss declined to $2.4 million in Q3 from a loss of $2.9 million in Q2. This decline was primarily due to lower R&D expenses in Q3, due to a surge in outsourced fabrication and test expenses in the first half of this year related to the development of our MST-SP technology for the analog market.
Although we do not expect Q4 R&D expenses to revert to the level of the second quarter, we do expect to see gradual increases in R&D expense continuing into next year as we add more capacity for epitaxial deposition and growing customer support. G&A expenses were also down sequentially, principally due to the timing of professional fees. Turning to the balance sheet, our cash at September 30, 2019 was $16.8 million, down $2.3 million from our $19.1 million cash balance at June 30, 2019. Our Q2 cash consumption was $2.4 million, exclusive of the proceeds of our May 2019 financing. We are reiterating the full year 2019 guidance that cash consumption as well as non-GAAP operating expenses will be in the range of $11.5 million-$12.5 million.
On previous earnings calls, I talked about our plans to lease an additional epi tool to use for both customer wafers and internal R&D. We have now reached agreement to lease a new tool, and during Q4, we will be making a deposit of $450,000, which obviously will impact our cash balance. Lease payments will not hit our income statement until the new tool is accepted, which we expect will happen in the first quarter of next year. As Scott mentioned, we just executed an integration license agreement with a fabless vendor, and we will recognize revenue from this vendor in Q4. This is probably a good time to review how we recognize revenue from license agreements. Under ASC 606, the most important factor for timing of revenue recognition is when our performance obligations have been met.
Because our integration license agreements provide that Atomera will do the MST deposition on our customers' wafers, revenue recognition from those contracts depends on both when we sign the contract, which confers rights to work on our MST technology, as well as on when we deliver the wafers. Our arrangements with integration license customers generally also require payments for the engineering service work, so wafer runs for a licensee can give rise to both types of revenue. Based on our recent license signing, the associated engineering service work, and our other customer engagements, we currently anticipate that our Q4 revenue will be in the range of $125,000-$150,000. We continue to see momentum in paid engagements for engineering services resulting from our breakthrough in five-volt analog, RF SOI, and FinFET.
We are also in discussions with multiple customers about licenses, but our visibility on timing of those licenses and on engineering services remains limited. With that, I will turn the call back to Scott for a few summary remarks before we open the call up to questions. Scott?
Thanks, Frank. I think you will agree that these last three months have resulted in many fine accomplishments for Atomera. We signed a new licensee, achieved record financial results, expanded our customer engagements, and continued to build our patent portfolio. Our existing licensees continue to move forward on their schedule for production, and we hope our newest licensee, using MST1, will move on that track even faster. We continue to push for new licenses and to be paid for our MST deposition work and are making good progress in that direction. The customers and programs we are working on today are each very high potential and capable of making the company successful on their own. When we get these folks into production, we will certainly be a powerful IP provider to the semiconductor industry and a much more valuable member of the semiconductor ecosystem.
We look forward to sharing more of our successes with you as we continue to build Atomera into an important technology provider to the semiconductor industry. Operator, we will now take questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Cody Acree with Loop Capital. Your line is open.
Yeah. Thank you, guys, for taking my questions, and congratulations on the progress. Scott and/or Frank, if you can kind of talk about how long you were engaged with this new licensee, and have you worked in any other areas with this licensee? Are you expecting multiple projects under this, or is it just simply in the RF SOI world?
Thank you, Cody. Actually, it's a great story. We first announced to our investors, and I think to the general public, that we had gotten kind of this breakthrough performance on the RF SOI technology in our earnings call that happened in the first week of May. It was only just very shortly before that we got those results. Our work with this new customer started, only in that timeframe. I'd say maybe, March or April. I can't remember exactly, but to progress from the point of just having first discussions with them in that timeframe to getting a license, in roughly 6 months, we think is a great accomplishment. We are definitely in discussions with them about working with them on some other technologies other than RF SOI.
It's quite a large fabless company, they are working in multiple areas, but we don't have anything to announce there yet. So far so good.
Scott, just to follow that, and then I have one last question. Have you done work in the past in gallium arsenide for these RF solutions? If so, I guess, what benefits do you bring versus RF SOI?
We haven't done work in gallium arsenide, Cody. Did you mean that when you asked gallium arsenide?
Yeah. Just if you've done any work there.
The work, yeah, you're right. As many people know, gallium arsenide is a very popular solution for making power amplifiers for cellular transceivers. We haven't actually done work on that kind of relatively more exotic technology. Our work has been focused on RF SOI and on CMOS that can be used for RF applications, both of which we think MST brings a big advantage on. I can't say whether we bring an advantage in GaAs or not, just because we haven't done work there.
Got you. Okay, lastly, Scott, if you believe that the semi sector is moving into a 2020 recovery cycle, which I do, then how does that impact your view of licensing, given that you've said in the past that the industry slowdown was actually creating a little bit of a pocket for you to work. If we go into an uptick, is that going to create a headwind for you?
I agree with your assessment as well, Cody. We kind of see signs of the green shoots that are starting to come up. We haven't seen that impact us yet with our customers. I still think it's too early. Typically, what we would see is a recovery and then some period, maybe a year, before it starts to really get to this impacted capacity that we were experiencing in the last couple of years, and it made it very hard for us to get. I'm hopeful that we still have some good runway here to do a lot of work with customers and hopefully take advantage of that recovery when it comes in full force.
Great. Thank you much. Congrats.
Thank you. As a reminder, to ask a question, that is star one on your telephone. Our next question comes from Suji Desilva with Roth Capital. Your line is open.
Hi, Scott. Hi, Frank. Congratulations on the third license agreement announcement, as well as the very impressive board of director addition. I think it's a great testament to your technology. I think, Frank, you already answered this in the prepared remarks, but given there's no deferred revenue on the balance sheet, I presume this license was executed at the new customer after the close, and if it had been, would there be deferred revenue or not? I just want to understand that dynamic.
You're right. In fact, the announcement, I think, was just made, and the license was executed during Q4. There wouldn't have been any deferred revenue that would have shown up on the Q3 balance sheet related to this one. You may see that related deferred revenue on our Q4 balance sheet. As I said in my remarks, the revenue recognition has to do with a couple of factors, not just the signing of the license, but also the related work that we do since we're required to put the MST on the wafers. To some extent, how much deferred revenue shows up at the end of the quarter has to do with the work that we do on the wafers. I'm not able to sort of guide on that until we actually get through the quarter and do that work.
That's fair, Frank. That was the color I was looking for. Maybe a bigger picture question or even two questions in one about working with fabless and foundry versus an IDM. Now that you have this foundry kind of using the technology for fabless, does that now potentially open that foundry up for other fabless companies in a faster cycle? Is that timeframe shorter in terms of getting another fabless customer up and running? More broadly, how is it different working with a fabless foundry pairing versus an IDM?
Let me handle that one, Suji. It's an interesting set of circumstances. As I said in my comments, some of the very large fabless companies have a process development technology underneath their umbrella. They develop a specialized process, then they use their foundry partner to manufacture that process just for them. However, the foundry certainly gets to know us as part of that engagement because we're working with both the foundry and the fabless supplier very closely. I think it's very reasonable to assume that as the foundry gets to know us and the benefits of our technology, that they would want to engage with us directly to make a technology that they would sell to the rest of the market that's not proprietary to this large fabless provider.
We definitely see that there's many benefits to this from our perspective, in terms of sharing our technology with a wider base out there. If a foundry does adopt our technology, and they make it available on their standard process flow to all of their fabless customers, then obviously that's a very wide group of people that we'd be making that offering available to, and that would be great.
Okay. Just to kind of add some color to that, are any of the 19 customers you're engaged with now, would you term those as foundries, or is it all fabless/IDM?
Oh, no. The 19 customers, very healthy mix of foundries and IDMs, and it's only one fabless so far, which are these guys.
Oh, okay.
I could see that growing in the future, but right now we have a lot of foundries and a lot of IDMs.
Okay. Good to know this is your first and only fabless customer so far. A couple questions back in the financials. You talked about OpEx moving to support new customers. What does that growth rate look like in 2020, and what kind of impact might that have on the cash burn?
I've been talking about this now to kind of give a heads-up that there, at some point, was going to be an increase in R&D expense because we could see coming a need for more EPI capacity. Right now, we process customer wafers, we do MST on internal R&D runs with one tool, and we have, at times, been constrained to balance the internal requirement and the external. That's why we're bringing on additional tool capacity. The increase to operating expense isn't going to happen until we bring the new tool online and start actually making the lease payments. That will happen, we anticipate, in Q1 of 2020. It's not a significant increase. I think there's going to be some initial startup costs when we bring on the second tool.
On a run rate basis, you're looking at probably in the range of $50,000 to $75,000 a month more of operating expense with, maybe during the first quarter, a little bit more than that, maybe twice as much, due to kind of the upfront installation and qualification of the new tool.
Okay. Along those lines, Frank, the year-over-year increase in customer service or R&D headcount to support that, is that a material element as well, or is that all in the plan and not something that's incremental as for this call?
It's not incremental as a result of this call. We are planning to add headcount. If anything, we had in our plan to probably have a new headcount on board right now, and that hasn't quite happened yet. The headcount openings that we have are ones that were already in our plan. When Scott talked about supporting more customers with engineering resources, that's not incremental to what we already had planned.
Okay. Last question, I'll pass it along. Just remind us, Scott or Frank, the customer runs, the volume of those happening, the dollars you get from that, and how we should think about that being correlated or not correlated to how close to the finish line you're getting on converting some of these customers to licensing, because I know there's a lot of moving parts there as well.
Yeah. It's kind of difficult to correlate the engineering services revenue, I think you're talking about to.
Correct
to when they'll get the licenses. Our engineering services revenue, we've talked about it in the past. I would say we charge customers a little bit less than $100,000 to do a run with us, but that can vary pretty widely because it's on a statement of work by statement of work basis. Some of our early customers, as you know, we've had agreements in place that we didn't charge them for that. We're trying to change that and have been making good progress. I don't think that there's a way that you can look at that and figure out Well, obviously, I guess the more customer runs people do, the further they're advancing in phase three and hopefully getting closer to licenses and closer to manufacturing. At a gross level, you could say if our engineering services revenue is very high, then that's good.
It shows we're making very good progress towards licenses. There's no way to get specific about that.
Okay. Appreciate you guys answering all the questions. Congratulations again on the progress.
Thank you. Once again, ladies and gentlemen, to ask a question, you'll need to press star one on your telephone keypad. I'm not showing any further questions at this time. I will now turn the call back over to Mr. Bibaud for any further remarks. We do have a re-queue for Cody Acree with Loop Capital. Your line is open.
Yeah. Thank you. I just wanted to real quickly follow up on Suji's question. I think he had asked about cash burn in 2020. Do you have any guidance there?
No. I'm not giving guidance for next year, but I would expect from a gross operating expense level as compared to this year, that it will be about in line with where we are with about, as I said, about a $75,000 a month increase with incremental R&D on tool and headcount.
Great. Thank you much.
Thank you. There are no further questions at this time. I would now like to turn the call back to Mr. Bibaud.
All right. I want to thank you all for attending today's presentation. Atomera had a very successful quarter, and we believe we'll continue to drive more compelling results during the rest of Q4. Please continue to look for our news, articles, and blog posts to keep you up to date on our progress. You can sign up for them along with investor alerts on our website at atomera.com. Should you have additional questions, please call Mike Bishop, and we will be happy to follow up. We look forward to seeing some of you during our scheduled marketing activities, which we'll be announcing soon. Thanks again for your support, and we look forward to our next update call with you in February.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating.