Atomera Inc Q3 FY2024 Earnings Call

Hello, everyone and welcome to Atomera’s Third Quarter Fiscal Year 2024 Update Call. I’d like to remind everyone that this call and webinar are being recorded, and a replay will be available on Atomera’s IR website for one year. I am Mike Bishop with the company’s Investor Relations. As in prior quarters, we are using Zoom and we will follow a similar presentation format with participants in a listen-only mode. We will open with prepared remarks from Scott Bibaud, Atomera’s President and CEO; and Frank Laurencio, Atomera’s CFO. Then, we will open the call to questions. If you are joining by telephone, you may follow a slide presentation to accompany our remarks on the Events and Presentations section of our Investor Relations page on our website. Before we begin, I’d 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 annual report on Form 10-K filed with the SEC on February 15, 2024. 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 the most directly comparable GAAP measures are included in today’s press release, which is also posted to our website. Now, I would like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott.

Good afternoon and thanks for joining today's call. The last three months for Atomera have been the busiest and most positive in my memory. I do feel that right now our team is firing on all cylinders in our development efforts, customer activity, partnerships and technology advancement. Today, I'll provide a comprehensive picture of the company with as much information on customer progress as I can by detailing our different technology segments and where our primary customers are making significant progress towards JDAs and/or license agreements. First, let's go over the opportunity for MST and power chips. The power semiconductor market is a large and rapidly growing segment driven by the power demands of large compute infrastructure and vehicle electrification. In 2024, this market is expected to be over $52 billion and innovations to drive efficiency, power and cost savings are being widely pursued. Of course, our most visible opportunity in this segment is with ST and the development of their next-generation smart power products incorporating MST. Atomera has been supporting ST in the development of their new process for over a year now, and I recognize that investors would like more insight into exactly where we are in the transition for production. There are two main areas in which Atomera has been supporting ST. The first is on MST CAD simulations to optimize silicon performance through integration of MST. This work has been underway for over a year and the correlation between modeling and hardware has been confirmed with real silicon multiple times. The number of silicon validation runs required will depend on how quickly ST achieves their design objectives. The second area in which we are cooperating with ST is manufacturability by enhancing the throughput of MST deposition on ST's factory production tools. I want to emphasize that this project is in great shape. Indeed, ST has authorized me to say that development is going well and that we are still on track to go to production as soon as development and qualification are complete. At that time, we expect royalties that will be compelling high gross margin revenue for Atomera. As with prior statements, I cannot comment on timing or schedule except to say that it is entirely under ST's control. ST is not the only company we've been working with in this segment. Atomera's MST SPX technology is applicable to voltage ranges from 7 to 48 volts, meaning it's interesting to many different players for a variety of applications. Since this is typically a legacy technology with relatively few knobs that will bring big performance improvements, when we demonstrate that MST can help them gain more than 20%, there's usually strong customer interest. We are currently in discussions with multiple customers on proposals to either license the technology outright or to enter into a JDA that will ultimately lead to production. One part of this market is particularly hot right now and provides a compelling opportunity for Atomera. Traditionally, server racks and data centers have been fed by a 12-volt power supply, but that standard is currently changing to 48 volts. Accelerating AI-driven power demands have created a need for higher power efficiency in those data centers and 48 volts can deliver power to reduce power dissipation by a factor of up to 16 times, which has led to a chip war to deliver the best devices. In the last quarter, Atomera has finalized a 48-volt version of our SPX technology with dramatic performance improvements specifically to address this segment. Introductions to new customers are just starting, but we are optimistic about its potential due to the further efficiency improvements it can bring to data centers. Next, we have the advanced node work for gate-all-around transistors at the leading edge, which represents about $150 billion market in 2023. Manufacturing technology at these advanced line widths has shifted from a primary focus on lithography to more extensive use of materials engineering solutions and particularly Epitaxy. As device architecture shifts from FinFET to gate-all-around, the number of Epi steps incorporated into the process flow is projected to more than triple. This trend makes it significantly easier to add MST to the primary Epi steps to deliver improved device performance. As Epitaxy becomes a more critical component of device architecture, it opens the door to our MST technology being more easily slotted into the production flow since the MST insertion cost to an existing Epi step is incremental compared to introducing MST as a standalone step. In addition to MST being easier to add, advanced node production is an area where we believe our technology can provide significant benefits. Our ability to block dopants, particularly phosphorus, in this application can provide a critical tool for the formation of advanced source drain structures as detailed in Robert Mears presentation at the recent ECS prime conference. With the incredibly tight channel lengths in today's newest transistors, obtaining high production yields has become one of the central challenges, and we believe MST can help to solve this problem, which will have a direct impact on the number and cost of GPUs that can be manufactured to meet the demands of the AI market. Our new head of business development has a deep background here, and we believe he will lead us to compelling market growth in this segment. Today we are working with multiple customers in the advanced node area. The memory segment, valued at over $110 billion in 2023, has many characteristics in common with the advanced node segment, except because it is a commodity market, it's hyper-focused on low production costs. Similar to gate-all-around, they are in a relentless drive to meet smaller node sizes, but in this case, they can benefit even more from material advances to meet yield or cost targets. Again, similar to advanced logic platforms, the memory platforms are beginning to introduce Epitaxy into the device structure, turning to materials engineering to drive performance. Just as with gate-all-around, the introduction of Epi into the memory flows, MST becomes an incremental cost adder to the Epi steps while delivering substantial device performance and cost benefits. We are excited about the potential for our technology in this space because we believe it provides real performance, die size and margin improvement potential for our customers even after paying us a royalty, and the opportunity here is huge, at approximately 20% of the entire semiconductor industry with very high volumes and long technology cycles. Again, we are working with multiple customers in this area. Finally, RF-SOI is another segment with excellent potential for our technology where we provide a performance advantage we don't believe is possible to achieve without MST. We continue to work with customers representing the majority of the supply of devices built on RF-SOI substrates. In each of these segments, we've made proposals to customers which we are optimistic will convert into JDAs or license agreements in the near future. Indeed, we are in active negotiations today on an agreement that we believe will be transformative for the company, and we are hopeful that we will be able to announce it within the next few months. Recently, we announced an agreement with a Center for Integrated Nanotechnologies at Sandia National Labs to further our efforts on GaN on silicon technology. Earlier work with Texas State University has shown that MST can reduce stresses induced during the manufacture of GaN on silicon substrates, which can improve the crystal quality as proven through physical tests. Now, we will take the developments a step further with the fabrication of GaN devices to validate that the physical improvements convert into electrical benefits. GaN on silicon will be the high-volume, low-cost substrate of the future for GaN devices, and if this technology works as expected, MST will be valuable to anyone who manufactures with it. A lot of R&D is going into GaN on silicon and announcements periodically come out about manufacturers bringing larger wafer sizes to production. Make no mistake though, those wafers are experiencing stress that leads to lower yields and higher defects, which MST may help to alleviate. The rapidly growing GaN market is particularly interesting to us because we believe the technology can be converted to revenue faster than our traditional business, and we hope the work with Sandia will help speed up our time to market. Customer engagement has intensified dramatically in the last quarter. We are engaged with a lot of very large customers and I sense that the need for our technology is stronger than ever. So let me cut to the chase and give a quick update on prior deals. JDA1 has recently requested additional data from us to validate MST's effectiveness in a specific application, and we are already planning wafer runs to demonstrate how MST can address their requirements. Discussions with JDA2 about a company-wide license spanning multiple technologies and nodes is ongoing, although this negotiation is moving more slowly than we would like. Our fabless licensee has wafers coming out imminently, and if those results are strong, we believe it will lead to a production transition program with both them and their foundry partner. Beyond these engagements, we have proposals outstanding with several others in addition to the large transformative customer we are negotiating with today. Right now, without exaggeration, I believe the Atomera team is more excited about our prospects than I've ever seen. The ST engagement, which is an enormous business with a long projected life, is moving nicely towards production, which ST has confirmed. Our potential in the outlined segments is even larger, and I feel we are very close to announcing deals which will cement that position. The work we're doing in gate-all-around and memory is tied directly to the biggest driver of the semiconductor industry today: the rollout of AI infrastructure, and our GaN work is not only aligned with a major industry push, but we also believe it can be executed with faster time to revenue than our other segments. So today is an exciting time to be at Atomera, and if we can execute on the opportunities in front of us, we will need to grow to support all the anticipated business. Now Frank will review our financials.

Thank you, Scott. At the close of the market today, we issued a press release announcing our results for the third quarter of 2024 and this slide shows our summary financials. Our GAAP net loss for the three months ended September 30, 2024 was $4.6 million, or $0.17 per share, compared to a net loss of $5 million or $0.20 a share in the third quarter of 2023. In Q2 of this year, our GAAP net loss was $4.4 million, which was $0.16 per share. Revenues were $22,000 in Q3 compared to $72,000 in Q2 of this year and $0 in Q3 of 2023. GAAP operating expenses were $4.8 million in Q3 2024, which was a decrease of approximately $534,000 from $5.4 million of operating expenses in Q3 of 2023, mainly due to a $546,000 decline in R&D expenses and a $117,000 decline in sales and marketing expense. This was offset in part by a $129,000 increase in G&A expenses. The decline in R&D expense was mainly due to the closure of our outsourced foundry TSI Semiconductor in the first quarter of this year. Sales and marketing declined year over year, primarily due to lower headcount. Sequentially, our GAAP operating expenses increased by $191,000 to $4.8 million in Q3 compared to $4.6 million in Q2 of this year, reflecting an increase of $170,000 in R&D expense and a $41,000 increase in sales and marketing, while G&A decreased slightly. Non-GAAP net loss in Q3 2024 was $3.9 million and compares to a loss of $4.3 million in Q3 2023. As with our GAAP results, the smaller loss was primarily due to R&D and sales and marketing expenses being lower. Sequentially, non-GAAP net loss increased by $251,000 from Q2 to Q4 of 2024 due to the increase in operating expenses combined with lower revenue. The differences between GAAP and non-GAAP operating expenses in all the periods we've presented are primarily due to non-cash stock compensation expenses which were approximately $900,000 in Q3 of this year, and $1 million in each of Q2 2024 and Q3 of 2023. Our balance of cash, cash equivalents, and short-term investments on September 30, 2024 was $17.3 million compared to $18.3 million at the end of Q2 2024. During the most recent quarter, we used $2.9 million of cash in operating activities compared to $3.2 million in the first quarter of this year. During Q3, we sold approximately 691,000 shares under our ATM facility at an average price per share of $3.18, resulting in net proceeds of approximately $2.1 million. As of September 30, 2024, we had 28.3 million shares outstanding. Revenue in Q3 was $22,000 and consisted of MST CAD license revenue, and we expect that our Q4 revenue will be approximately the same as in Q3. We're not providing revenue guidance beyond this quarter, consistent with our normal practice. The next major revenue milestone under our agreement with ST will occur when they complete the qualification process, which, as Scott said in his remarks, is proprietary information and the timeline is in ST's control. Moving to our expense guidance. During the first nine months of this year, we incurred total non-GAAP operating expenses of $11.5 million, which has us on track for a range of $15.75 million to $16 million of opEx for the full year, below the guidance we provided last quarter. We're in our 2025 planning process now, but I can tell you we expect to make additional investments in sales and marketing, and we continue to explore the most effective ways of utilizing outsourced foundry services. So our non-GAAP operating expenses in 2025 will be higher than this year, likely in the range of $16 million to $17 million. We'll provide more color on this in our next quarterly update call. Lastly, I want to give a quick update on our efforts for CHIPS Act funding. This topic is especially timely since I'm joining today's call from Washington, D.C. where I'm attending the annual meeting of the Microelectronics Commons and the Symposium of the National Semiconductor Technology Centers, or NSTC. In July, we submitted a funding proposal related to our work on GaN and other compound semiconductors, but no decisions have been made on that yet. We expect that the next phase of the RFP will be announced in late Q4 or Q1. Everything I'm hearing at the conference confirms there are many applications and funding opportunities for Atomera under the CHIPS Act, and our technology is compelling to various government departments. With that, I will turn the call back over to Scott for a few summary remarks before we open the call up for questions.

Thanks a lot Frank. From today's call, I hope you have a sense of the building momentum that we're feeling. Right now is a very exciting time to be part of the Atomera story. Our technology is being sought out by some of the biggest players in the industry. It's perfectly aligned with several industry trends and should form a very strong growth engine on top of the revenue base that we hope to build with ST as our foundation. Thanks as always for your support and Mike, we will now take questions.

Thank you, Scott. Our first question comes from Richard Shannon of Craig Hallum. Richard, please unmute and you may begin.

Okay, great. Thank you, Mike, and thanks Scott and Frank for taking my questions. Let's see here. I guess my first one is for Scott here. You made a very interesting statement in your prepared remarks about active conversations, and I probably got the language wrong here, but a transformative situation. Maybe you can give us a little bit more detail on exactly what this means. Any idea on technology area? Sounds like it could be a number of months before it closes. Sounds complex, but maybe give us a little bit more detail there. I'll probably have a follow-up.

Yes, what I mean by transformative is that we have a significant customer with considerable revenue potential. If we can start production with them, it could put us in a very advantageous financial position. Considering our business model and the possibility of achieving high gross margin revenue, collaborating with such a large company that can generate high revenue is certainly compelling for us. We are optimistic about this opportunity, and we've been engaging with them for quite some time. As mentioned previously, we only present proposals to companies after a substantial period of collaboration, ensuring mutual understanding that it is a logical step forward. This particular proposal has been in discussion for a while, and we are now in active negotiations. While I can't provide specific details about their industry or the timeline, I can confirm that we are genuinely excited about this development.

I will consider those thoughts and may follow up shortly. The larger question that this potentially transformative situation raises is significant. Many people are asking about the strong funnel you have, particularly with half of the largest twenty semiconductor companies in the world involved. However, everyone would like to see you complete a qualification. We have STMicro announced and seemingly progressing as expected towards completion. Could you discuss any progress you’re seeing with other companies in the funnel? Additionally, do you have any insights on the technology areas you think might be the first to reach that point?

Okay. So when we discuss the funnel, we currently have customers in phase one, phase three, and phase four. The customers in phase four have already installed the technology in their fabs, produced wafers, and are making significant progress. Those in phase three are actively experimenting with us. We remain optimistic that they will reach the performance levels necessary to proceed to production. Recently, we've observed that some legacy technologies take longer to enter production and to decide on changing their process nodes. Once they are ready for that change, the process can be quite lengthy. STMicro is an example that falls into this category. We believe that customers working on more advanced nodes, such as gate-all-around and memory, will move more quickly, although they will demand substantial resources. These companies have large teams of engineers focused on new nodes, and they frequently request extensive data and additional experiments from us. However, due to the significant resources on their side and the strong push to reach production, we anticipate a quicker time to market. This provides some insight into the ongoing work we have with various customers at different stages.

Okay. A couple of interesting insights there, Scott. I appreciate that. Maybe let's touch on a couple of the technology areas here. I guess, I wanted to follow up on RF-SOI. I think in the last quarter or two you talked about an advancement in the industry with going towards thinner wafers, and that seems to have been at least my conclusion would be that was one of the significant delay factors when we've been hearing about RF-SOI potential for a number of years now. Maybe give us an update there of how much that has pushed the ball forward here in terms of moving people towards that eventual goal here, or are there other potential obstacles to overcome in that technology space?

No, I just think this is a case where the latest and greatest, as we've talked about, the latest kind of thing that the industry has identified to take them to the next level of performance is to use these thinner wafers. Earlier in the year, we announced an agreement with Soitec to the point where they would make and sell engineering wafers to our customers, so they could run tests, more tests to bring that type of technology to market. And we've been just working with that on our customers that are working in this area. And unfortunately, no announcements yet there, but I would say we're continuing to move forward, making good progress and getting regular results that hopefully will lead us to the point where we're ready to start making some announcements.

Okay. I have two final questions before I step out of the line. It sounds like there’s some exciting progress happening with the advanced nodes. I believe your earlier comment referred to both the logic and memory aspects, but this question is probably more focused on the logic side. Is your collaboration ongoing with both foundries and fabless companies?

On the advanced node, no. For the most part, we're working only with people who manufacture the gate-all-around. Years ago, you could work with foundry partners on the upcoming advanced nodes and they would help to influence their foundry partner to manufacture with their ideas. But these days, gate-all-around is so complicated that really the fabless guys don't have as much influence as they used to have, let's say. And so, we'd be targeting primarily the folks who have the factories that are going to run these chips.

Okay. Fair enough. Then on my last question, just hitting on JDA1 specifically. Sounds like there's been some back and forth of going to Central Engineering and trying to get something moving with the specific customer groups here, wasn't clear to me based on your comments about whether there's some good progress being made in getting to some sort of business relationship there. Maybe if you could touch on the specifics there, please.

Yeah. I would say there's a slight difference to this set of requests that we have from what we've had in the past. And as you know, we first engaged with JDA1 at the Central Engineering level, and they proved out our technology kind of gave it a blessing of approval for people in the company to use. Today the inquiries that we're getting, the work that we're doing now is to address a very specific application with a very specific solution. And, of course, they want to know that our technology can actually deliver on some of the performance metrics that we have shown them in that application. And I would say it's certainly typical that you bring a customer a lot of data showing, hey, we can really do this, and then they say they give you a request for 10 more pieces of data to validate all of their doubts. And so that's kind of the stage that I'd say we're in right now.

Okay. Fair enough. I will jump out of line. Thanks for all the details, Scott.

Sure.

All right. Thanks, Richard. We have a number of questions coming in on the Q&A line, and I'll just dive in. The first is, is the recent announcement about Sandia Labs related to the CHIPS Act application submitted in July.

Yes, I'll address that. No, it's not related to that, which is excellent because it allows us to showcase the GaN technology further. We submitted a proposal under the CHIPS Act that pertains to GaN and other applications of MST in compound semiconductors. To elaborate on Sandia, we demonstrated the physical advantages of MST in developing GaN on silicon wafers, which improves quality due to the stress involved in that process. However, at Texas State, we couldn't electrically test the performance of these devices. Fortunately, Sandia had a program that enabled us to start testing how GaN devices performed on the substrates we worked on with Texas State. This testing should show improvement in performance alongside the enhancements in physical qualities. The great aspect is that the work at Sandia is at no cost to us, and the results should enhance our appeal for CHIPS Act funding as well as attract several commercial clients interested in our GaN offerings. Lastly, I see many opportunities for GaN and other compound semiconductors where funding is available, so we will keep pursuing that, but they are distinct aspects.

Okay. Thanks, Frank. And there's questions regarding the proposals and customers in the pipeline. And folks are wondering if they're currently. If all the proposals we have outstanding are currently in the pipeline in, for example, phases one through three.

Phases one through three?

Yes, we have proposals with customers in our pipeline. They are not all in phase three; some are in phase one, but they are all clients we've been collaborating with for a considerable time.

Okay. And then, Frank, there are questions about plans for funding. Do you want to address the outlook for funding and cash needs?

Sure. You may have noticed in the financials and my comments that we finished the quarter with a lower cash balance than at the end of June. We were cautious about selling more stock under the ATM program since the stock price has been close to historically low levels in recent months. We need to find a balance between not diluting our shareholders and ensuring we maintain a minimum cash reserve that exceeds 12 months of our planned expenditures, as required by GAAP accounting. This balance will always be our priority. When the stock price is relatively low, we will be more conservative in our approach.

Okay. It looks like Richard has a follow-up question. Richard, did you have another question?

Yes, I do. Thanks, Mike. Scott, I want to follow up on one of your comments in your prepared remarks regarding power in the 7 to 48-volt range. There are very interesting dynamics happening there that we're reasonably familiar with. I have a couple of questions on this. To what extent is the work you’re doing in this voltage range specific to 48-volts related to servers versus being more broadly applicable across the industry? Let me stop there, Scott.

Yeah. We've been talking about our SPX technology for a little while now. And although it had really been targeted from 7 volts to 48 volts, in fact, most of the interest that we saw in the industry earlier was probably not as high as the high end of 48 volts. Now the 48-volt stuff is, yes, it's very specifically tied to this expanding opportunity in data centers. That being said, it's the same type of transistor structure that would be used for other high 48-volt power requirements. But I think the big opportunity is located there at the data center right now.

Okay.

We've been discussing SPX for some time, but we've specifically adapted it for 48 volts. While it belongs to the same family, it's somewhat different from our other lower voltage technologies. It's optimized for the 48 volts, and I'm really excited about it. Our testing results indicate significant efficiency improvements that I believe will appeal to many. We're just beginning to engage with customers regarding this.

Okay. Excellent. We'll look forward to hearing more about that. My other question is a follow-up on an earlier response where it seems you have concluded, or at least the trend observed in past discussions, is that if you're trying to enter into legacy nodes, the timeframe to reach production or to get a license and move forward appears to be more delayed than with newer nodes. Is there anything you can do to help accelerate that process, or is this just an issue of working with companies that have legacy nodes?

Yeah, so…

Let me stop there.

No, it's a great question because I think what we have been doing up to now is going out and telling people, okay, we've got this, for example, on power, SPX technology, and we already announced that we have one customer on it. When they get to production, they're going to bring a whole new level of performance. And it was our belief that that would drive some of their competitors to say, okay, I have to start developing with that as well. Right? It has happened, but it hasn't happened as across the board as we had hoped it would. And it hasn't probably accelerated the development efforts at those companies as quickly as we like. We do believe when ST hits the market that's going to make a big difference. And also, some of the proposals that we have outstanding are with companies that would be entering into that space. So, I think we'll get more even before ST goes to production, that's my belief. But yeah, I mean, just if you think back about the history of ST, we started working with them in 2017 or 2018. We did some experiments. By the end of 2019, we really had shown excellent results with them. And between COVID and then building a new factory, they didn't really start work on the new process node until 2022. So, it's not that they take a long time once they decide to go to production. I think that part is maybe slightly slower, but similar to another process node going to production. But the decision to make a change to an old legacy node that's been running in high volume for some time doesn't come up every year. And so sometimes we have to wait for that to happen.

Okay. Okay. All right. I think that makes sense. I will jump out of line. Thank you, Scott.

Okay. Thanks, Richard.

All right. It looks like there are one or two more questions. The question is, you mentioned ST in your prepared remarks, but can you elaborate on how that relationship is evolving and share any additional comments that might give us insight into the progress?

Yeah. Let me say a few things about it. First of all, ST is an excellent company to work with. I think they were the company that invented BCD technology, which is what our SPX is running on. And so, obviously, we're working with some of the best technical experts in the field here. And I think we really enjoy the back and forth to be able to constantly be improving the products. Things have been going so well with ST that we've also kind of executed a land and expand type of strategy where we've already started working with some other groups inside ST as well. And so, hopefully, we'll be able to expand our business into them to multiple business units. It’s possible we could do that even before we get to volume production with the first product. So, things are going very well with them.

Okay. And just one final question. Can you provide some comments on the gate-all-around silicon results that were presented at PRiME 2024?

It's quite technical, but one of the things we presented at PRiME 2024 involves a gate-all-around source and drain, which uses a highly doped phosphorus source or drain. The channel is designed to be nearly dopant-free. Due to the small size of the structures, it's challenging to prevent the highly phosphorus-doped gate from diffusing into the channel. If enough phosphorus diffuses into the channel, it can cause a short circuit between the source and drain or significantly reduce the device's performance, leading to low yield. We believe that by introducing MST at the interface between the source and the channel, we can prevent phosphorus from migrating into the channel, thus avoiding shorts or reduced performance. This will not only enhance performance but also help gate-all-around manufacturers achieve higher yields of transistors during production. This is one of several applications we are promoting to customers in gate-all-around technology. Robert's slides from that conference should soon be available publicly and will demonstrate how our diffusion blocking can deliver the benefits I've mentioned.

Great. All right, Scott, I think that wraps up the Q&A session. You may prepare with closing remarks.

All right. Great. Yeah. First of all, I just want to say thank you all for joining us to hear the progress being made within Atomera. Please continue to look forward to our news, articles, and blog posts which are available along with investor alerts on our website atomera.com. Should you have additional questions, please contact Mike Bishop who will be happy to follow up. Thanks again for your support, and we look forward to our next update call.

Thank you, Scott. And with that, that concludes the Atomera third quarter 2024 conference call.