Atomera Incorporated

Okay, I think we're ready to begin. Hello, everyone, and welcome to Adam Mears' fourth quarter in fiscal year 2020 earnings webinar. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available from Adam Mears' IR website for one year. I'm Mike Bishop with the company's investor relations. We're obviously changing things up a bit this quarter using Zoom, but we will follow a similar format as prior quarters with participants in the listen-only mode. We will open with prepared remarks from Scott Bibaud, Adam Mears President and CEO, and Frank Laurencio, Adam Mears CFO. We will then 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 presentation section of our investor relations page on our website. 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 marks 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 prospectus supplement filed with the SEC on September 2, 2020. Except as otherwise required by federal securities laws, at AmeriDisclaims 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 posted on our website. Now, I would like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott.

Thanks, Mike, and welcome all of you to our Q4 update and 2020 review using our new Zoom format. As you know, we've had some very notable progress over the last three months, and I'm excited to share more details with you. Our work is ongoing in the context of an industry-wide turnaround that has been remarkable. From this past springtime when semiconductor companies pulled back out of caution to an environment today that is exceeding all expectations. In periods like this, where manufacturing lead times increase due to capacity constraints, we sometimes see customers limit or restrict access to R&D runs since production lots become so precious. But as of today, we do not see that in our customer base. Instead, we continue starting customer and R&D wafer runs and holding regular detailed technical meetings at the same pace as before the pandemic. We now believe visit to customer facilities will start happening again later this year, but for now they remain restricted. With so many industry players reporting strong financial results and outlooks, we believe customers will be working even harder to find ways to enhance their products, which will provide a positive tailwind to Atomera. Although restrictions on travel during the pandemic have affected Atomera's ability to add new customers to our pipeline, As you can see, our customer base continues to be large and broad-based. Our highest priority, therefore, is to move existing customers through the phases towards production, while adding new ones is a secondary objective. We do believe that MSTCAD will be an effective tool to add new customers, even without face-to-face meetings. Our recent release of MSTCAD has gotten a good response from the industry, with several companies starting to look into the modeling capabilities. Today, we have 25 engagements with 19 customers, several of whom have multiple engagements underway. We are also in discussions with new prospects that are not currently in our pipeline. Our licensees continue to move forward towards commercialization with MST, and we have several other phase three customers who we hope will move in that direction soon. That being said, Atomera works with very large companies in an industry that can move quite slowly even when excited about a new technology. We've consistently said in the past that phase three is very unpredictable, which makes it impossible to provide guidance on when the next deal via the JDA or standard license will occur. In January, we were able to announce a newly completed JDA with a major semiconductor company who is one of our existing phase three customers. This is evidence of Atomera delivering on a critical step towards commercializing MST. This JDA will result in the first customer moving to phase four since our agreement includes a manufacturing license which gives our customer the right to install our process and deposit MST on wafers in their own fab. As you can see, our pipeline does not yet show them in phase four because they have not met our strict criteria yet. For a customer to enter into phase four, we must have delivered to them our MST IP transfer package which is typically done when the customer's tool is properly configured and we have received payment. At that point, we will update the status on our customer engagement chart. Adam Ayer believes that working with some customers in a joint development format is one of the most efficient methods of achieving breakthrough results for three reasons. First, in some of our engagements, the team that's evaluating our results can view our efforts as competitive to their own. in a JDA, our two engineering teams work together to achieve mutually beneficial goals, which is far more productive. Second, joint development efforts are concentrated in a small centralized engineering team, which will become the customer's resident experts on MST technology. We believe these highly capable teams will do more than just adopt MST, they will customize it and add modifications on top of our licensed technology, creating a unique competitive advantage for themselves. We support these efforts wholeheartedly and believe it will make MST and our customers more successful in the long run. And finally, as business units consider adopting MST, they will look to these residents experts who will act as natural internal resources for Atom Air's technology. We hope this will allow MST to proliferate more quickly to the customer's organization. Now let me explain how this JDA fits into the big picture. In a non-JDA customer, phase four would typically take about three to six months to complete, followed by phase five, which we expect to take nine to 12 months. Customers do not typically enter into phase five unless they're sure they will go into production since it is expensive and requires a lot of resources. In a JDA, We expect customers to be in phase four longer, but when completed, business units adopting MST should be able to move more quickly through phase three and directly into phase five. Each business unit that adopts MST for a distinct process technology represents a separate revenue opportunity as each must enter into manufacturing and distribution licenses with us, potentially opening up multiple royalty streams if they go into production. Our first JDA is a major milestone in the history of Atomera. Negotiations had been moving slowly all year, but picked up considerably in November, and the final contract was signed at the end of December. It is gratifying to be working with a company which has such a great reputation for innovation. After evaluation of our technology over the last couple of years, they saw enough potential to take it to the next level, and we are excited to show them everything MSC can do. Beyond the business opportunity with this customer, the JDA announcement was important in other ways. It signals to other industry leaders that they should be working with us. And it proves that at least for certain type of customers, a JDA is perhaps the best way to engage with Atomera. We do expect each JDA to be unique, but our first one has established a structure of IP protection, license grants and fees that will form a baseline for future negotiations with other companies. In December, we were able to announce the general release of our MST CAD version 1.0 modeling software. Our customers use this tool extensively to model chip performance, given plan changes in design and construction of a wafer. Obviously, adding the ability to model MST is invaluable to our customers and will help accelerate adoption of the technology. I'd like to take a minute and explain how. In phase three, we confront the most complex part of integrating MST into a customer's process design, which is understanding the integration of MST with the manufacturing steps surrounding our material. As an example, let's just look at a single step, the implant of dopants into a transistor. Multiple different species of dopants such as boron, phosphorus, and other elements can be implanted before or after deposition of MST at different energy levels, angles, in different regions of the transistor, and then are activated using a wide variety of temperatures, times, and annealing methods. For this one step alone, there are thousands of permutations that could be used with different levels of effectiveness. Experienced integration engineers can make their best guess on a set of combinations and design experiments to test them, although they are always limited in the number of combinations that they can try. MST allows us to assess the different options much more accurately prior to running silicon and narrow the set of experiments to only those most likely to succeed, which can reduce the number of experimental wafers and development cycles. We believe this will help to accelerate our time to successful results with customers. Customer reaction to MST CAD release has been positive, and we believe as we introduce it to more companies, it will allow for a lower cost option of evaluation of MST prior to running wafers. This should have the effect of speeding customers into our funnel and increasing our market reach. Since our last call, we've also made good progress both internally and with customers on both MSTSP and RFSOI. Our improved ability to combine MSTCAD modeling with internal wafer runs has helped us bring both technologies closer to production worthiness. Today, we are witnessing growth of a new market in the rollout of 5G cellular. MST SP is targeted primarily at products that are battery operated and RFSOI brings new design options for 5G front ends. As the large manufacturers of 5G cellular devices seek out ways to achieve competitive advantage, Atom Air's MST will be one of the options that can provide them with a leg up. This is the type of market transition which allows new technologies like ours to get a foothold and start expanding. Epi deposition work by Atomera engineers in our new facility has been underway for the last few months, allowing us to get a running start qualifying MST on our new epi tool. We are very excited to take full possession of this instrument so we can accelerate our customer work on both 300 and 200 millimeter wafers with a fully state of the art setup. A single tool that supports both 200 and 300 millimeter wafers is certainly not industry standard. While that gives us unprecedented flexibility to meet our development activities, it has also put up some challenges in the installation since many of the fixtures needed to be custom made. Typically, we expect a 200 or 300 millimeter epi tool to take approximately three months to be qualified to produce MSD wafers. This one has taken much longer since it will support both wafer sizes. At present, we're down to the last few punch list items before our compliance to specification test can be signed off and acceptance approved by Atomera. At that point, we will take full possession of the tool, start paying on the lease, and commence work on customer wafers. We expect that to happen soon. Regardless of the installation delay, we continue to be excited about the opportunities the 300 millimeter tool will open to Atomera. Today, greater than 65% of the semiconductor industry revenue is driven by 300 millimeter wafers. Since the advanced nodes use this larger size, we will gain access to the higher ASP and therefore higher royalty segment of the market. It's worth taking a moment now to review some of our accomplishments in 2020, a year most of us otherwise would rather forget. After getting off to a strong start with some great technical results on MSTSP, RFSOI, matching, and other areas in Q1, we were hit with a pandemic-induced slowdown. Our engineers had to vacate the office, but they certainly didn't stop work on customer and R&D activities. Continuing to generate breakthrough results that help to achieve successes we will reap going forward. The first and most important of which is the execution of our JDA with a market leader in the semiconductor space. Across a wide variety of technical areas, we made strong progress, but we also took the pandemic as an opportunity to build company infrastructure to position ourselves for long-term success. First, we acquired and have almost completed a 300 millimeter epideposition facility, which will give us reliable access to a resource we've badly needed since the founding of our company. Our engineering team delivered on MSTCAD, an incredibly complex tool which opens up MST to many more players and will accelerate our time to market. We dramatically improved access and information on the company through a new website which both potential customers and investors seem to greatly appreciate. Innovation is critical to Atomera and one way to gauge innovation is to look at our patent portfolio metrics which we had great success growing in 2020. Our patent count is now up to 269 granted and pending which is a 17% increase year over year. Even more impressive is that we are up 46% over the last two years, which show 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. And since we also license KnowHow, which has no expiration date, Our licenses will have plenty of running room. The bedrock of any great licensing business is its patent portfolio, and I think you can agree that Atomera has taken strong steps to solidify that foundation. Finally, I would point to the closing of our ATM funding facility in January, which has given us the strongest balance sheet in the history of our company, enabling us to aggressively execute to grow our business. All of these pieces have come together at an advantageous time. Our customers are growing rapidly, are flush with cash, looking for competitive advantage, and we are ready to help them. Our team is confident that 2021 will be a breakout year for Atomera. The tools are in place and our technology position is solid. With hard work, continued innovation, and a strong focus on execution, we are now truly well situated to create an amazing future for Atomera. Now I will turn the call over to Frank

Thank you, Scott. At the close of market today, we issued a press release announcing our fourth quarter and full year 2020 results. This slide shows our summary financials, and I will now review them in more detail. Our gap net loss for the year ended December 31, 2020 was $14.9 million, which is 79 cents per share. compared to a net loss of $13.3 million or 84 cents per share in 2019. The larger net loss in 2020 was due to higher GAAP operating expenses and lower revenue. On a per share basis, net loss declined as a result of an increase in weighted average shares outstanding to 18.8 million shares in 2020 from 15.9 million in 2019. Revenue in 2020 was $62,000 compared to 2019 revenue of $533,000. Gap operating expenses in 2020 were $15 million, an increase of $1.1 million from 2019 operating expenses of $13.9 million. This increase was primarily due to increases of $676,000 in research and development $421,000 in general and administrative expenses, while sales and marketing expenses were flat. Our press release in this slide contain a reconciliation between our GAAP and non-GAAP results. As has generally been the case for us, the biggest difference between GAAP and non-GAAP expenses is stock compensation, which is a non-cash item. Our stock compensation expenses were $3 million in 2020 and $2.9 million in 2019. Non-GAAP adjusted EBITDA in 2020 was a loss of $11.7 million compared to a loss of $10.7 million in 2019. Since stock compensation expense did not change significantly between the periods, the factors affecting GAAP and non-GAAP expenses are basically the same, and my discussion of operating expenses is based on the non-GAAP numbers. Non-GAAP R&D expense was $7.3 million in 2020 compared to $6.9 million in 2019, an increase of approximately $367,000. This was primarily due to an increase of $509,000 in payroll and related expense based on adding three headcount in engineering. offset in part by a $216,000 decline in travel expenses due to COVID. Non-GAAP G&A expense increased by approximately $500,000 to 3.7 million in 2020 from $3.2 million in 2019, primarily due to higher legal expenses, which mainly related to filing new patents and maintaining our patent portfolio. Lastly, Non-GAAP sales and marketing expenses were basically unchanged at $769,000 in 2020 compared to $820,000 in 2019. Turning now to our quarterly results, GAAP net loss in the fourth quarter of 2020 was $3.9 million compared to a $3 million net loss in Q4 of 2019. The higher net loss was primarily due to an increase of $662,000 in GAAP operating expenses, as well as a decline in revenue from 138,000 in Q4 2019 to zero in Q4 2020. GAAP net loss per share was 19 cents in Q4 2020 compared to a loss of 18 cents per share in Q4 2019, reflecting our higher net loss partly offset by the higher share count. Non-GAAP adjusted EBITDA in Q4 2020 was $3.0 million compared to 2.4 million in Q4 2019. Also reflecting higher operating expense and lower revenue. Cash balance at December 31, 2020 was $37.9 million compared to 14.9 million at the end of 2019. Cash use in 2020 reflects $12.1 million used in operating activities and the receipt of $35.3 million from financing activities. Cash from financing includes net proceeds of $24 million from our at the market or ATM equity program that commenced on September 2nd, 2020. $9.4 million of net proceeds from our public offering in May 2020, and $1.9 million of proceeds from exercises of warrants and options. On January 5th, 2021, we announced the completion of the ATM program, which resulted in the sale of 2.2 million shares with net proceeds to us of $24.2 million after commissions and expenses. As of December 31, 2020, we had 22.4 million shares outstanding As Scott mentioned in his remarks, our JDA includes the grant of a manufacturing license and will generate revenue for Atomera. Consistent with past practice, we are only providing revenue guidance for this quarter. We anticipate that our Q1 revenue will be $400,000 based on payments under the JDA. However, the recognition of this revenue will depend on future events and therefore could slip from Q1 into Q2. The JDA includes other milestones that could result in additional revenue in later periods, but we're not in a position to forecast the timing or likelihood of those milestones. During 2020, our operating expenses were lower than we had forecast at the start of the year, mainly due to delays in reaching acceptance of the new 300 millimeter epi deposition tool. Although we have not yet reached that final acceptance step, which triggers the commencement of lease payments, we are very close. Our guidance is that non-GAAP operating expense in 2021 will increase to a range of $14 to $14.5 million. The main drivers of this increase will be 300 millimeter tool costs, higher engineering headcount, and higher G&A expense as we become subject to additional reporting obligations. With that, I will turn the call back over to Scott for a few summary remarks before we open the call up to questions. Scott.