Atomera Incorporated

Okay, I think we're ready to begin the call. Hello, everyone, and welcome to Adam Ayers' first quarter fiscal year 2021 earnings webinar. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available on Adam Ayers' IR website for one year. I'm Mike Bishop with the company's investor relations. After a positive experience last quarter, we are again using Zoom, and we will follow a similar format to prior quarters 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 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 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 19, 2021. Except as otherwise required by federal securities laws, Edomera 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 measure 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 Q1 update call. The last three months have been very interesting for our industry with the economic rebound driving semiconductor demand to the point where it's constraining industrial production across many different market segments. Fabs are once again running at or beyond their rated capacity, which as you might expect has had an effect on Atomera's efforts. For existing customers with wafers in process right now, we are seeing no major changes. But for those planning new experiments, we're hearing of potential delayed starts or extended processing times as production backlog takes first priority. That being said, all of our existing customers continue moving forward on their development work with us. During discussions of incremental or new customer projects, we have started to hear rumblings of restrictions on R&D wafers because of tight capacity. At the same time, we're seeing increased requests to understand how MST can grow production volumes through die size optimization. So current industry problems are a mixed blessing for us. It's helping to spread the word on the economic benefits of MST while potential new customer work to validate our solutions is difficult to get started. We were pleased during this last quarter to be able to show our first customer entering into phase four. As a reminder, phase four is defined as a customer installing MST in their own facility. For a customer to enter into phase four, a number of factors have to be properly aligned. First, the customer has to conclude that MST is worth the time and expense of dedicating a very expensive tool to its use. Second, they need to have at least one chamber available to work on MST. That either means doing some modifications to run MST in a dedicated chamber on an existing machine or buying and installing a new one so they can work with MST. Because tools dedicated to R&D are relatively rare in the industry, it's generally much easier for customers to introduce MST when building out a new fab or adding to an older one. So you can see that this phase four installation we achieved is no small feat. 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 new technology. We've consistently said in the past that phase three is very unpredictable, which makes it difficult to provide guidance on when the next deal, be it a JDA or a standard license, will occur. Although we continue to discuss JDAs with several customers, we are not in the late stages of negotiations on any at this time. Beyond the JDA, all customer engagements continue moving forward. A focus on existing customers, ongoing travel restrictions, and R&D wafer limitations will keep new customer growth from expanding significantly in the near term. However, we have been experiencing solid interest from both new and existing customers to learn how MST can be used to expand their production volume and help solve both current and future capacity issues. It has been well reported in the news that many of the world's manufacturers have experienced production stoppages for lack of the semiconductor chips necessary to build their products. The automotive industry gets the most press, but the same thing is actually happening in many areas of manufacturing. Semiconductor industry veterans that I have spoken with say this is the single worst shortage condition they've experienced in careers of over 30 years. It's worth the effort to dig a little deeper into the cause of this situation to understand the potential opportunity. Semiconductor companies are very focused on building out process technology for the next generation of semiconductor chips. Indeed, this year we've heard about over $200 billion in investments to be made in semiconductor manufacturing, the vast majority focused on the bleeding edge. that will ensure that our mobile phones, PCs and servers continue to get full supply of the fastest and most powerful chips needed for those applications. But what is plaguing the industry today is a shortage of capacity and older process generations that make the necessary chips for more mundane and less cutting edge applications like power management, sensors, microcontrollers and transceivers for automobiles, industrial products, Communication Gear and Appliances. Typically, these products were designed in process nodes that went into production decades ago. For certain designs, using a lot of analog circuitry, it doesn't make sense to shrink to a smaller node. Yet the fabs that produce these chips are maxed out and have a very hard time adding equipment to supplement their capacity. All the tricks available to get a few more wafers per hour out of these facilities were implemented years ago. Nevertheless, they keep trying to marginally increase output. One way they could get significant relief would be to use MST. Let's look at a few different ways MST can be used to solve industry problems. According to IC Insights, in 2020, more than 40% of monthly wafer capacity was for process nodes at 40 nanometers or above, with more than half of that in 180 nanometer or above. a manufacturing technology first introduced in the 1990s. Another 11% is in 20 to 40 nanometer, which the industry also categorizes as legacy nodes. These are the areas where the most help is needed. And MST is one of the only technologies with an ability to provide significant improvements in performance and die size for products in those process nodes. On this slide, we show how at 180 nanometers, MST-SP is able to outperform an industry standard design by more than 30%. If we take those same mechanisms and direct them to dye size reduction, MST is able to shrink a similar dye by approximately 15 to 20%. Our ongoing development work continues to find ways to use MST to improve these numbers and thus the expected savings. Now imagine an older fab that's very tightly restricted on the amount of wafers they can push through the building. The step function and costs to build a new facility is too large to consider. But by encouraging their engineers to make new designs using MST, they will get 15 to 20% more chips out of the same number of wafers produced without it. Our economic analysis shows this will have the effect of increasing both revenue and profits for the fabs and their customers while also providing a healthy royalty to Atomera. Remarkably, MST should work even better at nodes smaller than the ones we talked about before. Why? Well, as the industry goes to smaller gate lengths, they typically use much higher levels of doping. As you may remember, one of the key characteristics of MST is that it helps to control doping diffusion, which is more important as doping levels increase. Because of this, we believe MST can help to make transistors narrower in the nodes just above FinFETs, that is the 20 to 40 nanometer area I mentioned earlier. This could likewise increase the amount of dye one could squeeze onto a wafer, increasing capacity once again. Recently, we completed an analysis of how MSD could be used to improve performance of 28 nanometer products. Using parametric improvements we found through silicon experiments, we modified an industry standard 28 nanometer PDK and ran SPICE simulations for several different types of designs. The results were compelling. MSD showed higher electron mobility and better gate oxide integrity, allowing higher overdrive which resulted in more than a 30% performance improvement. We then traded off the performance improvement for die size reduction using MST on a typical NAND 2 gate like the one shown here. It resulted in a 22 to 25% area reduction. Analog scaling with MST provided a 21% reduction. So overall, you can see how these results can really move the needle on capacity improvements. We have been in discussions with many potential customers about using MST to help solve their production problems. Now, it is true that for this to happen, MST will have to be implemented and new chip designs will have to enter the pipeline. So it's not a quick fix. But the capacity problems we are seeing today are only slated to get worse in years ahead as the size of the market continues to expand, driving demand for these older process chips in factories that have very limited expansion options. Although the opportunity in legacy nodes is quite exciting for Atomera, MST technology is also very well positioned to solve problems for customers at the leading edge. as manufacturers attempt to make transistors of the smallest geometries, it's important that junctions are sharp and well-defined. As Robert Mears' blog post pointed out last week, MST does a much better job of that than other methods the industry is currently trying. We had previously been worried that MST, while very thin, may still be too thick for these applications, so we tried making it much thinner, and it still worked beautifully. Over the next few weeks, we will have more information about this development on our website, and you can be sure that our customers are going to be hearing about it as well. Efforts continue in the process of qualifying the new state-of-the-art epi capability at our facility in Tempe, Arizona. As part of this process, we have successfully demonstrated MST growth on our advanced epitaxial reactor, validating a tool that will be used for process development and customer support for both 200 and 300 millimeter wafers. With this new tool at our disposal, in addition to development, we will be able to conduct parallel testing and validation of MST with customers in phase four. This industry standard approach has been proven to expedite learning and qualification by customers. We continue to be excited about the opportunities 300 millimeter tool will open to Adamera. Today, greater than 65% of semiconductor industry revenue is driven by 300 millimeter wafers. So having this capability will allow us to try some very innovative business experiments to advance MST in the market. Our MST CAD software continues to be well received by customers and partners. Just as important, it has opened up the ability for our engineers to experiment with different integration options without having to wait for silicon runs to validate them. Here are three benefits we recently have realized with MSTCAD. First, we've identified an improvement that we believe is significant for integrating MST with RFS-OI by using a three-dimensional method of TCAD simulation. Second, MSTCAD has helped us to advance our MSTSP work much more quickly than we would have otherwise. Third, we are now also using it to evaluate different film types to optimize performance under different process conditions. Overall, the development work we've done on MSTCAD over the last several years is paying back giant dividends. As you can see, our opportunities abound. It's critical that we not lose focus on the most important objective for AtomEra, though, as we work to expand our efforts in multiple areas, and that is to get MST into production. It is for that reason that we spent time this year looking to supplement our team with an aggressive engineering manager with a reputation for execution, who also had the background to understand and guide our efforts in these many areas. We are very pleased to have Sudarshan Srinivasan join Adam Era. His prior experiences at Fly Materials, Intel and LAM bring a wealth of experience that we believe will accelerate and focus our efforts. He has only been on the job for a few weeks, but it's already bringing some excellent insights that will help to drive better performance of Adam Era in the future. Atomera continues to make strong progress on several fundamental applications we've been addressing for some time, but we also see more and more opportunities to tackle industry challenges with a film that brings a variety of benefits. With a strong technology base and a growing set of solutions it can provide, Atomera is currently very well positioned to navigate the road to a bright future. Now I will turn the call over to Frank to review our financials.

Thank you, Scott. At the close of the market today, we issued a press release announcing our first quarter 2021 results. This slide shows our summary financials, and I will now review them in more detail. Our gap net loss for the three months ended March 31st, 2021 was $3.6 million, which is 16 cents per share. In the first quarter of 2020, our gap net loss was also $3.6 million, and on a per share basis, it was 22 cents per share. The flat net loss compared to Q1 2020 was due to higher revenue, which offset an increase in operating expenses. The lower loss per share reflects an increase in weighted average shares outstanding to 22.1 million in Q1 2021 from 16.8 million in Q1 2020. Revenue in Q1 2021 was $400,000 compared to $62,000 in the first quarter of 2020. Gap operating expense in Q1 2021 was $4 million compared to 3.7 million in Q1 2020, an increase of $276,000. Research and development expenses increased by $167,000 while general and administrative and sales and marketing expenses increased by $68,000 and $41,000 respectively. Our press release and 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 $731,000 in Q1 2021 compared to $629,000 in Q1 2020. Non-GAAP adjusted EBITDA in Q1 2021 was a loss of $2.9 million, which is the same as in Q1 2020 as increased revenue offset our higher operating expense. Total non-GAAP operating expense was $3.3 million in Q1 2021 compared to $3 million in Q1 2020. Non-GAAP R&D expense was $2 million compared to 1.8 million in Q1 2020, an increase of $171,000. This was primarily due to an increase of $330,000 in payroll and related expense based on new headcount in engineering, offset in part by lower outsourcing and travel costs. Non-GAAP G&A expense in Q1 2021 was $1 million compared to 927,000 in Q1 2020. Non-GAAP sales and marketing expenses were $213,000 in Q1 2021 compared to $192,000 in Q1 2020. Sequentially, our gap net loss of $3.6 million in the first quarter of 2021 was $256,000 lower than our Q4 net loss of $3.9 million. Gap net loss per share was 16 cents in Q1 2021 compared to a loss of 19 cents per share in Q4 2020, reflecting our lower net loss as well as a higher share count. Non-GAAP adjusted EBITDA in Q1 2021 was $2.9 million compared to $3 million in Q4 2020, reflecting our increased revenue offset in part by the increase in operating expenses. Cash balance at March 31, 2021 was $36.7 million compared to $37.9 million at December 31. Net cash consumption of $1.2 million during Q1 reflects use of $3.9 million in operating activities offset in part by $2.8 million in cash from financing activities consisting of 2.5 million of proceeds from the exercise of stock options and proceeds of our at the market or ATM equity program in January. As in past years, our operating cash consumption is typically highest in the first quarter due to the timing of annual commitments, which are expense quarterly. As of March 31, 2021, we had 23.1 million shares outstanding. Our JDA customer entered into phase four and obtained a manufacturing license enabling them to deposit MST using a tool in their FAF. This license grant accompanied by delivery of our MST film recipe resulted in $400,000 of licensed revenue for Atomera. The JDA includes other milestones that could result in additional revenue in the future. We do not have enough visibility to forecast the timing or likelihood of achieving those milestones. Consistent with past practice, we are only providing revenue guidance for this quarter, which we expect will be zero. Until we reach distribution license agreements that generate royalties, our quarterly revenues will remain choppy and our visibility will continue to be limited. During periods of high capacity utilization, it can be even more challenging to schedule wafer runs that generate engineering services revenue. and the timing of those transactions like the closing of new licenses or signing JDAs is hard to predict. We continue to expect that our non-GAAP operating expenses for 2021 will be in the range of 14 to $14.5 million for the full year. 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?