Atomera Incorporated

Hello, everyone, and welcome to Atomera's second quarter fiscal year 2021 earnings 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'm Mike Bishop with the company's investor relations. We are again using Zoom and we will follow a format similar to prior quarters with participants in a listen-only mode. We will open with prepared remarks from Scott Bibaud, Atom Air's President and CEO, and Frank Laurencio, Atom Air'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 sections 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 factor 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, Adamera 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 posted on our website. And with that, I'd like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott.

Thanks, Mike. Good afternoon and welcome, everyone, to our Q2 update call. Atom Air has had some very strong behind-the-scenes accomplishments this past quarter, which I'd like to share with you. But let's start first by talking about the industry. The semiconductor space has never been more tumultuous. Not only do we have the pandemic playing out around the world, we have ongoing supply shortages, unprecedented sales and profitability, widespread consolidation or rumored consolidation, and giant geopolitical forces at play. I can tell you that Atomera has been witnessing all of these events up close and personal. Customer visits are still out of the question in Asia, but are starting to become more possible in Europe and the Americas. New wafer starts have been somewhat limited, but remarkably, the delays we've experienced in ongoing wafer runs have been minor. And we've even been able to get approved for some new starts. Considering the constraints in our industry, I view this as a strong endorsement of our technology's potential. Overall, we are weathering this storm quite well with inbound customer interest and no major disruptions to development projects underway. In this environment, we're not surprised that the number of customers and engagements in our pipeline has not changed. New customer growth is being held back by COVID travel restrictions and the capacity limitations in customers' factories. Our JDA partner, existing licensees, and other phase three customers continue to advance their efforts with us undaunted by the industry's communications and logistics challenges. We are making headway every day towards the goals our customers established at the beginning of our project. So although this chart is unchanged from last quarter's, there's a lot of good progress hidden within the phases and our JDA is on track. Here's another positive phenomenon that I'd like to address and it's related to TCAT. We have had a lot of inbound questions about how our TCAD product is doing and its success with customers. The first cohort of customers who've adopted MS-TCAD are finding it is assisting them greatly in narrowing down the wafer runs needed before achieving success. I think this is best illustrated with an example. One of our customers has a wafer run underway with the integration steps that we mutually agreed were the best suited for their devices. About two months after the wafer started, MSTCAD helped us identify an even better way to integrate our technology that would add to the device's performance. We shared it with the customer, who got very excited and contributed some of their own ideas about how it could be improved even further. So we ran TCAD again, and sure enough, their idea did make it better. Then last week, we found another innovation to optimize the device yet again that was subsequently proven on MS TCAD. We are now talking with our customer about starting wafers to demonstrate these latest innovations. Why is this remarkable? Well, just a few years ago, each of these three innovations would have needed silicon runs that typically take six to nine months. We ran these three TCAD simulations in just a month and a half. As a matter of fact, we still haven't even gotten the results from the first wafer run, and we already have a very specific plan for making the next wafer run much more successful. This is the power of MSTCAD. In the hands of smart integration engineers, this tool can help us do fewer wafer runs that will be more successful and so therefore get us to production more quickly. So how does this relate to the engagement chart? Today, it's becoming standard that our Phase 1 customers want to develop a detailed TCAD simulation before finalizing a plan to run MST wafers. So customers are staying in Phase 1 longer than in the past, but we believe this will lead to customers going through Phase 2 and Phase 3 faster than ever before. This should also make engagement contracts easier, since both sides will be able to exactly define what success looks like. It may appear that additional work in the planning phase will add time, but a more focused set of targets established up front will lead to faster progress through phase three and to production. And that's great news for our customers, for Atomera, and for our investors. Since we're talking about customers, I'd like to clarify our JDAs in general and our current engagement in particular. By now, you're all familiar with our standard customer flow. Usually this involves one process node where we work with customers to achieve a targeted performance spec by integrating MST in phase three, leading to a decision to go to production. MST is then installed in their fab, which is phase four, and then we go through process qualification in phase five before production begins. I'd like to emphasize that this phased approach is a model, and many customers do not follow one through six steps in order, but they do have to perform all of the functions shown here before they can go to production. JDAs are done differently, so I've removed the phase numbering to avoid some confusion. Generally speaking, we believe most JDAs will involve integration beginning and continuing while MST is installed at a customer fab. By combining installation and integration at the same location, development efforts will be expedited since the logistics of MST wafer handling are much more efficient. Also, because we believe the customer will understand MST better and have more buy-in and urgency on the program, It's our belief that MST JDA engagements like the one shown here are more likely to get to production quickly. That being said, the JDA we're working on today is somewhat unique. One central engineering group is pre-qualifying MST so they can confirm it meets the company's specifications and will subsequently make it available to their various business units for adoption. at that point, a business unit will integrate MSD into their products and then complete process qualification on that product line when they're ready to go to production. Because the technology is already installed, they will be able to move directly from integration to qualification. As in the prior JDA example, the integration work should definitely be much quicker than a typical engagement and MSD will be offered to multiple different product lines simultaneously, creating a much bigger revenue opportunity than a single process node engagement. We would love to replicate this type of unique JDA with large customers throughout the semiconductor industry. Today, Adam is in discussions with multiple customers about both types of JDAs. Our development organization has accomplished a lot during the last quarter, especially in our MST technology focus areas. Having demonstrated industry-leading performance in several critical specifications for power analog devices using MSTSP, our attention shifted to optimizing for device reliability and manufacturability. In the last few months, we've completed that task, making it easier for designers to adopt these technologies and bring them to production. This is a very large opportunity. because the initial focus for MST SP is in power management, which is the largest market segment of general purpose analog ICs. We can now start the process of rolling this technology out to a wider set of users, not just foundries and IDMs, but also to the many fabulous semiconductor companies in this space. This quarter, we have also demonstrated significantly higher performance using MST on RFSOI wafers which will enable more advanced and efficient implementations of the next generation of 5G cellular RF chips. But our technology clearly applies to areas beyond the more than more market segments. This quarter we put the industry on notice that our capabilities span to the bleeding edge with our white paper on MST for advanced nodes. I recommend looking over the white paper. Although it covers some sophisticated transistor concepts, it's not a difficult read and gives some good insights into the type of discussions we have with customers at the advanced nodes. The executive summary is this. As the industry goes to smaller and smaller process geometries, like two or three nanometers or below, the need to control dopant diffusion becomes even more critical. The industry has tried to use carbon, but our white paper makes the case that MST is a significantly more effective method of controlling diffusion across a number of different interfaces, even for very thin MST film implementations. And although the paper is targeted at manufacturers of 3D transistors like nanosheets and gate all around structures, the benefits we describe also apply to work going on in memories, Seamoss Image Sensors, and in other advanced products. Development in the most advanced nodes require operation in an ultra clean environment to deliver 300 millimeter wafers to customers at very high levels of purity, which requires sophisticated cleaning and inspection equipment, along with a state of the art epi tool. Although we have been depositing MST using and the EPPI tool for months, the facility has struggled to meet their contamination specifications. Now, new support equipment is being added that will finally resolve this issue. Within this quarter, we expect to reach formal acceptance and start paying for the lease on our new EPPI tool facility. This tool and the advances we've demonstrated in the last quarter will allow us to promote MST to a wider market and we're working to do so much more aggressively. Therefore, I'm pleased to welcome Jeff Lewis, who has taken the reins of our business development and marketing efforts. Jeff is a longtime semiconductor veteran and brings strong expertise in transistors, memory and EDA. He already is implementing strategies which will increase Atomera's visibility and drive faster conversion from integration to revenue. As you can see, Atomera has accomplished a lot during the last three months, and I believe we are positioned for continued strong execution over the second half of the year. As COVID restrictions lift around the world, we will be getting on the road and strengthening our personal contact with customers to make sure we're at the forefront of every company's mind. Since industry profitability is at an all-time high, customers are looking to spend that money, building up a competitive advantage. And Atomera is offering very compelling solutions to do that using MST. So the potential for some very big wins is excellent. Now, Frank will review our financials.

Thanks, Scott. At the close of the market today, we issued a press release announcing our second quarter 2021 results. This slide shows our summary financials, which I'll discuss now in more detail. Our gap net loss for the three months end of June 30, 2021 was $3.7 million, which is 17 cents per share. In the second quarter of 2020, gap net loss was $3.8 million with 21 cents per share. Each of the components of our OPEX were basically unchanged from the same period in 2020 with total GAAP operating expenses declining by $69,000. We did not recognize revenue in either of those periods. Weighted average shares outstanding were 22.5 million in Q2 2021 compared to 17.8 million in the prior year period. Sequentially, our GAAP net loss in Q2 increased to $3.7 million from 3.6 million in Q1 due to revenue declining by $400,000, which more than offset a $296,000 quarter-on-quarter decline in GAAP operating expenses. Lower expenses resulted from the timing of changes in our executive team. Net loss per share increased to 17 cents per share in Q2 compared to 16 cents in Q1. Weighted average shares outstanding of 22.5 million in Q2 compares to 22.1 million in Q1. The press release and this slide contain a reconciliation between GAAP and non-GAAP results. Non-GAAP adjusted EBITDA was a loss of $2.9 million and 13 cents per share in both Q2 and Q1 of this year, reflecting non-GAAP operating expense of $2.8 million in Q2 and 3.3 million in Q1. For a total of $6.1 million of non-GAAP operating expenses in the first half of 2021. In Q2 of 2020, non-GAAP adjusted EBITDA as well as non-GAAP OPEX were $3.0 million. Our cash balance at June 30 of this year was $34.3 million compared to $36.7 million at March 31. The $2.4 million decline reflects 2.7 million of cash used in operating activities offset by cash inflow of $354,000 from financing activities. During the first half of this year, our cash used in operating activities was $6.6 million and total cash balance declined by 3.6 million as operating cash use was partly offset by $3.1 million As of June 30, 2021, we have 23.1 million shares outstanding. As Scott mentioned in his remarks, work with our JDA customer remains on track and we hope to successfully complete the milestones remaining in that contract in the next few quarters. We don't have enough visibility to forecast the timing of achieving those milestones or the timing of closing on other customer agreements that we'll negotiate. So our guidance is for zero revenue in Q3. And consistent with past practice, we're not providing revenue guidance beyond this current quarter. Our $6.1 million of non-GAAP operating expenses in the first half of this year indicate a run rate below the plan on which I based My earlier annual expense guidance. The lower run rate is primarily due to the delay in commencing payments on the new EPI tool. However, we do expect to begin making those payments this quarter, and we have not changed our plans to add engineering headcount this year. We also expect that sales and marketing expenses will increase going forward as we roll out our offerings to a broader set of customers. I had previously guided that non-GAAP operating expenses would be in the range of $14 to $14.5 million for the full year, which would imply about $8 million in the second half of this year. We don't expect to reach that level, so we're reducing the range of our full year non-GAAP operating expense to a range of $13.25 to $13.75 million. With that, I'll turn before we open the call up to questions. Scott?