Atomera Incorporated

All right, I think we're ready to begin. Hello, everyone, and welcome to Adam Mara's second quarter fiscal year 2022 update call. I'd like to remind everyone that this call and webinar are being recorded and replay will be available on Adam Mara's IR website for one year. I'm Mike Bishop with the company's investor relations. As in prior quarters, we are using Zoom, and we will follow a similar format with participants in a listen-only mode. We will open with prepared remarks from Scott Bebo, Atom Air's president and CEO, and Frank Lorenzio, Atom Air's CFO. Then we will open the call for 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 15, 2022, and in our prospective supplement filed with the SEC on May 31, 2022. except as otherwise required by federal securities laws, Adam and Mary 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. Now, I would like to turn the call over to our President and CEO, Scott Bebo. Go ahead, Scott.

Good afternoon, and welcome to Adam Mara's second quarter 2022 update call. Once again, we've had a very productive quarter with progress I look forward to sharing. Then after discussing how the newly passed SHIPS Act affects us, I'll turn the call over to Frank to review our financials and outlook. In the first quarter, we saw our existing customers reinvigorated by the ability to start new wafer runs as fab capacity started to open up. The second quarter was where new customer interest and projects with existing customers have increased. really started to grow again. Atomera received a lot of inbound interest from customers at the industry's most important power and RF-focused trade shows, as well as the large BLSI and Semicon West conferences held over the last three months. These were great forums for Atomera to have the in-depth technical conversations necessary to deepen existing relationships and gain a foothold with new customers. We are starting to see the fruits of those efforts with our new addition to our customer pipeline. We expect that trend to continue as the number of targeted applications increases and R&D wafer runs become more accessible as fab capability continues to loosen up. The bigger news is that progress with our customers in phase three is going particularly well. We have a number of important wafer runs underway with licensees, JDA partners, and other customers, which hopefully will yield results encouraging them to move on to more licensing phases and ultimately into production. Although none of those lots are finished, we have been able to look at some data prior to lot completion and have been very encouraged by the promising interim test results. As you know, we use MSTCAD with customers to predict what kind of improvements they will see. Early indications are that the TCAD simulations, which showed enough potential to initiate customer wafer starts, are closely predicting the measured silicon improvements. And in many cases, the actual results are exceeding both our expectations and those of our customers. Results may vary when the final test data becomes available, so we must be patient. But those early results have folks very excited. Programs with all our licensees and JDA partners continues to make good progress with the exception of AKM, which is still recovering from a fab fire. As you can see from this chart, we now have 26 engagements with one new addition to the first phase. One customer has been in phase two longer than normal, which reflects an extended experiment they're conducting in that phase, different than those done by most customers. We believe that results from this effort will lead to a deeper engagement into licensing and production opportunities. There are two important factors determining how fast Anamara can make progress with new and existing customers. our ability to meet face-to-face to gain trust and credibility, and then our customers' capacity to start R&D wafers in their fabs. For the last two years, we've been held back on both fronts. Today, we can travel freely in the U.S. with only a few restrictions in Europe. So far, travel in Asia has been slower to recover, but our first trips over there have gotten underway this quarter. Industry capacity constraints are starting to soften, a positive for Atomera, but this trend is not uniform. While memory manufacturers and mature nodes at IDMs and foundries are starting to loosen up, manufacturers of the most advanced nodes are still highly impacted. So R&D starts in that area are still hard to come by. Our goal is to take advantage of lower travel restrictions to get MSD wafers started in as many customer fabs as possible and to build on the momentum we experienced in the first half of this year. We are seeing clear signs of interest in our technology across certain segments of the industry, displaying the domino effect I've spoken about in the past. Engineers are more comfortable using a novel technology if it's being used by others. And we believe this is being initiated because of industry chatter, even before anyone has gotten into production. In particular, our work on RFSOI, a technology which is critically important to the 5G cellular market, is something which has interest across the sector because of its ability to solve a difficult industry problem. 5G cellular devices can have up to 10 times the content of RF components as older 4G devices. At the same time, we hear consistent feedback from customers that continued improvement in key RF devices such as switches and LNAs are increasingly hard to come by with internal process tweaks. Accordingly, the payoff to customers who can implement industry-leading RF device performance should be very significant. So the interest from our customers in using MST to deliver such improvements is very exciting. Work with multiple customers is also underway with MST SP for power devices at five volts and above. This is an area that will exhibit continuous growth over the next decade due to the emphasis on battery operation and electric cars. And we believe Atomera will benefit from this trend. Now I'd like to take a few minutes to explain a quite important new discovery we've made on MST for advanced nodes. Atom air's technology is remarkable in the number of different benefits it can bring to semiconductor devices. And it does so through several mechanisms, including, importantly, enhanced electron mobility. While the electron mobility improvements have been confirmed for many years, the underlying physics behind how MSC delivers those enhancements have not been fully understood. In silicon devices, electron mobility can be impeded through three different types of electron scattering, coulombic, phonon, and surface roughness scattering. Until recently, our assumption was that at very advanced nodes, MST primarily improved phonon scattering, leading to about a 5% overall improvement in electron mobility, which is good, but may not drive standalone adoption. Recently, we completed some characterization of MST devices at temperatures near absolute zero, which gave us a unique ability to separate out MST's impact on each scattering component. To our surprise and delight, it showed that MST enhanced electron mobility related to surface roughness scattering by over 50%, which is a massive improvement and something particularly important in the advanced nodes. Okay, this is just one factor in a complicated transistor design, but the net result is that this new ability for MST to smooth the surface can bring greater than a 15% electron mobility improvement to the most advanced semiconductor processes. As the process node gets smaller, the MST benefit gets larger, which means that MST for only a modest incremental cost could deliver a full node of performance improvement. Now that is something that would be very compelling to designers working on the latest two or three nanometer gate all around transistors. Because this result is so new, a full peer reviewed journal article would not be available for some time. But today we did post a white paper describing the phenomenon in much more detail on our website. And this will be used to start discussions with our advanced node partners. Although a bit technical for most investors, it does provide an excellent background on our technology and explains the significant potential benefit for customers on advanced nodes. When a breakthrough in MST like this one is achieved, our team then goes to work documenting how it can be used in different applications. This is the valuable IP that forms the underpinning of Adam Ayer's business model. And I'm pleased to report that as of the end of Q2, we have reached 318 patents granted and pending with particularly strong growth in our foreign patent portfolio. As the industry has come to understand the benefits of MST and how they might use it in their own future designs, it is becoming increasingly common for them to refer to our technology in their own patents. This is a positive development for Atomera as it not only validates MST's innovative value to the industry, but it also opens another path of dialogue for us and the customer. Last week, Congress passed the Chips and Science Act, a $280 billion package that includes $50 billion in funding to develop and enhance domestic semiconductor manufacturing capability. Among the many reasons for passing this legislation is to make U.S. companies better at implementing the most advanced technology nodes we've just been talking about. But $2 billion of the Act was specifically allocated to improving legacy chip production, which is one of the key areas where MSD provides a rare and much-needed boost to the industry. At Amera, we'll be working with CHIPS Act administrators and our U.S. legacy FAB partners to educate them on how our technology can improve existing FAB capacity, throughput, and performance while improving their profitability. MSD can enable those legacy FABs to meet the goals of this new legislation now, not sometime in the future, and we believe CHIPS Act funding can help subsidize the costs of MSD implementation at our FAB partners. The CHIPS Act also initiates or strengthens several R&D initiatives important to Atomera, including the National Semiconductor Technology Center and our academic partners' efforts. Government advocacy for improving the U.S. semiconductor manufacturing prowess is another tailwind in conjunction with strong industry CapEx growth plans that will be a positive for Atomera as they both provide important catalysts for adoption of our technology. The CHIPS Act has capped off three months of intensive customer and R&D progress. The many wafer runs we have underway are progressing well and preliminary results look very promising. Our team is on the road and new customer activity is starting to pick up. Inside the company, we are meeting milestones, generating new and innovative IP and strengthening our team. I think we've accomplished a lot this year, but I also believe that the second half of 2022 will outshine the first because of the momentum we are carrying today and the customer opportunities in front of us. Next, let's have Frank review our financials.

Thank you. Thank you, Scott. At the close of the market today, we issued a press release announcing our results for the second quarter of 2022. And this slide shows our summary financials. Our gap net loss for the three months ended June 30, 2022 was $4.5 million or 20 cents per share compared to a net loss of $3.7 million or 17 cents per share in the second quarter of 2021. In Q1 of this year, our gap net loss was $4.1 million or 18 cents per share. The sequentially higher net loss in Q2 2022 over Q1 was mainly due to the fact that we recognize revenue in Q1 of $375,000, but we did not recognize any revenue in Q2. At the same time, our operating expenses increased only slightly over Q1. Gap operating expenses in Q2 were $4.4 million compared to $3.7 million in Q2 of 2021 and $4.3 million in Q1 of this year. Non-gap net loss for the second quarter of 2022 was $3.5 million compared to losses of $3.3 million in Q1 and $2.9 million in Q2 of 2021. Non-GAAP operating expenses last quarter were $3.6 million, which was unchanged sequentially over Q1 and compares to $2.9 million of non-GAAP operating expense in Q2 of 2021. The increase in non-GAAP operating expenses in Q2 this year versus the same period last year was $697,000. This increase primarily reflects a $336,000 increase in R&D expense due to our 300 millimeter tool lease, which commenced in August of 2021, as well as increases of $170,000 in sales and marketing and $190,000 in G&A expenses. Our cash balance at June 30, 2022 was $21.8 million. compared to $24.5 million at the end of Q1. We commenced our at-the-market, or ATM, equity program on May 31, 2022. And during the second quarter, we sold 31,652 shares at an average price per share of approximately $11.24, resulting in net proceeds of approximately $345,000 after sales commissions. I'd like to point out that on our cash flow statement, Q2 ATM proceeds are listed as $185,000 in cash from financing activities because all expenses related to the initial setup of the ATM are netted against the proceeds in that period, as required by GAAP accounting rules. Similar levels of ATM-related expenses will not recur in future periods. As of June 30, 2022, we had 23.5 million shares outstanding. As Scott mentioned in his remarks, we've made good progress with our JDA customers and other engagements. At this time, we're not yet in a position to predict when we may reach revenue generating milestones under our second JDA, which we announced last quarter. We're very happy their preliminary results are promising, and they've increased our confidence that this JDA will result in us reaching paid licensing phases and recognizing revenue. Since we cannot yet predict this timing, our guide for Q3 revenue is zero. And consistent with our past practice, we're not providing revenue guidance beyond the current quarter. On the last update and call in May, I guided the full year non-GAAP operating expenses for 2022 would be in the range of 15.25 to $15.75 million. I'm happy to announce that we've added two new engineering headcount in July, and we're catching up on our plans to grow our team. But as a result of these hiring delays, our expenses are trending lower than we originally planned. And I'm reducing the full year guidance for non-GAAP operating expenses to a range between 14.75 and $15.25 million. With that, I'll turn the call back over to Scott for a few summary remarks before we open the call up for questions. Scott.