Atomera Incorporated

Hello, everyone, and welcome to Adam Ayers' third quarter fiscal year 2022 update call. 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. 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, Atomera's president and CEO, and Frank Florencio, 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 of 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 on the company's annual report filed on Form 10-K, filed with the SEC on February 15, 2022, and in our prospectus supplement filed with the SEC on May 31, 2022. Except as otherwise required by federal securities laws, Adamair 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 releases, 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 Harris' third quarter 2022 update call. Heading toward the end of the year, we continue to be impressed with the depth of the relationships and engagements with our customers and believe we are moving closer to commercialization each quarter. The process takes time, but we are seeing good traction. I will highlight some of our progress in the third quarter, then I'll turn the call over to Frank to go through our financials. First, though, I'd like to address some industry trends and their impact on Atomera. Last quarter, I predicted the softening of demand in the semiconductor industry that's now playing out in earnings calls and analyst reports. Forecast reductions seem to be broad-based, driven by lower demand and export control restrictions. Associated with that, we are seeing some reductions in projected capital expenditures, although I would emphasize that this is a reduction from the record levels previously forecast by many companies. What does this mean for Atomera? Historically, in periods like this, we have seen an increase in development activity by our customers resulting in additional wafer runs and a growing interest from new customers as they seek competitive advantages coming out of the industry slowdown. This case does not appear to be an exception. We see strong and growing interest among our customers in introducing new specialty processes that can benefit from MST. Capacity is available in their factories to get the work done, and allocation of CapEx budgets, although somewhat reduced, is still plentiful to support the acquisition of new technologies and equipment. In short, this is the type of environment that provides a tailwind to adoption of Atomera technology. As you can see from our customer pipeline, we continue to work with a wide range of customers together representing at least 50% of the world's largest semiconductor makers. The solid progress we experienced in prior quarters has continued into the second half of this year. We maintain our focus on driving customers to adopt MST, in particular, those who are furthest along in their development. The semiconductor industry is known to experience the domino effect, where once a significant industry participant adopts a new technology, other players respond as fast followers. We are encouraged by the activity among early adopters and are working with urgency to move them towards production. On that note, I'd like to update you in some of our more important customer progress. In the past, we've spoken about two JDA customers. During the last quarter, the Atomera team has been collaborating closely with each of these customers to find MST solutions to real world problems being experienced in their fabs. we've been making very strong progress. In each of their applications, I believe we are bringing new technical capabilities that were not possible to achieve prior to their use of MST. Although we are restricted on what we can publicly disclose, let me assure you that we've been achieving the results that we had been hoping for since early this year, and are now more assured that our solutions will progress through the development process toward volume production. Likewise, we are actively working with each of our four other licensees to advance plans we hope will ultimately lead to further stage of licenses and then on to commercialization. For some, we are awaiting data that will help us prepare for the next steps. For others, we have the proof that is necessary to shift from demonstrating MST benefits to planning for production. As always, we will provide you with news on any significant milestones as they happen, subject to the confidentiality requirements of our customer engagements. In particular, when agreements are executed, we will disclose them in real time, and several of these are in the pipeline. Unfortunately, this process can be frustratingly slow, but given the positive developments we've driven, I believe it's only a matter of time for MST to become widely adopted. During this quarter, we continue to see strong interest in plans by more companies to adopt our two most mature and complete MST solutions or products, namely those around MST SP and MST for RFSOI. In both those areas, we now are convinced of two important things. One is that the solutions we are offering here are only possible through the use of MST. Secondly, We now understand the complex mechanisms driving these solutions even better than our customers, which gives us a unique ability to not only license our technology, but to meet our mission, which is to collaborate with customers to achieve financial benefit for both companies. MSD technology is specifically designed to help customers shrink their dye to put more product on each wafer, which leads to cost reductions and higher profitability. In times when capacity is tight, this may not be the first priority of semiconductor makers. But when they go into a slowdown, like there and now, this becomes absolutely critically important. I think it's a fair question to ask why, if these technologies and their associated economic benefit are so compelling, it takes so long to adopt. Of course, there are many answers to this question, but two stand out. Most companies have some kind of long range product development roadmap. Perhaps they've been in production with technology A for three or more years, and it's time to work on an upgrade. Consequently, the engineering team focuses on technology A for a period. So technology B and C will have to wait their turn, even if they have identified a real breakthrough. Generally, after identifying the breakthrough, they immediately add that development plan to the next year's development efforts. So although they're committed, work does not begin for several months. This is no reflection on the interest or expected return. It's just an example of allocating scarce resources. Once they do begin, The development project timeline can vary greatly depending on how full the fab is. For the last few years, throughput was extremely slow, but we expect it to accelerate now. So as I said earlier, it's only a matter of time. As an example, we introduced MST SP to the market last year, and even though it generated a lot of interest, we are in more discussions about new customer engagements now than we were last year. And once new programs get started, I expect development to move faster than in the past. In the press, you frequently read about developers of the most advanced nodes and how they're experiencing delays due to yield problems which prevent manufacturability in high volume. This is one of the principal reasons why it's taking longer to bring new nodes to market, a phenomenon people call the slowing of Moore's law. Atomera's technology is particularly versatile for use in these most advanced architectures of next generation transistors, which are called gate all around transistors. During the last quarter, we have seen evidence of this in successful experiments conducted on our tools. A fundamental challenge designers are trying to deal with at these ultra small nodes is that their precise, highly dope structures are sitting only angstroms away from other precise, highly dope structures, and they need to keep these boundaries in place through the whole manufacturing process. But high concentration dopants in nanotransistor structures tend to diffuse when exposed to the heat required in subsequent manufacturing steps. And there are a few mechanisms to prevent that diffusion. The industry has reacted by trying to lower the temperature of its manufacturing process, but a certain amount of heat is still necessary. So they need more techniques to solve the problem. Atomair's MST is one of the best known materials for preventing dopant diffusion. In a gate all around transistor, that means it can be used to prevent source or drain dopants from diffusing into the channel and thus preserve high electron mobility. It can also help prevent punch through between source and drain in the silicon substrate. Even beyond open engineering, MSD can be used to lower contact resistance at the silicon metal interface. It can reduce high K metal gate stack height. And finally, it can improve carrier mobility and gate leakage by reducing high K metal gate intermixing. For a process development engineer, each of these MST benefits provides a distinct tool for getting gate-all-around technology into production faster and at a higher yield. An implementation of MST in the manufacturing process is straightforward because epitaxial deposition is already used extensively for the process steps adjacent to the MST layers when building gate-all-around structures. Many of the ideas I've just spoken about have become apparent through our team's R&D efforts this year, between progress with our customers, new emerging opportunities, and the increasing expertise of the Atomera team in addressing critical industry issues. I believe our progress this past quarter is even greater than what we saw in the first half of the year. I wish you could experience the pace of customer and development activity inside Atomera. As I said before, this point in the industry cycle is ideal for our company, and we are doing everything in our power to take advantage. Our team is optimistic that these advances will soon lead to new customer growth, and even more importantly, licensing activity that will take more customers towards commercialization and will make Atomera a recognized semiconductor technology leader in the industry. Now let's have Frank 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 2022. This slide here shows our summary financials. Our gap net loss for the three months ended September 30th, 2022 was $4.6 million or 20 cents per share. Up slightly from our Q2 gap net loss of $4.5 million, which was also 20 cents per share. In Q3 of 2021, gap net loss was $4.2 million or 19 cents per share. Gap operating expenses in Q3 2022 were $4.7 million. an increase of approximately $210,000 over our $4.4 million of operating expense in Q2. This increase was primarily due to an increase of approximately $310,000 in R&D expenses, reflecting headcount growth, offset partly by $100,000 decline in G&A expense as legal and other fees declined sequentially, while sales and marketing expenses were basically flat quarter over quarter. As compared to our Q3 2021, gap operating expenses last quarter increased by $521,000, primarily as a result of a $510,000 increase in R&D expense due to increased engineering headcount, recruiting expenses, and higher total lease costs due to a full quarter of lease expense in Q3 2022 compared to only a partial quarter in Q3 2021. Non-GAAP net loss for the third quarter of 2022 was $3.7 million compared to losses of $3.6 million in Q2 and $3.4 million in Q3 2021. The differences between GAAP and non-GAAP operating expenses and, accordingly, between GAAP and non-GAAP net loss are almost entirely due to non-cash stock compensation expenses. Our cash balance at September 30th, 2022 was $23.3 million compared to 21.8 million at the end of Q2, which is an increase of $1.5 million. Operating cash used during Q3 was $3 million And during the quarter, we brought in approximately $4.6 million of cash from financing, net of expenses, and commissions, reflecting sales under our At the Market, or ATM, equity program. During the third quarter, we sold 386,415 shares at an average price per share of approximately $12.34 under the ATM. As of September 30th, 2022, we had 23.9 million shares outstanding. Turning now to our outlook for the rest of this year in 2023, never before has Atomera been engaged across such a diverse array of applications where our customers need innovative breakthroughs like MST. Obviously, we'd like these engagements to offer near-term revenue. And when additional customer wafer runs are required, licensing and go-to-market decisions get pushed out. Accordingly, our guide for revenue in Q4 is zero, and we're not providing revenue guidance beyond the current quarter, which is consistent with our past practice. Our last update call in July, I reduced our full-year guidance for non-GAAP operating expenses to a range of $14.75 to $15.25 million. For the first nine months of this year, our non-GAAP expenses totaled $10.6 million. And because we have good visibility through the end of the year, I expect our full-year operating expense on a non-GAAP basis will be at or slightly below the bottom end of that guidance range. On our next earnings call, I'll provide more specific color on our planned 2023 spending. With that, I'll turn the call back over to Scott for a few summary remarks before we open the call up to questions. Scott?