Atomera Incorporated

Hello, everyone, and welcome to Atom Air's second quarter fiscal year 2023 update call. I'd like to remind everyone that this call and webinar are being recorded and a replay will be available on Atom Air'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 presentation format with participants in a listen-only mode. We will open with prepared remarks from Scott Bebo, Atomera's President and CEO, and Frank Lorenzio, 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 factor section of our filings with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K, filed with the SEC on February 15, 2023. except as otherwise required by federal securities laws, that a mayor disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regard 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.

Thanks, Mike. Good afternoon, everyone. Welcome to Atomera's second quarter 2023 update call. We had a great quarter, continuing to build strong relationships with our customers, performing wafer runs for those in phase three, executing on compelling new R&D and building momentum with newer customers. I look forward to telling you about the developments. Capitalizing on the momentum generated by our first commercial license deal in Q2 with SCMicro, we've been busy meeting with new and existing customers to emphasize the urgency of adopting and taking MST to production. We've made good progress, both with those semiconductor companies already in our engagement pipeline and generating interest from new customers. Efforts continue with our first JDA partner, and this quarter we've been collaborating with them on the demonstration and testing of MST solutions for their particularly challenging applications. A lot of back and forth regarding those experiments has been taking place. We continue to engage with the central engineering unit for the purpose of bringing much needed solutions to their business units with whom we are also speaking. We believe these steps bring us closer to signing a license with a BU for our production project. Likewise, we continue to work with our second JDA customer on efforts focused around optimizing performance in their application so we can initiate the milestone payments and associated licenses defined in the JDA agreement. Meetings with the JDA customer and our other licensees about the specifics of MST integration in their devices, our TCAT analysis, planning and executing wafer runs, and implementation of the results have been happening with regularity and continue even today. A quick update on ST Micro. We described the steps remaining for commercialization and detail last quarter. Shortly after ST signed the license agreement, work began using MST CAD to create a new optimized design flow integrating MST into ST's devices. As described before, ST and Atomera are cooperating closely to achieve the greatest possible performance and cost improvements using MST, with the primary design responsibility for this effort being ST, with Atomera in a supporting role. The first revenue milestone under the contract will be triggered when ST installs our technology on an epideposition tool in one of their fabs. The TCAD work that's already commenced will run in parallel with ST's manufacturing of MST wafers. The installation process is largely dependent on their epi tool vendor. Due to logistics delays on the tool modification, we are currently expecting this to happen early in the fourth quarter. Once installation is complete and ST has successfully dialed in the tool, they'll be ready to build MST wafers. When ST has completed their work, they will start wafer level qualification to create a high volume, high yield manufacturing process, which will trigger another milestone payment and grant them the right to manufacture and sell products incorporating Atomera's technology. At that point, ST will enter volume production and we can expect to start seeing royalty payments. Our announcement of the license agreement with ST has definitely made waves in the industry. We've had excellent meetings with a number of potential customers who design and build analog and power products, and who are interested in working with us on MST. Some have already begun the process by commencing TCAD work with us, and we hope to add several new customers on this front in the near future. Work on RFSI continues to show very good promise in cellular handsets. Because of the large and expanding number of cellular frequency bands available in the world, the RF front end on mobile phones is becoming an increasingly complex and expensive piece of technology, which leverages advantages that specialized RFSOI substrates can provide. But those substrates also have some serious drawbacks related to dopant movement under the buried oxide layer. MST can help to solve those problems by enabling lower costs and less complex front ends, which should provide an excellent market for Atomera's technology. We are working with a number of customers on this today and expect to work with more in the near future. I want to spend a little bit of time talking about how MST can provide a real benefit to smaller lithography nodes. One of the biggest challenges in semiconductors is to keep lowering power consumption as the nodes get smaller. A phenomenon that prevents them from doing so is something called random dopant fluctuation, or RDF. which are variations in concentration of the implanted dopants. And the impact of those variations becomes more significant as the nodes size gets smaller. It's the demon that few people understand, increasing the cost and power consumption of advanced logic, DRAMs, and most other semiconductor devices. The good news is that MST is very adept at mitigating the problem of RDF. One of the most effective ways to improve power consumption is to lower the minimum voltage of transistors in each node. To do so, you have to be able to manufacture each transistor with as little variation as possible. The more variation in your manufacturing process, the bigger the transistors you must design and the harder it is to scale down your voltage. And one of the big drivers of variation is RDF. So to successfully scale to lower voltages, RDF must be controlled. Our analysis shows that in the latest gate-all-around transistors, a single dopant atom diffusing into the channel can significantly alter the transistor's characteristics. This is why the dopant control characteristics of MST are so important for advanced node customers. A big focus of our R&D activities today is around proving this capability in the 2 to 4 nanometer range. In DRAMs, one of the most challenging limits on scaling is in the manufacturing margin of the critical circuits responsible for reading the memory bit, which are called sense amps, and typically make up 10 to 12% of the DRAM chip area. Since DRAM capacitors leak, the margin on these sense amps define how long the capacitor can leak before becoming unreadable. So this establishes the refresh interval and resulting power consumption. By improving the variability of DRAM sense amps, MSD can help manufacturers make them smaller and use less power. In this chart, we show a 50% improvement of variability between matched transistors that use MST. Another way of looking at this is that an MST transistor can be a quarter the size of a normal transistor at the same sigma VT. Again, MST's ability to control random dopant fluctuation is what drives this very significant improvement in variability. The growth of AI has led to applications that are dramatically more memory intensive. So these type of power consumption improvements for DRAMs are particularly important, which is why we're starting to see very strong interest from players within the memory segment for using MST. Atomera's world-class team of engineers and scientists continues to find ways of leveraging MST to advance the state of the art in semiconductors. Recently, the IEEE Spectrum featured a segment on Adam Ayer's founder and his efforts early in his career to bring another key material advanced to market, the erbium-doped fiber amplifier. That invention went on to become one of the foundational technologies enabling the internet age. His technical leadership continues to drive our team to achieve a similarly groundbreaking result for today's semiconductor industry. There's no doubt that Atomair is seeing wider interest across more applications than ever before. With our recent announcement of the ST licensing deal, we are seeing tangible proof that customers are standing up and taking notice, and we believe this will accelerate our time to revenue with more licensees. Although it has been difficult for us to provide much public insight into specific opportunities, I can tell you that the team is busier than ever. Our travel spending has doubled this year, and that is because we see promising opportunities with new and existing customers around every corner, and we're enthusiastic about closing them. With that, I'll ask Frank to now review our financials.

Thank you, Scott. At the close of the market today, we issued a press release announcing our results for the second quarter of 2023. This slide shows our summary financials. Our gap net loss for the three months ended June 30th, 2023 was $5.2 million or 21 cents per share compared to a net loss of $4.5 million or 20 cents per share in the second quarter of 2022. In Q1 of 2023, our gap net loss was $5 million or 21 cents per share. GAAP operating expenses were $5.4 million in Q2 of 2023, which was an increase of approximately $913,000 from $4.4 million of OPEX in Q2 2022. The biggest driver of the year-on-year increase was a $759,000 increase in R&D expenses. $423,000 of which was due to higher spending with our contract foundry, TSI Semiconductors, where we processed a substantially higher number of wafer lots than in recent years, and we absorbed price increases for wafers and engineering services. The other main factor was payroll costs, which increased by $209,000 in Q2 2023 compared to the second quarter of last year, reflecting new hires that came on board last July. General and administrative expenses increased by $108,000 and sales and marketing increased by less than $50,000. Sequentially, our gap operating expenses increased by $192,000 from $5.2 million in Q1 of 2023 to $5.4 million in Q2, primarily due to a $156,000 increase in R&D expenses, also due to higher spending at TSI. Non-GAAP net loss in Q2 2023 was $4.3 million versus $3.6 million in Q2 of 2022 and $4.2 million in Q1 2023. The differences between GAAP and non-GAAP operating expenses in all the periods we've presented are almost entirely due to non-cash stock compensation expenses, which were $1 million in Q2 of 2023, $927,000 in Q1, and $859,000 in Q2 of 2022. Our balance of cash, cash equivalents, and short-term investments on June 30th, 2023 was $23.8 million compared to 17.1 million on March 31, 2023. During Q2, we used $3.9 million of cash in operating activities, and we raised $10.8 million of net proceeds from sales of approximately 1.4 million shares under our ATM facility at an average price of $8.15 per share. This compares to our very limited ATM activity in Q1. So we feel we are carefully balancing liquidity and dilution. As of June 30th, 2023, we had 25.8 million shares outstanding. Moving to our guidance, we still expect non-GAAP operating expenses for 2023 will be in the range of $16.25 to $16.75 million, but likely will be near the top end of that range, mainly due to higher spending with TSI. In April of this year, TSI increased its prices while at the same time their cycle times got substantially faster. We benefited from this through more cycles of learning. But the price increase and faster wafer processing combined to increase our R&D expenses. Also, our travel to customers has snapped back to above pre-COVID levels, such that we have spent nearly as much on travel in the first half of the year as we did in all of 2022. This is a welcome development because we're responding to greater customer interest, which should lead to additional licenses and faster commercialization. As Scott mentioned, we expect that ST will install MST in their tool in early Q4, which will trigger the first revenue milestone at that time. ST's commercial license is already influencing other major players to move more quickly to evaluate and install MST. Each commercial license involves upfront license fees with a list price over $3 million and results in recurring royalty revenue when the customer goes to production. So while our lack of revenue during the first half of the year is disappointing, in the big picture, we're confident that our investments in headcount, wafer processing, and sales activities are building the foundation for a profitable recurring revenue business. We do not give revenue guidance beyond the current quarter, so for Q3, we're guiding to zero revenue, though we may see some early recurring revenue from MSTCAB licenses during this quarter. With that, I'll turn the call back over to Scott for a few summary remarks before we open up the call to questions. Scott?