Atomera Incorporated

Hello, everyone, and welcome to Adam Mayer's third 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 Atomera's 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 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 15th, 2023, and its quarterly report on Form 10-Q filed today with the SEC. except as otherwise required by federal securities laws. Atom Air 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 also 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, everyone, and welcome to Adam Ayers' third quarter 2023 update call. During this past quarter, we've made great progress on a number of different fronts, both in customer and technology areas, and I'd like to bring you up to date on some of those activities. Our standard customer pipeline does not do justice to how active we've been with customers over the last three months. It seems that our business development, our technology teams are on the road almost every week to service the growing number of opportunities and applications that MST can address. Much of that is happening with our Phase 3 customers, so it's hard to show the progress on this chart, but I'll give you more details as we go along. One thing we had hoped to show on today's call is that our Phase 4 customers had grown by one to reflect the installation of MST on a tool in ST's factory. Unfortunately, up to today, it has not happened, but we do expect it to happen very soon and have been working diligently with ST on other parts of the development process. In past calls, I've discussed the path to production with ST, but I'd like to expand on the details here. Since completion of the license agreement in April, ST's engineering team, with some assistance from us, has been developing their new manufacturing process, which will include MST. This effort is primarily happening via computer simulations, and our MST CAD is an indispensable component of that effort. After the installation of MST onto their EPI tools, ST will build wafers using MST and test the results, which is called silicon validation. Using this methodology, ST will create a fully optimized manufacturing method, and when it is complete, they will freeze it, creating a process development kit, or PDK. From that point forward, when a new chip design is started by an ST development engineer, the chip will be based on the transistor characteristics provided in the new PDK, which will include MST. Wafer-level qualification, which is the process of finalizing their manufacturing flow across corner conditions to ensure it meets specifications, will be happening in parallel with ST's new chip designs. When process qualification is complete, any finalized chip designs will enter production and start generating royalties. All their subsequent chip designs will be based on this new PDK and will add to the royalty stream so the revenue potential will just continue to grow. As we've spoken about before, it's difficult for us to forecast the volume of these designs because they will be executed for many different applications and market sectors. When we first announced this transaction, we estimated ST would go to commercialization in a year and a half to two years. Despite the longer than anticipated time to complete equipment modifications, we still believe that timing holds true. It is important to recognize the significance of this milestone to our company. It validates not only our technology, but also our business model, and we are as impatient to see it completed as I'm sure you are. Now that we've covered ST, let me provide updates on other customers. I'm pleased to report that experiments with our JDA1 customer have shown excellent technical results that we believe solve a significant problem they are facing. The specific issues we have addressed are targeted at one of their largest BU's. At this point, our focus has shifted to finding a business solution that will work well for both of us. But given the strength of our technical offering, I am confident we will find a commercial structure for them to adopt MST. Likewise, with our JDA2 customer, recent silicon test results combined with MST CAD simulations have led us to start a new round of experiments to hopefully reach a performance level triggering the license agreements contemplated as part of the JDA package. It will take several months for those results to come out, but we hope with a lower level of fab utilization the industry is experiencing these days, we will get fast throughput. We are also seeing interest in our higher voltage technology offerings, MST SP and SPX. There is no doubt that our ST license announcement has stimulated interest in these technologies across the industry. Recently, our MST CAD was adopted by a very large analog and power manufacturer, which we believe is an excellent first step towards licensing our overall MST technology to them for production. We continue to see good momentum for both MST SP and SPX. More good news in the RF department. Our MST solution for RF SOI has been evolving over the last year due to new MST film formulations and integration techniques, which we have demonstrated to customers using simulations from MSTCAD. During the last three months, we've gotten new silicon test results that validate the improvements predicted by MSTCAD, improvements that are not possible without MST, and are badly needed by designers of RF front ends for cellular products. We believe this solution will be something that all RFSOI designers will want to use once they understand the benefits. And we're confident of this because the first few customers we've explained it to have been quite excited to get started. I'm hopeful this will lead to several new licenses and partnerships in the future. Similarly, in the advanced nodes market, our offering has gotten significantly stronger in the last three months. The key to advancing in this market is through ecosystems and partnerships, since the technology is so complex and expensive to prove out in silicon. We are working to establish and nurture those types of relationships today. Two weeks ago, we announced that Atomera was part of the Southwest Advanced Prototyping Hub led by Arizona State University, which has recently received funding through the Chips and Sciences Act. Atomera helped to drive for establishment of this hub because we believe that America needs an ecosystem of the most advanced development teams who can work together to redefine what's possible in the semiconductor industry. This has always been Atomera's focus, and we are gratified at the greater spotlight and resources that this funding will bring. And as a smaller company, we will gain great leverage from this partnership. We have no doubt that being part of this new ecosystem will assist us in implementing our technology at the biggest semiconductor makers who are interested in investing in advanced nodes today. Finally, you may have noticed that we added a new segment into our technology focus areas, MST for DRAM. During this past quarter, we published a comprehensive white paper on our website giving some details of the physics around how MST can be combined with sense amp circuit designs to make DRAM devices smaller and lower power. In short, MST will be able to bring improvements to DRAM devices that are on a scale with the benefits we are bringing to our other technology-focused segments. This memory work is Atomera's first direct foray into technologies that will enable the artificial intelligence revolution. It is clear that AI uses far more memory than traditional processors, which means the cost and power savings Atomera can bring to these devices will be critical. Further, because AI accesses memory in different ways, it demands different latency and bandwidth, all of which are going to drive big changes in the memory requirements of the future. Atomera intends to be a leading innovator in this space to take advantage of the opportunity that AI will provide for growth in the semiconductor market. As you can see from the wide set of exciting customer engagements, our business scope is expanding along with our potential. I do believe that the ST announcement has helped us get over a hurdle with many customers, which helps to explain this momentum. But more importantly, it is due to the efforts of our brilliant team of engineers and scientists who are constantly bringing cutting edge solutions to the semiconductor industry. Inside Atomera, we are very optimistic about the bright future our company has in front of us, and we hope to prove that by announcing more license and production deals in the near future. Frank will now 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 2023. This slide shows our summary financials. Our gap net loss for the three months ended September 30th, 2023 was $5 million or 20 cents per share compared to a net loss of $4.6 million, which was also 20 cents per share in the third quarter of 2022. In Q2 of 2023, our gap net loss was $5.2 million or 21 cents per share. Gap operating expenses were $5.4 million in Q3 2023, which was an increase of approximately $696,000 from $4.7 million in Q2 2022. The biggest driver of the year-on-year operating expense increase was a $562,000 increase in R&D expenses, $287,000 of which was due to higher prices for wafer processing and engineering services at our contract foundry, TSI Semiconductors. General and administrative expenses increased by approximately $116,000, and sales and marketing increased by less than $20,000. Other income net in Q3 2023 increased by $261,000 as compared to Q2 2022, mainly reflecting higher interest income from an Arizona refundable R&D tax credit. Sequentially, our GAAP operating expenses were flat at $5.4 million in both Q3 and Q2 2023. A $113,000 increase in R&D expenses, which was also due to TSI costs, was offset by declines in G&A and sales and marketing expenses. Non-GAAP net loss was flat sequentially at $4.3 million in Q3 and Q2 of 2023, and it compares to a loss of $3.7 million in Q3 of 2022. The differences between GAAP and non-GAAP operating expenses in all periods we're presenting are primarily due to non-cash stock compensation expenses. which were $1 million in both Q3 and Q2 of this year and $889,000 in Q3 of 2022. Our balance of cash, cash equivalents and short-term investments on September 30th, 2023 was $20.4 million compared to 23.8 million on June 30th, 2023. During Q3, we used $3.5 million of cash in operating activities, and we sold approximately 24,000 shares under our ATM facility at an average price of $9.17 per share. As of September 30th, 2023, we had 25.8 million shares outstanding. Moving now to our guidance, We still expect that our non-GAAP operating expenses for 2023 will be in the range of $16.25 to $16.75 million, and it should come in close to the midpoint of that range. On the last call, I cautioned that higher prices and number of wafers run at TSI had caused our outsourced R&D expense to run above our annual plan. However, We now expect that our work at TSI during Q4 as well as in Q1 of next year will primarily consist of finishing wafer lots that we have in progress or are just starting. As we discussed on our Q1 call, Bosch announced that they plan to acquire TSI and convert it to silicon carbide production by 2026. The acquisition closed at the end of August And in October, Bosch informed us and the rest of TSI's customers that they will cease supporting current customers in February 2024. Atomera is now in the process of finding a replacement. As Scott mentioned, we expect that STMicro will install MST in Q4. So our Q4 revenue should be in the range of $300,000 to $350,000, which would consist mostly of ST's first milestone payment for the installation of MST. After validation of film quality in ST's tool, there will be a second and final installation-related milestone payment. As we progress toward that second milestone and toward the much more substantial upfront fees for moving to commercial production, we will provide updated revenue guidance as appropriate. 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?