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?

Thanks, Frank. Once again, this quarter, Atomera has advanced our technology with customers across many different market segments. We believe the momentum we are carrying right now will help us to assemble a large and diversified set of customers and markets, building a strong and growing royalty stream. That is our goal, and I look forward to sharing our journey with you as we seek to build a semiconductor technology licensing powerhouse. Mike, we will now take questions.

All right. Thank you, Scott. If you wish to ask a question, please click the Q&A button at the bottom of the Zoom window. Then feel free to type in your question. I will do my best to aggregate the incoming queries and relay them to management. Alternatively, you can click and raise that click in the raise hand button and we may call on you to ask your question live. OK, as of right now, our first question comes from Richard Shannon of Craig Helm. Richard, if you would kindly unmute and you may ask your question.

Great. Thanks, Mike. And thanks, Scott and Frank, for letting me ask a question here. Let's start with the topic of STMicro here. I guess just wanted to clarify here, obviously, we understand some of the delay mechanisms here, but you also believe that there's going to be no delay in the ultimate 18 to 24 month time frame to get them to, I think your words are production. Correct me if I'm wrong there, Scott, but can you help us understand why you don't think there's any delay here?

Well, regardless of when they installed the tool, they were going to have to do a bunch of development work creating the new PDK using simulation technology. I think even if it had been in place, they probably would do quite a bit of that before they went to silicon validation. So by my estimate, I don't think we're behind as long as it gets installed soon, which we do believe it's going to happen.

Okay. Fair enough. Let's jump over to the topic of your first JDA customer. I think you said showing some great results to solve a big problem here, targeted one of their largest business units. By my notes here, you said you're focused on a business or a solution to work on with that business. Maybe you can help us a little bit, understand what's going on there.

Yeah. Yeah. So I think in the past, when we've talked about our JDA customer, we talked about how we were working with the central engineering organization and that they were evaluating our technology and then would recommend it out to the different business units. And obviously over the last few years, we've gone from very general test requirements that they had to prove that our film was of the type of quality that you take to production down to more and more specific application solutions to problems they're facing. The one that we've been working on over the past several months is a very challenging problem that their biggest business unit has been facing. And, and we believe we've delivered something really compelling to them. Now, you know, in our, in, in, We had created a JDA in the past and we put in place all the business terms for the JDA, but still haven't gotten to the business terms about being able to do a full license that would take them to production. And we're trying to work with them right now to figure out how can we find something that works for both them and us so that we could get a contract they'd feel comfortable and we'd feel comfortable and then start working to implement this in the business unit.

So this sounds like a business-related dynamic with the JDA1 customer and not anything technological in nature. Is that fair?

Yeah. Right now, I would say that's where we are. We're on business. When we get done with the business and we start doing more detailed technical work, of course, we'll be back into the technical side. But right now, I think we've proven what we need to get to real solid business discussions.

Fair enough. Sounds like some good progress there. Let's jump over to another question here. I think we've, since you announced STMicro, I think about six months ago, we've continued to ask the question about the halo effect that they may have on other analog peers. And one of your comments here, I think you said that MSTCab was adopted by a large analog and power manufacturer, which I think is a first step to licensed technology. A, would you believe, do you see this as the STMicro halo effect You know, having some having having some impact on this particular customer. And what does this mean about, you know, entering into, you know, into one of the phases in your in your status that you talk about every quarter?

Yeah. Okay. So first of all, uh, we are out talking to customers all the time about MST SP and SPX, which are technologies we've developed ourselves using MST and they show really impressive results. That should be enough for a customer to decide to use them. But the fact that we can say we've also done a license agreement with ST really we think helps to push it over the kind of over the top. Um, Now, what impact does that have on our customer pipeline that we showed you? Yeah, the fact is that we can be working with customers in phase one with MSTCAD. We also can be working with customers in phase two or phase three. Obviously, we think MSTCAD is going to be something that people use from the beginning until when they get into volume production. For this particular customer, actually, we had been working with them on some other technology, and they're already in phase three. So, like I said, we believe we made really good progress with them this quarter, but you can't really see it by looking at our pipeline chart. Okay.

I know that doesn't always capture that dynamic, but thanks for that detail, Scott. I know you discussed this and there was an interesting line in your press release this morning about the benefits of MST in both DRAM and advanced nodes. And maybe I'll allow you to answer the question. Either or both in aggregate, if you think that's appropriate, but are becoming increasingly clear to the industry. Maybe you can give us some sense here. It seems like you're getting some recognition industry conferences or recognition from the white papers or whatever you're writing. What makes you say this become increasingly clear to the industry?

Yeah, I mean, just definitely it's through technical conferences that we're getting invited to these different organizations like the Southwest Regional Development Hub that we're being, you know, we actually are kind of a founding member of, plus just the tool manufacturers and the customers themselves. They know about our technology, they ask us about it, and And so, you know, we can definitely see from where we were a few years ago that we were working on this technology, but we didn't have as deep engagements with either the customers or with the ecosystem partners. Now we really see that whole thing coming together. And I did talk about how important we think it is for ecosystems to be used because the big semiconductor guys, they don't directly... cooperate with each other, but they all use the ecosystem to come up with ways that they can make their next generation products more successful.

Okay. Fair enough. One last question for me, and I will jump out of line. You know, obviously, the macro is looking not very good, as we've seen for a number of reports in the SIMP industry and broader over the last couple of weeks here. Are you seeing any sense of this from your customers, whether, you know, in later stages or the latest stages of the phase that you talk about or even at the beginning of the cycle? Are you seeing any of that slowdown or delay? Alternatively, with utilizations much lower than they have been in quite some time, does this open up new opportunities that make it even more exciting and could even accelerate in this environment?

Yeah, so our view on the market right now, we think the market has, you know, this year has been a very rough year in terms of growth going negative and a lot of capacity being available out there. We always talk about a period when there's Low capacity utilization is great for us because our customers can just quickly throw some wafers into the line and they're not disrupting anything. And that's definitely true. We're starting to see signs that for next year, things will start to come back and maybe growth will pick up. But we're not seeing signs that we're going to get anywhere near the type of growth. really strong growth and high capacity utilization that we had back in 2020 and 2021. And so I think generally, I would say, we think that we're going back to kind of a normal level activity in the industry. And that should give us an ability to really do good development with people without being impeded by it.

Okay, fair enough. Thanks for that characterization. I will jump out of line, Scott. Thank you. All right. Thanks, Richard.

Thanks, Richard. Our next question comes from Cody Acree of Benchmark. Cody, feel free.

Yeah, guys, thanks for letting me ask questions. Maybe, Scott, if you can just talk about ST a bit. And I know that there's only so much you can share, but if you can talk about where you're seeing your MST applied within ST Micro to the extent that you can to give us some level of interaction or in-market targeting.

Yeah, so I think, of course, we can't say too much, but I can tell you that this technology has been adopted by their smart power products team. And so the new PDK that I spoke about would be one that would be designed at analog and power type of semiconductors. Now, analog and power... we believe spans multiple divisions with us within ST. Um, their AMS division is one that would be, you know, using it quite a bit. They also have a division called automotive that would use it, uh, quite a bit. Um, and, but it's very hard for us to say at this point, um, the size of the penetration that they'd have into those different areas. But we do know that their smart power product line is extremely successful, used throughout the industry. And one of the areas that ST has been investing in over the past few years, including building a new fab to support it.

And Scott, is that lack of visibility? Is that a lack of information you could share with us as to your engagement with ST? Or is that a lack of really full clarity to you as to where your technology is going to be applied?

Yeah, I would say it's a little bit of both, Cody, because they don't report publicly about smart power products. What they report is market segments, not technology segments, which is very common. in the semiconductor industry, right? Your development teams work on technology segments and your marketing teams kind of work on market segments. And what they're reporting are market segments. So what we're likely to see is very strong crossover of this technology into multiple different market segments. So as I was talking about earlier in my comments, we expect to see chip design starting that would be targeted at multiple different markets with multiple different requirements. So for example, higher voltage products maybe for the automotive industry or five volt type of products for battery powered consumer electronics. or just analog sensors that might be used in the industrial space. But what we don't know now, so we're not violating confidentiality because we just don't know, but we don't know where those designs will be coming from and what the potential volume of them will be.

And I guess, how much more will you be involved Will you be asked to be involved when it does get to be a productization stage?

Yeah, I think we may get less involved, frankly, at that point. Our big involvement is going to be right now during the development phase and then helping them to get the MST working as efficiently as possible, uh, as they go through their production line. But once they have a released PDK, for the most part, our support requirements, I expect to die down to very low. Uh, we may, and what I'd like to do is that we keep involvement with their design team so they understand all the benefits that they can get by using the MST. But, uh, You know, I still think for the most part, their engineers will understand it once they see it in the PDK and they'll be able to do that without our help.

And let me switch gears a bit to the RFSOI progress that you discussed and your script. Can you just help us to understand your engagements? Is this more on an IDM basis or is this through Foundry Partners?

It's both. It's both. We have very wide engagement on RFSOI for most of the foundry providers and several of the IDMs as well. And the good news is there's not 100 players in this space. There are a handful and we know who they are and we're presenting to them. So I do feel like we've got good traction with a majority of the folks who will be out there producing products with RFSOI.

And I guess from an MST standpoint, is there a potential for you to be incorporated in a current design process that they're working on today that's delivering the products, delivering to customers? Or would it take a complete, the bottom-up, re-engineer, re-presentation, re-qualification, re-certification, design wins, what do you think?

Yeah. So, Cody, in, you know, redesigning any existing chip and requalifying it in almost any market is a challenge. My understanding of this space, which I did work in for quite a long time, is that it's more cellular and consumer electronics technology. uh based and so the design cycles are happen every year or even more frequently and so if you come out with a new technology you probably wouldn't redesign an older chip and try to re-qualify you would design a new chip to take full advantage of all the new things that you've got going on and uh and get that qualified to go in new phones or new consumer electronics products or something And so I think that's more what we're looking at for the RFSOI space.

OK, great. And then, Frank, I guess you can just talk about your liquidity position. Twenty million in cash, three and a half million, a quarter burn. What are your options for your global liquidity and where are you comfortable with your cash balance?

Yeah, Cody, there's no change really. We've just, you know, we've addressed this in earlier, um, calls and, you know, this is about a level that we feel comfortable with. Um, you know, we, we certainly, um, you know, don't want to go, um, significantly lower, but we were very light in terms of, uh, any, uh, capital raising in Q3. We, you know, we're active in the market only on, um, just a couple of days. And so, you know, that reflects really our confidence in, you know, in what lies ahead. You know, obviously at three and a half, you know, actually our non-GAAP operating expense for the year at about 16 and a half million implies, you know, about 4 million a quarter, you know, in terms of non-cash, or sorry, cash, you know, gross cash usage. And so, you know, going sort of too far below that one year is not something that we ever like to do.

Is there a baseline of stock price that you wouldn't want to be engaged in your ATM?

No, we're never going to give that kind of. that kind of guidance. I mean, obviously we control what we can control. And there are sometimes things that happen in the market that will affect our stock price that are disconnected from, you know, the fundamentals in the business. But, um, You know, look, we we often get asked about the timing of making significant announcements. And we have on occasion. And certainly this was true with ST Micro, you know, open to a lot of speculation of, well, why did this come right at the earnings call? And we signed the deal the day before the earnings call. So we announced it. If we announced, you know, a transaction next week that was a, you know, material event for the company, we would announce it then. And so I think, you know, that's been our disclosure practice and it's not, you know, in any way kind of intentional. It's, you know, we will get that information out there. And to the extent that that is something that, affects the stock price, well, that's a good thing. We can certainly control execution, but a lot of things that have happened in the market over the last six or nine months, I think, have been very much across the industry and the stock market. Thank you, guys. Appreciate your time.

Thank you, Cody. And just a couple of questions coming in on the Q&A chat. So first one is regarding STMicro. And the question is, how many epi tools in the initial installation of MST at STMicro?

Yeah, it would be very typical for someone to install in just one tool for the development process. You can run a lot of wafers through one tool. They're not going to be pressed on everything. On capacity, be able to do those wafer level qualification or the silicon validation tests that I talked about. That should be fine. As they go to production, then it will really depend on the ramp rate for what volume they need. But in all likelihood, they'll have to add a lot more machines as they get to higher volumes. But we don't have much insight into that right now. We do know that the first installation is on a single tool.

Okay. And a question about JDA1 and timing. So I think folks are judging, you know, if ST takes this long, what would timing look for JDA1 should they choose to go to production? Is it about as long do you anticipate as it's taking STMicro or what are your thoughts on that?

You know, that's difficult to call because it depends where they slot in the technology in their development cycle. They're obviously working on their next generation technology. process. And so this would go into whatever that is defined as being, and I don't know how far down the road they are with it yet. So if they're pretty far down the road and they slot this in, then it would be sooner. I think it would be fair to say, though, all of them have to go through a similar type of process that we showed on STMicro, where they have to do silicon validation, get to a final PDK and wafer level qualification, and then take that to production. So it will be in a similar type of timeframe.

Okay. And there was a question about JDA2, and that is, you mentioned that there were new experiments being run. Does that indicate a shift to a new product area or different focus? Or if it's the same area, why would you need additional runs or experiments?

Yeah, so JDA2 is on a specific technology. We talked about that a while ago, and the technology has not changed. It's still the same focus area. Obviously, we had been working. We thought we were showing them some good improvements in that technology, but it obviously wasn't good enough to trigger improvement. The milestones that we had asked about that we had set forth in our initial JDA documents, which said, you know, if we can hit certain performance levels, then they would move forward with a full license and start the process of taking it to production. They never hit that. But we've been able to show them, based on very recent test results we got with them, that there's a really great potential to meeting or exceeding those targets. And so that's why we started the next round of experiments with them.

Okay. At this point in time, Scott, I'll turn it back to you for closing comments.

All right. Well, I want to thank you all for attending today's presentation. I'm happy to share with you some of our recent progress and our potential in new technology areas. Please continue to look for our news articles and blog posts, which are available along with investor alerts on our website, adamera.com. We are planning to attend the Craig Hallam Alpha Select Conference in a few weeks in New York City and the Benchmark Discovery Conference in December. And we look forward to seeing many of you at those events. Should you have additional questions, please contact Mike Bishop. We'll be happy to follow up. Thank you again for your support. And we look forward to our next update call.

Thank you. This concludes the Adam Mara third quarter update call.