Atomera - Earnings Call - Q2 2020

Transcript

Speaker 0

ahead.

Speaker 1

Thank you and good afternoon. I'm Mike Bishop with the company's Investor Relations. Joining me on today's call is Scott Bibeaux, Atomera's President and CEO and Frank Lourenco, Atomera's CFO. If you are joining by telephone, please go to the Events section of our Investor Relations page on our website to follow a slide presentation that accompanies our remarks. That presentation will remain available on our website after the call.

After prepared comments by Scott and Frank, we will open the call up to your questions. 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 and A session, are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of our filings with Securities and Exchange Commission, specifically in the company's prospectus supplement filed with the SEC on 05/13/2020. Except as otherwise required by federal securities laws, Atomera 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 to our website. Now I would like to turn the call over to our President and CEO, Scott Bibow. Go ahead, Scott.

Speaker 2

Thanks, Mike. Welcome to Atomera's Q2 update call. While the coronavirus continues to batter many segments of the economy and electronics industry, Atomera has been able to keep making great progress on customer developments without significant disruptions. Our customers continue to do wafer runs, test and review results and have them have regular and detailed technical meetings with us. We would certainly love to join them and their facilities for more intensive analysis and planning sessions.

Indeed, we believe that would help us to accelerate progress, but even without the ability to visit, we continue to make great strides together. Since our team primarily does engineering design, simulations and analysis that can be conducted remotely, stay at home restrictions have not affected our work. For the few who need to work with specialized tools, access to those facilities under social distance conditions has allowed our work to progress without significant interruption. All of our customers' fabs have continued to run during the past months, and our programs, which were launched before the virus period have not been affected. So although the pandemic has slowed down many things around us, our efforts continue largely undiminished.

As you can see from this chart, we continue to make progress with customers. In the last few months, one of our returning customers who had started a new program has now advanced into Phase three, giving us 17 customers in that most critical stage. Several of our existing customers have multiple engagements underway, so we now have 26 engagements with 19 customers. We continue to speak with several other new prospects who are not currently in our pipeline, but are interested in working with our technology. New customer acquisition is one area somewhat affected by the coronavirus slowdown for a few reasons.

In years past, when we were able to hold a multi hour in person technology review session with a potential customer, they would generally agree to start working with us and enter into our pipeline. During that meeting, we could read the room, identify the decision makers and try to address concerns expressed verbally or with body language. But it's hard to convince a potential customer to sign up for a multi hour Zoom call and it is harder still for our sales team to gauge reactions for follow-up. Needless to say, we are anxious to start traveling for in person meetings again. In addition, due to just how busy our team has been in the last few months, we have dialed back on our efforts to aggressively seek new customers.

Naturally, giving the choice of where to expand our limited engineering resources, we have been prioritizing engagements, which have a better chance to advance into Phase four over adding new customers into Phase one. Atomera is constantly working to develop deeper and more strategic relationships with customers, most recently through the pursuit of joint development agreements. We are advancing our work on this new agreement format with several large companies, those with multiple production nodes and multiple technology and product divisions, an approach that integrates development, licensing components and manufacturing requirements. But the execution of those agreements has been slowed down by the uncertainty and logistical constraints put in place by the coronavirus. Since our last update call, we have been making substantial progress with the first of our customers with whom we hope to institute a JDA.

Technical work and communication between our two companies has ramped up with extensive planning and data exchange happening in the last few months to allow them to do the pre work for the JDA now. We have even been informed that the JDA has overcome the most significant hurdle put in place by the customers' development organization. Unfortunately, as of this earnings call, the formal contract to kick off this effort effort has not been completed. We continue to be huge believers in joint development agreements because we expect that they will give us an advantage on both leading and trailing edge technologies the formal and will provide access to a variety platforms ultimately leading to deeper customer penetration, faster adoption and quicker ramping of manufacturing activities across their product lines. Discussions on JDAs with other customers continue.

We believe that this trend is very positive for Atomera and will help us to be more successful with bigger customers. As you know, we have three existing license partners and I can tell you that advancements continue with them towards solutions we hope will go into production as soon as possible. Each is still excited about the impact Atomera's MST can have on their competitiveness. One of the three has identified a coronavirus impact due to concerns on the market recovery and its potential change to their CapEx plans, but all of them continue to make progress forward. Although there are uncertainties in the market and we have not executed formal contracts that we can share with you today, Inside Atomera, there is a lot of confidence that MST technology offers customers significant benefits that they cannot achieve on their own.

We are busier than ever working on R and D programs, perfecting our simulations and deeply engaging with customers as we design, revise and analyze their ongoing wafer runs and plan for new ones. During the last few calls, I've been speaking about Atomera's MST SP technology and the potential it has to bring entirely new levels of performance to the large and growing five volt semiconductor segment. Recently, our engineering team was very excited to view the first results from an important customer's latest wafer run using MST SP. Data sets generated from an evaluation lot can be quite extensive because we include many different split conditions, which span multiple different channel lengths, implant conditions, annealing temperatures and many other factors. So collecting all the data can take weeks and analyzing it takes even longer.

But early indications from this customer's results, although not perfect, are exceeding expectations of both the customer and Atomera and validate some of the early projections we are making on the benefits of MST SP technology. These benefits will allow, for example, a more compact, low cost and efficient power management IC for use in the next generation of five gs cellular phones or other battery operated products. In the near term, we hope this customer takes advantage of those results to move forward quickly and we hope to achieve similarly promising results with our many other customers who develop five volt power devices. Likewise, work with customers on RF SOI and partnerships in this area continue to expand. Early in the pandemic, there was talk of the five gs cellular rollout being delayed due to the resulting economic uncertainty, but that talk seems to have faded.

One of the most challenging and costly aspects of designing and manufacturing a five gs cellular phone is the complicated RF front end required. Our MST technology on top of the RF SOI wafers used for many of these designs continues to show that it can markedly improve the performance of the critical RF front end components that do the heavy lifting in these phones. This is a real near term market transition where we believe MST can provide a competitive advantage. In addition to the focus areas that we've been highlighting, we continue to do R and D and customer work with MST and several other promising areas. As a result of these efforts, we have now grown our list of patents issued and pending to two forty four, which is truly an impressive portfolio for any company, but certainly for one of our size.

Since filing and maintaining patents is very expensive, our goal is not simply to increase our numbers, but to protect our technology in the key areas in which With our growing body of know how and the fact that our film is discoverable and manufactured chips, we believe our license portfolio has increasingly strong, long lasting and defensible value in the marketplace. Atomera is also excited about the new state of the art 300 millimeter epi deposition tool we've been working to secure. Installation of this tool has been underway since March and after some minor delays caused by supply chain disruptions during the pandemic, we expect to take possession of the new tool under a lease arrangement in the next few weeks, once certification acceptance tests have been completed. Most of our customer engagements use 300 millimeter wafer sizes. So this tool will have many benefits, which will help to accelerate Atomera's time to revenue.

For one, we will now have the ability to do short flow wafer trial runs to perfect our integration before entering into full flow customer trials, which as you know can take up to nine months or longer to get results. With this new capability, we will finally be able to take the time necessary to ensure earlier customer success on Epi runs. We will no longer need to ask customers who use 300 millimeter wafers to conduct R and D efforts on 200 millimeter wafers, which in the past has delayed decision making as customers then seek to revalidate results on 300 millimeter tools. We will be able to accommodate more customers running more experiments and it opens the possibility for Atomera to help customers who need a larger amount of wafers as they transition from development to pilot runs to early production. Because this will be a state of the art EPI tool, it will also allow us to make process improvements that will directly transition to our customers' production facilities when complete.

Since the more advanced nodes use 300 millimeter, this tool also helps us to more directly address the segment of the market with higher royalty potential. For all those reasons and more, we're about to become better positioned to assist our customers in the transition to production than ever before. Atomera has continued making progress at a fast pace and some of the results coming into us right now make us particularly optimistic. In prior calls, we indicated that our biggest limitation in customer engagements was the size of our team. At this point, we've made great progress resolving that issue by adding engineers to fill critical areas of support.

Although we are being careful with our cash, we are also very focused on growth and will carefully target our spending in only the most hard hitting areas. Despite disruptions from the pandemic, very few of our activities have slowed, customer results are improving and we continue to prioritize near term manufacturing opportunities. Now I will turn the call over to Frank to review our financials.

Speaker 3

Thank you, Scott. At the close of the market today, we issued a press release announcing our second quarter twenty twenty results. This slide shows our summary financial results, and I will now review them in more detail. Our GAAP net loss for the three months ended 06/30/2020, was $3,800,000 or $0.21 per share compared to a net loss of $3,600,000 or $0.24 per share in the 2019. The large net loss in Q2 twenty twenty was due to a $70,000 difference in revenue as compared to Q2 twenty nineteen as well as earning lower interest income in Q2 twenty twenty.

GAAP operating expenses were approximately 3,800,000 in both Q2 twenty twenty and Q2 twenty nineteen. Net loss per share declined due to an increase in weighted average shares outstanding from 15,400,000.0 in Q2 twenty nineteen to 17,800,000.0 in Q2 twenty twenty. Non GAAP adjusted EBITDA in the second quarter was a loss of $3,000,000 compared to a loss of $2,900,000 in Q2 twenty nineteen. Our press release and this slide contain a reconciliation between GAAP and non GAAP results. As has generally been the case for Atomera, the biggest difference between our GAAP and non GAAP results is stock compensation expense, which is a non cash item and was $766,000 in Q2 twenty twenty compared to $788,000 in Q2 twenty nineteen.

In my discussion of the factors affecting our operating expenses and operating loss, I will focus on non GAAP expenses, which we use for internal planning and to provide expense guidance. Our non GAAP operating expenses were approximately $3,000,000 in both Q2 twenty twenty and Q2 twenty nineteen. Non GAAP research and development expense was $1,800,000 in both periods as increased payroll expense due to higher headcount was offset by lower outsourced fabrication and testing expense in Q2 twenty twenty, reflecting the surge in R and D spending in the 2019 for our MST SP development as well as lower travel expenses in Q2 twenty twenty on account of coronavirus restrictions. Non GAAP G and A expense was $1,000,000 in Q2 twenty twenty as compared to $943,000.19. Lastly, non GAAP sales and marketing expenses were unchanged.

On a sequential basis, our GAAP net loss in the 2020 was $3,800,000 compared to a $3,600,000 net loss in 2020. The higher net loss was due to the fact that Q1 twenty twenty included a $138,000 charge related to a warrant that had been issued in connection with our pre IPO financings and also due to lower revenue. The warrant modification was a non cash item and did not recur in Q2. GAAP net loss per share was $0.21 per share in Q2 twenty twenty compared to $0.22 per share in Q1, reflecting a higher share count. Non GAAP adjusted EBITDA of $3,000,000 in Q2 twenty twenty compares to $2,900,000 in Q1, primarily due to the decline in revenue.

Total non GAAP operating expenses were unchanged at $3,000,000 in both Q1 and Q2. Our cash balance at 06/30/2020, was $18,000,000 compared to $11,400,000 on March 31. On May 15, we closed a public offering of 2,024,000 shares of our common stock at a price of $5 per share, netting us proceeds of approximately $9,400,000 after underwriting commission and offering expenses. Excluding the offering proceeds, our cash use was approximately $2,900,000 in Q2 compared to $3,600,000 of operating cash use in Q1. As has been the case for the past three years, our cash used during the first quarter is higher than in other quarters due to the timing of annual payments that are expensed ratably over the course of the year.

This year, approximately $211,000 for costs normally paid for in Q1 came due and were paid in April. So that cash use shifted over into Q2. As of 06/30/2020, we had 19,800,000.0 shares outstanding. Consistent with our past practice, we are only providing revenue guidance for the current quarter. As Scott mentioned in his remarks, we have not reached a formal agreement with the customer in most advanced JDA discussions, despite significant progress in passing technical milestones.

License agreement and engineering services discussions have been impacted by coronavirus travel restrictions and the backlog of work at customers gradually coming back to normal work schedules. Accordingly, we are not expecting to recognize any revenue in Q3. We have taken a conservative approach to growing our operating expenses, and we will continue to do so. We are reiterating our guidance for 2020 non GAAP operating expense in a range of $12,750,000 to $13,250,000 This reflects our additional headcount along with lease payments for the 300 millimeter Epi deposition tool beginning upon formal acceptance, which we expect in a matter of a few weeks. 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?

Speaker 2

Thanks, Frank. As you have heard on this call, while the coronavirus has caused some minor delays, our business has continued to advance and our efforts at customers are being rewarded. We now have a record number of customers engaged with us in Phase three, and we have made strong technical progress with our lead JDA customer. The technical breakthroughs enabled by our quantum engineering achievements continue to gain notoriety in the industry, and we are building on their success. Our new 300 millimeter EPI tool is weeks away from giving multiple advantages to accelerate licenses and time to manufacturing revenue.

Internally to Atomera, we are excited and optimistic. We will continue to execute aggressively to take advantage of the momentum we've built during this period, and I look forward to sharing the results of those efforts with you in the future. Operator, we will now take questions.

Speaker 4

Thank you. And our first question comes from David Williams with Loop Capital. Your line is open.

Speaker 5

Hey, good afternoon and thanks for asking the question. I'm actually on for Acre today. But first, just congratulations on the quarter and the progress. You guys are clearly moving forward even in the backdrop that is less than healthy. But maybe can you maybe give us a little bit of color around the implementation of the 300 millimeter tool and how that's going to help feed the customer licenses into the next phase?

Kind of any kind of directional color around that would be helpful.

Speaker 2

Yes. Thanks, David. Absolutely, the 300 millimeter tool. So just to give you an idea that in years past, we typically would get access to a 300 millimeter tool either once or twice during the course of the year. It was very expensive and we'd only have access to it for about a month.

So naturally a number of customers who wanted to do experiments with us and work with us would have to wait for that period when we'd get a tool available to us. Now we'll have the ability to do those type of lots much faster And we believe that will help to for most of our customers who are using 300 millimeters to get to their results positive results much faster and help us to get to licenses earlier. It also allows us to do wider range of work on 300 millimeter things and to take our time a little bit more to make sure that every customer run that we do will have greater success. So it's going to be really major new capability that we have internally and we think that it will give us lots of ability to go and improve our business.

Speaker 5

Fantastic. And you said you would expect that to be installed and maybe accept within the next several weeks. Is that right?

Speaker 2

Yes, that's right. Just in the next few weeks. Great.

Speaker 5

And then how long will it take once that's accepted before you can really start to trial the system and start really using that and gaining that efficiency?

Speaker 2

Yeah. So when they when it passes acceptance, that means the tool is fully functional and working and they turn it over to us. Then we have some work to do to get our MSC film qualified and properly calibrated on the device. And that will take three weeks, three to four weeks maybe. So by September, we really believe that we should be able to be doing deposition on customer wafers.

Speaker 5

Okay, great. And then one more, you don't mind. You had mentioned that you guys are not really prioritizing new customer acquisition right now. When do you think that maybe the conditions change where you'll be able to start doing that or maybe have the resources so you can continue to grow that pipeline?

Speaker 2

Yes. We have gotten to the point where we're so busy with existing customers that we really have to ask a question about whether adding new customers makes the most sense. And as I said in my comments, in most cases, doesn't. If a very large potential customer came on board that we're not working with already, then we would probably try to squeeze them in. But we've been held up by the fact that our engineers are just too busy with all of the work we have with existing customers.

So now we've met we have brought on a number of engineers just in the last couple of months. It will take them a little while to get to fully productive. And when they do, I think it will open up bandwidth for us to add a few more customers. The other thing is as we push customers over into Phase four and beyond, the workload on our team actually starts to decline as customer takes on more and more of those efforts. So that would be another way that we'd be able to have a lot more bandwidth to bring in new customers.

But I do want to emphasize that we've always talked about one of the primary ideas about Atomera, our objectives as a company is that we will stay lean so that there's a lot of leverage to the bottom line when we work with customers. Today, have a very large pipeline with a relatively small team, and we hope to continue that same level of efficiency as we add more customers.

Speaker 5

Great. Thanks so much. I it and best of luck on the quarter.

Speaker 2

Thanks very much.

Speaker 4

Thank you. Our next question comes from Daniel Carlson with Tailwinds Research. Your line is open.

Speaker 6

Hey guys. Well, thanks for taking my questions. First off, it sounds like you've made great progress on MST SP. Wondering if you can just sort of quantify how large the opportunities are in the market and how much of your pipeline is that applicable to?

Speaker 2

Yes. Thanks for the comment, Dan. So MST SP, when we talk about it, we usually talk about it in the context of five volt power management devices, which a number of our customers are working on. But it really technology that's applicable across the entire analog semiconductor segment, it's our belief. Anyway, and so the analog segment of semiconductors really accounts for between 1520% of the total revenue that's available in the $400,000,000,000 semiconductor market every year.

So it's an extremely large market and extremely large opportunity. We do have a number of customers either a big cluster of customers in our existing pipeline that are working on analog technology like this. I can't give you I can't tell you who's working on MST SP specifically, but we've announced two out of three of our customers that are we've given the names of them and both of them are very big players in the analog space. So you can and that's representative of a lot of our customers in the pipeline. Lots of exposure to this big breakthrough technology that we're working on.

Speaker 6

Great. Thanks. That's really helpful actually. And just speaking of you keep talking about the JDA structure and it seems like it's real focus. Does that indicate a departure from your typical phases of engagement?

Does it affect the timing of licenses from typical engagements?

Speaker 2

It does not I mean it isn't a major departure from the phased approaches that we've talked about before. And I think in our graphic we show it kind of spanning Phases two through four. There's a few important things in there. Basically, a customer has to go through the same type of evaluation process as whether they're a JDA or just a normal license customer. And so they will still go through the same things that are happening in those phases.

But secondly, we also are setting the expectation with our JDA customers that they will also have to execute the same licenses that they would in a JDA as they would if they were just going through regular phases of the license process with us. The big difference is that when they get to the end of the process, they will have approved the technology across a large organization, making it much faster to add incremental process nodes as new licensees. So first one, maybe it'll take the same amount of time as a normal cycle, we're hopeful that it will be faster. But definitely with the second and third engagements inside that customer, they should be preapproved through the JDA and be able to move much faster.

Speaker 6

Great. That's helpful. Thank you. I'll jump back in the queue. Appreciate it guys.

Speaker 3

Thanks, Tim.

Speaker 4

Thank you. And there are no further questions in the queue. I'd like to turn the call back to Mr. Bibaud for closing remarks.

Speaker 2

Well, I want to thank you all for attending today's presentation. We're pleased to be able to share with you some of the excitement we're feeling inside Atomera. Please continue to look for our news, articles and blog posts to keep you up to date on our progress. You could sign up for them along with investor alerts on our website atomera.com. Should you have additional questions, please call Mike Bishop and we'll be happy to follow-up.

We look forward to seeing some of you during our scheduled marketing activities such as at the LD Micro Virtual Conference on September 1. We thank you again for your support and look forward to speaking with you again on our next update call.

Speaker 4

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.