Good afternoon, and welcome to the Atomera First Quarter 2019 Earnings Call. [Operator Instructions] This event is being recorded and will be available for replay for approximately one week. I would now like to turn the conference over to Mike Bishop. Please go ahead.

Thank you, Sherry, and good afternoon. I'm Mike Bishop with the company's Investor Relations. Joining me on today's call is Scott Bibaud, Atomera's President and CEO; and Frank Laurencio, 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 up the call for 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&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 March 11, 2019. 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 on our website. Now, I would like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott.

Thank you, Mike, and good afternoon, everyone. I'm glad you can join us today for a review of our first quarter results. After my remarks, I will turn the call over to Frank so he can go over our financial results, and we will open it up to questions. Atomera is a materials and intellectual property licensing company with a proprietary transistor enhancement film called Mears Silicon Technology, or MST. Our company develops new materials designed to improve the performance of semiconductors and helps our customers integrate them into the manufacturing flow of both existing and new fabs. Our technology can address the slowdown in Moore's Law by providing new materials and integration techniques to the industry, which will improve performance, cut power consumption and decrease product costs. Atomera is not a manufacturer; we are an IP provider, granting customers the right to manufacture using our technology in exchange for a license fee and royalty payment upon shipment of their products. Before I share updates on the customer front, I'd like to tell you about some exciting outcomes from our recent engineering efforts. Q1 has been a quarter of breakthroughs for Atomera. All of us within the company feel that we have turned a corner that will lead to accelerated success for the company. I'd like to share with you three of our breakthroughs, two in summary form due to customer confidentiality and the third in more detail. During the last three months, we have gotten some extremely promising data from our ongoing wafer runs. One of the big breakthroughs has been in the industry's more advanced production nodes. Atomera, in partnership with UC Berkeley School of Engineering and Notre Dame's Engineering Department, has published papers in the past detailing the advantages that MST could bring to both high-k metal-gate…

Thank you, Scott. At the close of the market today, we issued a press release announcing our operating and financial results for the first quarter of 2019. Our summary financial results are shown here, and I will now review them in more detail. Our GAAP net loss for the three months ended March 31, 2019, was $3.5 million or $0.24 per share compared to a net loss of $3.1 million or $0.26 per share in the first quarter of 2018. Our higher net loss was primarily due to increased operating expenses, which were $3.7 million in the first quarter of this year as compared to $3.1 million in the first quarter of 2018. Now let me share some color on the components of operating expense. Our R&D expense in Q1 2019 was $2.1 million, an increase of approximately $436,000 from $1.7 million in Q1 2018. This increase was mainly due to higher spending on outsourced fabrication and test supporting both customer evaluations and internal R&D work and higher payroll and stock-based compensation expense due to increased headcount. Our general and administrative expense in Q1 2019 was $1.3 million, which was an increase of $119,000 from $1.2 million in Q1 2018 and reflected higher stock-based compensation expense as well as higher benefits and insurance costs. GAAP net loss on a per share basis declined to $0.24 per share in the first quarter of 2019 from $0.26 in Q1 2018, primarily due to an increase in weighted average shares outstanding to 14.8 million in Q1 2019 as compared to 12 million shares in Q1 2018. Non-GAAP adjusted EBITDA in the first quarter was a loss of $2.9 million compared to a loss of $2.6 million in Q1 2018, reflecting the same reasons I discussed in explaining our GAAP results. Our press release…

Thanks, Frank. Q1 was a quarter of major innovation for Atomera. Our team is very excited because it appears that we have unlocked a whole new level of performance in a wide variety of segments all over just a few months. This new work will extend our already very strong IP portfolios, which this quarter has exceeded over 200 patents granted and pending. Our engineers continue to innovate with new ways to improve results for customers across more process nodes and technologies than we were a year ago. Atomera is delivering compelling solutions to some of the most difficult problems in the semiconductor industry. And unlike other exotic options, the technology is available today. It is very clear that the Atomera of today is far more valuable than at any point in the life of the company. Our years of innovation and investment are starting to pay off. We look forward to sharing more information on our technology and business with you as we continue to build Atomera into an important and successful technology provider to the semiconductor industry. Operator, we will now take questions.

[Operator Instructions] Our first question comes from Cody Acree with Loop Capital.

Congrats on the progress. Just a point of clarification, Frank, I had to drop off for a second. Your cash burn in the quarter was what?

$3.8 million in the quarter.

$3.8 million. And then you made a comment that $11 million to $12 million for the year. Is that correct in '19?

Yes, that's right. That's the guidance.

And, so your -- so let me just make sure I've got this correct with your monthly revenue run rate, you are again expecting $11 million to $12 million exiting 2019, are you expecting to be at the breakeven level by the end of this year on a run rate basis?

Well, as I said earlier, we're not giving revenue guidance for the full year. But consistent with what I've said before, that is possible based on engineering services engagements or getting customers to, what we call, Phase 4, which would be manufacturing licenses, which involve larger upfront fees than the integration licenses. So it's depended on those -- on the revenue side, which, again, as I said, we're not giving full year guidance.

Scott, two engagements dropped for Phase 3. Can you talk just a little bit more about the reasoning, was there any concerns, issues about the performance they expected versus performance they were seeing? And did that play into the decision at all?

So as I mentioned two customers, one -- and we have been working with for a longer time. We are working in one particular segment with them and their company made a decision about what they're going to do in that segment. And so they didn't want to continue with further internal development for it. And so they canceled that program. We -- as I said, we're still in discussions with them about another segment. So I don't think it was performance related. The second customer, yes, I mean, with them, we didn't even really get a chance to complete a full set of runs and the analysis that we do and try to figure out how good or bad the performance was and plan for next steps before they just decided that they didn't have the budget. And so -- I've been talking about this for some time. We now -- we decided a year ago or more, we wanted to start engaging with some smaller customers because they move fast. They make quick decisions. We can work with their senior management directly and get buy-in. But at the same time, they also can decide to change their mind very quickly and that's what happened in this case. The remainder of our engagements in Phase 3 are strong and steady. And I don't see this happening with other folks on the horizon. As a matter of fact, with our new performance levels that we've been talking about, just in the past week, we've been in phone calls with customers. I think universally, they think this is really amazing results that we're presenting and we're going to be meeting with all of them and giving details of it, and I wouldn't be surprised to see growth in our customer pipeline related to that.

And then lastly, just on the MST SP with the initial application like switches and power management, do you have an estimation of the size of applicability of that technology? What kind of market you might be able to service just within that? And then where that natural extension of that technology be beyond switches and power management?

Yes. I think the data that we saw just looking at published market size data of about $469 billion semiconductor market for last year. If you looked at power management and 15% in total.

Yes. I mean -- yes, about 15%. I mean, from our quick analysis, it looked like about 15% of the total market would be -- would fall into this category with power and analog, right? But the -- and I think one of the things that you need to understand about our announcement is we have been working with a lot of customers on this specific 5-volt problem. As a matter of fact, as I said, it's more than 1/3 of the customers that are in our overall pipeline. And those customers -- the reason why we have so many customers working on the 5-volt problem is because it's a very popular technology. I think, Cody, you're very schooled in this analog space and know how important the 5 volt is for mobile phones and any kind of battery products and a whole bunch of other areas. And it's been a very, very intractable problem that we've been working on for a long time and our customers have been interested in the solution. I think they're very interested in our solutions at 15%, 16%, 18%, 20%. At 50%, it's like a game changer. So I know this is early. I know it's kind of technical for many investors to just look at it and understand on the face of it, but I would encourage people to go out and like do a little bit of research on the importance for these type of products and you get a very good idea about the potential of it.

[Operator Instructions] Our next question comes from Suji Desilva with ROTH Capital.

Congratulations on the progress made in these three months. So on the comment, Frank, you made about the ratable recognition of the AKM and STM, right, I mean, you said the customers did not specify delivery date. So in that case, what period is this being ratably recognized over? I just wasn't clear on that.

Yes. So basically, it will all be recognized by the end of Q3. So we sign the contracts in -- at the beginning of Q4 last year. So basically, we'll have recognized all of the revenue from those two contracts during one year.

So one year timeframe, okay, good. And then another question on the numbers you gave. You gave customer total of 17 and engagements of 22 versus 17 and 21 last quarter. How did the two folks that dropped out of the third -- Phase 3 factor in here? Is that -- are the 1Q numbers net of those? Or are they still in there? Can you just clarify that for me?

Well, one of the customers didn't drop out entirely. They moved from Phase 3 to Phase 1. So that customer is still in the pipeline, but -- and they were just like one engagement. And then we -- yes, I'm trying to remember, we had one or two customers enter into the Phase 1. Yes, so we had two additional engagements begin in Phase 1. One was with a customer who added a second technology node and the other one was a new customer.

That helps. I do remember you said you had another project going with the one that dropped the Phase 3 project. So I understand why the customer is still there. That makes sense. Okay. And my third question really is around the weaker macro environment that's happening now and you said kind of hypothetically that people would have more free time to potentially progress evaluating MST or would be able to run more tests. Are you actually seeing that manifest, Scott, in this environment? People being able to pull in projects that maybe would have taken a little longer given the environment?

Yes. We did see some of that in Q1. And I'm hopeful we continue to see it. In my long experience in semiconductors, I know a bunch of people on this call have the same. I've seen a lot of slowdowns that started in Q4. And by the second half of Q3, you've forgotten that they were there, right? So I hope we can -- I mean, it's our goal to really try to take advantage of this time period when there's a little bit more space in the fabs. We're pushing our customers very hard to start a lot of wafer runs and get results that we can work with quickly.

All right. I guess you appreciate it can be a narrow window and that's probably accurate. But my other question is around the -- as you have these initial integration licenses, I know you're not giving revenue guidance or sort of notion of when manufacturing licenses come in. But what's the framework for us to think about that how the timing of manufacturing licenses come in after a customer has begun the integration phase? What's the way to think about that progression? Is it number of runs before they get there? Or is some other way to think about it, anything would help in terms of knowing when manufacturing licenses or what -- how those would come on next?

Yes. We've always said that's the most unpredictable -- the hardest thing to predict. We set a goal for ourselves at the very beginning that when we start working with a customer in integration, we would like to do three integrations with the runs with them before they're ready to move to manufacturing. But I would not say that we've had that experience so far and we're all learning a little bit. I still think that's the right goal for us. And I think with 50% improvement then we're going to get people who do a first run and get much higher performance numbers than they've gotten in the past and maybe it only takes one or two more before they go to that manufacturing license and start transitioning into production. So yes, definitely early days to see the reaction to how customers will change behavior based on this new data. But like I said in my remarks, we believe it will cause people to decide faster to get to numbers that will justify changing over to new process node a lot quicker, and it will give us a lot more negotiating levers to say, "Hey, you want to get 50% improvement? You got to pay us for the engineering services fees and you got to pay us for licenses quicker." So I think it's all giving us much more power.

And can you remind us, Scott, how long a typical run takes, is it one to two quarters or a few weeks? Or just...

No, a typical run -- I think the fastest run we've ever done has been -- was about 5 months, but a typical run is about 8 months. And that's from like planning the thing to actually reviewing the test results.

Okay, that's great. And my last question is more on the technology side, the MST SP you announced, you talked about the doping profile being a proprietary element of that. What specifically is it that you're able to do that is differentiated from potential competitors in the MST SP, where you can manage the doping process and that -- and how that's proprietary?

No. You know what, I'm not even going to say it's proprietary, so the SP is a technique that the industry has known about for some time, but it just doesn't really provide any benefit. I mean, if you were a new semiconductor designer, you might go and say, "Hey, this would be interesting." It might have an improvement, but then when you implement it, you would find that it really didn't provide any benefit. It adds complexity without a benefit. So they haven't used it in the industry. It was the innovation that we came up with was that because of the characteristics of MST and its ability to block opens and keep them in certain regions where you want to have it opens and keep them out of regions or we don't have to it opens, that if we can use this technique in conjunction with MST, that we would get a big breakthrough and that's exactly what has happened. So although the SP is some know-how that we have and we do actually have the ability to patent the concept of using SP with MST, the SP technology is really not a proprietary technique that no one has ever done before. And so there's one thing I think it's important to understand and I mentioned in my remarks, but today when we work with customers, we get to a certain performance level and then both of us put our heads together and we say what do we can going to -- what's the next thing we're going to tweak in the integration process to get to a much higher level of performance. That's expected. You're tweaking these things in the integration process. SP is a basically a tweak. It's not a small tweak. It's a kind of a breakthrough tweak, obviously. But it's exactly what customers expect to be doing between runs to get their performance level higher. So we're not going into existing customers and saying, "Hey, let's throw out the film development and all the work you've done and start over." No, we're saying, "Hey, let's make this next level tweak and see if we can get to a much higher level of performance." So -- yes, so we think it can be implemented pretty quickly by a lot of our customers.

Speakers, I'm showing no further questions from the phone lines at this time. I would now like to turn the call back over to Mr. Scott Bibaud for any closing remarks.

All right, thank you. I want thank you all for attending today's presentation. As I mentioned Q3 has been a quarter of breakthroughs for us. And we really look forward to continuing to update with you with news on both our technical and business improvements through news, articles. We'll be putting up blog posts on this in the near future, white papers and all of those to keep you up-to-date on our progress. You can 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, which we'll be announcing soon. Again, we thank you for your support and look forward to our next update call in August.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.