Atomera Inc Q4 FY2021 Earnings Call

Hello, everyone, and welcome to Atomera's Fourth Quarter Fiscal Year 2021 Update Call. I would like to remind everyone that this call and webinar are being recorded, and a replay will be available on Atomera's IR website for 1 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 format with participants in a listen-only mode. We will open the call with prepared remarks from Scott Bibaud, Atomera's President and CEO; and Frank Laurencio, 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 Presentations 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 15, 2022. Except as otherwise required by the 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.

Thanks, Mike. Good afternoon, and welcome to Atomera's update call for Q4 2021. We've had a very eventful three months capped by our recent announcements of an integration license with a foundry and progress on our JDA. If you've been following us for any length of time, you know that large semiconductor companies are not fast-moving, especially in a period of capacity constraints, which makes the momentum we're building even more impressive. I would first like to discuss these accomplishments and provide some additional insights into the latest changes in the semiconductor market and how it impacts Atomera before turning the call to Frank to briefly review the numbers and outlook. A week ago, we announced our fifth license agreement, an integration license with a foundry partner. This builds on the license agreements with AKM and STMicro, plus another unnamed partner, and of course, the JDA. Given the customary nondisclosure, we provided as much information as we are allowed to in the press release. Let me say, however, that we are very happy to be working with this foundry partner because they're very well known in the industry for bringing innovative technologies to market. We started our engagement with them some time ago, so they are already a Phase 3 customer. Over the last year, they have used our MSTcad modeling software to unveil some compelling new uses of MST that may enhance some of their specialty processes. Once that advantage was made clear to them through our modeling software, they immediately took steps to start running MST on device wafers. Electrical results, which validate the modeling run by this new licensee, would be a breakthrough in performance that I think they would be extremely enthusiastic about taking into production. We also hit a significant milestone in our JDA partnership with a large semiconductor manufacturer. Very recently, we were informed that we have passed all the technical specifications required to complete the JDA. While some documentation is required before the JDA is officially completed, our customer is satisfied that Atomera's technology meets their challenging requirements, which validates the manufacturability and the effectiveness of using MST in a world-class fab. At this point, our focus for this customer will turn towards engaging with different business units or application areas within the company to have MST integrated into their devices and hopefully take into production. As I have said in the past, if a business unit wants to use MST, the next step is for us to do integration work on those specific applications. While it is hard for us to predict the required time frame, these are the opportunities that we've been looking forward to over the last year. The completion of the JDA is a revenue-bearing event, so Frank will have more to say on that in our financial section. As you can see from our engagement chart, we do remain flat with a number of customers last quarter. But during Q4, we have seen a significant uptick in the amount of activity by those customers inside Phase 3, and we believe this will continue over the next year as availability of R&D wafers and a focus on innovation returns to the industry. We have heard feedback asking for more details of the activities within Phase 3 of our customer pipeline. Although we've considered several ways to do this, given the highly competitive nature of our industry, small disclosures by us about the details of our work can be extrapolated by knowledgeable players into competitive intelligence. I can tell you that within Phases 3 and 4, we have projects representing at least six different application areas. In some of those, we're engaged with many different customers working on very similar solutions. In others, the focus is on quite different specifications within a single broad application area and in some applications that may be only one or two customers. In each of these engagements, confidentiality is vital to our customers. Our engineering team has got their hands full servicing the customer interest coming into Atomera these days. In the past, we've noticed an increase in interest by other semiconductor companies when new licensees are announced, and we think this trend is very helpful for Atomera to build our customer base in the long term. In November, Atomera announced the availability of MST SP technology, which was our first design package ready for customers to adopt as a full transistor solution. We accomplished this by developing MST SP on our own wafers in our partner development fab so that we can freely share all the designs and resulting data we generated. The detailed announcement and promotional materials were very comprehensive and give us something we haven't had before: the ability to market our technology to potential customers without actually meeting them face-to-face. Although quite technical, the information was picked up by many different publications. As an example, I would point you to an EE Times article on January 26 called 'Quantum-Engineered Material Boosts Transistor Performance,' which is available in the News section of our website. We hope this type of article will extend the reach of MST to fabless semiconductor designers worldwide. Market reaction to the launch has been quite good. We are seeing excellent incoming interest in this technology. We are hopeful that MST SP, which is targeted at 5-volt devices, will gain strong traction, will be introduced into new fab capacity being added at legacy nodes and will become a new standard for the industry. The economic benefit of this technology is very compelling for all members of the value chain, and we will continue to deliver that message until we get customers into production. We also continue to see strong interest in MST focused at RF SOI, which is a technology fundamental to the success of the 5G cellular market. Atomera has a large body of simulation results in diffusion blocking data to prove that our technology will have significant performance benefits for RF SOI devices, which has led us to having multiple engagements underway in this area. Earlier, I spoke about how our newest licensee used MSTcad to model a big improvement in device performance using our technology. This is an example of how MSTcad is becoming a more and more important tool for Atomera, especially in the earlier parts of customer engagements when they're trying to understand how best to integrate MST into their products. MSTcad is a tool that sits on top of the market-leading industry TCAD tools made by Synopsys. So it's vital that we work closely with them as a partner. Synopsys believes in Atomera because they understand the complex physics behind our film and how it can impact devices. In March, Synopsys will be sponsoring a webinar for their worldwide TCAD user base to learn about Atomera's technology and how MSTcad can be used to optimize transistors. We're very excited to leverage the marketing strength of Synopsys to bring our technology to a much wider audience. During our last earnings call, we announced that we had reached formal acceptance of our new 300-millimeter Epi tool and had commenced MST deposition on wafers. I'm pleased to say that in the last three months, our Epi tools have been utilized for multiple customer wafer runs and the operations of these tools are meeting all of our expectations. Now I'd like to provide some thoughts on the overall semiconductor manufacturing environment. Industry analysts seem to have a wide-ranging set of estimates for when capacity constraints in the semiconductor industry will start to dissipate, generally falling sometime from Q3 of this year into 2023. As you know, Atomera has been affected by these fab constraints in a few different ways. Essentially, when customers can't run wafers or add tools, they do not prioritize development that requires those resources. I'm pleased to report that Atomera is currently engaged in a large number of different R&D runs with customers in Phase 3 of our pipeline. And we believe that this indicates the development pendulum is starting to swing away from dealing with supply issues and back to new technology development. As you can imagine, this is a very beneficial trend for us. We also believe it's a strong vote of confidence in Atomera's technology when companies with very limited R&D wafer capability are allocating it to development using MST technology. We continue to see very strong CapEx growth by almost all players in the semiconductor industry. Inevitably, the most advanced nodes are getting a lot of that CapEx, but legacy nodes are now starting to get long overdue attention with capital directed towards building new factories or expanding production in existing fabs to correct long-term capacity issues. Today's Intel announcement of the Tower acquisition is a good example of this type of investment. We believe this allocation of capital provides a very strong opportunity for Atomera since MST can uniquely enhance older nodes that have run out of other options. Our MST SP product is a great example of how our technology can be used to improve both performance and die size, and therefore, capacity in a legacy fab. We are at the beginning of an unprecedented period of CapEx growth in the semiconductor industry, and with that growth come exceptional opportunities for Atomera. I think you can agree that the last three months have been very productive for Atomera. Our company achieved several important milestones, including publicly announcing MST SP, reaching 300 patents granted and pending, inclusion in the Forbes list of Best American Small Companies for 2022, and more recently announcing a new license with a foundry and fulfillment of the technical milestones specified in our JDA. We are clearly entering 2022 with strong momentum, which is something we hope to carry forward through the remainder of the year. Now, Frank will review our financials.

Thank you, Scott. At the close of the market today, we issued a press release announcing our fourth quarter and full year 2022 results. This slide shows our summary financials. Our GAAP net loss for the year ended December 31, 2021, was $15.7 million or $0.70 per share compared to a net loss of $14.9 million or $0.79 per share in 2020. Revenue increased by $338,000 from $62,000 in 2020 to $400,000 in 2021. GAAP operating expenses were $15.9 million in 2021, which was an increase of $960,000 from $15.0 million in 2020. Non-GAAP net loss for 2021 was $12.5 million and reflected $12.9 million in non-GAAP operating expenses. In 2020, our non-GAAP net loss was $11.7 million, the same as our non-GAAP operating expenses for that year. Stock compensation expense, which is the largest component of non-GAAP costs, was $3 million in both years. Our press release and this slide contain a reconciliation between our GAAP and non-GAAP results. In the fourth quarter of 2021, our GAAP net loss was $4.2 million or $0.18 per share compared to a net loss of $3.9 million or $0.19 per share in Q4 of 2020, reflecting higher operating expenses. Sequentially, the Q4 net loss in 2021 was approximately flat compared to Q3. On a non-GAAP basis, our Q4 2021 net loss was $3.4 million compared to a loss of $3 million in Q4 2020. The $3.4 million in non-GAAP net loss in Q4 was unchanged sequentially from Q3 2021. Focusing now on the components of operating expenses. Our full year research and development expenses in 2021 were $8.8 million, an increase of $355,000 from $8.4 million in 2020. This increase was mainly due to the new Epi tool lease, which we started making payments on in August of 2021. General and administrative expenses increased to $6.2 million in 2021 from $5.6 million in 2020, mainly reflecting higher insurance and payroll costs. Sales and marketing expenses in 2021 were $986,000 compared to $921,000 in the prior year. Our cash balance at December 31, 2021, was $28.7 million compared to $37.9 million at the end of 2020. The $9.2 million decline over the year reflects $12.4 million of cash used in operating activities, offset by $3.3 million of cash received from financing activities. As of December 31, 2021, we had 23.2 million shares outstanding. Last year, we recognized $400,000 of manufacturing license revenue when we transferred our MST recipe to our JDA partner. The JDA also included technical objectives, which, if achieved, would result in incremental revenue of $300,000 to us. As Scott mentioned, we have now completed those tactical objectives. And revenue recognition depends on receiving final documentation, which is likely to happen in Q2 of 2022, though it could happen in Q1, depending on our partner's internal process. Likewise, timing of revenue recognition under the new integration license is dependent on delivery of wafers and other factors. So our estimate is that revenue for Q1 will be between $0 and $25,000, and that the remaining JDA revenue will be recognized in Q2 of 2022. Our non-GAAP operating expenses for 2021 were $12.9 million. At this time last year, my guidance for 2021 OpEx was a range of $14 million to $14.5 million, which was based on two assumptions that played out differently from what we have been expecting back then. First, we had assumed that we would accept the tool and start making lease payments on it in Q1 of 2021. As the year progressed, we provided updates on delays related to the tool and ultimately, we only reached final acceptance in August. Secondly, we did not grow our headcount at the rate we originally anticipated. But now the lease payments of $150,000 per month are part of our baseline R&D expenses, and we are actively hiring, primarily in engineering. Based on these assumptions, we expect that our 2022 non-GAAP operating expenses will be in the range of $15.25 million to $15.75 million. Earlier today, we filed a universal shelf registration statement on Form S-3 with the SEC. We had put up a similar shelf registration in 2019, and those facilities have a term of three years. With that, I will turn the call back over to Scott for a few summary remarks before we open the call up to questions.

Thanks, Frank. The successes Atomera is experiencing as we enter into 2022 are based on the solid and impressive work our team accomplished in 2021. Early in the year, we announced our JDA and the execution of our first manufacturing license. In parallel, we were busy creating strong positions in several specific technology areas, which we announced to customers over the year, including RF SOI, high-k/metal gate, advanced nodes, and finally, our public release on MST SP. We solidified our development and customer support capabilities with MSTcad and our new world-class Epi facility, which gives us the ability to get customers through the integration process and to market more quickly than ever before. Atomera's quantum engineered technology is cementing its reputation over a broad swath of the semiconductor industry, and we hope to continue expanding it. We believe customers will take advantage of the upcoming industry investment cycle to incorporate Atomera's technology and expand their competitive advantage in the market. Inside Atomera, both our management and engineering teams are optimistic. You can count on us to continue this momentum throughout the year to establish Atomera as a technology licensing leader in the semiconductor industry, and I will look forward to sharing those successes with you in the future.

Thank you, Scott. Our first question comes from Richard Shannon of Craig-Hallum.

All right. There we go. Thank you, Mike. And Scott and Frank, thanks for taking my questions. A lot of good stuff to ask about here. Let's see here. Let's start with the JDA where you said you met all of the technical requirements. So I guess I'd love to understand and characterize what happens next year. Obviously, we've got a constrained environment here from a test point of view with these business units you talk about. How fast could we move with any particular business unit towards a more complete agreement and getting to production there? And what do you think is more realistic in this environment?

Yes. Thanks, Richard. I'm pleased to share a little more detail on the JDA. So when we entered into the JDA, the way it was structured, a central engineering group said they're going to evaluate our technology for a number of things, importantly for manufacturability and for how well it actually performed in doing the things that we have been saying it could do. And so they wrote some specifications, and they said, 'When you guys pass those specifications, then we can start sharing your technology with different business units.' And so what's happened now is that we've actually officially passed those specifications. We did not officially complete the JDA, which is the paperwork thing, but the important thing is our technology has been proven to do what we said it would do. Now we'll engage with different business units, at least I hope we will. That's our intent. We're starting to talk to some about integrating MST. And when they do that, we'll start going through a normal integration process like we do with many customers, where we help them figure out how to put our technology into their designs. And then they will probably run wafers to see what the impact is. The time frame for doing that is always hard to predict. But I can say in the case of this JDA, the customer has got MST installed in their factory. So it should be much faster for them to perform integration than it would be for a customer that's flying wafers around the world to get MST deposited by us and then sending them back. That can put months of delays into the process. So it could be fast if they moved very quickly. Yet, like I said, the integration phase is very difficult to predict. But once it got into the next phase, which would be where it was in production qualification, we think that takes 9 to 12 months, and then they could get into production from there.

So with this JDA customer having MST installed, how many cycles can they do a year? I mean, can they do 3 or 4 or even more non-overlapping cycles? Or is it not that optimistic?

They can do cycles very quickly. It's hard to say, Richard, because as you know, like in older process nodes, it might take just a couple of months to run through a full cycle, and the newest process nodes, that can take a very long time. And so we're not exactly sure where they will be using this and hopefully, they'll be using it in multiple different areas. But just to give you an idea about how much time they would save by sending us the wafer typically it takes about 2 months to take the wafers out of your fab, back them up, send them to us. We do all of our testing and make sure everything's nice and clean. We do the MST depositions, package it all, send it back to them. They have to do a whole bunch of testing to make sure everything is clean and not contaminated, and then find time to slot it into their production line. That whole process I just talked about can take 2 months, sometimes even 3 months. But since MST is installed in their factory, it can literally take half an hour or less for them to deposit MST and continue moving it down the line. So it can save a lot of time.

Okay. Fair enough then. Scott, I may have missed this, but I know on the last call, you talked about kind of expanding JDA pipeline. Can you characterize the pace in the last quarter?

Yes, Richard, you're right. I didn't talk about that on the call so you didn't miss it. I'll continue to say the same thing. We still have a number of JDA customers that we are continuing to talk to, and we are hopeful that those will turn into actual JDA agreements sometime over the course of this year.

Okay. Let's jump over to the foundry license you announced last week. I know you haven't given much detail in announcing it's a foundry. I think you said in your prepared remarks, it is a customer that has been in Phase 3 for a while. Did I catch that correctly?

That's correct, yes.

Okay. Can you characterize how long you've been engaged with them in any way to help us think about this?

Yes. I would say we've been engaged with them for a few years now.

For a few years.

And we've done some experiments, and now, so kind of more of a proof-of-concept experiments. And so now as I talked about in the script, they did a bunch of work on our MSTcad tools focused on one particular applications area they get very excited about. We are talking to them about multiple different applications areas there.

Okay. And this is your first foundry license that I recall. Please correct me if I'm wrong there, but maybe you can talk about the broader foundry environment and receptivity that you're hearing, especially as you've announced this foundry customer.

Yes, this is the first time we've confirmed a license with a foundry. Foundries are quite intriguing. If our technology is embraced by a foundry and becomes part of a standard process, it allows fabless design companies globally to create chips compatible with our process, which we find very exciting. Historically, we’ve noticed that some foundries are hesitant to modify their processes unless there is demand from an end customer. Securing a foundry's adoption of our technology presents a great opportunity, but it can be challenging to achieve this without a lead customer advocating for our technology. This is one reason why our recent announcement regarding MST SP and its rollout is so thrilling, as it enables fabless designers to understand the advantages of MST SP and encourages them to approach their foundry partners, urging them to adopt Atomera's MST technology to reap these benefits.

Okay. Are you trying to draw a line between MST SP and this foundry license, Scott? Or are you just noting that general opportunity?

No, I'm not making any connection whatsoever between the two.

Okay. Okay. Fair enough. My last question, I'll jump out of line here, Scott, and I may not have caught your comments directly here, but I think you said you're pleased to report that you've done a large number of R&D runs with a lot of companies in Phase 3. I think it's towards the end of your prepared remarks. Can you help us understand kind of the scale of improvement either in terms of number of wafer runs or customers doing this? Or just more detail behind that comment?

In the past 1.5 years, we've faced capacity constraints, but we've been collaborating with customers on MSTcad, planning, and other projects. While many had innovative ideas, they couldn't start wafer production due to these limitations and had to rely on engineering analysis instead. Recently, over the last 3 or 4 months, we've noticed a shift with several customers indicating that they can now run wafers and are eager to do so. Our Epi tools, both new and existing, are being effectively utilized, particularly for customer runs on R&D lines. This trend signals a change in the industry, as we're seeing more opportunities for R&D wafer runs and an increased focus on product innovation rather than merely addressing capacity issues.

Thank you, Richard. I will now gather some questions from the audience. The first question is about an update on the previous licensees. We mentioned in the press release that we have announced five licenses. Can you provide an update on some of the earlier ones and their progress?

Yes, we cannot provide detailed results on our licensees, but I can confirm that we are actively collaborating with all our existing licensees on planning and wafer production, with one exception. As I mentioned before, our Japanese licensee AKM experienced a factory fire over a year ago, and they are still in the recovery process, which has paused their R&D efforts for now. However, we have an agreement that once they recover, they will resume those efforts with us, and we will continue moving forward. Aside from that, we are maintaining strong progress with all our existing licensees and are continually working toward production.

All right. And another question here is, do you see traction more coming from legacy semi? Or are you seeing traction from fabless semiconductor companies as well?

We are experiencing a mix in our sales efforts, primarily focused on IDMs and foundries. Most of our work remains concentrated in that area, but we are gradually increasing our engagement with fabless semiconductor companies, which is a direction we plan to expand. It's important to note that there are likely 50 or fewer notable IDMs and foundries, making it feasible for our direct sales team to connect with them. In contrast, the number of fabless companies ranges in the hundreds, around 300 to 400, which presents more challenges. This is why we are adopting broader outreach strategies, such as public relations and publications, alongside our direct sales efforts.

All right. Frank, could you provide us with more information regarding the shelf registration on the SEC form that was filed? Are there any plans related to it?

Yes. I'm happy to do that. So we had a shelf registration statement that we filed in 2019. And under the SEC rules, the S-3 registration statement has a life of three years. So I consider it just good practice to always have an available shelf registration statement to take advantage of opportunities if we see them. So it was just a question of renewing that facility right now.

Okay. And a high-level question here. At what point is a JDA classified as Phase 5? And what does that look like and mean?

Yes. Regardless of whether it's a JDA or a licensee, Phase 5 is when a customer begins process qualification. This is a clearly defined term in the semiconductor industry. When introducing a new manufacturing process intended for production, it must undergo a series of tests to evaluate various potential production variations that may arise with the tools used. This process typically takes between 9 to 12 months and can be quite costly. When a semiconductor company enters process qualification, it usually indicates their intent to proceed to production. One of the crucial steps for our customers before moving to production is entering process qualification, whether they are a straight licensee or a JDA partner. As they enter process qualification and prepare to market the product, we need to finalize the negotiation of our distribution license with them. This license would grant them the rights to sell products utilizing our technology and outline the royalty rates we will receive from them. Successfully closing one of these distribution licenses would be significant news, and we will inform you as soon as possible.

Okay. Great. And then a question about the new licensee since it's a foundry. Did one of their customers lead you to the foundry, or did you approach the foundry directly? Also, do you need to establish separate license agreements with the end customer through the foundry?

Okay. So first, on this particular foundry, we engaged with directly a few years ago and have been exploring a number of different areas with them. We have also spoken with some of their customers. If the question is who was responsible for initially getting us in there, I would say it was direct to the foundry. What is the last part of the question, Mike?

It was whether there's a separate license agreement with the end customer?

That's a great question. There's actually some technical structures where there would be a license with both the fabless customer and with the foundry that they use. But in most cases, the vast majority of fabless semiconductor makers use a process that's owned by the foundry. And in that case, the foundry would have a license with us to manufacture and sell their own foundry process. In the case where a fabless customer might have a proprietary process, their own proprietary process, running at a foundry, then they would be a licensee with us and so with the foundry.

Okay. And our last question talks about MSTcad and if you've seen an uptick of activity with MSTcad and what metrics do you use to determine whether the MSTcad is impactful and hit the penetration into the market.

Yes. MSTcad, we definitely have seen a lot more customers come in. MSTcad is definitely not like a generally off-the-shelf product. It's extremely technical, and we made it and continue to make it easier to use, but it does require a lot of handholding by our team to help them get the technology properly integrated into their TCAD stack and to interpret the results. And we're constantly improving that and making new releases that improve usability. But I can tell you that our engineering team is supporting more and more customers, and I don't think at this time, it would be possible for customers to be playing with MSTcad without working with us. So yes, we have pretty good metrics on how many customers are using it and what they're using it for, and we're very pleased with its uptick.

Great. And Scott, feel free to proceed with any closing comments you may have.

All right. Mike, thanks, and thank you all for attending today's presentation. It's really been good to be able to share with you some of the information on our recent efforts and to give you a feeling of the enthusiasm we are experiencing inside Atomera. Please continue to look for our news, articles, and blog posts to keep you up-to-date on our progress. You can sign up for them along with investor alerts on our website atomera.com. We look forward to seeing some of you during our scheduled marketing activities. Should you have additional questions, please contact Mike Bishop, who will be happy to follow up. Thank you again for your support, and we look forward to our next update call.

Thanks, Scott. And at this time, this concludes the webinar for today. Have a good evening.

Thank you.

Thank you.