Atomera Incorporated

Hello, everyone, and welcome to Adam Ayer's fourth quarter fiscal year 2022 update call. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available on Adam Ayer's IR 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 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 today, February 15, 2023. Except as otherwise required by federal securities laws, Ed Amer disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regard 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'd like to turn the call over to our President and CEO, Scott Bebo. Go ahead, Scott.

Thanks, Mike. Good afternoon and welcome to Atomera's fourth quarter 2022 update call. I'd like to bring you all up to date on our progress in the last three months and summarize our accomplishments for 2022, which I consider to be a very strong year for Atomera. But first, let me give some context to the events happening in our industry. More so than in most areas, semiconductors have gone through a quite predictable business cycle ever since manufacturing started in the early 1960s, with consistent sequences of very sharp growth, followed by an equally sharp decline happening roughly every four or five years. The last few years have been very high growth ones, with the associated capacity crunches and ASP inflation that you would expect in that environment. Now, we are experiencing the downside with leading forecasters predicting greater than a 20% contraction in the industry for 2023. Semiconductor veterans understand this cycle and know how to react to it. So what we are starting to see is a reduction in last year's aggressive CapEx forecasts and foundry prices moderating along with some announcements of layoffs and budget restrictions. But what is also in the standard playbook for this part of the cycle is to move to invest counter cyclically to get first mover advantage when the inevitable rebound happens. In other words, to double down on R&D and invent your way out of the problem. This part of the semiconductor economic cycle is where Atomera thrives. Due to fab over utilization, our customers have postponed their normal development efforts for the last few years. So there's now pent up demand for improvements that must be executed, particularly in the application areas which experienced the greatest constraints. And that is exactly where Atomera can provide readily available solutions that are otherwise difficult for our customers to achieve. Our customers have the fab capacity to run wafers and we have the technology to help them invent their way to long-term competitive advantage. Our business activity has absolutely accelerated to reflect the growth and new opportunities you would expect in such an environment. New engagements do take time to work through the pipeline. So this chart on slide four unfortunately does not do a great job showing our progress. In searching for a metric that can illustrate our activity level better, I found that travel to customers for new projects is up between 450 to 500% over the last three months versus the same period last year. This rate of close customer engagement is not letting up, and I am confident it will result in more licensing opportunities over the next few quarters. As a first indicator, one of our customers in the pipeline who ran more tests in phase two than is typical has now very enthusiastically moved on to phase three based on the test results. Since this is another large customer, we expect it will lead to good things. We continue to work very closely with our two JDA customers and collaborated with them to achieve fresh results in Q4, which we believe will start us on a path towards production with one or more business units. Likewise, we continue to work closely with our licensees and are optimistic that the work we're doing together will result in further licensing stages and a near-term path to production. Progress through our pipeline, especially over the last couple of years, has been frustratingly slow. But I will reiterate, it is only a matter of time before improvements come to market, and our degree of confidence has increased over the past quarter. Cycles of learning are starting to speed up again now that fabs have the capacity to run wafers on shorter lead times. We do expect to see a growing customer pipeline and to announce additional licensees in the months ahead. During the last quarter, we have seen unprecedented interest and activity in the leading digital nodes where our technology provides a number of benefits for 3D technologies, as discussed on our last call and shown on this slide. We put out preliminary information on this topic in August, gave an important paper at an IEEE conference in November, and had many discussions with potential customers and ecosystem partners at the IEDM show in December. Finally, in January, we put together all of our ideas on the topic and released a comprehensive white paper called MSD Benefits for Gate All Around. A document that is media enough for a semiconductor device engineer, but is also comprehensible to a technology savvy investor. I really encourage you to look it over. For customers under NDA, we can go into much greater depth on both the physics and the measured silicon results that back up our findings. Development of these next generation transistors is incredibly costly and difficult. It is widely held that an industry-wide cooperative approach is the only way forward. In other words, it will take an ecosystem of innovators composed of more than just the leading semiconductor players to bring the newest nodes to market. Advanced semiconductor equipment, materials, metrology, and development partners are all required. The US government has invested in the ecosystem through the CHIPS Act and creation of the National Semiconductor Technology Center, which will serve as the focal point for research and engineering here in the United States. This past quarter, Atomera announced a collaboration with Arizona State University, which we believe will become a regional hub of the DoD Microelectronics Commons lab to fab efforts due to its advanced macro technology works facility, which is where Atomera's state of the art epideposition tool currently resides. We likewise intend to become active in other US regional initiatives and with our university partners in areas related to CHIPS Act funding. And these are not just domestic efforts. We're also in discussions to engage with ecosystem partners overseas. Overall, we're very excited about the prospects for Atomera in the most advanced semiconductor architectures. It's a perfect showcase for our technology. There are plenty of R&D dollars being devoted to it, and it will establish Atomera's MST technology on the bleeding edge of transistor development. In 2022, we've made great advances on both our technologies focused on the mature process nodes. In particular, we're very excited by the benefits MSD can bring to RFSOI devices, which are critical to 5G cellular phones and beyond. Our simulations and semiconductor test devices show great promise, although results have been taking longer than was expected. But, We have learned things in our customers' real-world test environments that will make MST even more successful in the upcoming testing sessions. We are confident these new techniques will be considered a critical enabling step in development of optimized RFSOI devices, leading to licenses and royalty revenue from all the players in the industry. We'd continue to get traction with our MST SP product offerings due to the strong benefits we bring to 5-volt transistors. Customers also want to use MST for higher voltage transistors used in a wide set of applications requiring greater power. Over a year ago, Atomera started experiments to enhance these very hard to design devices. Although we have not rolled out the technology yet, our early test data shows very encouraging results that may open up a larger slice of the power market for us and one where we know there's widespread customer interest. We call this new technology MST-SPX and I want to tell you more about it in the near future. 2022 was an extremely productive year for Atomera. We announced new license and joint development agreements. We made very strong progress in each of our product focus areas to the point where we are involved in major conversations about how to enable the next generation of semiconductor transistor. We've deepened our relationships with many critical players and positioned ourselves to take advantage of this innovation cycle within the industry. Another thing we've been quietly doing has been strengthening our patent strategy. As you can see from this chart, we are now at 339 patents granted and pending, which is triple the patents we had at our IPO. Our efforts reflect the fact that Atomera is not just a materials technology inventor. We are also an expert in using this valuable material to make transistors work better in many applications. And that is where our recent new patents have been focused. So as some of our earliest fundamental patents start to sunset, we have built a portfolio of new patents that cover the device designs that can only be enabled by MST and that are in growing use today. Nobody understands better than Atomera how MSD can make products better. So we continue to create a portfolio of these competitive ideas well into the future. Not only does it strengthen our licensing potential, it also helps customers to understand the potential of MSD. I know it can be frustrating for investors to gauge our progress, but big customer development activities often don't happen on a predictable schedule even when you've proven your technology is a winner. But our customers are seeing the advantages that they get from using MST, and they will eventually get their programs on a path to production. I am confident we'll be able to make exciting customer announcements like that during the course of this year. In the meantime, morale inside Atomera is running very high. We are so busy with customer projects and new developments, we're straining to keep up. There is no doubt that at this pace, we will need to add resources to handle all of our new opportunities. We continue to believe strongly in a future where licensing activity, followed by commercialization, will make Atomera a recognized innovation leader in the semiconductor industry. Now, let's have Frank 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 gap net loss for the year end of December 31, 2022 was $17.4 million, or 75 cents per share, compared to a net loss of $15.7 million, or 70 cents per share in 2021. Revenue in 2022 was $382,000 and consisted of the success fee earned on completion of the technical objectives in the JDA with our first JDA customer, an integration license fee from our foundry licensee, and MST CAD revenue. Gap operating expenses were $17.8 million in 2022, which was an increase of $1.9 million from $15.9 million in 2021. This increase was mainly due to a $1.3 million increase in R&D expenses, primarily reflecting lease payments for our EPI tool, as our payments commenced in August of 2021, and 2022 reflects a full year of the tool lease. Sales and marketing expenses increased by approximately $362,000 and general and administrative expenses increased by approximately $277,000. Non-GAAP net loss for 2022 was $14.1 million and reflected $14.4 million of non-GAAP operating expenses. In 2021, our non-GAAP net loss was $12.5 million reflecting $12.9 million of non-GAAP operating expenses. The differences between GAAP and non-GAAP operating expense in both years, and accordingly between GAAP and non-GAAP net loss, are almost entirely due to non-cash stock compensation expenses, which were $3.4 million in 2022 and $3 million in 2021. Turning now to our quarterly results, Our Q4 2022 gap net loss was $4.3 million, or 18 cents per share, compared to a net loss of $4.2 million in Q4 2021, which was also 18 cents per share. In Q3 of 2021, our gap net loss was $4.6 million, or 20 cents per share. Our cash balance on December 31, 2022 was $21.2 million, compared to $28.7 million at the end of 2021. Cash at the end of Q3 2022 was $23.3 million. During 2022, we used $12.5 million of cash in operating activities, $2.9 million of which was in Q4. On May 31st, 2022, we established an at-the-market or ATM equity financing facility. From the time we set up the ATM through the end of 2022, we sold a total of 527,093 shares at an average price of $11.68. Most of the cash from financing in 2022 came from ATM sales executed during Q3. During Q4, we sold 109,026 shares at an average price of $9.47. We have not sold any shares under the ATM since November. In fact, we have only used the ATM on four trading days in the past six months, evidence that we are using this tool judiciously. As of December 31, 2022, we had 24 million shares outstanding. As usual, we have a good handle on our spending plans for the year, but it is still difficult to predict the timing of revenue, so we will not give revenue guidance beyond the current quarter, and our Q1 revenue guide is zero. Turning to expenses, our non-GAAP OpEx in 2022 was $14.4 million, and our 2023 guidance is a range of $16.25 to $16.75 million. I want to stop and add some further color to our OpEx plan. Back in 2020, the first year of the pandemic, our non-GAAP OpEx was $11.7 million. This increased to $12.9 million in 2021 as some COVID-related restrictions eased off and we brought our new EpiTool fully online in the second half of the year. Coming into 2022, I had given a range of around $15.5 million of non-GAAP OpEx for the year. but we hired and spent below our plan due to capacity shortages and a tight labor market. Looking forward to 2023, our plan to ramp up spending reflects a positive outlook. We're actively working on programs across the spectrum of power and analog, RFSOI, and advanced logic. And doing this requires more human resources, more wafer processing, and more metrology to support the variety of opportunities we see in this environment. As Scott said in his remarks, we're confident that we will be able to make exciting customer announcements during the course of this year. And we're making the investments needed to support them. 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?