Atomera Inc 10-Q

Item 1. Financial Statements Atomera Incorporated Condensed Balance Sheets (in thousands, except per share data) September 30, December 31, 2020 2019 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 25,297 $ 14,871 Prepaid expenses and other current assets 181 132 Total current assets 25,478 15,003 Property and equipment, net 87 63 Operating lease right-of-use asset 735 161 Long-term prepaid rent 450 – Security deposit 13 13 Total assets $ 26,763 $ 15,240 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 563 $ 315 Accrued expenses 234 145 Accrued payroll related expenses 511 819 Current operating lease liability 92 152 Deferred revenue – 37 Total current liabilities 1,400 1,468 Long term operating lease liability 631 – Total liabilities 2,031 1,468 Commitments and contingencies (see Note 9) Stockholders’ equity: Preferred stock, $ 0.001 par value, authorized 2,500 shares; none issued and outstanding at September 30, 2020 and December 31, 2019 – – Common stock, $ 0.001 par value, authorized 47,500 shares; 20,971 and 17,117 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 21 17 Additional paid-in capital 170,975 149,017 Accumulated deficit ( 146,264 ) ( 135,262 ) Total stockholders’ equity 24,732 13,772 Total liabilities and stockholders’ equity $ 26,763 $ 15,240 The accompanying notes are an integral part of these condensed financial statements. 3 Atomera Incorporated Condensed Statements of Operations (Unaudited) (in thousands, except per share data) Three Months ended September 30, Nine Months ended September 30, 2020 2019 2020 2019 Revenue $ – $ 254 $ 62 $ 395 Cost of revenue – ( 204 ) ( 13 ) ( 224 ) Gross margin – 50 49 171 Operating expenses Research and development 2,049 1,746 6,197 5,930 General and administrative 1,322 1,239 4,247 4,048 Selling and marketing 208 240 648 712 Total operating expenses 3,579 3,225 11,092 10,690 Loss from operations ( 3,579 ) ( 3,175 ) ( 11,043 ) ( 10,519 ) Other income Interest income 1 89 41 265 Total other income 1 89 41 265 Net loss $ ( 3,578 ) $ ( 3,086 ) $ ( 11,002 ) $ ( 10,254 ) Net loss per common share, basic and diluted $ ( 0.19 ) $ ( 0.19 ) $ ( 0.61 ) $ ( 0.66 ) Weighted average number of common shares outstanding, basic and diluted 19,337 16,567 18,028 15,597 The accompanying notes are an integral part of these condensed financial statements. 4 Atomera Incorporated Statements of Stockholders’ Equity For the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) (in thousands) Common Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balance January 1, 2020 17,117 $ 17 $ 149,017 ( 135,262 ) $ 13,772 Stock-based compensation 420 1 628 – 629 Warrant exercise 189 – 164 – 164 Warrant modification – – 139 – 139 Net loss – – – ( 3,645 ) ( 3,645 ) Balance March 31, 2020 17,726 18 149,948 ( 138,907 ) 11,059 Underwritten public offering of common stock, net of commissions and expenses 2,024 2 9,393 – 9,395 Stock option exercise 33 – 137 – 137 Stock-based compensation 43 – 766 – 766 Net loss – – – ( 3,779 ) ( 3,779 ) Balance June 30, 2020 19,826 $ 20 $ 160,244 ( 142,686 ) $ 17,578 At-the-market sale of stock, net of commissions and expenses 846 1 8,519 – 8,520 Stock option exercise 103 – 645 – 645 Stock-based compensation – – 829 – 829 Warrant Exercise 196 – 738 – 738 Net loss – – – ( 3,578 ) ( 3,578 ) Balance September 30, 2020 20,971 $ 21 $ 170,975 ( 146,264 ) $ 24,732 Common Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balance January 1, 2019 15,034 $ 15 $ 139,693 $ ( 121,962 ) $ 17,746 Stock-based compensation 298 – 694 – 694 Net loss – – – ( 3,534 ) ( 3,534 ) Balance March 31, 2019 15,332 15 140,387 ( 125,496 ) 14,906 Registered direct offering of common stock, net of commissions and expenses 1,675 2 6,395 – 6,397 Stock-based compensation 67 – 788 – 788 Net loss – – – ( 3,634 ) ( 3,634 ) Balance June 30, 2019 17,074 $ 17 $ 147,570 $ ( 129,130 ) $ 18,457 Stock-based compensation – – 798 – 798 Net loss – – – ( 3,086 ) ( 3,086 ) Balance September 30, 2019 17,074 $ 17 $ 148,368 $ ( 132,216 ) $ 16,169 The accompanying notes are an integral part of these condensed financial statements. 5 Atomera Incorporated Condensed Statements of Cash Flows (Unaudited) (in thousands) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ ( 11,002 ) $ ( 10,254 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 32 33 Right of use asset amortization 107 99 Stock-based compensation 2,224 2,280 Warrant modification expense 139 – Changes in operating assets and liabilities: Accounts receivable – ( 2 ) Prepaid expenses and other current assets ( 49 ) ( 22 ) Long-term prepaid rent ( 450 ) – Accounts payable 248 ( 143 ) Accrued expenses 89 46 Accrued payroll expenses ( 308 ) ( 362 ) Lease liability ( 110 ) ( 99 ) Deferred revenue ( 37 ) ( 55 ) Net cash used in operating activities ( 9,117 ) ( 8,479 ) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment ( 56 ) ( 51 ) Net cash used in investing activities ( 56 ) ( 51 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from underwritten public offering, net of commissions and expenses 9,395 – Proceeds from at-the-market sale of stock, net of commissions and expenses 8,520 – Proceeds from registered direct offering of common stock, net of commissions and expenses – 6,397 Proceeds from exercise of warrants 902 – Proceeds from exercise of stock options 782 – Net cash provided by financing activities 19,599 6,397 Net increase (decrease) in cash and cash equivalents 10,426 ( 2,133 ) Cash and cash equivalents at beginning of period 14,871 18,933 Cash and cash equivalents at end of period $ 25,297 $ 16,800 Supplemental information: Cash paid for interest $ – $ – Cash paid for taxes $ – $ – The accompanying notes are an integral part of these condensed financial statements. 6 ATOMERA INCORPORATED NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS For the Three and Nine Months Ended September 30, 2020 1. NATURE OF OPERATIONS Atomera Incorporated (“Atomera” or the “Company”) was incorporated in the state of Delaware in March 2007 under the name MEARS Technologies, Inc. and is engaged in the development, commercialization and licensing of proprietary processes and technologies for the semiconductor industry. On January 12, 2016, the Company changed its name to Atomera Incorporated. The Company is in the development stage, having only recently begun limited revenue-generating activities, and is devoting substantially all of its efforts toward technology research and development and to commercially licensing its technology to designers and manufacturers of integrated circuits. The Company has primarily financed operations through private placements of equity and debt securities, the Company’s Initial Public Offering (the “IPO”) which was consummated on August 10, 2016, and subsequent public offerings of its common stock. On May 15, 2020, the Company closed an underwritten public offering of 2,024,000 shares of common stock at a public offering price of $ 5.00 per share, resulting in approximately 9400 $9.4 million of net proceeds after deducting underwriting commission and other offering expenses. On September 2, 2020, Atomera entered into an Equity Distribution Agreement with Craig-Hallum Capital Group LLC, as agent, under which the Company may offer and sell, from time to time at its sole discretion, shares of its $ 0.001 par value common stock, in “at the market” offerings to or through the agent as its sales agent, having an aggregate offering price of up to $ 25,000,000 . 2. LIQUIDITY AND MANAGEMENT PLANS At September 30, 2020, the Company had cash and cash equivalents of approximately $ 25.3 million 25,297 and working capital of approximately $ 24.1 million. The Company has generated only limited revenue since inception and has incurred recurring operating losses. Based on the funds it has available as of the date of the filing of this report, the Company believes that it has sufficient capital to fund its current business plans and obligations over at least 12 months from the date that these financial statements have been issued. However, the semiconductor industry is generally slow to adopt new manufacturing process technologies and conducts long testing and qualification processes which have limited the Company’s ability to control, and there can be no assurances of the timing of receipt of meaningful amounts of revenue. In addition, the COVID-19 pandemic has impacted some of the Company’s customer contract negotiations and delayed some engineering work by its customers. Accordingly, the Company may require additional capital, the receipt of which cannot be assured. In the event the Company requires additional capital, there can be no guarantee that funds will be available on commercially reasonable terms, if at all. The Company’s future capital requirements and the adequacy of its available funds will depend on many factors, including the Company’s ability to successfully commercialize its technology in the near term, competing technological and market developments, and the need to enter into collaborations with other companies or acquire technologies to enhance or complement its current offerings. If the Company is unable to secure additional capital, it may be required to curtail its research and development initiatives, change its business strategy and take additional measures to reduce costs in order to conserve its cash. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020 except those noted below under the caption “Adoption of recent accounting standards”. 7 Basis of presentation of unaudited condensed financial information The unaudited condensed financial statements of the Company for the three and nine months ended September 30, 2020 and 2019 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the Company’s financial position and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, 2019 was derived from the audited financial statements included in the Company's financial statements as of and for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2020. These financial statements should be read in conjunction with that report. Adoption of recent accounting standards In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. The new guidance represents significant changes to accounting for credit losses: (i) full lifetime expected credit losses will be recognized upon initial recognition of an asset in scope; (ii) the current incurred loss impairment model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without recognition threshold; and (iii) the estimate of expected credit losses will be based upon historical information, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 introduces two distinctive credit loss impairment models: (i) current expected credit losses (“CECL”) impairment model (Subtopic 326-20) applicable to financial assets measured at amortized cost; and (ii) available-for-sale debt securities impairment model (Subtopic 326-30). ASU No. 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this standard on January 1, 2020 and it did not have a material impact on its financial position, results of operations or financial statement disclosure. Recent accounting standards In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. This guidance is effective as of January 1, 2022 (Early adoption is permitted effective January 1, 2021). The Company is currently evaluating the effect the updated standard will have on its financial position, results of operations or financial statement disclosure . 4. REVENUE The Company recognizes revenue when it satisfies a performance obligation by transferring the product or service to the customer, either at a point in time or over time. The Company usually recognizes revenue from integration service agreements at a point in time and integration license agreements over a period of time. Disaggregation of revenue: The following table provides information about disaggregated revenue by primary geographical markets and timing of revenue recognition for the three and nine month periods ended September 30, 2020 and 2019 (in thousands): Information about disaggregated revenue and timing of revenue Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Primary geographic markets North America $ – $ 50 $ 62 $ 50 Europe – 104 – 187 Asia Pacific – 100 – 158 Total $ – $ 254 $ 62 $ 395 Timing of revenue recognition Products and services transferred at a point in time $ – $ 222 $ 62 $ 240 Products and services transferred over time – 32 – 155 Total $ – $ 254 $ 62 $ 395 8 Unbilled contracts receivable and deferred revenue : Timing of revenue recognition may differ from the timing of invoicing customers. Accounts receivable includes amounts billed and currently due from customers. Unbilled contracts receivable represents unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date exceeds the amount billed, and the right to receive payment is subject to the underlying contractual terms. Unbilled contracts receivable amounts may not exceed their net realizable value and are classified as long-term assets if the payments are expected to be received more than one year from the reporting date. The Company records deferred revenue when revenue will be recognized after invoicing. During the nine months ended September 30, 2020, the Company recognized approximately $ 37,000 of revenue that was included in deferred revenue as of December 31, 2019. 5. BASIC AND DILUTED LOSS PER SHARE Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding and the dilutive common stock equivalent shares outstanding during the period. The Company’s potentially dilutive common stock equivalent shares, which include incremental common shares issuable upon (i) the exercise of outstanding stock options and warrants and (ii) vesting of restricted stock units and restricted stock awards, are only included in the calculation of diluted net loss per share when their effect is dilutive. Since the Company has had net losses for all periods presented, all potentially dilutive securities are anti-dilutive. Accordingly, basic and diluted net loss per share are equal. The following potential common stock equivalents were not included in the calculation of diluted net loss per common share because the inclusion thereof would be anti-dilutive (in thousands): Schedule of anti dilutive shares Three and Nine Months Ended September 30, 2020 2019 Stock Options 3,463 2,935 Unvested restricted stock 716 480 Warrants 369 765 Total 4,548 4,180 6. LEASES The Company leases corporate office space in Los Gatos, California. In August 2020, the Company and its landlord amended the lease of this office. This amendment extends the expiration date of the lease from January 2021 to January 2026 and increases the space from 3,396 square feet to 4,101 square feet. Under Accounting Standard Codification (“ASC”) 842, the lease amendment was treated as a separate lease for the new space and a modification of the lease for the original space. An additional right-of-use (“ROU”) asset and lease liability of approximately $ 681,000 were recorded during the three and nine months ended September 30, 2020. The lease liability is based on the present value of the minimum lease payments, discounted using the Company’s estimated incremental borrowing rate of 5.5 % . The lease contains escalating payments on the anniversary of the original commencement which are included in the measurement of the initial lease liability. Additional payments based on a change in the Company’s share of the operating expenses, including property taxes and insurance, are recorded as a period expense when incurred. Lease expense for operating leases consists of the lease payments recognized on a straight-line basis over the lease term. When the additional space is available for use, the Company expects to record an additional ROU asset and corresponding liability of approximately $ 144,000 . This is expected in early 2021. 9 The components of operating lease costs were as follows (in thousands): Components of lease costs Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Fixed lease costs $ 30 $ 27 $ 83 $ 81 Variable lease costs 9 14 36 40 Short term lease costs 11 7 28 23 Total operating lease costs $ 50 $ 48 $ 147 $ 144 Future minimum payments under non-cancellable leases as of September 30, 2020 were as follows (in thousands): Schedule of future minimum lease payments For the Year Ended December 31, Amount Remaining 2020 $ 27 2021 108 2022 166 2023 170 2024 & thereafter 371 Total future minimum lease payments 842 Less imputed interest ( 119 ) Total lease liability $ 723 The following table provides supplemental information and non-cash activity related to the Company’s operating leases (in thousands): Supplemental non-cash activity related to operating leases Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Operating cash flow information: Cash paid for amounts included in the measurement of lease liabilities $ 41 $ 40 $ 123 $ 120 Non-cash activity: Right-of-use assets obtained in exchange for the lease obligations $ 681 $ – $ 681 $ 295 In October 2019, the Company entered into an agreement to lease a tool for use in the development of the Company’s technology. The lease is for five years at $150,000 per month. The lease commencement date is anticipated to be in November 2020, at which time the Company will account for the lease under ASC 842. A prepayment of $ 450,000 was made in the nine months ended September 30, 2020, this payment represents the final three payments under the lease and is recorded as a long-term prepaid until the lease commencement, at which time it will be record in accordance with ASC 842. 10 7. WARRANTS A summary of warrant activity for the nine months ended September 30, 2020 is as follows (in thousands except per share amounts and contractual term): Schedule of warrant activity Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (In Years) Outstanding at January 1, 2020 765 $ 5.75 Exercised ( 386 ) $ 2.34 Expired ( 10 ) $ 0.15 Outstanding at September 30, 2020 369 $ 9.46 0.8 The warrants outstanding at September 30, 2020 had an intrinsic value of approximately $ 396,000 based on a per-share stock price of $10.45 as of September 30, 2020. On March 17, 2020, 196,602 warrants with an exercise price of $3.75 were set to expire. Prior to the expiration, the Company entered into an agreement with the warrant holders, whereby it modified the terms of the warrants to extend the expiration date until September 17, 2020 in exchange for the removal of a cashless exercise provision. No other terms were modified. Due to this modification, the Company incurred a modification expense of approximately $ 139,000 that is included in general and administrative expenses on the Condensed Statement of Operations for the nine months ended September 30, 2020. All of the modified warrants were exercised on August 6, 2020. 8. STOCK BASED COMPENSATION In May 2017, the Company’s shareholders approved its 2017 Stock Incentive Plan (“2017 Plan”) after its 2007 Stock Incentive Plan (“2007 Plan”) had expired in March 2017. The 2017 Plan provides for the grant of non-qualified stock options and incentive stock options to purchase shares of the Company’s common stock and for the grant of restricted and unrestricted shares. The 2017 Plan provides for the issuance of 3,750,000 shares of common stock. All of the Company’s employees and any subsidiary employees (including officers and directors who are also employees), as well as all of the Company’s nonemployee directors and other consultants, advisors and other persons who provide services to the Company are eligible to receive incentive awards under the 2017 Plan. Generally, stock options and restricted stock issued under the 2017 Plan vest over a period of one to four years from the date of grant. The following table summarizes the stock-based compensation expense recorded in the Company’s results of operations during the three and nine months ended September 30, 2020 and 2019 for stock options and restricted stock granted under the 2017 Plan and the 2007 Plan (in thousands): Schedule of stock-based compensation expense Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Research and development $ 319 $ 223 $ 843 $ 622 General and administrative 470 541 1,269 1,557 Selling and Marketing 40 34 112 101 $ 829 $ 798 $ 2,224 $ 2,280 11 As September 30, 2020, there was approximately $ 5.8 million of total unrecognized compensation expense related to unvested share-based compensation arrangements that are expected to vest. This cost is expected to be recognized over a weighted-average period of 2.7 years. The weighted average grant date fair value per share of the options granted under the Company’s 2017 Plan was $ 7.64 and $ 2.80 for the three and nine months ended September 30, 2020, respectively. The weighted average grant date fair value per share of the options granted under the Company’s 2017 Plan was $ 2.50 for the nine months ended September 30, 2019. The following table summarizes stock option activity during the nine months ended September 30, 2020 (in thousands except exercise prices and contractual terms): Schedule of stock option activity Number of Shares Weighted- Average Exercise Prices Weighted- Average Remaining Contractual Term (In Years) Intrinsic Value Outstanding at January 1, 2020 2,935 $ 6.36 Granted 664 $ 4.20 Exercised ( 136 ) $ 5.76 Outstanding at September 30, 2020 3,463 $ 5.97 6.77 $ 15,677 Exercisable at September 30, 2020 2,404 $ 6.62 5.92 $ 9,358 During the nine months ended September 30, 2020, the Company granted options under the 2017 Plan to purchase approximately 664,000 shares of its common stock to its employees. The fair value of these options was approximately $ 1.9 million at the time of grant. The Company issues restricted stock to employees, directors and consultants and estimates the fair value based on the closing price on the day of grant. The following table summarizes all restricted stock activity during the nine months ended September 30, 2020 (in thousands except per share data): Schedule of restricted stock option activity Number of Shares Weighted- Average Grant Date Fair Value Outstanding at January 1, 2020 486 $ 4.50 Granted 463 $ 4.43 Vested ( 233 ) $ 4.57 Outstanding non-vested shares at September 30, 2020 716 $ 4.43 During the nine months ended September 30, 2020, the Company granted approximately 463,000 restricted stock awards under the 2017 Plan to its employees and directors. The fair value of these awards was approximately $ 2.1 million at the time of grant. 12 9. COMMITMENTS AND CONTINGENCIES Litigation, Claims and Assessments The Company may be subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The Company is not party to any material litigation as of September 30, 2020, or through the date these financial statements have been issued. 10. SUBSEQUENT EVENTS Management has evaluated subsequent events and transactions through the date these financial statements were issued. Between October 1, 2020 and the date of filing this report, the Company issued and sold 484,148 shares of its common stock through the At-The-Market program initiated in September 2020. Net proceeds from the sale of these shares after sales commissions and expenses was approximately $5.0 million. 13