Atomera Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of Atomera Incorporated should be read in conjunction with our unaudited condensed financial statements and the accompanying notes that appear elsewhere in this filing. Statements in this Quarterly Report on Form 10-Q include forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those risk factors set forth under the heading “Risk Factors” within our Prospectus Supplement filed pursuant to Rule 424(b)(5) with the SEC on September 2, 2020 and other documents we subsequently file from time to time with the SEC, such as our Annual Report on Form 10-K filed with the SEC on March 13, 2020, quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. Overview We are engaged in the business of developing, commercializing and licensing proprietary processes and technologies for the $450+ billion semiconductor industry. Our lead technology, named Mears Silicon Technology TM , or MST ® , is a thin film of reengineered silicon, typically 100 to 300 angstroms (or approximately 20 to 60 silicon atomic unit cells) thick. MST can be applied as a transistor channel enhancement to CMOS-type transistors, the most widely used transistor type in the semiconductor industry. MST is our proprietary and patent-protected performance enhancement technology that we believe addresses a number of key engineering challenges facing the semiconductor industry. We believe that by incorporating MST, transistors can be made smaller, with increased speed, reliability and power efficiency. In addition, since MST is an additive and low-cost technology, we believe it can be deployed on an industrial scale, with machines commonly used in semiconductor manufacturing. We believe that MST can be widely incorporated into the most common types of semiconductor products, including analog, logic, optical and memory integrated circuits. We do not intend to design or manufacture integrated circuits directly. Instead, we develop and license technologies and processes that we believe offer the designers and manufacturers of integrated circuits a low-cost solution to the industry’s need for greater performance and lower power consumption. Our customers and partners include: · foundries, which manufacture integrated circuits on behalf of fabless manufacturers; · integrated device manufacturers, or IDMs, which are the fully integrated designers and manufacturers of integrated circuits; · fabless semiconductor manufacturers, which are designers of integrated circuits that outsource the manufacture of their chips to foundries; · original equipment manufacturers, or OEMs, that manufacture the epitaxial, or EPI, machines used to deposit semiconductor layers, such as the MST film, onto the silicon wafer; and · electronic design automation companies, which make tools used throughout the industry to simulate performance of semiconductor products using different materials, design structures and process technologies. 14 Our commercialization strategy is to generate revenue through licensing arrangements whereby foundries, IDMs and fabless semiconductor manufacturers pay us a license fee for their right to use MST technology in the manufacture of silicon wafers as well as a royalty for each silicon wafer or device that incorporates our MST technology. To date we have generated revenue from (i) licensing agreements with two IDMs and one fabless manufacturer and (ii) engineering services provided to foundries, IDMs and fabless companies. We were organized as a Delaware limited liability company under the name Nanovis LLC on November 26, 2001. On March 13, 2007, we converted to a Delaware corporation under the name Mears Technologies, Inc. On January 12, 2016, we changed our name to Atomera Incorporated. On August 10, 2016, we closed our initial public offering of 3,680,000 shares of common stock at a public offering price of $7.50 per share. We received approximately $24.7 million in net proceeds after deducting underwriting discounts and commission and other offering expenses. On October 15, 2018, we closed an underwritten public offering of 2,625,000 shares of common stock at a public offering price of $4.75 per share, resulting in approximately $11.4 million of net proceeds to us after deducting underwriting discounts and commission and other offering expenses. On May 30, 2019, we closed a registered direct offering of 1,675,000 shares of common stock at a price of $4.00 per share, resulting in approximately $6.4 million of net proceeds to us after deducting placement agent fees and other offering expenses. On May 15, 2020, we 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 $9.4 million of net proceeds to us after deducting underwriting commission and other offering expenses. On September 2, 2020, we entered into an Equity Distribution Agreement with Craig-Hallum Capital Group LLC, as agent, under which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $25.0 million in an “at-the-market” or ATM offering, to or through the agent. As of September 30, 2020, 845,730 shares have been sold at an average price of approximately $10.48 million, resulting in approximately $8.5 million of net proceeds to us after deducting commissions and other offering expenses. Between October 1, 2020 and the date of tiling this report, we sold an additional 484,148 shares of our common stock at average price of $10.62 resulting in net proceeds of approximately $5.0 million Results of Operations Revenues . To date, we have only generated limited revenue from customer engagements for integration engineering services and integration license agreements. In the future, we expect to collect increased fees from license agreements and royalties from customer sales of products that incorporate our MST technology, subject to our ability to enter into manufacturing and distribution license agreements with our current and future licensees. Our integration services consist of depositing our MST film on semiconductor wafers, delivering such wafers to customers to finalize building devices, and performing tests for customers evaluating MST. The integration license agreements we have entered into to date grant the licensees the right to build products that integrate our MST technology deposited by us onto their semiconductor wafers, but the agreements do not grant the licensees the rights to manufacture on their site or to sell products incorporating MST. For revenue recognition purposes, we have determined that the grant of rights in integration licenses is not distinct from the delivery of integration services, and therefore revenue from both integration licenses and integration services is recognized as the services are provided to the customer. In general, this is proportionate to the delivery of MST processed wafers to the customer, but if the agreements do not specify a time and quantity of wafer delivery, we will record revenue over the period of time of which we anticipate delivering an estimated quantity of wafers. 15 Revenue for the three months ended September 30, 2020 and 2019 was approximately $0 and $254,000, respectively. Revenue for the nine months ended September 30, 2019 was approximately $62,000 and $395,000, respectively. Revenue in all periods was generated from integration license agreements and integration engineering services. Cost of Revenue. Cost of revenue consists of costs of materials, as well as direct compensation and expenses incurred to provide integration engineering services. Cost of revenue was approximately $0 and $204,000 for the three months ended September 30, 2020 and 2019, respectively. Cost of revenue was approximately $13,000 and $224,000 for the nine months ended September 30, 2020 and 2019, respectively. We anticipate that our cost of revenue will vary substantially depending on the mix of integration license and integration engineering services and the nature of products and/or services delivered in each customer engagement. Operating Expenses. Operating expenses consist of research and development, general and administrative, and selling and marketing expenses. For the three months ended September 30, 2020 and 2019 our operating expenses totaled approximately $3.6 million and $3.2 million, respectively. For the nine months ended September 30, 2020 and 2019 our operating expenses totaled approximately $11.1 million and $10.7 million, respectively. Research and development expense. To date, our operations have focused on the research, development, patent protection, and commercialization of our processes and technologies related to MST. Our research and development costs primarily consist of payroll and benefit costs for our engineering staff and costs of outsourced fabrication and metrology of semiconductor wafers incorporating our MST technology. For the three months ended September 30, 2020 and 2019, we incurred approximately $2.0 million and $1.7 million, respectively, of research and development expense, an increase of approximately $303,000 or 17%. The increase in research and development expense is primarily due to additional headcount and an increase in outsourced research and development costs. For the nine months ended September 30, 2020 and 2019, we incurred approximately $6.2 million and $5.9 million, respectively, of research and development expense, an increase of approximately $267,000 or 5%. The increase in research and development expense is primarily due to additional headcount offset by a decrease in outsourced research and development costs. General and administrative expense. General and administrative expenses consist primarily of payroll and benefit costs for administrative personnel, office-related costs and professional fees. General and administrative costs for the three months ended September 30, 2020 and 2019 were approximately $1.3 million and $1.2 million, respectively, representing an increase of approximately $83,000 or 7%. The increase in general and administrative expenses is primarily the due the increase in legal expenses related to increasing and maintaining our patent portfolio. General and administrative costs for the nine months ended September 30, 2020 and 2019 were approximately $4.2 million and $4.0 million, respectively, representing an increase of approximately $199,000 or 5%. The increase in costs was primarily due to an increase of approximately $384,000 in professional fees primarily for patent expenses, director fees related to the addition of a new independent board member and an approximately $139,000 expense resulting from the modification of expiring warrants (see note 7 to our condensed financial statements included elsewhere in this report). These increases were offset by a decrease in stock-based compensation expense of approximately $288,000. Selling and marketing expense. Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel. Selling and marketing expenses for the three months ended September 30, 2020 and 2019 were approximately $208,000 and $240,000, respectively, representing a decrease of approximately $32,000, or 13%. The decrease in costs is primarily related to a lower bonus accrual. 16 Selling and marketing expenses for the nine months ended September 30, 2020 and 2019 were approximately $648,000 and $712,000, respectively, representing a decrease of approximately $64,000, or 9%. The decrease in costs is primarily related to a reduction of approximately $22,000 in payroll related expenses and a decline of $47,000 in travel expenses. Interest income. Interest income for the three months ended September 30, 2020 and 2019 was approximately $1,000 and $89,000, respectively. Interest income for the nine months ended September 30, 2020 and 2019 was approximately $41,000 and $265,000, respectively. Interest income for each period related to interest earned on our cash and cash equivalents and decreased as our average cash balances declined and interest rates continued to fall during 2020. While we finished the quarter with a higher cash balance, most of the cash was received at the end of the period. Cash Flows from Operating, Investing and Financing Activities Net cash used in operating activities of approximately $9.1 million for the nine months ended September 30, 2020 resulted primarily from our net loss of approximately $11.0 million adjusted by approximately $2.2 million in stock-based compensation expense offset by increase of approximately $499,000 in prepaids and other assets. Net cash used in operating activities of approximately $8.5 million for the nine months ended September 30, 2019 resulted primarily from our net loss of approximately $10.3 million adjusted by approximately $2.3 million for stock-based compensation expense and a decrease in liabilities of approximately $514,000. Net cash used in investing activities of approximately $56,000 for the nine months ended September 30, 2020 and approximately $51,000 for nine months ended September 30, 2019 consisted of the purchase of computers and lab equipment. Net cash provided by financing activities of approximately $19.6 million for the nine months ended September 30, 2020 was primarily related to the net proceeds from our underwritten public offering in May 2020, proceeds from our ATM program in September 2020 and the exercise of approximately 386,000 warrants and approximately 136,000 stock options during this nine-month period. Net cash provided by financing activities of approximately $6.4 million for the nine months ended September 30, 2019 related to the net proceeds from our registered direct offering of common stock in May 2019. Liquidity and Capital Resources As of September 30, 2020, we had cash and cash equivalents of approximately $25.3 million and working capital of approximately $24.1 million. For the nine months ended September 30, 2020, we had a net loss of approximately $11.0 million and used approximately $9.1 million of cash and cash equivalents in operations. Since inception, we have incurred recurring operating losses. As of the date of this report, we believe that our available working capital is sufficient to fund our working capital requirements for at least the next 12 months following the date of the filing of this report. However, the semiconductor industry is generally slow to adopt new manufacturing process technologies and conducts long testing and qualification processes which we have limited ability to control, and there can be no assurance of the timing of our receipt of meaningful amounts of revenue. In addition, the ongoing COVID-19 pandemic has impacted some customer contract negotiations and delayed engineering work by some of our customers. Accordingly, the economic uncertainty caused by the pandemic may negatively impact our ability to generate revenue. 17 Our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability, in the near term, to successfully commercialize our MST technology, competing technological and market developments; and the need to enter into collaborations with other companies or acquire technologies to enhance or complement our current offerings. If we are not able to generate sufficient revenue from license fees and royalties in a timeframe that satisfies our cash needs, we will need to raise more capital. In the event we require additional capital, we will endeavor to acquire additional funds through various financing sources, including follow-on equity offerings, debt financing and joint ventures with industry partners. In addition, we will consider alternatives to our current business plan that may enable to us to achieve revenue-producing operations and meaningful commercial success with a smaller amount of capital. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives, change our business strategy and take additional measures to reduce costs in order to conserve cash. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements or issued guarantees to third parties. Recent Accounting Standards We are required to adopt certain new accounting standards, see note 3 to the condensed financial statements included in Item 1 of this Form 10-Q. Critical Accounting Policies There have been no changes to our critical accounting policies from those included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 13, 2020. Item 3. Quantitative and Qualitative Disclosure about Market Risk. Not applicable.