Atomera Inc 10-K

Item 8. Financial Statements and Supplementary Data Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 25 Balance Sheets at December 31, 2021 and 2020 27 Statements of Operations for the years ended December 31, 2021 and 2020 28 Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020 29 Statements of Cash Flows for the years ended December 31, 2021 and 2020 30 Notes to the Financial Statements 31 24 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Atomera Incorporated Opinion on the Financial Statements We have audited the accompanying balance sheets of Atomera Incorporated (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Description of the Matter As described in Note 7, during the year ended December 31, 2021, the Company recorded a right-of-use (“ROU”) asset of approximately $6.4 million and a corresponding lease liability of approximately $6 million related to the leasing of an equipment tool in accordance with provisions of Accounting Standards Codification 842, Leases (“ASC 842”). In connection with the application of ASC 842, the Company was required to (a) determine the classification of the lease as an operating or finance lease and (b) develop an estimate pertaining to collateralized incremental borrowing rates (“IBR”) in order to determine the present value of the lease payments when the discount rate is not implicit in the lease. The determination of an IBR required management to evaluate its credit rating, adjustments for the impact of collateral, and the overall economic environment. We identified the application of ASC 842 as a critical audit matter because of the (a) overall material amount of the transaction, (b) significant impact of management’s assumptions and estimates in determining the selected IBRs and their related impact on the ROU asset and liability recorded, (c) impact that the initial classification of the lease has on the Company’s current and future results from operations and (d) the associated presentation and disclosure requirements associated with new leases accounted for under ASC 842. 25 How We Addressed the Matter in Our Audit Our audit procedures related to the application of ASC 842 to address this critical audit matter included the following: · We evaluated the classification of the lease in the financial statement and footnotes based on the terms of the lease and guidance in ASC 842. · We assessed the reasonableness of the methodology used by the Company to estimate the IBR based on the definition and guidance in ASC 842. · With the assistance of our internal valuation specialists, we assessed the reasonableness of the inputs used to estimate the IBRs by comparing to Company specific benchmarks, comparable companies and other market information. Such evaluation involved the performing of a sensitivity analysis on the IBR and evaluation of the impact of such analysis on the financial statements and disclosures. · We evaluated the disclosures and financial statement presentation made by the Company to ensure they complied with the guidance in ASC 842. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2015. Los Angeles, CA February 15, 2022 688 26 Atomera Incorporated Balance Sheets (in thousands, except per share data) December 31, 2021 2020 ASSETS Current Assets: Cash and cash equivalents $ 28,699 $ 37,942 Prepaid expenses and other current assets 309 132 Total current assets 29,008 38,074 Property and equipment, net 196 153 Long-term prepaid rent – 450 Long-term prepaid maintenance and supplies 91 – Security deposit 14 13 Operating lease right-of-use-asset 900 705 Financing lease right-of-use-asset 5,851 – Total assets $ 36,060 $ 39,395 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 338 $ 442 Accrued expenses 203 211 Accrued payroll related expenses 601 705 Current operating lease liability 216 90 Current financing lease liability 1,395 – Total current liabilities 2,753 1,448 Long-term operating lease liability 768 602 Long-term financing lease liability 4,158 – Total liabilities 7,679 2,050 Commitments and contingencies (see Note 8) Stockholders’ equity: Preferred stock, $0 .001 par value, authorized 2,500 shares: none issued and outstanding at December 31, 2021 and 2020 – – Common stock, $ 0.001 par value, authorized 47,500 shares; 23,207 shares issued and outstanding at December 31, 2021 and 22,375 issued and outstanding as of December 31, 2020 23 22 Additional paid-in capital 194,212 187,463 Accumulated deficit ( 165,854 ) ( 150,140 ) Total stockholders’ equity 28,381 37,345 Total liabilities and stockholders’ equity $ 36,060 $ 39,395 The accompanying notes are an integral part of these financial statements. 27 Atomera Incorporated Statements of Operations (in thousands, except per share data) Years Ended December 31, 2021 2020 Revenue: $ 400 $ 62 Cost of revenue – ( 13 ) Gross margin 400 49 Operating Expenses: Research and development 8,779 8,424 General and administrative 6,164 5,624 Selling and marketing 986 921 Total operating expenses 15,929 14,969 Loss from operations ( 15,529 ) ( 14,920 ) Other income (expense): Interest income 9 42 Interest expense ( 128 ) – Total other income (expense), net ( 119 ) 42 Net loss before income taxes ( 15,648 ) ( 14,878 ) Provision for income taxes 66 – Net loss $ ( 15,714 ) $ ( 14,878 ) Net loss per common share, basic and diluted $ ( 0.70 ) $ ( 0.79 ) Weighted average number of common shares outstanding, basic and diluted 22,492 18,752 The accompanying notes are an integral part of these financial statements. 28 Atomera Incorporated Statements of Stockholders’ Equity (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 463 1 3,040 – 3,041 Warrant modification – – 141 – 141 Warrant exercises 411 – 994 – 994 Stock option exercises 153 – 889 – 889 Underwritten public offering of common stock, net of commissions 2,024 2 9,393 – 9,395 At-the-market sale of stock, net of commissions and expenses 2,207 2 23,989 – 23,991 Net loss – – – ( 14,878 ) ( 14,878 ) Balance December 31, 2020 22,375 $ 22 $ 187,463 $ ( 150,140 ) $ 37,345 Stock-based compensation 89 – 2,973 – 2,973 Warrant exercises 223 – – – – Stock option exercises 571 1 3,533 – 3,534 Forfeited restricted stock awards ( 65 ) – – – – At-the-market sale of stock, net of commissions and expenses 14 – 243 – 243 Net loss – – – ( 15,714 ) ( 15,714 ) Balance December 31, 2021 23,207 $ 23 $ 194,212 $ ( 165,854 ) $ 28,381 The accompanying notes are an integral part of these financial statements. 29 Atomera Incorporated Statements of Cash Flows (in thousands) Years Ended December 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ ( 15,714 ) $ ( 14,878 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 67 41 Operating lease right of use asset amortization 186 138 Financing lease right of use asset amortization 532 – Stock-based compensation 2,973 3,041 Warrant modification expense – 141 Changes in operating assets and liabilities: Accounts receivable – – Prepaid expenses and other current assets ( 177 ) – Long-term prepaid rent – ( 450 ) Accounts payable ( 104 ) 127 Accrued expenses ( 10 ) 66 Accrued payroll expenses ( 104 ) ( 114 ) Operating lease liability ( 90 ) ( 142 ) Deferred revenue – ( 37 ) Net cash used in operating activities ( 12,441 ) ( 12,067 ) CASH FROM INVESTING ACTIVITIES Acquisition of property and equipment ( 109 ) ( 131 ) Net cash used in investing activities ( 109 ) ( 131 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from at-the-market sale of stock, net of commissions and expenses 243 23,991 Proceeds from underwritten public offering, net of commission and expenses – 9,395 Proceeds from exercise of stock options 3,534 889 Proceeds from exercise of warrants – 994 Payments of principal for financing lease ( 470 ) – Net cash provided by financing activities 3,307 35,269 Net increase/(decrease) in cash and cash equivalents ( 9,243 ) 23,071 Cash and cash equivalents at beginning of year 37,942 14,871 Cash and cash equivalents at end of year $ 28,699 $ 37,942 Supplemental information: Cash paid for interest $ 128 $ – Cash paid for taxes $ 66 $ – The accompanying notes are an integral part of these financial statements. 30 Atomera Incorporated Notes to the Financial Statements 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. Atomera is an early-stage company, 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. 2. LIQUIDITY AND MANAGEMENT PLANS At December 31, 2021, the Company had cash and cash equivalents of approximately $ 28.7 million and working capital of approximately $ 26.3 million. The Company has generated only limited revenues since inception and has incurred recurring operating losses. The Company’s operating plans for the next 12 months include increased research and development headcount and increased spending on outsourced fabrication and testing. 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, as the Company has generated only limited revenue from its principal operations, it is subject to all the risks inherent in the initial organization, financing, expenditures, complications and delays in a new business. 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, 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 and take additional measures to reduce costs in order to conserve its cash. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the financial position, results of operations and cash flows for all periods presented. Fair Value of Financial Instruments Authoritative guidance requires disclosure of the fair value of financial instruments. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable, the carrying amounts of which approximate their estimated fair values primarily due to the short-term nature of the instruments or based on information obtained from market sources and management estimates. The Company measures the fair value of certain of its financial assets and liabilities on a recurring basis. A fair value hierarchy is used to rank the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value which is not equivalent to cost will be classified and disclosed in one of the following three categories: Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities. Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices for similar assets and liabilities, unadjusted quoted prices in the markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 31 Cash and cash equivalents The Company maintains its operating accounts in a single reputable financial institution. The balances are insured by the U.S. Federal Deposit Insurance Corporation (“FDIC”) up to specified limits. The Company’s cash and cash equivalents are maintained in checking accounts and money market funds with maturities of less than three months when purchased, which are readily convertible to known amounts of cash. Concentration of Credit Risk and Major Customers Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents and accounts receivable. One customer represented 100% of revenue during the year ended December 31, 2021 and a separate single customer represented 100% of revenue during the year ended December 31, 2020. No customer represented a balance of accounts receivable at December 31, 2021 or 2020. At times, the amounts on deposit at the financial institution exceed the federally insured limits. Management believes that the financial institutions which hold the Company’s cash is financially sound and, accordingly, minimal credit risk exists. As of December 31, 2021 and 2020, the Company’s cash balances were in excess of insured limits maintained at the financial institution. Accounts Receivable The Company grants credit to its business customers. Collateral is generally not required for trade receivables. The Company maintains allowances for potential credit losses when necessary. Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances, and an analysis of days sales outstanding by customer. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At December 31, 2021 and 2020, there were no allowances for doubtful accounts since the balances were collected during the year. Any allowances recorded are included in Accounts Receivable, net in the accompanying balance sheets. Impairment of long-lived assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that it is more likely than not that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with authoritative guidance which requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. During the years ended December 31, 2021 and 2020, the Company had noted no indicators of impairment. Property and equipment Items capitalized as property and equipment are stated at cost. Maintenance and routine repairs are charged to operations when incurred, while betterments and renewals are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets starting when the asset is placed in service. 32 Common stock warrants The Company classifies as equity any warrants that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control), (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement) or (iii) that contain reset provisions that do not qualify for the scope exception. The Company assesses classification of its common stock warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company’s freestanding derivatives consist of warrants to purchase common stock. The Company evaluated these warrants to assess their proper classification and determined that the common stock warrants meet the criteria for equity classification in the balance sheet. Such warrants are measured at fair value, which the Company determines using the Black-Scholes-Merton option-pricing model. Revenue The Company generates revenue from integration engineering services, which it delivers either pursuant to integration license agreements or delivery of engineering services and from the grant of manufacturing licenses to customers to use its technology in the manufacture of semiconductor wafers and/or devices for the customer’s internal use. Revenue is recognized based on the following steps: (i) identification of the contract, or contracts, with a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations of the contract, and (v) recognition of revenue when, or as, the Company satisfies a performance obligation. The Company’s integration services generally consist of depositing its proprietary technology onto the customer’s semiconductor wafers and delivering such wafers back to the customer. Revenue from integration services is recognized as the performance obligations are satisfied, which is upon transfer of control of the wafers to the customer (generally upon shipment). Revenue from manufacturing licenses is recognized as the performance obligations are satisfied, which is upon delivery of the Company’s MST recipe to the customer for the customer’s internal use. For recognizing integration service revenue from integration license agreements, the Company assesses (i) whether the license grant is distinct from or combined with the transfer of goods or services and (ii) whether the license is a right to access intellectual property or a right to use the intellectual property. For licenses that are not distinct, but combined with other goods or services, the revenue is recognized at a point in time or over time as the obligations to perform the combined services and/or deliver the combined goods are satisfied. The Company’s integration license agreements contain a technology grant as well as a performance obligation to deliver wafers with its technology deposited on them. The Company has determined the grant of rights in these integration license agreements is not distinct from the integration service. Accordingly, revenue from integration license agreements is recognized as the service is provided to the customer. For manufacturing licenses, revenue is recognized at the point in time when the Company delivers its MST recipe because this license confers a right to use the Company’s technology and not a right to access the technology over time. Deferred revenues consist of unearned amounts that have been billed to the customer in advance of the Company’s performance obligations. These amounts have not yet been recognized as revenue. Revenue for these items will be recognized in accordance with the Company’s revenue policy. Research and development expenses In accordance with authoritative guidance, the Company charges research and development costs to operations as incurred. Research and development expenses consist of personnel costs for the design, development, testing and enhancement of the Company’s technology, and certain other allocated costs, such as depreciation and other facilities related expenditures. 33 Leases The Company accounts for leases in accordance with the authoritative guidance. On January 1, 2019, the Company adopted the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2016-02, Leases (Topic 842). The Company determines if a contract contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”) assets represent its right to use an underlying asset for the lease term while lease liabilities represent its obligation to make lease payments arising from the lease. All leases greater than 12 months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. Leases are accounted for as operating leases unless it meets one of the following criteria: (a) the lease term accounts for most of the remaining economic life of the underlying asset; (b) the present value of the lease payments is over 90% of the fair value of the underlying asset; (c) the underlying asset would have no alternative use for the lessor at the end of the lease; or (d) ownership of the underlying assets transfers to the Company at the end of the lease term. If the lease meets one of these criteria, then it would be accounted for as financing lease and the ROU assets would be amortized over the life of the lease and interest expense is recognized on the liability. Stock-based compensation The Company computes stock-based compensation in accordance with authoritative guidance. The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of its stock options. The Black-Scholes-Merton option-pricing model includes various assumptions, including the fair market value of the common stock of the Company, expected life of stock options, the expected volatility and the expected risk-free interest rate, among others. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. Forfeitures are recorded when they occur. As a result, if other assumptions had been used, stock-based compensation cost, as determined in accordance with authoritative guidance, could have been materially impacted. Furthermore, if the Company uses different assumptions on future grants, stock-based compensation cost could be materially affected in future periods. Income Taxes In accordance with authoritative guidance, deferred tax assets and liabilities are recorded for temporary differences between the financial reporting and tax bases of assets and liabilities using the current enacted tax rate expected to be in effect when the differences are expected to reverse. A valuation allowance is recorded on deferred tax assets unless realization is considered more likely than not. The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are not recorded as a tax benefit or expense in the current year. The Company recognizes interest and penalties, if any, related to uncertain tax positions in interest expense. No interest and penalties related to uncertain tax positions were accrued at either December 31, 2021 or 2020. The Company follows authoritative guidance which requires the evaluation of existing tax positions. Management has analyzed all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes both federal and states where the Company has operations. Open tax years are those that are open for examination by taxing authorities. Use of estimates The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used when accounting for revenue recognition, fair value of stock-based compensation and warrants, borrowing rates used for lease accounting and valuation allowance against deferred tax assets. Actual results could differ from those estimates. 34 Subsequent events Management has evaluated subsequent events and transactions occurring through the date these financial statements were issued. See Note 14. Adoption of recent accounting standards In December 2019, the FASB issued ASU No. 2019-12, Simplifying Accounting for Income Taxes . This is part of the FASB’s overall initiative to reduce complexity in accounting standards. Amendments include removal of certain exceptions to the general principles of Accounting Standard Codification (“ASC”) 740, Income taxes , and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The Company adopted this standard on January 1, 2021 and it did not have a material impact on its financial position, results of operations or financial statement disclosure. 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 adopted this standard on January 1, 2022 and it did not have a material impact on its financial position, results of operations or financial statement disclosure. Recent accounting standards The Company has evaluated all issued but not yet effective accounting pronouncements and determined that they are either immaterial or not relevant to the Company. 4. REVENUE The Company recognizes revenue in accordance with ASC 606. The amount of revenue that the Company recognizes reflects the consideration it expects to receive in exchange for goods or services and such revenue is recognized at the time when goods or services are transferred and/or delivered to its customers. Revenue is recognized when the Company 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 and from manufacturing licenses at a point in time and integration license agreements over a period of time. The following table provides information about disaggregated revenue by primary geographical markets and timing of revenue recognition for the years ended December 31, 2021 and 2020 (in thousands): Schedule of information about disaggregated revenue and timing of revenue Year Ended December 31, 2021 2020 Primary geographic markets North America $ – $ 62 Asia Pacific 400 – Total $ 400 $ 62 Timing of revenue recognition Products and services transferred at a point in time $ 400 $ 62 Products and services transferred over time – – Total $ 400 $ 62 35 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 year ended December 31, 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 by the weighted-average number of shares and dilutive share equivalents outstanding for the period, determined using the treasury-stock and if-converted methods. 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 Year Ended December 31, 2021 2020 Stock Options 2,869 3,446 Unvested restricted stock 386 642 Warrants 1 320 3,256 4,408 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): Schedule of property and equipment December 31, 2021 2020 Laboratory equipment $ 200 $ 163 Computer equipment 132 111 Furniture and fixtures 85 64 Leasehold improvements 24 6 Software 4 6 Office equipment 4 4 449 354 Less: Accumulated depreciation and amortization ( 253 ) ( 201 ) $ 196 $ 153 Depreciation and amortization expense relating to property and equipment was approximately $ 67,000 and $ 41,000 for the years ended December 31, 2021 and 2020, respectively. The Company depreciates computer equipment, laboratory equipment and office equipment on straight-line basis over three years. Furniture and fixtures are depreciated on a straight-line basis over five years. The Company amortizes software on straight-line basis over three years. Leasehold improvements are amortized over the remaining life of the lease. 36 7. LEASES The Company leases corporate office space in Los Gatos, California. In August 2020, the Company and its landlord amended the lease for this office. This amendment extends the expiration date of the operating lease from January 2021 to January 2026 and increases the space from 3,396 square feet to 4,101 square feet. Under 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 ROU asset and lease liability of approximately $681,000 were recorded at the time of the amendment. In January 2021 the additional space became available for use, and the Company recorded an additional ROU asset and corresponding liability of approximately $144,000. 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. In March 2021, the Company began leasing 474 square feet of office space in Tempe, Arizona. The new lease is classified as an operating lease with an initial term of two years and an option to extend for an additional three years through February 2026. The lease also contains a performance standard for research collaboration with Arizona State University. The agreement requires a minimum value of collaborative research in each year of the lease. The lease is accounted for under ASC 842 and accordingly, the research payments are included in the ROU and lease liability at the commencement. In March 2021, the Company recorded an ROU and associated lease liability of approximately $ 238,000 . The lease liability is based on the present value of the minimum lease payments, discounted using the Company’s estimated incremental borrowing rate of 5.25 % over five years, as the Company expects to lease the space through the three-year extension. The lease also contains escalating payments on the anniversary of the original commencement which are included in the measurement of the initial lease liability. 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 and commenced on August 1, 2021. A prepayment of $ 450,000 was made in year ended December 31, 2020 which represents the final three monthly payments under the lease and was recorded as a long-term prepaid until the lease commencement. At commencement, the Company recorded an ROU asset of approximately $ 6.4 million and a corresponding lease liability of approximately $ 6 .0 million. The lease was classified as a financing lease and accordingly, amortization is recorded as a research and development expense in the Company’s statement of operations. Interest expense is also recorded and included in other income or expense in the Company’s statement of operations. The lease liability is based on the present value of the minimum lease payments, discounted using the Company’s estimated incremental borrowing rate of 5.25 % at the time of commencement. The lease payment of $150,000 per month includes approximately $ 30,000 in supplies and maintenance that is recorded as an operating expense and is not included in the valuation of the lease liability. The Company elected to exclude these costs from the asset and related lease liability valuation for this class of assets. These costs will be expensed as operating expenses in the period incurred. Lease expense for operating leases consists of the lease payments recognized on a straight-line basis over the lease term. Expenses for financing leases consists of the amortization expenses recognized on a straight-line basis over the lease term and interest expense. The components of lease costs were as follows (in thousands): Schedule of components of lease costs Year Ended December 31, 2021 2020 Financing lease costs: Amortization of ROU assets $ 532 $ – Interest on lease liabilities 128 – Total financing lease costs $ 660 $ – Operating lease costs Fixed lease costs 238 123 Variable lease costs – 36 Short-term lease costs 44 39 Total operating lease costs $ 282 $ 198 37 Future minimum payments under non-cancellable leases as of December 31, 2021 were as follows (in thousands): Schedule of future minimum lease payments For the Year Ended December 31, Financing leases Operating leases 2022 1,436 222 2023 1,436 296 2024 1,436 278 2025 1,435 284 2026 & thereafter 478 21 Total future minimum lease payments 6,221 1,101 Less imputed interest ( 668 ) ( 117 ) Total lease liability $ 5,553 $ 984 The below table provides supplemental information and non-cash activity related to the Company’s operating and financing leases are as follows (in thousands): Supplemental non-cash activity related to operating leases Year Ended December 31, 2021 2020 Operating cash flow information: Cash paid for amounts included in the measurement of operating lease liabilities $ 143 $ 164 Cash paid for amounts included in the measurement of financing lease liabilities $ 598 $ – Non-cash activity: Right-of-use assets obtained in exchange for operating lease obligations $ 382 $ 681 Right-of-use assets obtained in exchange for financing lease obligations $ 6,383 $ – The weighted average remaining discount rate is 5.25 % for the Company’s operating and financing leases. The weighted average remaining lease term is 4.1 years for operating leases and 4.6 years for financing lease. In October 2016, the Company entered into lease agreement for approximately 200 square feet of office space in Cambridge, Massachusetts. The lease, with current monthly payments of $2,942 per month, commenced on October 24, 2016. Because the lease is month to month and can be cancelled with a 30-day notice, the future lease payments are not included in the Company’s lease accounting under ASC Topic 842. 8. COMMITMENTS AND CONTINGENCIES Legal The Company may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes and are not predictable with assurance. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which the Company is or could become involved in litigation may have a material adverse effect on its business and financial condition. The Company is not party to any material litigation as of December 31, 2021 or through the date these financial statements have been issued. 9. STOCKHOLDERS’ EQUITY The Company is authorized to issue to up 2,500,000 shares of preferred stock, $ .001 par value. As of December 31, 2021, and 2020, no shares have been designated and no shares are issued and outstanding. Preferred stock may rank prior to common stock with respect to dividends rights, liquidation preferences, or both, and may have full or limited voting rights. 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 $ 9.4 million of net proceeds after deducting underwriting commission and other offering expenses. 38 On September 2, 2020, Atomera entered into an Equity Distribution Agreement with Craig-Hallum Capital Group LLC, as agent, under which the Company offered and sold, from time to time at its sole discretion, shares of its 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. On January 5, 2021 we announced the completion of this offering after 2,221,575 shares were sold for an average price per share of $ 11.25 , resulting in approximately $ 24.2 million of net proceeds to us after deducting commissions and other offering expenses. As of December 31, 2021, the Company has reserved approximately 2.9 million shares of common stock for issuance pursuant to outstanding stock options and warrants. 10. WARRANTS The Company estimated the fair value of warrants using the Black-Scholes option pricing model. There were no warrants issued in the year ending December 31, 2021 or 2020. A summary of warrant activity for the year ended December 31, 2021 is as follows (shares in thousands except per share and contractual term): Schedule of warrant activity Number of Shares Weighted- Average Exercise Prices Weighted-Average Remaining Contractual Term (In Years) Outstanding at January 1, 2021 320 $ 9.47 Exercised ( 318 ) $ 9.38 Expired ( 1 ) $ 9.38 Outstanding and exercisable at December 31, 2021 1 $ 33.75 0.3 The warrants outstanding at December 31, 2020 had an intrinsic value of $ 0 based on a per-share stock price of $ 20.12 as of December 31, 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 Statement of Operations for the year ended December 31, 2020. All of the modified warrants were exercised on August 6, 2020. On December 3, 2020, the Company modified 12,200 warrants with an original exercise price of $9.375 and an expiration date August 4, 2021. The warrants were modified to decrease the exercise price to $7.50 and change the expiration date to December 31, 2020. The warrants were then exercised December 4, 2020. Due to the modification, the Company incurred a modification expense of approximately $ 2,000 that is included in general and administrative expenses on the Statement of Operations for the year ended December 31, 2020. In December 2020, a warrant for 37,562 shares was presented for cashless exercise resulting in the issuance of 13,165 shares of common stock. In January 2021, warrants for 317,488 shares were presented for cashless exercises resulting in the issuance of 223,487 shares of common stock. 11. STOCK-BASED COMPENSATION On March 14, 2007, the Company’s stockholders approved the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan expired in March 2017, however all options and warrants outstanding at the time of the expiration remained outstanding and exercisable by their term. At the time of the expiration of the 2007 plan, options to purchase 2,106,637 shares of common stock were outstanding. In May 2017, the Company’s shareholders approved its 2017 Stock Incentive Plan (“2017 Plan”). 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 share grants. The Company reserved a total of 3,750,000 shares of common stock for issuance under the 2017 Plan. All employees, officers, directors, consultants, advisors and other persons who provide services to the Company or any subsidiaries of the Company are eligible to receive incentive awards under the 2017 Plan. As of December 31, 2021, awards of 2,686,343 shares of common stock had been granted under the 2017 Plan, net of forfeited restricted stock and option awards and a total of 1,063,657 shares of common stock are reserved for issuance. 39 The following table summarizes the stock-based compensation expense recorded in the Company’s results of operations during the years ended December 31, 2021 and 2020 for stock options and restricted stock (in thousands): Schedule of stock-based compensation expense Year Ended December 31, 2021 2020 Research and development $ 907 $ 1,148 General and administrative 1,893 1,741 Selling and Marketing 173 152 $ 2,973 $ 3,041 As of December 31, 2021, there was approximately $ 4.9 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements that are expected to vest. This cost is expected to be recognized over a weighted-average period of 2.1 years. The Company records compensation expense for employee awards with graded vesting using the straight-line method. The Company records compensation expense for nonemployee awards with graded vesting using the accelerated expense attribution method. The Company recognizes compensation expense over the requisite service period applicable to each individual award, which generally equals the vesting term. The Company estimates the fair value of each option award using the Black-Scholes-Merton option pricing model. Forfeitures are recognized when realized. The fair value of employee stock options issued was estimated using the following weighted-average assumptions: Schedule of employee stock options Year Ended December 31, 2021 2020 Weighted average exercise price: $ 22.05 $ 4.20 Weighted average grant date fair value per share: $ 15.49 $ 2.80 Assumptions: Expected volatility 81.1 % 77.8 % Weighted average expected term (in years) 6.34 6.0 Risk-free interest rate 1.05 % 0.71 % Expected dividend yield 0.0 % 0.0 % The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Company’s expected volatility was based upon the historical volatility of the Company. The expected life of the Company’s options was determined using the simplified method as a result of limited historical data regarding the Company’s activity. The dividend yield considers that the Company has not historically paid dividends and does not expect to pay dividends in the foreseeable future. The following table summarizes stock option activity during the year ended December 31, 2021 (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, 2021 3,446 $ 5.97 – – Granted 158 $ 22.05 Exercised ( 571 ) $ 6.21 Forfeited ( 164 ) $ 8.85 Outstanding at December 31, 2021 2,869 $ 6.64 5.77 $ 39,002 Exercisable at December 31, 2021 2,326 $ 6.43 5.22 $ 31,976 40 During the year ended December 31, 2021, the Company granted options under its 2017 Plan purchase 158,352 shares of its common stock to its employees. The fair value of these options was approximately $ 2.5 million. 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 year ended December 31, 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, 2021 642 $ 4.43 Granted 89 $ 21.02 Vested ( 280 ) $ 6.12 Forfeited ( 65 ) $ 6.13 Outstanding non-vested shares at December 31, 2021 386 $ 6.75 12. 401(k) PLAN During 2002, the Company established a plan under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). The 401(k) Plan covers substantially all of its employees who have attained 18 years of age. Employees may elect to contribute part of their annual compensation to the 401(k) Plan, up to the maximum deferral allowance for individuals by the Internal Revenue Service under Code Section 401(k), and the Company may make a matching contribution. During the years ended December 31, 2021 and 2020, there were no matching contributions made by the Company. 13. INCOME TAXES The loss before provision for income taxes consisted of the following (in thousands): Schedule of provision for income taxes Year Ended December 31, 2021 2020 Domestic $ ( 15,648 ) $ ( 14,878 ) International – – Total $ ( 15,648 ) $ ( 14,878 ) The Company had $66,000 and $0 of current income tax expense for the years ended December 31, 2021 and 2020, respectively. The Company accounts for income taxes in accordance with ASC 740, which requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance. The valuation allowance decreased by approximately $ 1.8 million during the year ended December 31, 2021 and increased by approximately $ 3.8 million during the year ended December 31, 2020. 41 The Company’s deferred tax assets are as follows (in thousands): Schedule of deferred tax Year Ended December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 23,097 $ 24,125 Tax credit 1,883 1,889 Fixed assets and intangibles 978 1,144 Stock compensation 799 1,321 Accruals and other 132 151 Lease liability 1,430 148 Total deferred tax assets 28,319 28,778 Deferred tax liabilities: Right of use asset ( 1,477 ) ( 151 ) Total deferred tax assets ( 1,477 ) ( 151 ) Valuation allowance ( 26,842 ) ( 28,627 ) Net deferred tax asset $ – $ – Net operating losses and tax credit carryforwards as of December 31, 2021, are as follows (in thousands): Schedule of operating losses Amount Expiration in years Net operating losses, federal $ 66,147 No expiration Net operating losses, federal $ 34,791 2027-2037 Net operating losses, state $ 33,499 2030-2041 Tax credits, federal $ 1,578 2027-2041 Tax credits, state $ 627 No expiration Tax credits, state $ 781 2022-2036 The effective tax rate of the Company’s provision (benefit) for income taxes differs from the federal statutory rate as follows: Schedule of effective tax rate Year ending December 31, 2021 2020 Statutory rate 21.00 % 21.00 % State rate 2.77 % 2.17 % Non-deductible items 0.00 % 0.84 % Change in valuation allowance 11.41 % ( 25.29 )% Change in tax credits 4.54 % 1.28 % Foreign withholding tax ( 0.33 )% – Section 382 limitation ( 51.59 )% – Section 162(m) limitation ( 9.12 )% – Stock based compensation excess windfall 20.89 % – Total ( 0.42 )% – Utilization of U.S. net operating losses and tax credit carryforwards may be limited by “ownership change” rules, as defined in Section 382 and Section 383 of the Internal Revenue Code. Similar rules may apply under state tax laws. Under those sections of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income or tax may be limited. In general, an “ownership change” will occur if there is a cumulative change in ownership by “5% stockholders” that exceeds 50 percentage points over a rolling three-year period. 42 During the fourth quarter of 2021, the Company performed an analysis to assess whether an “ownership change,” as defined by Section 382 of the Code, has occurred from its inception through December 31, 2021. Based on this analysis, the Company has experienced “ownership changes,” limiting the utilization of the net operating loss carryforwards or research and development tax credit carryforwards under Section 382 of the Code. The limitation is calculated by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then applying additional adjustments, as required. As a result of the analysis, the Company has determined that approximately $ 31 million of federal net operating loss and $ 0.7 million of federal R&D credit carryforwards are limited and will expire unutilized. Additionally, approximately $ 2.6 million of state net operating loss and $ 0.5 million of state tax credits are also limited and will expire unutilized. The Company’s tax disclosures as of December 31, 2021 reflect the impairment of the above-mentioned tax attributes. The Company establishes reserves for uncertain tax positions based on the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2021 and 2020, respectively, the Company has no accrued interest or penalties related to uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In the normal course of business, the Company is subject to examination by their respective taxing authorities. The Company is not currently under audit by the Internal Revenue Service or other similar state or local authority. The statute of limitations remains effectively open for all tax years since inception (2007). Tax years outside the normal statute of limitations remain open to examination by tax authorities due to tax attributes generated in earlier years which have been carried forward and may be examined and adjusted in subsequent years when utilized. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the years ended December 31, 2021 and 2020 (in thousands): Schedule of unrecognized tax benefits 2021 2020 January 1 – unrecognized tax benefits $ 1,070 $ 865 Increases (decreases) – prior year tax positions ( 480 ) – Increases – current year tax positions 306 205 December 31 - unrecognized tax benefits $ 896 $ 1,070 The following table summarizes the activity in the Company’s Valuation Allowance and Qualifying Accounts for the years ended December 31, 2021 and 2020 (in thousands): Schedule of valuation allowance Balance at Beginning of Year Additions Deductions Balance at End of Year Deferred tax assets valuation allowance Year ended December 31, 2021 $ 28,627 $ 6,125 $ 7,910 $ 26,842 Year ended December 31, 2020 $ 24,877 $ 3,951 $ 201 $ 28,627 14. SUBSEQUENT EVENTS Management has evaluated subsequent events and transactions through the date these financial statements were issued. Integration License Agreement. On February 3, 2022 the Company entered into an Integration License Agreement granting its licensee the right to evaluate MST technology, complete the manufacturing process and to provide limited samples to their customers. 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.