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Item 7. Management’s Discussion and Analysis

2023-02-15 compared with 2022-02-15 · 151 added, 120 removed, 128 unchanged (68% of the section changed)

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 financial

The following discussion and

analysis of the financial condition and results of operations of Atomera Incorporated should be read in conjunction with our financial

statements and the accompanying notes that appear elsewhere in this Annual Report.

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of developing, commercializing and licensing proprietary processes and technologies for the $550+ billion semiconductor industry.

lead technology, named Mears Silicon Technology TM , or MST ® , is a thin film of reengineered silicon, typically

lead technology, named Mears Silicon Technology™, 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 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

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analog, logic, optical and memory integrated circuits.

We do not intend to design

or manufacture integrated circuits directly.

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

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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;

fabless semiconductor manufacturers, which are designers of integrated circuits that outsource the manufacturing 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 silicon wafers;

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.

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incorporates our MST technology.

To date we have generated revenue from (i) licensing agreements with two IDMs, one fabless manufacturer

and one foundry, (ii) a joint development agreement, or JDA, with a leading semiconductor provider and (ii) engineering services provided

to foundries, IDMs and fabless companies.

We also license our MSTcad TM software to our customers for use in simulating the effects of

using MST technology on their wafers and/or devices.

To date, we have generated revenue from (i) licensing agreements with two IDMs, one

fabless manufacturer and one foundry, (ii) a joint development agreement, or JDA, with a leading semiconductor provider, (iii) engineering

services provided to foundries, IDMs and fabless companies and (iv) licensing MSTcad.

We were organized as a Delaware

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On January 12, 2016, we changed our name to Atomera Incorporated.

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 discounts and other offering expenses.

Between September 2020 and

January 2021,we conducted an at-the-market offering of our common shares through Craig-Hallum Capital Group LLC, as agent, pursuant to

which we sold 2,221,575 shares at an average price per share of approximately $11.25, resulting in approximately

$24.2 million of net proceeds to us after deducting commissions and other offering expenses.

Between September 2020 and January

2021,we conducted an at-the-market offering of our common shares through Craig-Hallum Capital Group LLC, as agent, pursuant to which we

sold 2,221,575 shares at an average price per share of approximately $11.25, resulting in approximately $24.2 million of net proceeds

to us after deducting commissions and other offering expenses.

On May 31, 2022, we entered into

an Equity Distribution Agreement with Oppenheimer & Co.

Inc and Craig-Hallum Capital Group LLC, as agents, under which we may offer

and sell, from time to time at our sole discretion, shares of our common stock having aggregate offering proceeds of up to $50.0 million

in an “at-the-market” or ATM offering, to or through the agents.

During the year ended December 31, 2022, approximately 527,000

shares were sold at an average price per share of approximately $11.68, resulting in approximately $5.8 million of net proceeds to us

after deducting commissions and other offering expenses.

Results of Operations for the Years Ended December

31, 2022 and 2021

date, we have only generated limited revenue from customer engagements for integration engineering services, integration license agreements

and a manufacturing license granted under a JDA.

In the future, we expect to collect increased fees from license agreements and JDAs as

well as 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

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.

Our JDA included the grant of a manufacturing license to our customer and we were

paid for such license upon delivery of our IP transfer package which enabled our customer to install MST in a tool in their facility and

to use it to manufacture wafers for internal use.

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.

We have also determined that the grant of our manufacturing

license under the JDA confers a right to use our technology and accordingly revenue was recognized at the point in time when we delivered

our IP transfer package.

Revenue for the years ended

December 31, 2021 and 2020 was approximately $400,000 and $62,000, respectively.

Our revenue in 2021 consisted of a manufacturing license

fee pursuant to our JDA.

Our 2020 revenue was generated from integration services engagements and integration license agreements.

we have only generated limited revenue from customer engagements for integration engineering services, integration license agreements,

a manufacturing license granted under a JDA, a success fee for achievement of milestones under that JDA and licensing our MSTcad software.

In the future, we expect to collect increased fees from license agreements and JDAs as well as 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.

JDA included the grant of a manufacturing license to our customer and we were paid for such license upon delivery of our IP transfer package

which enabled our customer to install MST in a tool in their facility and to use it to manufacture wafers for internal use.

This JDA also

contained targeted technical specifications that, if met, would result in payment of a success fee to us.

Those technical objectives were

met and we have collected the success fee.

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.

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.

have also determined that the grant of our manufacturing license under the JDA confers a right to use our technology and accordingly revenue

was recognized at the point in time when we delivered our IP transfer package.

The success fee under our JDA was treated as engineering

services revenue and recognized upon our customer’s confirmation that the JDA’s technical objectives had been met.

Our licensing

of MSTcad grants customers the right to use MSTcad software to simulate the effects of incorporating MST technology into their semiconductor

manufacturing process.

Such MSTcad licenses are granted on a monthly basis and revenue is recognized over time.

Revenue for the years ended December

31, 2022 and 2021 was approximately $382,000 and $400,000, respectively.

Our revenue for 2022 consisted of a success fee pursuant to our

JDA, a license fee paid under an integration license agreement and MSTcad license revenue.

Our revenue for 2021 consisted of a manufacturing

license fee pursuant to our JDA.

Cost of Revenue.

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Operating Expenses.

Operating expenses consist of research and development, general and administrative, and selling and marketing expenses.

years ended December 31, 2021 and 2020 our operating expenses totaled approximately $15.9 million and $15.0 million, respectively.

expenses consist of research and development, general and administrative, and selling and marketing expenses.

For the years ended December

31, 2022 and 2021 our operating expenses totaled approximately $17.8 million and $15.9 million, respectively.

Research and development

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2022 and 2021, we incurred approximately $10.0 million and $8.8 million, respectively, of research and development expense, an increase

of approximately $355,000, or 4%.

The increase in research and development expense was primarily due to an increase of approximately $632,000

in payroll related costs due to headcount growth.

These increases in expenses were partly offset by an approximately $240,000 decrease

in stock-based compensation expense.

of approximately $1.3 million, or 14%.

The increase was primarily due to approximately $850,000 of increased tool lease related expenses

as the tool lease commenced in August 2021, and increase of approximately $246,000 in stock-based compensation and an increase of approximately

$180,000 in technical consulting expenses.

General and administrative

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The increase in costs was primarily due to

increases of approximately $316,000 in insurance costs, approximately $153,000 in stock-based compensation and approximately $137,000

in payroll related expenses, offset in part by a decrease of approximately $122,000 in professional fees.

Selling and marketing

Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel and business

development consulting services.

Selling and marketing expenses for the years ended December 31, 2021 and 2020 were approximately $986,000

and $921,000, respectively, representing an increase of approximately $65,000, or 7%.

an increase of approximately $103,000 in patent fees and legal fees associated with our patents, an increase of approximately $95,000

in insurance costs and increase of approximately $86,000 in payroll related expenses.

Selling and marketing expense.

Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel and business development

consulting services.

Selling and marketing expenses for the years ended December 31, 2022 and 2021 were approximately $1.3 million and

$986,000, respectively, representing an increase of approximately $362,000, or 37%.

The increase in costs is primarily related to increased

spending in new marketing initiatives.

spending in employee-related costs of approximately $104,000, an increase in outsourced marketing expenses of approximately $83,000 and

an increase in stock-based compensation of approximately $77,000.

Interest income.

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Interest income for each period

related to interest earned on our cash and cash equivalents.

The decrease in interest income was due to declining interest rates during

2020 and 2021.

related to interest earned on our cash and cash equivalents and the increase was primarily due to progressively higher interest rates

during these periods.

Interest expense.

expense for the year ended December 31, 2021 was approximately $128,000 and related to the new tool financing lease entered into in August

There was no interest expense recorded for the year ended December 31, 2020.

Provision for income

The provision for income taxes for the years ended December 31, 2021 and 2020 was $66,000 and $0, respectively.

Our provision

is for income taxes due to a foreign country arising from withholding taxes imposed on payments received for revenue.

expense for the years ended December 31, 2022 and 2021 was approximately $255,000 and $128,000, respectively.

Interest expense is related

to the new tool financing lease entered into in August 2021.

Provision for income taxes .

The provision for income tax for the year ended December 31, 2021 was $66,000 and related to income taxes due to a foreign country arising

from withholding taxes imposed on payments received for revenue.

There was no provision for income tax recorded for the year ended December

Liquidity and Capital Resources

As of December 31, 2021, we

had cash and cash equivalents of approximately $28.7 million and working capital of approximately $26.3 million.

As of December 31, 2022, we had

cash and cash equivalents of approximately $21.2 million and working capital of approximately $18.7 million.

For the year ended December

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Since inception, we have incurred recurring operating losses.

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.

Between September 2020

and January 2021, we conducted an at-the-market offering of our common shares through Craig-Hallum Capital Group LLC, as agent,

pursuant to which we sold 2,221,575 shares at an average price per share of approximately $11.25, resulting in approximately $24.2

million of net proceeds to us after deducting commissions and other offering expenses.

During the year ended December

31, 2022, we sold approximately 527,000 shares pursuant to our ATM at an average price per share of approximately $11.68, resulting in

approximately $5.8 million of net proceeds to us after deducting commissions and other offering expenses

We believe that our available

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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

If we are not able to generate sufficient revenue from license fees and royalties in a time frame 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 and take additional measures to reduce costs in order to conserve its cash.

sources, including our ATM Facility, follow-on equity offerings, debt financing and joint ventures with industry partners.

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 and take additional measures to reduce costs in order to conserve its cash.

Cash Flows from Operating, Investing and Financing

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activities of approximately $12.5 million for year ended December 31, 2022 resulted primarily from our net loss of approximately $17.4

million adjusted by approximately $3.0 million of stock-based compensation expense.

million adjusted by approximately $3.4 million of stock-based compensation expense and amortization of right-of-use assets of approximately

Net cash used in operating

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million adjusted by approximately $3.0 million of stock-based compensation expense.

Net cash used by investing

activities of approximately $109,000 and approximately $131,000 for the years ended December 31, 2021 and 2020, respectively, consisted

of the purchase of computers, lab tools and leasehold improvements for the remodeled Los

Net cash used by investing activities

of approximately $39,000 and approximately $109,000 for the years ended December 31, 2022 and 2021, respectively, consisted of the purchase

of computers, lab tools and leasehold improvements for the remodeled Los

Gatos office space and our new Tempe office space.

Net cash provided by financing

activities of approximately $5.0 million for the year ended December 31, 2022.

related primarily to net proceeds from our at-the-market

offering during the year ended December 31, 2022 offset in part by approximately $984,000 in principal payments on our financing lease.

Net cash provided by financing

activities of approximately $3.3 million for the year ended December 31, 2021 related to the exercise of approximately 571,000 stock options

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payments on our financing lease.

Net cash provided by

financing activities of approximately $35.3 million for the year ended December 31, 2020 related to the net proceeds from our underwritten

public offering of common stock in May 2020 and our at-the-market offering beginning in September 2020 and continuing through the end

Critical Accounting Estimates

Our financial statements are

prepared in accordance with accounting principles generally accepted in the United States.

The preparation of financial statements in

conformity with those accounting principles requires us to use judgement in making estimates and assumptions based on the relevant information

available at the end of each period.

These estimates and assumptions have a significant effect on reported amounts of assets, liabilities,

sales and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make

estimates and assumptions on matters that are inherently uncertain.

Our financial statements are prepared

in accordance with accounting principles generally accepted in the United States.

The preparation of financial statements in conformity

with those accounting principles requires us to use judgement in making estimates and assumptions based on the relevant information available

at the end of each period.

These estimates and assumptions have a significant effect on reported amounts of assets, liabilities, sales

and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates

and assumptions on matters that are inherently uncertain.

Actual results could differ from our estimates.

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as the performance obligations are satisfied, which is upon delivery of the Company’s MST recipe to the customer.

For recognizing integration

service revenue from integration license agreements, we assess (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 recognizing integration service

revenue from integration license agreements, we assess (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

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We account for leases in accordance

with the authoritative guidance.

On January 1, 2019, we adopted the Financial Accounting Standards Board (“FASB”) issued Accounting

Standards Update (“ASU”) No 2016-02, Leases (Topic 842).

We determine 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.

Lease expenses for operating leases is recognized on a straight-line-basis over the lease term.

Lease expenses

for financing leases is amortization of the he ROU assets over the life of the lease and interest expense is recognized on the liability.

Off-Balance Sheet Arrangements

We have not entered into off-balance sheet arrangements

or issued guarantees to third parties.

with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2016-02, Leases

We determine 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.

Lease expenses for operating leases is recognized

on a straight-line-basis over the lease term.

Lease expenses for financing leases is amortization of the he ROU assets over the life of

the lease and interest expense is recognized on the liability.

Stock-based Compensation

have stock-based compensation programs, which include restricted stock awards (“RSAs”) and stock options and an employee stock

purchase plan.

We account for stock-based compensation expense, including the expense for grants of RSAs and stock options that may be

settled in shares of our common stock, based on the fair values of the equity instruments issued.

The fair value is determined on the

measurement date, which is the date of grant.

The fair value of our RSAs is measured at the market price of our common stock on the measurement

date amortized over the vesting period of the award.

The fair value for our stock option awards is determined at the grant date using

the Black-Scholes Option Pricing Model and amortized over the vesting period of the option.

for the Black-Scholes valuation model used for employee stock awards include:

· Expected term – We derived the expected term for employee stock awards

using limited historical information to develop expectations about future exercise patterns and post vesting employment termination behavior.

· Expected volatility – Volatility is estimated using Atomera’s

historical volatility for similar terms.

· Expected dividend rate – We have not declared or paid dividends to

our stockholders and have no plans to pay dividends;

therefore, we have assumed an expected dividend yield of 0%.

· Risk-free interest rate – The risk-free interest rate is based on the

yields of U.S.

Treasury securities with maturities similar to the expected terms of the associated awards.

· The fair value of our common stock is measured at the market price on the

measurement date.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis