Atomera Inc 10-K

Item 7. 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 statements and the accompanying notes that appear elsewhere in this Annual Report. Statements in this Annual Report on Form 10-K 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 Annual 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 in this Annual Report. 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 Annual 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 Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual 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 $530+ billion semiconductor industry. Our 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 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. 23 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 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; 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. 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. We also license our MSTcad 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 ST and AKM, both of which are 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 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 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. During the year ended December 31, 2023, approximately 1.8 million shares were sold at an average price per share of approximately $7.97, resulting in approximately $13.5 million of net proceeds to us after deducting commissions and other offering expenses. Results of Operations for the Years Ended December 31, 2023 and 2022 Revenues. To date, we have only generated limited revenue. 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 (i) to enter into manufacturing and distribution license agreements with our current and future licensees and (ii) to advance such licensees, including ST, through licensing phases to royalty-bearing product shipments. 24 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 these agreements do not grant the licensees the rights to manufacture on their site or to sell products incorporating MST. Our first 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. Our license agreement with ST, which we executed in April 2023, was our first full commercial license agreement and provided for grants of a manufacturing license enabling ST to install MST in a tool in their fab and to manufacture wafers for internal development use only as well as a distribution license granted upon completion of process qualification. The ST license agreement provides for payments of license fees, payable upon reaching milestones for MST installation and acceptance, in the case of the manufacturing license, and upon reaching process qualification milestones. After process qualification is complete and associated payments are made, ST will be required to pay royalties for all products they sell that utilize MST. 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 as the obligations to perform the combined services and/or deliver the combined goods are satisfied. Integration license agreements contain a technology grant as well as a performance obligation to deliver wafers with our technology deposited on them. We have historically 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 we deliver our MST recipe as the license to manufacture using MST technology is a right to use the Company’s technology and not a right to access the technology over time. However, in cases where our manufacturing license grants include a customer acceptance requirement, revenue is recognized over time. Revenue for the years ended December 31, 2023 and 2022 was approximately $550,000 and $382,000, respectively. Our revenue for 2023 consisted of revenue from a manufacturing license. 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. Cost of Revenue. Cost of revenue consists of costs of materials, as well as direct compensation and expenses incurred to provide integration engineering services, support for customer installation and qualification and MSTcad support. Cost of revenue was approximately $28,000 and $81,000 for the years ended December 31, 2023 and 2022, respectively. We anticipate that our cost of revenue will vary substantially depending on the mix of license and engineering services revenues we receive 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 years ended December 31, 2023 and 2022 our operating expenses totaled approximately $21.2 million and $17.8 million, respectively. Research and development expenses. To date, our operations have focused on the research, development, patent prosecution, and commercialization of our MST technology and related technologies such as MSTcad. Our research and development costs primarily consist of payroll and benefit costs for our engineering staff and costs of outsourced fabrication (including epi tool leases) and metrology of semiconductor wafers incorporating our MST technology. For the years ended December 31, 2023 and 2022, we incurred approximately $12.5 million and $10.0 million, respectively, of research and development expense, an increase of approximately $2.5 million, or 25%. The increase was primarily due to outsourced research and development costs, which increased by approximately $1.1 million due to price increases and a higher number of wafers processed. The other main factors that drove the increase in research and development expenses were increases of approximately $739,000 in employee costs reflecting new hires and an increase in the annual bonus accrual, an approximately $255,000 increase in stock-based compensation expense and an increase of approximately $266,000 in technical consulting expenses. 25 General and administrative expenses. 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 years ended December 31, 2023 and 2022 were approximately $7.1 million and $6.4 million, respectively, representing an increase of approximately $634,000, or 10%. The increase in costs was primarily due to an increase in employee-related costs of approximately $166,000, an increase of approximately $116,000 in patent fees and legal fees associated with our patents, an increase of approximately $100,000 in other legal fees and an increase of approximately $301,000 in stock-based compensation expense. Selling and marketing expenses. 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, 2023 and 2022 were approximately $1.6 million and $1.3 million, respectively, representing an increase of approximately $251,000, or 19%. The increase in costs is primarily related to increased spending on employee-related costs of approximately $72,000, an increase in stock-based compensation of approximately $91,000 and an increase of approximately $62,000 in travel-related expenses. Interest income. Interest income for the years ended December 31, 2023 and 2022 was approximately $723,000 and $340,000, respectively. Interest income for each period related to interest earned on our cash and cash equivalents and the increase was primarily due to progressively higher interest rates during these periods. Accretion income. Accretion income for the year ended December 31, 2023 was approximately $283,000. Accretion income relates to the increase in value of our available-for-sale securities from the purchase date through the maturity date. There was no income from accretion for the year ended December 31, 2022 because our active cash management program, which involves investment of a portion of our cash in short-term fixed-income securities commenced in the first quarter of 2023. Other income/expense, net. Other income for the year December 31, 2023 of approximately $75,000, consisted primarily of a refundable state research and development tax credit, net of filing costs and tax consulting services. There was no other income/expenses for the year ended December 31, 2022. Interest expense. Interest expense for the years ended December 31, 2023 and 2022 was approximately $194,000 and $255,000, respectively. Interest expense is related to the tool financing lease entered into in August 2021. Liquidity and Capital Resources As of December 31, 2023, we had cash, cash equivalents and short-term investments of approximately $19.5 million and working capital of approximately $16.6 million. For the year ended December 31, 2023, we had a net loss of approximately $19.8 million and used approximately $14.6 million of cash and cash equivalents in operations. Since inception, we have incurred recurring operating losses. During the year ended December 31, 2023, we sold approximately 1.8 million shares pursuant to our ATM at an average price per share of approximately $7.97, resulting in approximately $13.5 million of net proceeds to us after deducting commissions and other offering expenses. We believe that our available working capital is sufficient to fund our presently forecasted working capital requirements for, at least, the next 12 months following the date of the filing of this report. However, our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability 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 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 our ATM Facility, 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 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. 26 Cash Flows from Operating, Investing and Financing Activities: Net cash used in operating activities of approximately $14.6 million for year ended December 31, 2023 resulted primarily from our net loss of approximately $19.8 million, adjusted by approximately $4.0 million of stock-based compensation expense and amortization of right-of-use assets of approximately $1.4 million. Net cash used in operating 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 $3.4 million of stock-based compensation expense and amortization of right-of-use assets of approximately $1.4 million. Net cash used in investing activities of approximately $6.8 million and for year ended December 31, 2023 consisted primarily of the purchase of short-term available-for-sale investments, offset by the maturity of short-term available-for-sale investments. Net cash used by investing activities of approximately $39,000 for the year ended December 31, 2022, consisted of the purchase of computers and lab tools for our Tempe office space. Net cash provided by financing activities of approximately $12.7 million for the year ended December 31, 2023 related primarily to net proceeds from our ATM Facility during the year ended December 31, 2023, offset in part by approximately $918,000 in principal payments on our financing lease. 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 ATM Facility during the year ended December 31, 2022, offset in part by approximately $984,000 in principal payments on our financing lease. 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. Actual results could differ from our estimates. Leases We account for leases in accordance with 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 ROU assets over the life of the lease and interest expense is recognized on the liability. Stock-based Compensation We 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. 27 Assumptions for the Black-Scholes valuation model used for employee stock awards include: · Expected term – We derived the expected term for employee stock awards using historical information to develop expectations about future exercise patterns and behavior after employment termination. · 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. 28