Item 7. Management’s Discussion and Analysis
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 $550+ 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 is our proprietary and patent-protected performance
enhancement technology that we believe addresses a number of key engineering challenges facing the semiconductor industry. We believe
that by incorporating MST, transistors can be made smaller, with increased speed, reliability and power efficiency. In addition, since
MST is an additive and low-cost technology, we believe it can be deployed on an industrial scale, with machines commonly used in semiconductor
manufacturing. We believe that MST can be widely incorporated into the most common types of semiconductor products, including analog,
logic, optical and memory integrated circuits.
We do not 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.
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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, 2023, we sold approximately
1.8 million shares 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. During the year ended December 31, 2024, we sold approximately 4.1 million shares
at an average price per share of approximately $5.38, resulting in approximately $21.3 million of net proceeds to us after deducting commissions
and other offering expenses.
Results of Operations for the Years Ended December
31, 2024 and 2023
Revenues. To date,
we have only generated limited revenue from customer engagements for engineering services, integration license agreements, an R&D
license granted under a JDA, our license agreement with ST and licensing of MSTcad. Our license agreement with ST, which was executed
in April 2023, is our first commercial manufacturing and distribution agreement and, assuming successful completion of contractual milestones
and payments of associated fees, will entitle us to royalties on all MST-enabled products manufactured for commercial purposes. Our MSTcad
licenses grant customers the right to use MSTcad software to simulate the effects of incorporating MST technology into their semiconductor
manufacturing process. MSTcad licenses are granted on a monthly or yearly basis and revenue is recognized over time.
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 an R&D 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 license enabling ST to install MST in a tool in their fab and to manufacture wafers for internal development use only as well as an
HVM 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 R&D license, and upon reaching process qualification
milestones. After process qualification is complete and associated payments are made, ST will obtain an HVM license and 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.
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Revenue for the years ended December
31, 2024 and 2023 was approximately $135,000 and $550,000, respectively. Our revenue in 2024 consisted of MSTcad licensing and related
consulting services revenue, and engineering services revenue from the delivery of MST wafers. Our revenue for 2023 consisted of revenue
from a manufacturing license.
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 $123,000 and $28,000 for the
years ended December 31, 2024 and 2023, 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, 2024 and 2023, our operating expenses totaled approximately $19.3 million and $21.2 million, respectively.
Research and development
expenses. To date, our operations have focused on the research, development, 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,
2024 and 2023, we incurred approximately $11.0 million and $12.5 million, respectively, of research and development expense, a decrease
of approximately $1.5 million, or 12%. This decrease was primarily due to a decline of approximately $1.6 million in outsourced research
and development as we discontinued working with TSI Semiconductor as of January 31, 2024.
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, 2024 and 2023 were approximately $7.3 million
and $7.1 million, respectively, representing an increase of approximately $191,000, or 3%. The increase in costs was primarily due to
an increase in employee-related costs of approximately $136,000 and an increase of approximately $332,000 in patent fees and legal fees
associated with our patents. These costs were partially offset by a decrease of approximately $144,000 in stock-based compensation and
approximately $90,000 in corporate legal expenses.
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, 2024 and 2023 were approximately $1.1 million and
$1.6 million, respectively, representing a decrease of approximately $546,000, or 34%. The decrease in costs is primarily related to a
reduction in headcount which decreased employee related costs, stock-based compensation and travel expenses.
Interest income. Interest
income for the years ended December 31, 2024 and 2023 was approximately $779,000 and $723,000, 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 and cash balances during these periods.
Accretion income.
Accretion income for the years ended December 31, 2024 and 2023 was approximately $178,000 and $283,000, respectively. Accretion income
relates to the increase in value of our available-for-sale securities from the purchase date through the maturity date.
Other income/expense, net.
Other income for the years December 31, 2024 and 2023 was approximately $73,000 and $75,000, respectively. Other income consisted primarily
of a refundable state research and development tax credit, net of filing costs and tax consulting services for both years.
Interest expense. Interest
expense for the years ended December 31, 2024 and 2023 was approximately $129,000 and $194,000, respectively. Interest expense is related
to the tool financing lease entered into in August 2021.
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Liquidity and Capital Resources
As of December 31, 2024, we had
cash, cash equivalents and short-term investments of approximately $26.8 million and working capital of approximately $23.5 million. For
the year ended December 31, 2024, we had a net loss of approximately $18.4 million and used approximately $13.2 million of cash and cash
equivalents in operations. Since inception, we have incurred recurring operating losses.
During the year ended December
31, 2024, we sold approximately 4.1 million shares pursuant to our ATM at an average price per share of approximately $5.38, resulting
in approximately $21.3 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.
Cash Flows from Operating, Investing and Financing
Activities:
Net cash used in operating activities
of approximately $13.2 million for year ended December 31, 2024 resulted primarily from our net loss of approximately $18.4 million, adjusted
by approximately $3.9 million of stock-based compensation expense and amortization of right-of-use assets of approximately $1.3 million.
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 provided in investing
activities of approximately $6.1 million and for year ended December 31, 2024 consisted primarily of the maturity of short-term available-for-sale
investments, offset by the purchase of short-term available-for-sale investments.
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 provided by financing
activities of approximately $20.3 million for the year ended December 31, 2024 related primarily to net proceeds from our ATM Facility,
offset in part by approximately $1.1 million in principal payments on our financing lease.
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,
offset in part by approximately $918,000 in principal payments on our financing lease.
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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 our right to use an underlying asset for the lease term while lease liabilities represent our 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 consists of 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.
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.
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