# Atomera Inc: Form 10-Q for the period ended Sep 30, 2018

- Company: [Atomera Inc](/companies/atom.md) (CIK 1420520)
- Form: 10-Q
- Filed: 2018-11-05
- Accepted by EDGAR: Nov 5, 2018, 16:03 ET
- Period: 2018-09-30
- Accession: 0001683168-18-003243
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1420520/000168316818003243/atomera_10q-093018.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1420520/000168316818003243/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $0 | us-gaap:Revenues |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $96.0k | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $0 | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $113.0k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $0 | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | −$17.0k | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $1.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $5.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | −$3.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | −$9.8m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | −$3.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | −$9.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | −$0.28 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.80 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | −$7.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $21.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-09-30 | $10.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $10.3m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $10.4m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $1.5m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2018-09-30 | $9.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,540 characters.

*The following discussion and analysis of the financial condition and results of operations of Atomera Incorporated should be read in conjunction with our unaudited condensed financial statements and the accompanying notes that appear elsewhere in this filing. Statements in this Quarterly Report on Form 10-Q include forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 6, 2018 and referenced under the heading “Risk Factors” within Part II, Item 1A of this Quarterly Report and other documents we subsequently file from time to time with the Securities and Exchange Commission (the “SEC”), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.*

### Overview

We are engaged in the business of developing, commercializing and licensing proprietary processes and technologies for the $400+ billion semiconductor industry. Our lead technology, named Mears Silicon TechnologyTM, 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 smaller, with increased speed, reliability and energy efficiency. In addition, since MST is an additive and low cost technology, we believe it can be deployed on an industrial scale, with machines commonly used in semiconductor manufacturing. We believe that MST can be widely incorporated into the most common types of semiconductor products, including analog, logic, optical and memory integrated circuits.

We do not intend to design or manufacture integrated circuits directly. Instead, we intend to develop and license technologies and processes that we believe will 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 are expected to 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 who 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, onto the base silicon wafer; and
- electronic design automation companies, which make tools used throughout the industry to simulate performance of semiconductor products using different materials, design structures and process technologies.

We intend to generate revenue through licensing arrangements whereby foundries and IDMs pay us a license fee for their use of 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 intend to enter into licensing arrangements with fabless semiconductor manufacturers pursuant to which we will charge them a royalty for each device they sell that incorporates our MST technology.

On October 13, 2017, the SEC declared effective our Registration Statement on Form S-3 which enables us to issue equity and/or debt instruments in one or more offerings. On October 15, 2018, we announced the closing of an underwritten public offering of 2,625,000 shares of common stock at a public offering price of $4.75 per share, pursuant to our Registration Statement on Form S-3. We have also granted the underwriters a 30-day option to purchase up to an additional 393,750 shared of its common stock, to cover over allotments, if any. We received approximately $11.5 million after deducting underwriting discounts and commission and other estimated offering expenses.

In September and October 2018, respectively, we entered into separate license agreements with Asahi Kasei Microdevices, or AKM, and STMicroelectronics, or ST, both of which are leading IDMs. The licensees have each agreed to pay us licensing fees for the right to build products that integrate MST technology deposited by us onto their semiconductor wafers, but the agreements do not grant the licensees the right to sell products incorporating MST. We intend that each license agreement will be the first of a three-stage licensing process with each of AKM and ST, to be followed by manufacturing and distribution license agreements with each of them. If executed, those manufacturing and distribution license agreements will allow each licensee to manufacture MST-enabled products entirely in their own facility and to sell them to their customers. We expect that the manufacturing and distribution agreements will provide for substantially larger upfront license fee payments than integration license fees and that the agreements will require the respective licensees to make royalty payments to us based the number and sales price of MST-enabled products they sell to their customers. However, our ability to enter into royalty-based manufacturing and distribution agreements with AKM and ST will depend, in large part, on the performance of devices they build using MST and the successful integration of our MST technology on a high-volume production scale.

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.

### Results of Operations

***Revenue.*** To date, we have only generated limited revenue from engineering services and, in time, we expect to collect license fees and royalties from customer sales of products that incorporate our MST technology. Our engineering services consist of depositing our MST film on semiconductor wafers and performing tests for customers evaluating MST. The 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. Revenue is recognized upon transfer of control of promised products, services or intellectual property (“IP”) rights in an amount that reflects the consideration that we expect to receive in exchange for those products, services or licensing of IP rights.

We did not generate revenue in the three months ended September 30, 2018 or 2017.

Revenue for the nine months ended September 30, 2018 was $96,000 and consisted of engineering services a. We did not generate revenue in the nine months ended September 30, 2017.

***Cost of revenue.*** Cost of revenue consists of royalties paid to third parties, costs of materials, as well as direct compensation and expenses incurred to provide engineering services. Cost of revenue was approximately $0 and $113,000 for the three and nine months ended September 30, 2018, respectively and $0 for the three and nine months ended September 30, 2017. We anticipate that our cost of revenue for engineering services will vary substantially depending on the nature of products and/or services delivered in each customer engagement. Accordingly, our gross margin for engineering services may vary significantly among customer engagements and from period to period and is not indicative of margins we expect to obtain from license fees and royalties.

***Operating expenses.*** Operating expenses consist of research and development, general and administrative, and selling and marketing expenses. For the three months ended September 30, 2018 and 2017, our operating expenses totaled approximately $3.5 million and approximately $3.3 million, respectively. The increase in operating expense was primarily due to an approximate $346,000 increase in payroll and related expenses and an approximate $110,000 increase in outsourced fabrication and testing expenses, which was offset by a decrease of approximately $285,000 in stock compensation expense.

For the nine months ended September 30, 2018 and 2017, our operating expenses totaled approximately $9.8 million and approximately $10.6 million, respectively. The decline in operating expense was primarily due to an approximate $1.8 million decrease in stock compensation expense, which was partly offset by an approximate $682,000 increase in payroll and related costs and an approximate $425,000 increase in outsourced fabrication and testing expenses. Stock compensation expense for the nine months ended September 30, 2017 included the full vesting in August 2017 of restricted stock grant made to certain members of our board of directors in connection with the completion of our IPO.

***Research and development expenses.*** To date, our operations have focused on the research, development, patent protection, and commercialization of our processes and technologies, including our proprietary and patent-protected MST performance enhancement technology. Our research and development costs primarily consist of payroll and benefit costs for our engineering staff and costs of outsourced fabrication and metrology of semiconductor wafers incorporating our MST technology.

For the three months ended September 30, 2018 and 2017, we incurred approximately $1.9 million and $1.6 million, respectively, of research and development expense, an increase of approximately $320,000 or 20%. The increase in research and development expense is primarily due to an increase of approximately $110,000 in spending on outsourced fabrication and metrology to support increased engagements with customers evaluating MST and an increase of approximately $186,000 in payroll and related expense reflecting an increase in engineering headcount and increase in the expected bonus accrued for this quarter compared to the same quarter last period.

For the nine months ended September 30, 2018 and 2017, we incurred approximately $5.4 million and $4.5 million, respectively, of research and development expense, an increase of approximately $848,000 or 19%. The increase in research and development expense is primarily due to an increase of approximately $425,000 in spending on outsourced fabrication and metrology to support increased engagements with customers evaluating MST, an increase of approximately $396,000 in payroll expense reflecting an increase in engineering headcount and an increase in stock-based compensation expense of approximately $72,000 which was offset by approximately $64,000 decrease in professional fees for recruiting.

***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 three months ended September 30, 2018 and 2017 were approximately $1.3 million and $1.4 million, respectively, representing a decrease of approximately $50,000 or 4%. The decrease in costs was primarily due to a decrease of approximately $199,000 in stock compensation expense. This decrease was partially offset by an approximate $127,000 increase in payroll and related costs due to an increase in the expected bonus accrued for this quarter compared to the same quarter last year.

For the nine months ended September 30, 2018 and 2017, we incurred approximately $3.8 million and $4.7 million, respectively, of general and administrative expense, a decrease of approximately $908,000 or 19%. The decrease in costs was primarily due to a decrease of approximately $1.2 million in stock compensation expense. This decrease was partially offset by an approximate $222,000 increase in payroll and related costs due to an increase in salaries and projected bonus and an approximate $55,000 increase in insurance expenses primarily due to increases in premiums.

***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 three months ended September 30, 2018 and 2017 were approximately $237,000 and $350,000, respectively, representing a decrease of approximately $113,000, or 32%. Approximately $122,000 of the decrease is due to lower stock-based compensation. The remaining decrease is due to an approximate $19,000 decrease in consulting expense, which is partially offset by an approximately $32,000 increase in payroll and related expenses.

For the nine months ended September 30, 2018 and 2017, we incurred approximately $695,000 and $1.4 million, respectively, of selling and marketing expense, a decrease of approximately $672,000 or 49%. The decrease primarily related to an approximate $627,000 decrease in stock compensation expense and an approximate $95,000 decrease in consulting expense. These decreases were offset in part by an increase of approximately $63,000 in payroll and related costs due to the increase in expected bonus accrued for the nine months ended September 30, 2018 compared to the same period of 2017.

***Interest income and expenses.*** Interest income for the three months ended September 30, 2018 and 2017 was approximately $48,000 and $42,000, respectively. Interest income for the nine months ended September 30, 2018 and 2017 was approximately $145,000 and $106,000, respectively. Interest income for each period related to interest earned on our cash and cash equivalents.

### Liquidity and Capital Resources

As of September 30, 2018, we had cash and cash equivalents of approximately $10.0 million and working capital of approximately $8.9 million. For the nine months ended September 30, 2018, we had a net loss of approximately $9.6 million and used approximately $7.4 million of cash in operations. Since inception, we have incurred recurring operating losses. At September 30, 2018, we had an accumulated deficit of approximately $118.7 million.

On October 15, 2018 we closed an underwritten public offering of 2,625,000 shares of our common stock at a public offering price of $4.75 per share, pursuant to our Registration Statement on Form S-3. We have also granted the underwriters a 30-day option to purchase up to an additional 393,750 shares of our common stock, to cover over allotments, if any, at an exercise price of $4.75 per share. We received approximately $11.3 million of net proceeds, after deducting underwriting discounts and commissions and other estimate offering expenses

As of the date of this report, and after giving effect to our October 2018 public offering of common shares, 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, the semiconductor industry is generally slow to adopt new manufacturing process technologies and conducts long testing and qualification processes which we have limited ability to control, and there can be no assurance of the timing of our receipt of meaningful amounts of revenue.

If we are not able to generate sufficient revenue from license fees and royalties in a timeframe that satisfies our cash needs, we will need to raise more capital. In the event we require additional capital, we will endeavor to acquire additional funds through various financing sources, including follow-on equity offerings, debt financing and joint ventures with industry partners. In addition, we will consider alternatives to our current business plan that may enable to us to achieve revenue-producing operations and meaningful commercial success with a smaller amount of capital. However, there can be no guarantees that additional capital, whether under the S-3 Registration Statement or otherwise, will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to further pursue our business plan and we may be unable to continue operations.

### Cash Flows from Operating, Investing and Financing Activities

Net cash used in operating activities of approximately $7.4 million for the nine months ended September 30, 2018 resulted primarily from our net loss of approximately $9.7 million adjusted by approximately $1.8 million for stock-based compensation expense.

Net cash used in operating activities of approximately $7.1 million for the nine months ended September 30, 2017 resulted primarily from our net loss of approximately $10.5 million adjusted by approximately $3.6 million for stock-based compensation expense and a decrease of approximately $233,000 in accrued payroll expense

Net cash used in investing activities of approximately $21,000 for the nine months ended September 30, 2018 and approximately $17,000 for nine months ended September 30, 2017 consisted of the purchase of property and equipment.

No cash was used in or provided by financing activities for the nine months ended September 30, 2018 or 2017.

### Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements or issued guarantees to third parties.

### Recent Accounting Pronouncements

We are required to adopt certain new accounting pronouncements. See note 3 to the condensed financial statements included in Item 1 of this Form 10-Q.

### Critical Accounting Policies

There have been no changes to our critical accounting policies from those included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 6, 2018.

## Controls and procedures

As filed, 886 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and principal financial and accounting officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2018.

### Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the three-month period ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

## Risk factors

As filed, 4,909 characters.

*We have set forth below the risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations that reflect material substantive changes from the risks disclosed in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on March 6, 2018, or Annual Report. The risks described below and included in our Annual Report are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and accompanying notes.*

***While we have recently entered into two integration license agreements, there can be no assurance that either relationship will lead to a royalty-based manufacturing or distribution license agreement***. In September and October 2018, respectively, we entered into separate license agreements with Asahi Kasei Microdevices, or AKM, and STMicroelectronics, or ST, both of which are leading IDMs. The licensees have each agreed to pay us licensing fees for the right to build products that integrate MST technology deposited by us onto their semiconductor wafers, but the agreements do not grant the licensees the right to sell products incorporating MST. We intend that each license agreement will be the first of a three-stage licensing process with each of AKM and ST, to be followed by manufacturing and distribution license agreements with each of them. If executed, those manufacturing and distribution license agreements will allow each licensee to manufacture MST-enabled products entirely in their own facility and to sell them to their customers. We expect that the manufacturing and distribution agreements will provide for substantially larger upfront license fee payments than integration license fees and that the agreements will require the respective licensees to make royalty payments to us based the number and sales price of MST-enabled products they sell to their customers. However, our ability to enter into royalty-based manufacturing and distribution agreements with AKM and ST will depend, in large part, on the performance of devices they build using MST and the successful integration of our MST technology on a high-volume production scale. There can be no assurance that our MST technology will deliver the performance, power or other requirements our customers seek for their products or that the integration of our technology with our customers’ manufacturing process will be successful in high volume. In addition, even if our MST technology is successfully integrated into the licensees’ products, either or both of the licensees may decide, for reasons unrelated to the price or performance of our MST technology, not to enter into manufacturing and distribution license agreements.

***We expect that our product qualification and licensing cycle will be lengthy and costly, and our marketing, engineering and sales efforts may be unsuccessful.*** We expect to incur significant engineering, marketing and sales expenses prior to entering into any license agreements, generating a license fee and establishing a royalty stream from each licensee. The introduction of any new process technology into semiconductor manufacturing is a lengthy process and we cannot forecast the length of time it takes to establish a new licensing relationship. Based on our engagements with potential customers to date, we believe the time from initial engagement until our customers execute a license and subsequently incorporate our technologies in their integrated circuits, can take 18 to 36 months or longer. Our integration license agreements with AKM and ST do not commit either customer to manufacturing or distribution licenses and we expect both customers to perform additional tests on evaluation wafers under their respective integration licenses before deciding whether to enter the next stages of licensing MST. As such, we will incur additional expenses in our engagements with AKM and ST before we receive license fees, if any, for manufacturing and distribution and before any subsequent royalty stream begins. While we believe that licensing of MST with AKM and ST could accelerate licensing decisions by other customers, the evaluation process for new technologies in the semiconductor industry is inherently long and complex and there can be no assurance that we will successfully convert other customer prospects into paying customers or that any of these customers will generate sufficient revenue to cover our expenses.

Filed Nov 5, 2018.
Source: SEC EDGAR, the filing index for accession 0001683168-18-003243. Last ingested by Listed: Nov 5, 2026, 02:11 ET. No prices; not investment advice.