Atomera Incorporated 2019 Form 10-K Summary
Business Context and Reporting Period
Atomera develops and licenses Mears Silicon Technology (MST), a proprietary thin-film silicon process intended to improve semiconductor transistor performance, power efficiency, reliability and scalability. The company does not manufacture integrated circuits. Revenue is currently generated from integration license agreements and engineering services; no royalty-bearing manufacturing or distribution license had been executed as of the filing date.
The filing covers the fiscal year ended December 31, 2019, compared with fiscal 2018. The Form 10-K was filed on March 13, 2020. Atomera had 17.1 million shares outstanding at December 31, 2019 and 17.3 million shares outstanding as of March 6, 2020.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $533,000 | $246,000 | +117% |
| Gross profit | $280,000 | $98,000 | +186% |
| Gross margin | 52.5% | 39.8% | +12.7 percentage points |
| Operating expenses | $13.905 million | $13.231 million | +5% |
| Loss from operations | $(13.625) million | $(13.133) million | Loss increased 4% |
| Net loss | $(13.300) million | $(12.897) million | Loss increased 3% |
| Basic and diluted loss per share | $(0.84) | $(1.02) | Improved due primarily to higher share count |
| Cash used in operations | $(10.408) million | $(9.773) million | Use increased 6% |
| Cash and cash equivalents | $14.871 million | $18.933 million | Down $4.062 million |
| Working capital | Approximately $13.5 million | Not clearly provided | Not applicable |
| Accumulated deficit | $(135.262) million | $(121.962) million | Deficit increased $13.3 million |
Research and development expense increased to $7.748 million from $7.318 million, primarily because of higher stock-based compensation and payroll costs. General and administrative expense increased to $5.203 million from $4.956 million, while selling and marketing expense was essentially unchanged at $954,000.
Cash used in investing activities was $51,000, principally for property and equipment. Financing activities provided $6.397 million from the May 2019 registered direct offering of common stock. The company had no disclosed debt financing and reported total liabilities of $1.468 million at year-end, substantially below cash and total assets of $15.240 million.
Stock-based compensation was $2.929 million in 2019, compared with $2.425 million in 2018. Outstanding options, restricted stock and warrants represented significant potential dilution; approximately 4.185 million potentially dilutive securities were excluded from diluted loss per share because they were anti-dilutive.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled, but remained limited and was derived solely from integration services and integration license arrangements rather than production royalties.
- Gross margin improved materially as revenue grew faster than cost of revenue.
- Operating expenses and net loss increased modestly, and operating cash burn rose to $10.4 million.
- Atomera raised approximately $6.4 million net through a May 2019 registered direct offering, issuing 1.675 million shares.
- The company entered into an integration license agreement with a leading fabless RF semiconductor provider in October 2019, in addition to existing agreements with Asahi Kasei Microdevices and STMicroelectronics.
- As of the filing date, MST was in the integration phase across 15 customer engagements. No customer had progressed beyond the integration phase in the standard commercialization process.
- Adoption of the new lease accounting standard resulted in recognition of an operating lease right-of-use asset and lease liabilities, without an impact on earnings or cash flows upon adoption.
Guidance, Outlook, Commentary and Risks
Management stated that available working capital was expected to fund current business plans and obligations for at least the 12 months following the filing date. However, the company expects continued operating losses and negative operating cash flow until it secures manufacturing and distribution licenses that generate larger upfront fees and royalties. Additional capital may be required before royalty revenue begins or becomes sufficient to cover operating expenses.
Customer qualification for semiconductor process technologies may take 18 to 36 months or longer. Current integration licenses permit evaluation of MST but do not permit customers to manufacture MST-enabled products at their facilities or sell those products. Future manufacturing and distribution agreements are not assured and depend on successful high-volume integration, product performance and customer decisions.
- The business is highly dependent on adoption of MST and conversion of evaluation relationships into commercial, royalty-bearing licenses.
- Revenue may be concentrated among a small number of customers. In 2019, six customers represented approximately 26%, 19%, 16%, 16%, 13% and 9% of revenue.
- Customer access to manufacturing equipment and facilities has caused evaluation delays, and leased epitaxial equipment is subject to maintenance and downtime risks.
- In October 2019, Atomera agreed to lease an epitaxial tool for five years at $150,000 per month, with commencement anticipated in April 2020.
- The company cited competition, intellectual-property challenges, patent expiration beginning in August 2023, potential infringement claims, and the risk that patents may not adequately protect MST.
- The company identified the coronavirus outbreak as a potential source of disruption to customer operations, evaluations, negotiations and revenue; the financial effect was not reasonably estimable at filing.
- The company had no material pending litigation as of December 31, 2019 and through the financial statement issuance date.
- Management reported effective disclosure controls and internal control over financial reporting. Because Atomera was an emerging growth company and smaller reporting company, the auditor did not provide an attestation report on internal control effectiveness.
Important Facts for Investors to Verify
- Whether AKM, STMicroelectronics or the RF semiconductor licensee progresses from integration licenses to manufacturing and distribution agreements.
- The timing, size and terms of any future upfront license fees and royalty arrangements.
- Actual customer qualification results and whether MST benefits can be replicated in high-volume commercial production.
- Cash burn, remaining liquidity and the timing and terms of any required equity, debt or strategic financing.
- The financial impact of the $150,000-per-month epitaxial tool lease and other planned increases in research and development spending.
- Customer concentration, renewal or continuation of evaluation agreements, and the potential effect of semiconductor industry cycles or customer delays.
- Patent validity, enforceability and expiration, including the effect of core patent expirations beginning in 2023.
- Potential dilution from approximately 3.7 million shares reserved for outstanding options and warrants, subsequent equity awards, and future capital raises.