Atomera Incorporated — 2016 Q2 Form 10-Q Summary
Business Context and Reporting Period
Atomera develops, commercializes and licenses semiconductor process technologies, primarily Mears Silicon Technology (MST), a thin-film enhancement intended to improve transistor performance, reliability and energy efficiency. The company was still in the development stage and had not commenced planned principal operations or generated revenue. The filing covers the three and six months ended June 30, 2016; the financial statements are unaudited and presented under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $0.87 million | $1.81 million |
| General and administrative expense | $0.89 million | $1.75 million |
| Selling and marketing expense | $0.09 million | $0.21 million |
| Total operating expenses | $1.85 million | $3.78 million |
| Interest expense, net | $0.75 million | $1.31 million |
| Net loss | $2.60 million | $5.09 million |
| Net loss per share | $1.61 | $3.14 |
At June 30, 2016, cash was $5.27 million, total assets were $5.69 million, and working capital deficit was approximately $18.2 million. Senior secured convertible notes payable, net, totaled $22.87 million, including $20.71 million of principal, $2.55 million of accrued interest and debt discount. Stockholders’ deficit was $17.91 million, and accumulated deficit was $88.47 million.
For the six months, operating cash use was $3.29 million, investing cash use was $0.01 million, and financing cash provided was $5.38 million. Cash increased by $2.07 million from $3.20 million at December 31, 2015 to $5.27 million at June 30, 2016. The filing does not provide a meaningful operating margin because the company had no revenue; operating loss equaled operating expenses.
Material Changes Versus the Prior Comparable Period
- Six-month research and development expense increased 66% to $1.81 million, primarily from higher engineering headcount and outsourced fabrication and metrology.
- Six-month general and administrative expense decreased 18% to $1.75 million, largely because the prior-year period included approximately $1.0 million of non-cash warrant compensation; 2016 included higher payroll and severance costs.
- Selling and marketing expense increased from zero to $0.21 million as the company expanded customer-facing commercialization efforts.
- Six-month operating loss increased from $3.25 million to $3.78 million, while net loss increased from $4.04 million to $5.09 million.
- Interest expense increased from $0.79 million to $1.31 million following the issuance of approximately $5.96 million of additional secured notes in April 2016.
- Operating cash use increased 39% year over year, while financing cash inflows declined 30% because the comparable 2015 period included larger note financing proceeds.
Outlook, Liquidity, Risks and Unusual Items
On August 10, 2016, after quarter-end, Atomera completed an initial public offering of 3.68 million shares at $7.50 per share. Net proceeds were approximately $24.7 million. Concurrently, approximately $23.5 million of principal and accrued interest under the secured notes converted into 6,264,659 common shares at a $3.75 conversion price, eliminating the debt.
Management stated that the IPO proceeds and debt conversion should provide sufficient capital for at least 12 months from the filing date to pursue customer qualification, licensing and potential full-scale industrial production. Planned activities included hiring up to six employees, expanding research and development and sales efforts, developing customer evaluation tools, and pursuing additional U.S. and foreign patents.
- The company had no revenue, recurring operating losses and an accumulated deficit of approximately $88.5 million.
- Commercial success depends on securing foundry, IDM or fabless semiconductor customers, completing lengthy technology testing and qualification processes, and entering initial licensing or commercial agreements.
- Management cautioned that additional capital may be required and may not be available on acceptable terms.
- Key risks include semiconductor industry adoption cycles, protection of intellectual property, the ability to commercialize MST, financing needs and continued operating losses.
- A potential incentive award of approximately $1.7 million was outstanding at quarter-end, subject to IPO and service conditions. Following quarter-end, this arrangement was replaced with restricted stock awards totaling 440,364 shares, issued at the IPO closing.
- The company relocated its headquarters to Los Gatos, California, incurred severance costs, and entered into operating leases with approximately $0.27 million of remaining minimum payments disclosed at June 30, 2016.
- Management reported effective disclosure controls as of June 30, 2016 and no material changes to internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the post-IPO capitalization, including the 3.68 million IPO shares, 6.26 million shares issued on note conversion and 440,364 restricted shares.
- Confirm the use of IPO proceeds, post-IPO cash balance and the company’s updated liquidity runway.
- Track whether Atomera secures initial MST licensing agreements, customer qualifications or production programs.
- Review the terms, dilution and exercise prices of outstanding options and warrants.
- Assess ongoing research, sales and marketing spending against the company’s commercialization milestones.
- Monitor the need for additional financing and the effect of any future equity issuance on existing shareholders.