Atomera Incorporated — Q3 2019 Form 10-Q Summary
Business context and reporting period
Atomera develops, commercializes and licenses its proprietary Mears Silicon Technology (MST) for the semiconductor industry. The company does not intend to manufacture integrated circuits and remains in the development stage, with limited revenue and substantially all resources directed toward research, development, customer engagements and commercialization.
This Form 10-Q covers the three and nine months ended September 30, 2019. The financial statements are unaudited. Atomera had 17.1 million common shares outstanding as of October 28, 2019.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $254,000 | $0 | $395,000 | $96,000 |
| Gross margin | $50,000 | $0 | $171,000 | $(17,000) |
| Gross margin percentage | 19.7% | Not meaningful | 43.3% | (17.7%) |
| Operating expenses | $3.225 million | $3.483 million | $10.690 million | $9.826 million |
| Loss from operations | $(3.175) million | $(3.483) million | $(10.519) million | $(9.843) million |
| Net loss | $(3.086) million | $(3.435) million | $(10.254) million | $(9.698) million |
| Net loss per share | $(0.19) | $(0.28) | $(0.66) | $(0.80) |
| Cash used in operations | Not provided | Not provided | $(8.479) million | $(7.356) million |
Revenue consisted of integration services and integration license agreements. Nine-month revenue was generated across North America, Europe and Asia Pacific. The company recognized $222,000 of Q3 revenue at a point in time and $32,000 over time.
Cash and cash equivalents were $16.8 million at September 30, 2019, compared with $18.9 million at December 31, 2018. Working capital was approximately $15.9 million, and accumulated deficit was $132.2 million. Total liabilities were $1.3 million, consisting primarily of operating lease liabilities and accrued obligations; the filing does not report conventional debt.
Net cash used in investing activities was $51,000. Financing activities provided $6.397 million from the May 2019 registered direct offering. Cash decreased by $2.133 million during the first nine months of 2019.
Material changes versus the prior comparable period
- Q3 revenue increased from zero to $254,000; nine-month revenue increased 311% to $395,000 from $96,000.
- Q3 gross profit was $50,000, compared with break-even in the prior-year quarter. Nine-month gross profit was $171,000, compared with a $17,000 gross loss in 2018.
- Q3 operating expenses declined 7% to $3.225 million, primarily because of lower research and development and general and administrative costs. Nine-month operating expenses increased 9% to $10.690 million.
- Nine-month research and development expense increased 11% to $5.930 million, reflecting higher outsourced fabrication and metrology spending, engineering headcount and stock-based compensation.
- Nine-month net loss increased 6% to $10.254 million, although per-share loss improved because of the higher share count.
- The May 2019 registered direct offering issued 1.675 million shares and generated approximately $6.4 million in net proceeds.
- Atomera adopted ASC Topic 842 for leases, recognizing a $196,000 operating lease right-of-use asset and $187,000 of lease liabilities at September 30, 2019.
Outlook, risks and unusual items
Management expects increased research and development headcount and higher spending on outsourced fabrication and testing. Based on available funds at the filing date, management believes capital is sufficient to fund current plans and obligations for at least the next 12 months.
The company continues to incur recurring operating losses and has generated only limited operating revenue. Management states that additional capital may be required if meaningful manufacturing license fees, engineering revenue or royalties do not develop. Future financing may include equity, debt or joint ventures, but availability and terms are not assured.
Management highlights the semiconductor industry's lengthy testing and qualification cycles, slow adoption of new manufacturing technologies and the company's limited control over the timing of commercial revenue. No material litigation was reported. The primary risk factors were stated to be materially unchanged from those previously disclosed.
On October 9, 2019, Atomera entered into a five-year equipment lease at $150,000 per month, with an anticipated March 1, 2020 commencement. This represents a significant planned increase in future cash commitments.
Stock-based compensation was $2.280 million for the first nine months of 2019, including $798,000 in Q3. Approximately $4.6 million of unrecognized stock-based compensation remained at September 30, 2019. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether integration services and license agreements convert into recurring manufacturing license fees and royalties.
- The timing and commercial qualification of MST with current and prospective semiconductor customers.
- Cash runway under the planned increase in research, development, fabrication and testing expenditures.
- The potential need for additional capital and the dilution or financing risk associated with future fundraising.
- The financial impact of the five-year equipment lease beginning in 2020.
- The scale and sustainability of stock-based compensation and other non-cash expenses.
- The composition and concentration of the limited revenue reported in 2019.