Atomera Incorporated 2016 Form 10-K Summary
Business Context and Reporting Period
Atomera develops and seeks to commercialize and license Mears Silicon Technology (MST), a proprietary silicon-based transistor enhancement for the semiconductor industry. The company does not manufacture integrated circuits. Its intended revenue model consists of upfront license fees and royalties on wafers or devices incorporating MST.
The filing covers the fiscal year ended December 31, 2016, and was filed March 31, 2017. Atomera remained a development-stage company and had not commenced revenue-producing operations. As of the filing date, MST was in evaluation with two integrated device manufacturers and one foundry; no customer had advanced beyond the evaluation phase.
Financial Performance, Cash Flow, Liquidity and Capitalization
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $4.0 million | $2.0 million |
| General and administrative expense | $5.1 million | $3.4 million |
| Selling and marketing expense | $0.9 million | $0.04 million |
| Total operating expenses | $10.0 million | $5.5 million |
| Loss from operations | $(10.0) million | $(5.5) million |
| Net loss | $(12.6) million | $(9.5) million |
| Net loss per share | $(2.22) | $(7.55) |
| Net cash used in operating activities | $(6.8) million | $(4.4) million |
| Cash and cash equivalents at year-end | $26.7 million | $3.2 million |
| Working capital | $25.8 million | $(13.3) million, implied from reported balances |
| Accumulated deficit | $96.0 million | $83.4 million |
Margins are not meaningful because the company reported no revenue. Interest expense was $2.6 million in 2016, compared with $1.9 million in 2015, and included non-cash debt-related charges and a $0.7 million increase in the fair value of a warrant. No income tax expense was recorded because of operating losses, and deferred tax assets were fully offset by a valuation allowance.
Net cash used in investing activities was $13,000. Net cash provided by financing activities was $30.3 million, primarily from $24.7 million of net IPO proceeds and $5.5 million of net proceeds from April 2016 secured convertible notes. The secured notes, including accrued interest of approximately $23.5 million, automatically converted into 6,264,659 common shares upon the IPO, eliminating the reported debt balance at year-end.
Material Changes Versus the Prior Comparable Period
- Operating expenses increased approximately 82% to $10.0 million, driven by higher research and development, public-company costs, personnel additions, stock compensation and commercialization activity.
- Research and development expense increased 97% to $4.0 million, including greater outsourced fabrication and metrology spending and increased engineering payroll.
- General and administrative expense increased 48% to $5.1 million, primarily from executive compensation, stock-based compensation, IPO-related activities, bonuses and director compensation.
- Selling and marketing expense increased to $0.9 million from $36,000 as the company expanded business development efforts.
- Net loss increased by approximately $3.1 million, while operating cash burn increased by approximately $2.4 million.
- Cash increased by $23.5 million following the IPO and financing activities, and stockholders’ equity improved from a $13.1 million deficit to $25.8 million of positive equity.
- The 2015 loss included a one-time non-cash charge of approximately $2.1 million related to the exchange of options and warrants; no comparable charge was recorded in 2016.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
Management expected continued operating losses and negative operating cash flows until MST is qualified, licensed and used in full-scale commercial production. The company stated that available capital was expected to fund its current plan for at least 12 months from the filing date, including efforts to secure a licensee and achieve industrial production, but acknowledged that additional financing may be required.
Management’s near-term priorities included increasing research and development and sales and business development activities, accelerating customer testing, and securing adoption by at least one foundry, IDM or fabless semiconductor manufacturer. The company stated that semiconductor qualification and licensing cycles may take 18 to 36 months or longer.
- Commercial-scale manufacturing of an MST-enabled product had not occurred, and preliminary test results may not be reproducible at commercial scale or at the expected cost.
- The business depends on adoption of MST and a royalty-based model that has not yet generated revenue.
- Customer concentration, lengthy qualification cycles, cyclicality in semiconductor demand and difficulty verifying royalty reports could affect future revenue.
- Patent validity, enforceability and protection of trade secrets remain material risks. Core MST patents begin expiring in 2023.
- The company’s license with ASM International requires royalties of 5% of net royalty revenue or 2.5% of net revenue for products using specified ASM patents, and expires January 8, 2019. No royalty obligation had been incurred as of December 31, 2016.
- Additional financing may be unavailable or available only on unfavorable terms, creating a risk to continued operations if commercialization is delayed.
- Stock-based compensation was $2.5 million in 2016, and approximately $5.5 million of additional unrecognized compensation expense remained at year-end.
- Atomera had no pending legal proceedings reported as of the filing date and no off-balance-sheet arrangements or third-party guarantees.
Investor Verification Checklist
- Verify progress from evaluation to process installation, qualification and production with the two IDMs and one foundry.
- Monitor revenue commencement, license agreements, royalty rates and customer concentration.
- Assess quarterly cash burn and remaining cash runway relative to the company’s stated commercialization timeline.
- Review any subsequent equity or debt financing and potential dilution from outstanding options and warrants.
- Evaluate whether commercial-scale MST results confirm the claimed performance, reliability, energy-efficiency and cost benefits.
- Track patent challenges, expiration dates and the impact of the ASM license expiring in 2019.
- Confirm the company’s ability to fund operations if customer qualification takes longer than the expected 18-to-36-month cycle.