2.
|
LIQUIDITY AND MANAGEMENT PLANS
|
At September 30,
2020, the Company had cash and cash equivalents of approximately $25.3 million
25,297 and working capital of approximately $24.1
million. The Company has generated only limited revenue since inception and has incurred recurring operating losses.
Based on the funds it has
available as of the date of the filing of this report, the Company believes that it has sufficient capital to fund its current
business plans and obligations over at least 12 months from the date that these financial statements have been issued. However,
the semiconductor industry is generally slow to adopt new manufacturing process technologies and conducts long testing and qualification
processes which have limited the Company’s ability to control, and there can be no assurances of the timing of receipt of
meaningful amounts of revenue. In addition, the COVID-19 pandemic has impacted some of the Company’s customer contract negotiations
and delayed some engineering work by its customers. Accordingly, the Company may require additional capital, the receipt of which
cannot be assured. In the event the Company requires additional capital, there can be no guarantee that funds will be available
on commercially reasonable terms, if at all. The Company’s future capital requirements and the adequacy of its available
funds will depend on many factors, including the Company’s ability to successfully commercialize its technology in the near
term, competing technological and market developments, and the need to enter into collaborations with other companies or acquire
technologies to enhance or complement its current offerings. If the Company is unable to secure additional capital, it may be required
to curtail its research and development initiatives, change its business strategy and take additional measures to reduce costs
in order to conserve its cash.
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Significant accounting policies
There have been no material
changes in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020 except those noted below under
the caption “Adoption of recent accounting standards”.
Basis of presentation of unaudited condensed financial information
The unaudited condensed
financial statements of the Company for the three and nine months ended September 30, 2020 and 2019 have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information
and pursuant to the requirements for reporting on Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by GAAP for complete financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation
of the Company’s financial position and the results of operations. Results shown for interim periods are not necessarily
indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, 2019 was derived
from the audited financial statements included in the Company's financial statements as of and for the year ended December 31,
2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2020. These financial statements
should be read in conjunction with that report.
Adoption of recent accounting standards
In June 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s
main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other
financial assets in scope. The new guidance represents significant changes to accounting for credit losses: (i) full lifetime expected
credit losses will be recognized upon initial recognition of an asset in scope; (ii) the current incurred loss impairment model
that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without
recognition threshold; and (iii) the estimate of expected credit losses will be based upon historical information, current conditions,
and reasonable and supportable forecasts. ASU No. 2016-13 introduces two distinctive credit loss impairment models: (i) current
expected credit losses (“CECL”) impairment model (Subtopic 326-20) applicable to financial assets measured at amortized
cost; and (ii) available-for-sale debt securities impairment model (Subtopic 326-30). ASU No. 2016-13 is effective for public entities
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this
standard on January 1, 2020 and it did not have a material impact on its financial position, results of operations or financial
statement disclosure.
Recent accounting standards
In
August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging
- Contracts in Entity’s Own Equity (Subtopic 815-40). The new guidance eliminates the beneficial conversion and
cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s
own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance
modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted
EPS computation. This guidance is effective as of January 1, 2022 (Early adoption is permitted effective January 1, 2021).
The Company is currently evaluating the effect the updated standard will have on its financial position, results of operations
or financial statement disclosure.
The Company recognizes
revenue when it satisfies a performance obligation by transferring the product or service to the customer, either at a point in
time or over time. The Company usually recognizes revenue from integration service agreements at a point in time and integration
license agreements over a period of time.
Disaggregation of revenue:
The following table provides information about
disaggregated revenue by primary geographical markets and timing of revenue recognition for the three and nine month periods ended
September 30, 2020 and 2019 (in thousands):
Information about disaggregated revenue and timing of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Primary geographic markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
–
|
|
|
$
|
50
|
|
|
$
|
62
|
|
|
$
|
50
|
|
Europe
|
|
|
–
|
|
|
|
104
|
|
|
|
–
|
|
|
|
187
|
|
Asia Pacific
|
|
|
–
|
|
|
|
100
|
|
|
|
–
|
|
|
|
158
|
|
Total
|
|
$
|
–
|
|
|
$
|
254
|
|
|
$
|
62
|
|
|
$
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a point in time
|
|
$
|
–
|
|
|
$
|
222
|
|
|
$
|
62
|
|
|
$
|
240
|
|
Products and services transferred over time
|
|
|
–
|
|
|
|
32
|
|
|
|
–
|
|
|
|
155
|
|
Total
|
|
$
|
–
|
|
|
$
|
254
|
|
|
$
|
62
|
|
|
$
|
395
|
|
Unbilled contracts receivable and deferred revenue:
Timing of revenue recognition
may differ from the timing of invoicing customers. Accounts receivable includes amounts billed and currently due from customers.
Unbilled contracts receivable represents unbilled amounts expected to be received from customers in future periods, where the revenue
recognized to date exceeds the amount billed, and the right to receive payment is subject to the underlying contractual terms.
Unbilled contracts receivable amounts may not exceed their net realizable value and are classified as long-term assets if the payments
are expected to be received more than one year from the reporting date.
The Company records deferred
revenue when revenue will be recognized after invoicing. During the nine months ended September 30, 2020, the Company recognized
approximately $37,000 of revenue that was included in deferred revenue as of December 31, 2019.
5.
|
BASIC AND DILUTED LOSS PER SHARE
|
Basic net loss per share
is calculated by dividing the net loss by the weighted-average number of shares outstanding for the period. Diluted net loss per
share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of shares
of common stock outstanding and the dilutive common stock equivalent shares outstanding during the period. The Company’s
potentially dilutive common stock equivalent shares, which include incremental common shares issuable upon (i) the exercise of
outstanding stock options and warrants and (ii) vesting of restricted stock units and restricted stock awards, are only included
in the calculation of diluted net loss per share when their effect is dilutive. Since the Company has had net losses for all periods
presented, all potentially dilutive securities are anti-dilutive. Accordingly, basic and diluted net loss per share are equal.
The following potential
common stock equivalents were not included in the calculation of diluted net loss per common share because the inclusion thereof
would be anti-dilutive (in thousands):
Schedule of anti dilutive shares
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Stock Options
|
|
|
3,463
|
|
|
|
2,935
|
|
Unvested restricted stock
|
|
|
716
|
|
|
|
480
|
|
Warrants
|
|
|
369
|
|
|
|
765
|
|
Total
|
|
|
4,548
|
|
|
|
4,180
|
|
The Company leases corporate office space in Los Gatos, California. In August 2020, the Company and its landlord amended the lease of this office. This amendment extends the expiration date of the lease from January 2021 to January 2026 and increases the space from 3,396 square feet to 4,101 square feet. Under Accounting Standard Codification (“ASC”) 842, the lease amendment was treated as a separate lease for the new space and a modification of the lease for the original space. An additional right-of-use (“ROU”) asset and lease liability of approximately $681,000 were recorded during the three and nine months ended September 30, 2020. The lease liability is based on the present value of the minimum lease payments, discounted using the Company’s estimated incremental borrowing rate of 5.5%. The lease contains escalating payments on the anniversary of the original commencement which are included in the measurement of the initial lease liability. Additional payments based on a change in the Company’s share of the operating expenses, including property taxes and insurance, are recorded as a period expense when incurred. Lease expense for operating leases consists of the lease payments recognized on a straight-line basis over the lease term. When the additional space is available for use, the Company expects to record an additional ROU asset and corresponding liability of approximately $144,000. This is expected in early 2021.
The components of operating
lease costs were as follows (in thousands):
Components of lease costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Fixed lease costs
|
|
$
|
30
|
|
|
$
|
27
|
|
|
$
|
83
|
|
|
$
|
81
|
|
Variable lease costs
|
|
|
9
|
|
|
|
14
|
|
|
|
36
|
|
|
|
40
|
|
Short term lease costs
|
|
|
11
|
|
|
|
7
|
|
|
|
28
|
|
|
|
23
|
|
Total operating lease costs
|
|
$
|
50
|
|
|
$
|
48
|
|
|
$
|
147
|
|
|
$
|
144
|
|
Future minimum payments
under non-cancellable leases as of September 30, 2020 were as follows (in thousands):
Schedule of future minimum lease payments
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
Amount
|
Remaining 2020
|
|
$
|
27
|
|
2021
|
|
|
108
|
|
2022
|
|
|
166
|
|
2023
|
|
|
170
|
|
2024 & thereafter
|
|
|
371
|
|
Total future minimum lease payments
|
|
|
842
|
|
Less imputed interest
|
|
|
(119
|
)
|
Total lease liability
|
|
$
|
723
|
|
The following table provides
supplemental information and non-cash activity related to the Company’s operating leases (in thousands):
Supplemental non-cash activity related to operating leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
123
|
|
|
$
|
120
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for the lease obligations
|
|
$
|
681
|
|
|
$
|
–
|
|
|
$
|
681
|
|
|
$
|
295
|
|
In October 2019, the Company
entered into an agreement to lease a tool for use in the development of the Company’s technology. The lease is for five years
at $150,000 per month. The lease commencement date is anticipated to be in November 2020, at which time the Company will account
for the lease under ASC 842. A prepayment of $450,000 was made in the nine months ended September 30, 2020, this payment represents
the final three payments under the lease and is recorded as a long-term prepaid until the lease commencement, at which time it
will be record in accordance with ASC 842.
A summary of warrant activity
for the nine months ended September 30, 2020 is as follows (in thousands except per share amounts and contractual term):
Schedule of warrant activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (In Years)
|
|
Outstanding at January 1, 2020
|
|
|
765
|
|
|
$
|
5.75
|
|
|
|
|
|
Exercised
|
|
|
(386
|
)
|
|
$
|
2.34
|
|
|
|
|
|
Expired
|
|
|
(10
|
)
|
|
$
|
0.15
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
369
|
|
|
$
|
9.46
|
|
|
|
0.8
|
|
The warrants outstanding
at September 30, 2020 had an intrinsic value of approximately $396,000 based on a per-share stock price of $10.45 as of September
30, 2020.
On March 17, 2020, 196,602
warrants with an exercise price of $3.75 were set to expire. Prior to the expiration, the Company entered into an agreement with
the warrant holders, whereby it modified the terms of the warrants to extend the expiration date until September 17, 2020 in exchange
for the removal of a cashless exercise provision. No other terms were modified. Due to this modification, the Company incurred
a modification expense of approximately $139,000 that is included in general and administrative expenses on the Condensed Statement
of Operations for the nine months ended September 30, 2020. All of the modified warrants were exercised on August 6, 2020.
8.
|
STOCK BASED COMPENSATION
|
In May 2017, the Company’s
shareholders approved its 2017 Stock Incentive Plan (“2017 Plan”) after its 2007 Stock Incentive Plan (“2007
Plan”) had expired in March 2017. The 2017 Plan provides for the grant of non-qualified stock options and incentive stock
options to purchase shares of the Company’s common stock and for the grant of restricted and unrestricted shares. The 2017
Plan provides for the issuance of 3,750,000 shares of common stock. All of the Company’s employees and any subsidiary employees
(including officers and directors who are also employees), as well as all of the Company’s nonemployee directors and other
consultants, advisors and other persons who provide services to the Company are eligible to receive incentive awards under the
2017 Plan. Generally, stock options and restricted stock issued under the 2017 Plan vest over a period of one to four years from
the date of grant.
The following table summarizes
the stock-based compensation expense recorded in the Company’s results of operations during the three and nine months ended
September 30, 2020 and 2019 for stock options and restricted stock granted under the 2017 Plan and the 2007 Plan (in thousands):
Schedule of stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
319
|
|
|
$
|
223
|
|
|
$
|
843
|
|
|
$
|
622
|
|
General and administrative
|
|
|
470
|
|
|
|
541
|
|
|
|
1,269
|
|
|
|
1,557
|
|
Selling and Marketing
|
|
|
40
|
|
|
|
34
|
|
|
|
112
|
|
|
|
101
|
|
|
|
$
|
829
|
|
|
$
|
798
|
|
|
$
|
2,224
|
|
|
$
|
2,280
|
|
As September 30, 2020,
there was approximately $5.8 million of total unrecognized compensation expense related to unvested share-based compensation arrangements
that are expected to vest. This cost is expected to be recognized over a weighted-average period of 2.7 years.
The weighted average grant
date fair value per share of the options granted under the Company’s 2017 Plan was $7.64 and $2.80 for the three and nine
months ended September 30, 2020, respectively. The weighted average grant date fair value per share of the options granted under
the Company’s 2017 Plan was $2.50 for the nine months ended September 30, 2019.
The following table summarizes
stock option activity during the nine months ended September 30, 2020 (in thousands except exercise prices and contractual terms):
Schedule of stock option activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Prices
|
|
|
Weighted-
Average
Remaining
Contractual
Term (In Years)
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2020
|
|
|
2,935
|
|
|
$
|
6.36
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
664
|
|
|
$
|
4.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(136
|
)
|
|
$
|
5.76
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
3,463
|
|
|
$
|
5.97
|
|
|
|
6.77
|
|
|
$
|
15,677
|
|
Exercisable at September 30, 2020
|
|
|
2,404
|
|
|
$
|
6.62
|
|
|
|
5.92
|
|
|
$
|
9,358
|
|
During the nine months
ended September 30, 2020, the Company granted options under the 2017 Plan to purchase approximately 664,000 shares of its common
stock to its employees. The fair value of these options was approximately $1.9 million at the time of grant.
The Company issues restricted
stock to employees, directors and consultants and estimates the fair value based on the closing price on the day of grant. The
following table summarizes all restricted stock activity during the nine months ended September 30, 2020 (in thousands except per
share data):
Schedule of restricted stock option activity
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Outstanding at January 1, 2020
|
|
|
486
|
|
|
$
|
4.50
|
|
Granted
|
|
|
463
|
|
|
$
|
4.43
|
|
Vested
|
|
|
(233
|
)
|
|
$
|
4.57
|
|
Outstanding non-vested shares at September 30, 2020
|
|
|
716
|
|
|
$
|
4.43
|
|
During the nine months
ended September 30, 2020, the Company granted approximately 463,000 restricted stock awards under the 2017 Plan to its employees
and directors. The fair value of these awards was approximately $2.1 million at the time of grant.
9.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation, Claims and Assessments
The Company may be subject
to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The Company is not party to any
material litigation as of September 30, 2020, or through the date these financial statements have been issued.
Management has evaluated
subsequent events and transactions through the date these financial statements were issued.
Between October 1, 2020
and the date of filing this report, the Company issued and sold 484,148 shares of its common stock through the At-The-Market program
initiated in September 2020. Net proceeds from the sale of these shares after sales commissions and expenses was approximately
$5.0 million.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
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
under the heading “Risk Factors” within our Prospectus Supplement filed pursuant to Rule 424(b)(5) with the SEC on
September 2, 2020 and other documents we subsequently file from time to time with the SEC, such as our Annual Report on Form 10-K
filed with the SEC on March 13, 2020, 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 $450+ 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 made smaller, with increased speed, reliability
and power 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 develop and license technologies and processes that we believe 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 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 that outsource the manufacture of their chips to foundries;
|
|
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original equipment manufacturers, or OEMs, that manufacture the epitaxial, or EPI, machines used to deposit semiconductor layers, such as the MST film, onto the silicon wafer; and
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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.
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Our commercialization strategy
is to generate revenue through licensing arrangements whereby foundries, IDMs and fabless semiconductor manufacturers pay us a
license fee for their right to use MST technology in the manufacture of silicon wafers as well as a royalty for each silicon wafer
or device that incorporates our MST technology. To date we have generated revenue from (i) licensing agreements with two IDMs and
one fabless manufacturer and (ii) engineering services provided to foundries, IDMs and fabless companies.
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.
On August 10, 2016, we
closed our initial public offering of 3,680,000 shares of common stock at a public offering price of $7.50 per share. We received
approximately $24.7 million in net proceeds after deducting underwriting discounts and commission and other offering expenses.
On October 15, 2018, we
closed an underwritten public offering of 2,625,000 shares of common stock at a public offering price of $4.75 per share, resulting
in approximately $11.4 million of net proceeds to us after deducting underwriting discounts and commission and other offering expenses.
On May 30, 2019, we closed
a registered direct offering of 1,675,000 shares of common stock at a price of $4.00 per share, resulting in approximately $6.4
million of net proceeds to us after deducting placement agent fees and other offering expenses.
On May 15, 2020, we closed
an underwritten public offering of 2,024,000 shares of common stock at a public offering price of $5.00 per share, resulting in
approximately $9.4 million of net proceeds to us after deducting underwriting commission and other offering expenses.
On September 2, 2020, we
entered into an Equity Distribution Agreement with Craig-Hallum Capital Group LLC, as agent, under which we may offer and sell,
from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $25.0 million
in an “at-the-market” or ATM offering, to or through the agent. As of September 30, 2020, 845,730 shares have been
sold at an average price of approximately $10.48 million, resulting in approximately $8.5 million of net proceeds to us after deducting
commissions and other offering expenses. Between October 1, 2020 and the date of tiling this report, we sold an additional 484,148
shares of our common stock at average price of $10.62 resulting in net proceeds of approximately $5.0 million
Results of Operations
Revenues.
To date, we have only generated limited revenue from customer engagements for integration engineering services and integration
license agreements. In the future, we expect to collect increased fees from license agreements and royalties from customer sales
of products that incorporate our MST technology, subject to our ability to enter into manufacturing and distribution license agreements
with our current and future licensees. Our integration services consist of depositing our MST film on semiconductor wafers, delivering
such wafers to customers to finalize building devices, and performing tests for customers evaluating MST. The integration 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, but the agreements do not grant the licensees the rights to manufacture on their site or
to sell products incorporating MST. For revenue recognition purposes, we have determined that the grant of rights in integration
licenses is not distinct from the delivery of integration services, and therefore revenue from both integration licenses and integration
services is recognized as the services are provided to the customer. In general, this is proportionate to the delivery of MST processed
wafers to the customer, but if the agreements do not specify a time and quantity of wafer delivery, we will record revenue over
the period of time of which we anticipate delivering an estimated quantity of wafers.
Revenue for the three months
ended September 30, 2020 and 2019 was approximately $0 and $254,000, respectively. Revenue for the nine months ended September
30, 2019 was approximately $62,000 and $395,000, respectively. Revenue in all periods was generated from integration license agreements
and integration engineering services.
Cost of Revenue.
Cost of revenue consists of costs of materials, as well as direct compensation and expenses incurred to provide integration
engineering services. Cost of revenue was approximately $0 and $204,000 for the three months ended September 30, 2020 and 2019,
respectively. Cost of revenue was approximately $13,000 and $224,000 for the nine months ended September 30, 2020 and 2019, respectively.
We anticipate that our cost of revenue will vary substantially depending on the mix of integration license and integration engineering
services and the nature of products and/or services delivered in each customer engagement.
Operating Expenses.
Operating expenses consist of research and development, general and administrative, and selling and marketing expenses.
For the three months ended September 30, 2020 and 2019 our operating expenses totaled approximately $3.6 million and $3.2 million,
respectively. For the nine months ended September 30, 2020 and 2019 our operating expenses totaled approximately $11.1 million
and $10.7 million, respectively.
Research and development
expense. To date, our operations have focused on the research, development, patent protection, and commercialization of
our processes and technologies related to MST. 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, 2020 and 2019, we incurred approximately $2.0 million and $1.7 million, respectively, of research and development
expense, an increase of approximately $303,000 or 17%. The increase in research and development expense is primarily due to additional
headcount and an increase in outsourced research and development costs.
For the nine months ended
September 30, 2020 and 2019, we incurred approximately $6.2 million and $5.9 million, respectively, of research and development
expense, an increase of approximately $267,000 or 5%. The increase in research and development expense is primarily due to additional
headcount offset by a decrease in outsourced research and development costs.
General and administrative
expense. 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, 2020 and
2019 were approximately $1.3 million and $1.2 million, respectively, representing an increase of approximately $83,000 or 7%. The
increase in general and administrative expenses is primarily the due the increase in legal expenses related to increasing and maintaining
our patent portfolio.
General and administrative
costs for the nine months ended September 30, 2020 and 2019 were approximately $4.2 million and $4.0 million, respectively, representing
an increase of approximately $199,000 or 5%. The increase in costs was primarily due to an increase of approximately $384,000 in
professional fees primarily for patent expenses, director fees related to the addition of a new independent board member and an
approximately $139,000 expense resulting from the modification of expiring warrants (see note 7 to our condensed financial statements
included elsewhere in this report). These increases were offset by a decrease in stock-based compensation expense of approximately
$288,000.
Selling and marketing
expense. Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel.
Selling and marketing expenses for the three months ended September 30, 2020 and 2019 were approximately $208,000 and $240,000,
respectively, representing a decrease of approximately $32,000, or 13%. The decrease in costs is primarily related to a lower bonus
accrual.
Selling and marketing expenses
for the nine months ended September 30, 2020 and 2019 were approximately $648,000 and $712,000, respectively, representing a decrease
of approximately $64,000, or 9%. The decrease in costs is primarily related to a reduction of approximately $22,000 in payroll
related expenses and a decline of $47,000 in travel expenses.
Interest income.
Interest income for the three months ended September 30, 2020 and 2019 was approximately $1,000 and $89,000, respectively.
Interest income for the nine months ended September 30, 2020 and 2019 was approximately $41,000 and $265,000, respectively. Interest
income for each period related to interest earned on our cash and cash equivalents and decreased as our average cash balances declined
and interest rates continued to fall during 2020. While we finished the quarter with a higher cash balance, most of the cash was
received at the end of the period.
Cash Flows from Operating, Investing and
Financing Activities
Net cash used in operating
activities of approximately $9.1 million for the nine months ended September 30, 2020 resulted primarily from our net loss of approximately
$11.0 million adjusted by approximately $2.2 million in stock-based compensation expense offset by increase of approximately $499,000
in prepaids and other assets.
Net cash used in operating
activities of approximately $8.5 million for the nine months ended September 30, 2019 resulted primarily from our net loss of approximately
$10.3 million adjusted by approximately $2.3 million for stock-based compensation expense and a decrease in liabilities of approximately
$514,000.
Net cash used in investing
activities of approximately $56,000 for the nine months ended September 30, 2020 and approximately $51,000 for nine months ended
September 30, 2019 consisted of the purchase of computers and lab equipment.
Net cash provided by financing
activities of approximately $19.6 million for the nine months ended September 30, 2020 was primarily related to the net proceeds
from our underwritten public offering in May 2020, proceeds from our ATM program in September 2020 and the exercise of approximately
386,000 warrants and approximately 136,000 stock options during this nine-month period.
Net cash provided by financing
activities of approximately $6.4 million for the nine months ended September 30, 2019 related to the net proceeds from our registered
direct offering of common stock in May 2019.
Liquidity and Capital Resources
As of September 30, 2020,
we had cash and cash equivalents of approximately $25.3 million and working capital of approximately $24.1 million. For the nine
months ended September 30, 2020, we had a net loss of approximately $11.0 million and used approximately $9.1 million of cash and
cash equivalents in operations. Since inception, we have incurred recurring operating losses.
As of the date of this
report, we believe that our available working capital is sufficient to fund our 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. In addition, the ongoing COVID-19 pandemic has
impacted some customer contract negotiations and delayed engineering work by some of our customers. Accordingly, the economic uncertainty
caused by the pandemic may negatively impact our ability to generate revenue.
Our future capital requirements
and the adequacy of our available funds will depend on many factors, including our ability, in the near term, to successfully commercialize
our MST technology, competing technological and market developments; and the need to enter into collaborations with other companies
or acquire technologies to enhance or complement our current offerings. 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. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives,
change our business strategy and take additional measures to reduce costs in order to conserve cash.
Off-Balance Sheet Arrangements
We have not entered into
any off-balance sheet arrangements or issued guarantees to third parties.
Recent Accounting Standards
We are required to adopt
certain new accounting standards, 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, 2019
filed with the SEC on March 13, 2020.