Atomera Inc (ATOM)

Item 7. 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 financial
statements and the accompanying notes that appear elsewhere in this Annual Report. Statements in this Annual Report on Form 10-K 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 Annual
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 in this Annual Report. 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 Annual 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 Annual Report. Readers are urged to carefully
review and consider the various disclosures made in this Annual 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 $550+ billion semiconductor industry. Our
lead technology, named Mears Silicon Technology™, 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 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 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:

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. We also license our MSTcad software to our customers for use in simulating the effects of using MST technology
on their wafers and/or devices. To date, we have generated revenue from (i) licensing agreements with ST and AKM, both of which are IDMs,
one fabless manufacturer and one foundry, (ii) a joint development agreement, or JDA, with a leading semiconductor provider, (iii) engineering
services provided to foundries, IDMs and fabless companies and (iv) licensing MSTcad.

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 May 31, 2022, we entered into
an Equity Distribution Agreement with Oppenheimer & Co. Inc and Craig-Hallum Capital Group LLC, as agents, under which we may offer
and sell, from time to time at our sole discretion, shares of our common stock having aggregate offering proceeds of up to $50.0 million
in an “at-the-market” or ATM offering, to or through the agents. During the year ended December 31, 2023, we sold approximately
1.8 million shares at an average price per share of approximately $7.97, resulting in approximately $13.5 million of net proceeds to us
after deducting commissions and other offering expenses. During the year ended December 31, 2024, we sold approximately 4.1 million shares
at an average price per share of approximately $5.38, resulting in approximately $21.3 million of net proceeds to us after deducting commissions
and other offering expenses.

Results of Operations for the Years Ended December
31, 2024 and 2023

Revenues. To date,
we have only generated limited revenue from customer engagements for engineering services, integration license agreements, an R&D
license granted under a JDA, our license agreement with ST and licensing of MSTcad. Our license agreement with ST, which was executed
in April 2023, is our first commercial manufacturing and distribution agreement and, assuming successful completion of contractual milestones
and payments of associated fees, will entitle us to royalties on all MST-enabled products manufactured for commercial purposes. Our MSTcad
licenses grant customers the right to use MSTcad software to simulate the effects of incorporating MST technology into their semiconductor
manufacturing process. MSTcad licenses are granted on a monthly or yearly basis and revenue is recognized over time.

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 these agreements do not grant the licensees the
rights to manufacture on their site or to sell products incorporating MST. Our first JDA included the grant of an R&D license to our
customer and we were paid for such license upon delivery of our IP transfer package which enabled our customer to install MST in a tool
in their facility and to use it to manufacture wafers for internal use. This JDA also contained targeted technical specifications that,
if met, would result in payment of a success fee to us. Those technical objectives were met and we have collected the success fee. Our
license agreement with ST, which we executed in April 2023, was our first full commercial license agreement and provided for grants of
a license enabling ST to install MST in a tool in their fab and to manufacture wafers for internal development use only as well as an
HVM license granted upon completion of process qualification. The ST license agreement provides for payments of license fees, payable
upon reaching milestones for MST installation and acceptance, in the case of the R&D license, and upon reaching process qualification
milestones. After process qualification is complete and associated payments are made, ST will obtain an HVM license and will be required
to pay royalties for all products they sell that utilize MST.

For recognizing integration service
revenue from integration license agreements, we assess (i) whether the license grant is distinct from or combined with the transfer of
goods or services and (ii) whether the license is a right to access intellectual property or a right to use the intellectual property.
For licenses that are not distinct, but combined with other goods or services, the revenue is recognized at a point in time or over time
as the obligations to perform the combined services and/or deliver the combined goods are satisfied. Integration license agreements contain
a technology grant as well as a performance obligation to deliver wafers with our technology deposited on them. We have historically determined
the grant of rights in these integration license agreements is not distinct from the integration service. Accordingly, revenue from integration
license agreements is recognized as the service is provided to the customer. For manufacturing licenses, revenue is recognized at the
point in time when we deliver our MST recipe as the license to manufacture using MST technology is a right to use the Company’s
technology and not a right to access the technology over time. However, in cases where our manufacturing license grants include a customer
acceptance requirement, revenue is recognized over time.

Revenue for the years ended December
31, 2024 and 2023 was approximately $135,000 and $550,000, respectively. Our revenue in 2024 consisted of MSTcad licensing and related
consulting services revenue, and engineering services revenue from the delivery of MST wafers. Our revenue for 2023 consisted of revenue
from a manufacturing license.

Cost of Revenue. Cost
of revenue consists of costs of materials, as well as direct compensation and expenses incurred to provide integration engineering services,
support for customer installation and qualification and MSTcad support. Cost of revenue was approximately $123,000 and $28,000 for the
years ended December 31, 2024 and 2023, respectively. We anticipate that our cost of revenue will vary substantially depending on the
mix of license and engineering services revenues we receive 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 years ended December
31, 2024 and 2023, our operating expenses totaled approximately $19.3 million and $21.2 million, respectively.

Research and development
expenses. To date, our operations have focused on the research, development, and commercialization of our MST technology and related
technologies such as MSTcad. Our research and development costs primarily consist of payroll and benefit costs for our engineering staff
and costs of outsourced fabrication (including epi tool leases) and metrology of semiconductor wafers incorporating our MST technology.

For the years ended December 31,
2024 and 2023, we incurred approximately $11.0 million and $12.5 million, respectively, of research and development expense, a decrease
of approximately $1.5 million, or 12%. This decrease was primarily due to a decline of approximately $1.6 million in outsourced research
and development as we discontinued working with TSI Semiconductor as of January 31, 2024.

General and administrative
expenses. 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 years ended December 31, 2024 and 2023 were approximately $7.3 million
and $7.1 million, respectively, representing an increase of approximately $191,000, or 3%. The increase in costs was primarily due to
an increase in employee-related costs of approximately $136,000 and an increase of approximately $332,000 in patent fees and legal fees
associated with our patents. These costs were partially offset by a decrease of approximately $144,000 in stock-based compensation and
approximately $90,000 in corporate legal expenses.

Selling and marketing expenses.
Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel and business development
consulting services. Selling and marketing expenses for the years ended December 31, 2024 and 2023 were approximately $1.1 million and
$1.6 million, respectively, representing a decrease of approximately $546,000, or 34%. The decrease in costs is primarily related to a
reduction in headcount which decreased employee related costs, stock-based compensation and travel expenses.

Interest income. Interest
income for the years ended December 31, 2024 and 2023 was approximately $779,000 and $723,000, respectively. Interest income for each
period related to interest earned on our cash and cash equivalents and the increase was primarily due to progressively higher interest
rates and cash balances during these periods.

Accretion income.
Accretion income for the years ended December 31, 2024 and 2023 was approximately $178,000 and $283,000, respectively. Accretion income
relates to the increase in value of our available-for-sale securities from the purchase date through the maturity date.

Other income/expense, net.
Other income for the years December 31, 2024 and 2023 was approximately $73,000 and $75,000, respectively. Other income consisted primarily
of a refundable state research and development tax credit, net of filing costs and tax consulting services for both years.

Interest expense. Interest
expense for the years ended December 31, 2024 and 2023 was approximately $129,000 and $194,000, respectively. Interest expense is related
to the tool financing lease entered into in August 2021.

Liquidity and Capital Resources

As of December 31, 2024, we had
cash, cash equivalents and short-term investments of approximately $26.8 million and working capital of approximately $23.5 million. For
the year ended December 31, 2024, we had a net loss of approximately $18.4 million and used approximately $13.2 million of cash and cash
equivalents in operations. Since inception, we have incurred recurring operating losses.

During the year ended December
31, 2024, we sold approximately 4.1 million shares pursuant to our ATM at an average price per share of approximately $5.38, resulting
in approximately $21.3 million of net proceeds to us after deducting commissions and other offering expenses.

We believe that our available
working capital is sufficient to fund our presently forecasted working capital requirements for, at least, the next 12 months following
the date of the filing of this report. However, our future capital requirements and the adequacy of our available funds will depend on
many factors, including our ability 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 time frame 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 our ATM Facility, 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 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 and take additional measures to reduce costs in order to conserve its cash.

Cash Flows from Operating, Investing and Financing
Activities:

Net cash used in operating activities
of approximately $13.2 million for year ended December 31, 2024 resulted primarily from our net loss of approximately $18.4 million, adjusted
by approximately $3.9 million of stock-based compensation expense and amortization of right-of-use assets of approximately $1.3 million.

Net cash used in operating activities
of approximately $14.6 million for year ended December 31, 2023 resulted primarily from our net loss of approximately $19.8 million, adjusted
by approximately $4.0 million of stock-based compensation expense and amortization of right-of-use assets of approximately $1.4 million.

Net cash provided in investing
activities of approximately $6.1 million and for year ended December 31, 2024 consisted primarily of the maturity of short-term available-for-sale
investments, offset by the purchase of short-term available-for-sale investments.

Net cash used in investing activities
of approximately $6.8 million and for year ended December 31, 2023 consisted primarily of the purchase of short-term available-for-sale
investments, offset by the maturity of short-term available-for-sale investments.

Net cash provided by financing
activities of approximately $20.3 million for the year ended December 31, 2024 related primarily to net proceeds from our ATM Facility,
offset in part by approximately $1.1 million in principal payments on our financing lease.

Net cash provided by financing
activities of approximately $12.7 million for the year ended December 31, 2023 related primarily to net proceeds from our ATM Facility,
offset in part by approximately $918,000 in principal payments on our financing lease.

Critical Accounting Estimates

Our financial statements are prepared
in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity
with those accounting principles requires us to use judgement in making estimates and assumptions based on the relevant information available
at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets, liabilities, sales
and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates
and assumptions on matters that are inherently uncertain. Actual results could differ from our estimates.

Leases

We account for leases in accordance
with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2016-02, Leases
(Topic 842). We determine if a contract contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”)
assets represent our right to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease
payments arising from the lease. All leases greater than 12 months result in the recognition of a ROU asset and a liability at the lease
commencement date based on the present value of the lease payments over the lease term. Lease expenses for operating leases is recognized
on a straight-line-basis over the lease term. Lease expenses for financing leases consists of amortization of the ROU assets over the
life of the lease and interest expense is recognized on the liability.

Stock-based Compensation

We
have stock-based compensation programs, which include restricted stock awards (“RSAs”) and stock options and an employee stock
purchase plan. We account for stock-based compensation expense, including the expense for grants of RSAs and stock options that may be
settled in shares of our common stock, based on the fair values of the equity instruments issued. The fair value is determined on the
measurement date, which is the date of grant. The fair value of our RSAs is measured at the market price of our common stock on the measurement
date amortized over the vesting period of the award. The fair value for our stock option awards is determined at the grant date using
the Black-Scholes Option Pricing Model and amortized over the vesting period of the option.

Assumptions
for the Black-Scholes valuation model used for employee stock awards include:

Item 7. 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 financial
statements and the accompanying notes that appear elsewhere in this Annual Report. Statements in this Annual Report on Form 10-K 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 Annual
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 in this Annual Report. 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 Annual 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 Annual Report. Readers are urged to carefully
review and consider the various disclosures made in this Annual 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 $530+ billion semiconductor industry. Our
lead technology, named Mears Silicon Technology™, 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:

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. We also license our MSTcad software to our customers for use in simulating the effects of using MST technology
on their wafers and/or devices. To date, we have generated revenue from (i) licensing agreements with ST and AKM, both of which are IDMs,
one fabless manufacturer and one foundry, (ii) a joint development agreement, or JDA, with a leading semiconductor provider, (iii) engineering
services provided to foundries, IDMs and fabless companies and (iv) licensing MSTcad.

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 May 31, 2022, we entered
into an Equity Distribution Agreement with Oppenheimer & Co. Inc and Craig-Hallum Capital Group LLC, as agents, under which we may
offer and sell, from time to time at our sole discretion, shares of our common stock having aggregate offering proceeds of up to $50.0
million in an “at-the-market” or ATM offering, to or through the agents. During the year ended December 31, 2022, approximately
527,000 shares were sold at an average price per share of approximately $11.68, resulting in approximately $5.8 million of net proceeds
to us after deducting commissions and other offering expenses. During the year ended December 31, 2023, approximately 1.8 million shares
were sold at an average price per share of approximately $7.97, resulting in approximately $13.5 million of net proceeds to us after deducting
commissions and other offering expenses.

Results of Operations for the Years Ended December
31, 2023 and 2022

Revenues. To
date, we have only generated limited revenue. In the future, we expect to collect increased fees from license agreements and JDAs as well
as royalties from customer sales of products that incorporate our MST technology, subject to our ability (i) to enter into manufacturing
and distribution license agreements with our current and future licensees and (ii) to advance such licensees, including ST, through licensing
phases to royalty-bearing product shipments.

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 these agreements do not grant the licensees the
rights to manufacture on their site or to sell products incorporating MST. Our first JDA included the grant of a manufacturing license
to our customer and we were paid for such license upon delivery of our IP transfer package which enabled our customer to install MST in
a tool in their facility and to use it to manufacture wafers for internal use. This JDA also contained targeted technical specifications
that, if met, would result in payment of a success fee to us. Those technical objectives were met and we have collected the success fee.
Our license agreement with ST, which we executed in April 2023, was our first full commercial license agreement and provided for grants
of a manufacturing license enabling ST to install MST in a tool in their fab and to manufacture wafers for internal development use only
as well as a distribution license granted upon completion of process qualification. The ST license agreement provides for payments of
license fees, payable upon reaching milestones for MST installation and acceptance, in the case of the manufacturing license, and upon
reaching process qualification milestones. After process qualification is complete and associated payments are made, ST will be required
to pay royalties for all products they sell that utilize MST.

For recognizing integration
service revenue from integration license agreements, we assess (i) whether the license grant is distinct from or combined with the transfer
of goods or services and (ii) whether the license is a right to access intellectual property or a right to use the intellectual property.
For licenses that are not distinct, but combined with other goods or services, the revenue is recognized at a point in time or over time
as the obligations to perform the combined services and/or deliver the combined goods are satisfied. Integration license agreements contain
a technology grant as well as a performance obligation to deliver wafers with our technology deposited on them. We have historically determined
the grant of rights in these integration license agreements is not distinct from the integration service. Accordingly, revenue from integration
license agreements is recognized as the service is provided to the customer. For manufacturing licenses, revenue is recognized at the
point in time when we deliver our MST recipe as the license to manufacture using MST technology is a right to use the Company’s
technology and not a right to access the technology over time. However, in cases where our manufacturing license grants include a customer
acceptance requirement, revenue is recognized over time.

Revenue for the years ended
December 31, 2023 and 2022 was approximately $550,000 and $382,000, respectively. Our revenue for 2023 consisted of revenue from a manufacturing
license. Our revenue for 2022 consisted of a success fee pursuant to our JDA, a license fee paid under an integration license agreement
and MSTcad license revenue.

Cost of Revenue. Cost
of revenue consists of costs of materials, as well as direct compensation and expenses incurred to provide integration engineering services,
support for customer installation and qualification and MSTcad support. Cost of revenue was approximately $28,000 and $81,000 for the
years ended December 31, 2023 and 2022, respectively. We anticipate that our cost of revenue will vary substantially depending on the
mix of license and engineering services revenues we receive 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
years ended December 31, 2023 and 2022 our operating expenses totaled approximately $21.2 million and $17.8 million, respectively.

Research and development
expenses. To date, our operations have focused on the research, development, patent prosecution, and commercialization of our
MST technology and related technologies such as MSTcad. Our research and development costs primarily consist of payroll and benefit costs
for our engineering staff and costs of outsourced fabrication (including epi tool leases) and metrology of semiconductor wafers incorporating
our MST technology.

For the years ended December
31, 2023 and 2022, we incurred approximately $12.5 million and $10.0 million, respectively, of research and development expense, an increase
of approximately $2.5 million, or 25%. The increase was primarily due to outsourced research and development costs, which increased by
approximately $1.1 million due to price increases and a higher number of wafers processed. The other main factors that drove the increase
in research and development expenses were increases of approximately $739,000 in employee costs reflecting new hires and an increase in
the annual bonus accrual, an approximately $255,000 increase in stock-based compensation expense and an increase of approximately $266,000
in technical consulting expenses.

General and administrative
expenses. 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 years ended December 31, 2023 and 2022 were approximately $7.1 million
and $6.4 million, respectively, representing an increase of approximately $634,000, or 10%. The increase in costs was primarily due to
an increase in employee-related costs of approximately $166,000, an increase of approximately $116,000 in patent fees and legal fees associated
with our patents, an increase of approximately $100,000 in other legal fees and an increase of approximately $301,000 in stock-based compensation
expense.

Selling and marketing
expenses. Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel and business
development consulting services. Selling and marketing expenses for the years ended December 31, 2023 and 2022 were approximately $1.6
million and $1.3 million, respectively, representing an increase of approximately $251,000, or 19%. The increase in costs is primarily
related to increased spending on employee-related costs of approximately $72,000, an increase in stock-based compensation of approximately
$91,000 and an increase of approximately $62,000 in travel-related expenses.

Interest income. Interest
income for the years ended December 31, 2023 and 2022 was approximately $723,000 and $340,000, respectively. Interest income for each
period related to interest earned on our cash and cash equivalents and the increase was primarily due to progressively higher interest
rates during these periods.

Accretion income.
Accretion income for the year ended December 31, 2023 was approximately $283,000. Accretion income relates to the increase in value of
our available-for-sale securities from the purchase date through the maturity date. There was no income from accretion for the year ended
December 31, 2022 because our active cash management program, which involves investment of a portion of our cash in short-term fixed-income
securities commenced in the first quarter of 2023.

Other income/expense,
net. Other income for the year December 31, 2023 of approximately $75,000, consisted primarily of a refundable state research
and development tax credit, net of filing costs and tax consulting services. There was no other income/expenses for the year ended December
31, 2022.

Interest expense. Interest
expense for the years ended December 31, 2023 and 2022 was approximately $194,000 and $255,000, respectively. Interest expense is related
to the tool financing lease entered into in August 2021.

Liquidity and Capital Resources

As of December 31, 2023, we
had cash, cash equivalents and short-term investments of approximately $19.5 million and working capital of approximately $16.6 million.
For the year ended December 31, 2023, we had a net loss of approximately $19.8 million and used approximately $14.6 million of cash and
cash equivalents in operations. Since inception, we have incurred recurring operating losses.

During the year ended December
31, 2023, we sold approximately 1.8 million shares pursuant to our ATM at an average price per share of approximately $7.97, resulting
in approximately $13.5 million of net proceeds to us after deducting commissions and other offering expenses.

We believe that our available
working capital is sufficient to fund our presently forecasted working capital requirements for, at least, the next 12 months following
the date of the filing of this report. However, our future capital requirements and the adequacy of our available funds will depend on
many factors, including our ability 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 time frame 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 our ATM Facility, 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 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 and take additional measures to reduce costs in order to conserve its cash.

Cash Flows from Operating, Investing and Financing
Activities:

Net cash used in operating
activities of approximately $14.6 million for year ended December 31, 2023 resulted primarily from our net loss of approximately $19.8
million, adjusted by approximately $4.0 million of stock-based compensation expense and amortization of right-of-use assets of approximately
$1.4 million.

Net cash used in operating
activities of approximately $12.5 million for year ended December 31, 2022 resulted primarily from our net loss of approximately $17.4
million, adjusted by approximately $3.4 million of stock-based compensation expense and amortization of right-of-use assets of approximately
$1.4 million.

Net cash used in investing
activities of approximately $6.8 million and for year ended December 31, 2023 consisted primarily of the purchase of short-term available-for-sale
investments, offset by the maturity of short-term available-for-sale investments. Net cash used by investing activities of approximately
$39,000 for the year ended December 31, 2022, consisted of the purchase of computers and lab tools for our Tempe office space.

Net cash provided by financing
activities of approximately $12.7 million for the year ended December 31, 2023 related primarily to net proceeds from our ATM Facility
during the year ended December 31, 2023, offset in part by approximately $918,000 in principal payments on our financing lease.

Net cash provided by financing
activities of approximately $5.0 million for the year ended December 31, 2022 related primarily to net proceeds from our ATM Facility
during the year ended December 31, 2022, offset in part by approximately $984,000 in principal payments on our financing lease.

Critical Accounting Estimates

Our financial statements are
prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in
conformity with those accounting principles requires us to use judgement in making estimates and assumptions based on the relevant information
available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets, liabilities,
sales and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make
estimates and assumptions on matters that are inherently uncertain. Actual results could differ from our estimates.

Leases

We account for leases in accordance
with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2016-02, Leases
(Topic 842). We determine if a contract contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”)
assets represent its right to use an underlying asset for the lease term while lease liabilities represent its obligation to make lease
payments arising from the lease. All leases greater than 12 months result in the recognition of a ROU asset and a liability at the lease
commencement date based on the present value of the lease payments over the lease term. Lease expenses for operating leases is recognized
on a straight-line-basis over the lease term. Lease expenses for financing leases is amortization of the ROU assets over the life of the
lease and interest expense is recognized on the liability.

Stock-based Compensation

We
have stock-based compensation programs, which include restricted stock awards (“RSAs”) and stock options and an employee stock
purchase plan. We account for stock-based compensation expense, including the expense for grants of RSAs and stock options that may be
settled in shares of our common stock, based on the fair values of the equity instruments issued. The fair value is determined on the
measurement date, which is the date of grant. The fair value of our RSAs is measured at the market price of our common stock on the measurement
date amortized over the vesting period of the award. The fair value for our stock option awards is determined at the grant date using
the Black-Scholes Option Pricing Model and amortized over the vesting period of the option.

Assumptions
for the Black-Scholes valuation model used for employee stock awards include:

Item 7. 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 financial
statements and the accompanying notes that appear elsewhere in this Annual Report. Statements in this Annual Report on Form 10-K 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 Annual
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 in this Annual Report. 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 Annual 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 Annual Report. Readers are urged to carefully
review and consider the various disclosures made in this Annual 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 $550+ billion semiconductor industry. Our
lead technology, named Mears Silicon Technology™, 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:

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. We also license our MSTcadTM software to our customers for use in simulating the effects of
using MST technology on their wafers and/or devices. To date, we have generated revenue from (i) licensing agreements with two IDMs, one
fabless manufacturer and one foundry, (ii) a joint development agreement, or JDA, with a leading semiconductor provider, (iii) engineering
services provided to foundries, IDMs and fabless companies and (iv) licensing MSTcad.

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.

Between September 2020 and January
2021,we conducted an at-the-market offering of our common shares through Craig-Hallum Capital Group LLC, as agent, pursuant to which we
sold 2,221,575 shares at an average price per share of approximately $11.25, resulting in approximately $24.2 million of net proceeds
to us after deducting commissions and other offering expenses.

On May 31, 2022, we entered into
an Equity Distribution Agreement with Oppenheimer & Co. Inc and Craig-Hallum Capital Group LLC, as agents, under which we may offer
and sell, from time to time at our sole discretion, shares of our common stock having aggregate offering proceeds of up to $50.0 million
in an “at-the-market” or ATM offering, to or through the agents. During the year ended December 31, 2022, approximately 527,000
shares were sold at an average price per share of approximately $11.68, resulting in approximately $5.8 million of net proceeds to us
after deducting commissions and other offering expenses.

Results of Operations for the Years Ended December
31, 2022 and 2021

Revenues. To date,
we have only generated limited revenue from customer engagements for integration engineering services, integration license agreements,
a manufacturing license granted under a JDA, a success fee for achievement of milestones under that JDA and licensing our MSTcad software.
In the future, we expect to collect increased fees from license agreements and JDAs as well as 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. Our first
JDA included the grant of a manufacturing license to our customer and we were paid for such license upon delivery of our IP transfer package
which enabled our customer to install MST in a tool in their facility and to use it to manufacture wafers for internal use. This JDA also
contained targeted technical specifications that, if met, would result in payment of a success fee to us. Those technical objectives were
met and we have collected the success fee.

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. We
have also determined that the grant of our manufacturing license under the JDA confers a right to use our technology and accordingly revenue
was recognized at the point in time when we delivered our IP transfer package. The success fee under our JDA was treated as engineering
services revenue and recognized upon our customer’s confirmation that the JDA’s technical objectives had been met. Our licensing
of MSTcad grants customers the right to use MSTcad software to simulate the effects of incorporating MST technology into their semiconductor
manufacturing process. Such MSTcad licenses are granted on a monthly basis and revenue is recognized over time.

Revenue for the years ended December
31, 2022 and 2021 was approximately $382,000 and $400,000, respectively. Our revenue for 2022 consisted of a success fee pursuant to our
JDA, a license fee paid under an integration license agreement and MSTcad license revenue. Our revenue for 2021 consisted of a manufacturing
license fee pursuant to our JDA.

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 $81,000 and $0 for the years ended December 31, 2022 and 2021, respectively. We anticipate that our
cost of revenue will vary substantially depending on the mix of license and engineering services revenues we receive 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 years ended December
31, 2022 and 2021 our operating expenses totaled approximately $17.8 million and $15.9 million, respectively.

Research and development
expense. To date, our operations have focused on the research, development, patent prosecution, and commercialization of our MST
technology and related technologies such as MSTcad. Our research and development costs primarily consist of payroll and benefit costs
for our engineering staff and costs of outsourced fabrication (including epi tool leases) and metrology of semiconductor wafers incorporating
our MST technology.

For the years ended December 31,
2022 and 2021, we incurred approximately $10.0 million and $8.8 million, respectively, of research and development expense, an increase
of approximately $1.3 million, or 14%. The increase was primarily due to approximately $850,000 of increased tool lease related expenses
as the tool lease commenced in August 2021, and increase of approximately $246,000 in stock-based compensation and an increase of approximately
$180,000 in technical consulting expenses.

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 years ended December 31, 2022 and 2021 were approximately $6.4 million
and $6.2 million, respectively, representing an increase of approximately $277,000, or 4%. The increase in costs was primarily due to
an increase of approximately $103,000 in patent fees and legal fees associated with our patents, an increase of approximately $95,000
in insurance costs and increase of approximately $86,000 in payroll related expenses.

Selling and marketing expense.
Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel and business development
consulting services. Selling and marketing expenses for the years ended December 31, 2022 and 2021 were approximately $1.3 million and
$986,000, respectively, representing an increase of approximately $362,000, or 37%. The increase in costs is primarily related to increased
spending in employee-related costs of approximately $104,000, an increase in outsourced marketing expenses of approximately $83,000 and
an increase in stock-based compensation of approximately $77,000.

Interest income. Interest
income for the years ended December 31, 2022 and 2021 was approximately $340,000 and $9,000, respectively. Interest income for each period
related to interest earned on our cash and cash equivalents and the increase was primarily due to progressively higher interest rates
during these periods.

Interest expense. Interest
expense for the years ended December 31, 2022 and 2021 was approximately $255,000 and $128,000, respectively. Interest expense is related
to the new tool financing lease entered into in August 2021.

Provision for income taxes.
The provision for income tax for the year ended December 31, 2021 was $66,000 and related to income taxes due to a foreign country arising
from withholding taxes imposed on payments received for revenue. There was no provision for income tax recorded for the year ended December
31, 2022.

Liquidity and Capital Resources

As of December 31, 2022, we had
cash and cash equivalents of approximately $21.2 million and working capital of approximately $18.7 million. For the year ended December
31, 2022, we had a net loss of approximately $17.4 million and used approximately $12.5 million of cash and cash equivalents in operations.
Since inception, we have incurred recurring operating losses.

During the year ended December
31, 2022, we sold approximately 527,000 shares pursuant to our ATM at an average price per share of approximately $11.68, resulting in
approximately $5.8 million of net proceeds to us after deducting commissions and other offering expenses

We believe that our available
working capital is sufficient to fund our presently forecasted working capital requirements for, at least, the next 12 months following
the date of the filing of this report. However, our future capital requirements and the adequacy of our available funds will depend on
many factors, including our ability 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 time frame 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 our ATM Facility, 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 and take additional measures to reduce costs in order to conserve its cash.

Cash Flows from Operating, Investing and Financing
Activities:

Net cash used in operating
activities of approximately $12.5 million for year ended December 31, 2022 resulted primarily from our net loss of approximately $17.4
million adjusted by approximately $3.4 million of stock-based compensation expense and amortization of right-of-use assets of approximately
$1.4 million

Net cash used in operating
activities of approximately $12.4 million for year ended December 31, 2021 resulted primarily from our net loss of approximately $15.7
million adjusted by approximately $3.0 million of stock-based compensation expense.

Net cash used by investing activities
of approximately $39,000 and approximately $109,000 for the years ended December 31, 2022 and 2021, respectively, consisted of the purchase
of computers, lab tools and leasehold improvements for the remodeled Los

Gatos office space and our new Tempe office space.

Net cash provided by financing
activities of approximately $5.0 million for the year ended December 31, 2022. related primarily to net proceeds from our at-the-market
offering during the year ended December 31, 2022 offset in part by approximately $984,000 in principal payments on our financing lease.

Net cash provided by financing
activities of approximately $3.3 million for the year ended December 31, 2021 related to the exercise of approximately 571,000 stock options
and net proceeds from our at-the-market offering in January 2021. These amounts were offset in part by approximately $470,000 in principal
payments on our financing lease.

Critical Accounting Estimates

Our financial statements are prepared
in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity
with those accounting principles requires us to use judgement in making estimates and assumptions based on the relevant information available
at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets, liabilities, sales
and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates
and assumptions on matters that are inherently uncertain. Actual results could differ from our estimates.

Revenue

We generate revenue from integration
engineering services, which we deliver either pursuant to integration license agreements or delivery of engineering services and from
the grant of manufacturing licenses to customers to use its technology in the manufacture of semiconductor wafers and/or devices for the
customer’s internal use. Revenue is recognized based on the following steps: (i) identification of the contract, or contracts, with
a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation
of the transaction price to the performance obligations of the contract, and (v) recognition of revenue when, or as, we satisfy a performance
obligation. Integration services generally consist of depositing our proprietary technology onto the customer’s semiconductor wafers
and delivering such wafers back to the customer. Revenue from integration services is recognized as the performance obligations are satisfied,
which is upon transfer of control of the wafers to the customer (generally upon shipment). Revenue from manufacturing licenses is recognized
as the performance obligations are satisfied, which is upon delivery of the Company’s MST recipe to the customer.

For recognizing integration service
revenue from integration license agreements, we assess (i) whether the license grant is distinct from or combined with the transfer of
goods or services and (ii) whether the license is a right to access intellectual property or a right to use the intellectual property.
For licenses that are not distinct, but combined with other goods or services, the revenue is recognized at a point in time or over time
as the obligations to perform the combined services and/or deliver the combined goods are satisfied. Integration license agreements contain
a technology grant as well as a performance obligation to deliver wafers with our technology deposited on them. We have determined the
grant of rights in these integration license agreements is not distinct from the integration service. Accordingly, revenue from integration
license agreements is recognized as the service is provided to the customer. For manufacturing licenses, revenue is recognized at the
point in time when we deliver our MST recipe as the license to manufacture using MST technology is a right to use the Company’s
technology and not a right to access the technology over time.

Leases

We account for leases in accordance
with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2016-02, Leases
(Topic 842). We determine if a contract contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”)
assets represent its right to use an underlying asset for the lease term while lease liabilities represent its obligation to make lease
payments arising from the lease. All leases greater than 12 months result in the recognition of a ROU asset and a liability at the lease
commencement date based on the present value of the lease payments over the lease term. Lease expenses for operating leases is recognized
on a straight-line-basis over the lease term. Lease expenses for financing leases is amortization of the he ROU assets over the life of
the lease and interest expense is recognized on the liability.

Stock-based Compensation

We
have stock-based compensation programs, which include restricted stock awards (“RSAs”) and stock options and an employee stock
purchase plan. We account for stock-based compensation expense, including the expense for grants of RSAs and stock options that may be
settled in shares of our common stock, based on the fair values of the equity instruments issued. The fair value is determined on the
measurement date, which is the date of grant. The fair value of our RSAs is measured at the market price of our common stock on the measurement
date amortized over the vesting period of the award. The fair value for our stock option awards is determined at the grant date using
the Black-Scholes Option Pricing Model and amortized over the vesting period of the option.

Assumptions
for the Black-Scholes valuation model used for employee stock awards include:

Item 7. 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 financial
statements and the accompanying notes that appear elsewhere in this Annual Report. Statements in this Annual Report on Form 10-K 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 Annual
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 in this Annual Report. 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 Annual 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 Annual Report. Readers are urged to carefully
review and consider the various disclosures made in this Annual 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 $550+ 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:

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, one fabless manufacturer
and one foundry, (ii) a joint development agreement, or JDA, with a leading semiconductor provider 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 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 discounts and other offering expenses.

Between September 2020 and
January 2021,we conducted an at-the-market offering of our common shares through Craig-Hallum Capital Group LLC, as agent, pursuant to
which we sold 2,221,575 shares at an average price per share of approximately $11.25, resulting in approximately
$24.2 million of net proceeds to us after deducting commissions and other offering expenses.

Results of Operations for the Years Ended December
31, 2021 and 2020

Revenues. To
date, we have only generated limited revenue from customer engagements for integration engineering services, integration license agreements
and a manufacturing license granted under a JDA. In the future, we expect to collect increased fees from license agreements and JDAs as
well as 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. Our JDA included the grant of a manufacturing license to our customer and we were
paid for such license upon delivery of our IP transfer package which enabled our customer to install MST in a tool in their facility and
to use it to manufacture wafers for internal use. 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. We have also determined that the grant of our manufacturing
license under the JDA confers a right to use our technology and accordingly revenue was recognized at the point in time when we delivered
our IP transfer package.

Revenue for the years ended
December 31, 2021 and 2020 was approximately $400,000 and $62,000, respectively. Our revenue in 2021 consisted of a manufacturing license
fee pursuant to our JDA. Our 2020 revenue was generated from integration services engagements and integration license agreements.

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 $13,000 for the years ended December 31, 2021 and 2020, respectively. We anticipate that our
cost of revenue will vary substantially depending on the mix of license and engineering services revenues we receive 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
years ended December 31, 2021 and 2020 our operating expenses totaled approximately $15.9 million and $15.0 million, respectively.

Research and development
expense. To date, our operations have focused on the research, development, patent prosecution, and commercialization of our MST
technology and related technologies such as MSTcad. Our research and development costs primarily consist of payroll and benefit costs
for our engineering staff and costs of outsourced fabrication (including epi tool leases) and metrology of semiconductor wafers incorporating
our MST technology.

For the years ended December
31, 2021 and 2020, we incurred approximately $8.8 million and $8.4 million, respectively, of research and development expense, an increase
of approximately $355,000, or 4%. The increase in research and development expense was primarily due to an increase of approximately $632,000
in payroll related costs due to headcount growth. These increases in expenses were partly offset by an approximately $240,000 decrease
in stock-based compensation expense.

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 years ended December 31, 2021 and 2020 were approximately $6.2 million
and $5.6 million, respectively, representing an increase of approximately $540,000, or 10%. The increase in costs was primarily due to
increases of approximately $316,000 in insurance costs, approximately $153,000 in stock-based compensation and approximately $137,000
in payroll related expenses, offset in part by a decrease of approximately $122,000 in professional fees.

Selling and marketing
expense. Selling and marketing expenses consist primarily of salary and benefits for our sales and marketing personnel and business
development consulting services. Selling and marketing expenses for the years ended December 31, 2021 and 2020 were approximately $986,000
and $921,000, respectively, representing an increase of approximately $65,000, or 7%. The increase in costs is primarily related to increased
spending in new marketing initiatives.

Interest income. Interest
income for the years ended December 31, 2021 and 2020 was approximately $9,000 and $42,000, respectively. Interest income for each period
related to interest earned on our cash and cash equivalents. The decrease in interest income was due to declining interest rates during
2020 and 2021.

Interest expense. Interest
expense for the year ended December 31, 2021 was approximately $128,000 and related to the new tool financing lease entered into in August
2021. There was no interest expense recorded for the year ended December 31, 2020.

Provision for income
taxes. The provision for income taxes for the years ended December 31, 2021 and 2020 was $66,000 and $0, respectively. Our provision
is for income taxes due to a foreign country arising from withholding taxes imposed on payments received for revenue.

Liquidity and Capital Resources

As of December 31, 2021, we
had cash and cash equivalents of approximately $28.7 million and working capital of approximately $26.3 million. For the year ended December
31, 2021, we had a net loss of approximately $15.7 million and used approximately $12.4 million of cash and cash equivalents in operations.
Since inception, we have incurred recurring operating losses.

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.

Between September 2020
and January 2021, we conducted an at-the-market offering of our common shares through Craig-Hallum Capital Group LLC, as agent,
pursuant to which we sold 2,221,575 shares at an average price per share of approximately $11.25, resulting in approximately $24.2
million of net proceeds to us after deducting commissions and other offering expenses.

We believe that our available
working capital is sufficient to fund our presently forecasted working capital requirements for, at least, the next 12 months following
the date of the filing of this report. However, our future capital requirements and the adequacy of our available funds will depend on
many factors, including our ability 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 and take additional measures to reduce costs in order to conserve its cash.

Cash Flows from Operating, Investing and Financing
Activities:

Net cash used in operating
activities of approximately $12.4 million for year ended December 31, 2021 resulted primarily from our net loss of approximately $15.7
million adjusted by approximately $3.0 million of stock-based compensation expense.

Net cash used in operating
activities of approximately $12.1 million for year ended December 31, 2020 resulted primarily from our net loss of approximately $14.9
million adjusted by approximately $3.0 million of stock-based compensation expense.

Net cash used by investing
activities of approximately $109,000 and approximately $131,000 for the years ended December 31, 2021 and 2020, respectively, consisted
of the purchase of computers, lab tools and leasehold improvements for the remodeled Los

Gatos office space and our new Tempe office space.

Net cash provided by financing
activities of approximately $3.3 million for the year ended December 31, 2020 related to the exercise of approximately 571,000 stock options
and net proceeds from our at-the-market offering in January 2021. These amounts were offset in part by approximately $470,000 in principal
payments on our financing lease.

Net cash provided by
financing activities of approximately $35.3 million for the year ended December 31, 2020 related to the net proceeds from our underwritten
public offering of common stock in May 2020 and our at-the-market offering beginning in September 2020 and continuing through the end
of 2020.

Critical Accounting Estimates

Our financial statements are
prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in
conformity with those accounting principles requires us to use judgement in making estimates and assumptions based on the relevant information
available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets, liabilities,
sales and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make
estimates and assumptions on matters that are inherently uncertain. Actual results could differ from our estimates.

Revenue

We generate revenue from integration
engineering services, which we deliver either pursuant to integration license agreements or delivery of engineering services and from
the grant of manufacturing licenses to customers to use its technology in the manufacture of semiconductor wafers and/or devices for the
customer’s internal use. Revenue is recognized based on the following steps: (i) identification of the contract, or contracts, with
a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation
of the transaction price to the performance obligations of the contract, and (v) recognition of revenue when, or as, we satisfy a performance
obligation. Integration services generally consist of depositing our proprietary technology onto the customer’s semiconductor wafers
and delivering such wafers back to the customer. Revenue from integration services is recognized as the performance obligations are satisfied,
which is upon transfer of control of the wafers to the customer (generally upon shipment). Revenue from manufacturing licenses is recognized
as the performance obligations are satisfied, which is upon delivery of the Company’s MST recipe to the customer.

For recognizing integration
service revenue from integration license agreements, we assess (i) whether the license grant is distinct from or combined with the transfer
of goods or services and (ii) whether the license is a right to access intellectual property or a right to use the intellectual property.
For licenses that are not distinct, but combined with other goods or services, the revenue is recognized at a point in time or over time
as the obligations to perform the combined services and/or deliver the combined goods are satisfied. Integration license agreements contain
a technology grant as well as a performance obligation to deliver wafers with our technology deposited on them. We have determined the
grant of rights in these integration license agreements is not distinct from the integration service. Accordingly, revenue from integration
license agreements is recognized as the service is provided to the customer. For manufacturing licenses, revenue is recognized at the
point in time when we deliver our MST recipe as the license to manufacture using MST technology is a right to use the Company’s
technology and not a right to access the technology over time.

Leases

We account for leases in accordance
with the authoritative guidance. On January 1, 2019, we adopted the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No 2016-02, Leases (Topic 842). We determine if a contract contains a lease in whole or in
part at the inception of the contract. Right-of-use (“ROU”) assets represent its right to use an underlying asset for the
lease term while lease liabilities represent its obligation to make lease payments arising from the lease. All leases greater than 12
months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease
payments over the lease term. Lease expenses for operating leases is recognized on a straight-line-basis over the lease term. Lease expenses
for financing leases is amortization of the he ROU assets over the life of the lease and interest expense is recognized on the liability.

Off-Balance Sheet Arrangements

We have not entered into off-balance sheet arrangements
or issued guarantees to third parties.