Lightwave Logic, Inc. 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following selected financial information is derived from our historical financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere within this Annual Report on Form 10-K and the "Forward-Looking Statements" explanation included elsewhere herein. Overview Lightwave Logic, Inc. is a technology platform company leveraging its proprietary engineered electro-optic (EO) polymers to transmit data at higher speeds with less power in a small form factor. The Company’s high activity and high stability organic polymers allow it to create next-generation photonic EO devices that convert data from electrical signals into light/optical signals for applications in telecommunications, and for data transmission potentially used to support generative AI. Our differentiation at the modulator device level is in higher speed, lower power consumption, simplicity of manufacturing, small footprint (size), and reliability. We have demonstrated the electro-optic polymers potential for higher speed and lower power consumption in packaged devices, and during 2024, we continued to make advances in techniques to translate our world class material properties to efficient, reliable modulator devices with commercial foundries. We are currently focused on a) working with potential and existing customers to integrate our proprietary materials into our customers’ specific PIC and device architecture. b) testing and demonstrating the superior performance, simplicity of manufacturability and reliability of our devices, including in conjunction with the silicon photonics manufacturing ecosystem c) providing our potential and existing customers with the proper Process Development Kits (PDKs) to enable the efficient and fast integration of our materials into their own design and manufacturing plans. In 2024 we continued to work with silicon-based foundry partners to help scale in volume our polymer modulator devices and we received working modulator chips from these foundries. We have advanced and matured our interactions with our foundry partners and we continue to receive working modulator chips for prototyping. Silicon-based foundries are semiconductor fabrication plants developed for the electronics IC business, that are now engaging with silicon photonics to increase their wafer throughput. Partnering with silicon-based foundries not only demonstrates that our polymer technology can be transferred into standard production lines using standard equipment, it also allows us to efficiently utilize our capital. The foundry partnerships will allow us to scale our high-performance polymer optical engines quickly and efficiently. We have now received silicon wafers that range up to 200mm in diameter, which aligns well with foundry manufacturing. Our extremely strong and broad patent portfolio allows us to optimize our business model in three areas: 1) Traditional focus on polymer materials development, 2) Patent licensing and 3) Technology transfer to foundries. We are continually looking to strengthen our patent portfolio both by internal inventions and acquisition of intellectual property. We are initially targeting applications in fiber optic data communications and telecommunications markets, in particular ultra-high bandwidth optical connections deployed inside and between datacenters and/or AI clusters. In addition, we are exploring other applications that include automotive/LIDAR, sensing, displays, storage, aerospace and defense, etc., for our polymer technology platform. Our goal is to have our unique polymer technology platform become ubiquitous across multiple market verticals over and above the optical fiber optic communications markets. 29 Artificial Intelligence (AI) has been integrating deeper within our daily activities with applications to make us more efficient and possibly smarter. The impact on the internet is huge, and the internet is based on an optical network that utilizes data centers to route and switch traffic or information to and from destinations. Data centers are being upgraded today in a fashion that the industry has not seen before with significant investments of capital. The expected demands of increased traffic, information, and data driven by AI is changing the way the internet is being operated. AI is now creating new and interesting market opportunities to upgrade the internet. Three of these opportunities are important today: density, speed, and low power and these are very well aligned with our high performance electro-optic polymers modulator platform. We are designing high performance polymer modulator optical engines to support the rise and growth of AI as it generates more information that will travel through the internet and optical network. While we are not directly an AI company designing electronic processors, we do see immediate benefits of enabling higher levels of information to cross the internet using our optical polymer modulator platform. Commencement of Commercial Operations We commenced commercial operations in May 2023. Presently, our commercial operations consist of a material supply license agreement to provide Perkinamine ® chromophore materials for polymer based photonic devices and photonic integrated circuits (PICs). The license agreement represents tangible commercial progress for electro-optic polymers as part of our Company's business plan. Our Company is also in various stages of photonic proprietary device designs and materials development and evaluation with potential customers and strategic partners. We expect to continue to obtain a revenue stream from technology licensing agreements, and to obtain additional revenue streams from technology transfer agreements and sale of our electro-optic proprietary device designs. Business Strategy Our first revenue stream was obtained from our entry into a material supply license agreement to provide Perkinamine ® chromophore materials for polymer based photonic devices and photonic integrated circuits (PICs). Our Company is also in various stages of photonic device designs and materials development and evaluation with potential customers and strategic partners. We expect to continue to obtain a revenue stream from technology licensing agreements, and to obtain additional revenue streams from technology transfer agreements and sale of our proprietary electro-optic devices. Specifically, our business strategy provides that our revenue stream will be derived from one or some combination of the following: (i) technology licensing for specific product application; (ii) joint venture relationships with significant industry leaders; and (iii) the sale of our own proprietary electro-optic device designs. Our objective is to be a leading provider of proprietary technology and know-how in the electro-optic materials and devices. In order to meet this objective, we intend to continue to: • Further the development of proprietary organic electro-optic polymer material systems • Develop photonic device designs based on our P 2 IC™ technology   • Develop proprietary intellectual property • Grow our device design development capabilities • Partner with silicon-based foundries who can scale volume quickly • Grow our product reliability and quality assurance capabilities • Grow our optoelectronic packaging and testing capabilities • Grow our commercial material manufacturing capabilities • Maintain/develop strategic relationships with major telecommunications and data communications companies to further the awareness and commercialization of our technology platform  • Add high-level personnel with industrial and manufacturing experience in key areas of our materials and device development Create Organic Polymesr-Enabling design and production of Electro-Optic Modulators We intend to utilize our proprietary optical polymer technology to create an initial portfolio of commercial electro-optic polymer product devices designs with applications for various markets, including telecommunications, data communications and data centers. These product devices will be part of our proprietary photonics integrated circuit (PIC) technology platform . Capital Requirements We commenced commercial operations in May 2023, and we do not generate sufficient revenues to pay for our operating expenses. We have incurred substantial net losses since inception. We have satisfied our capital requirements since inception primarily through the issuance and sale of our common stock. 30 Results of Operations Comparison of year ended December 31, 2024 to year ended December 31, 2023 Revenues During the year ended December 31, 2024, we recognized $81,855 of licensing and royalty revenue and $13,750 of revenue for the device processing work on the device supplied by a customer. During the year ended December 31, 2023, we recognized $40,502 of licensing and royalty revenue. Cost of sales During the year ended December 31, 2024, we recognized $7,395 in cost of sales. During the year ended December 31, 2023, we recognized $2,513 in cost of sales. Operating expenses For the Year Ended December 31, 2024 For the Year Ended December 31, 2023 Change from Prior Year Percent Change from Prior Year Research and development 16,806,548 $ 15,903,689 $ 902,859 6 % General and administrative 6,370,805 5,359,565 1,011,240 19 % $ 23,177,353 $ 21,263,254 $ 1,914,099 9 % Research and development expenses increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to increases in research and development salary and benefits expenses, research and development equipment depreciation expense, prototype device development and wafer fabrication expenses, research and development travel expenses, rent expenses, property tax expenses, research and development consulting expenses, software expenses, and laboratory and wafer fabrication materials and supplies expenses, offset by decreases in research and development non-cash stock option amortization expenses, research and development recruiting fees, and research and development employee relocation expenses in the year ended December 31, 2024, compared to the same period in 2023. · Research and development salary and benefits expenses increased by $1,472,979 in the year ended December 31, 2024, compared to the same period in 2023. · Depreciation expense increased by $424,232 in the year ended December 31, 2024, compared to the same period in 2023. · Prototype device development and wafer fabrication expenses increased by $341,555 in the year ended December 31, 2024, compared to the same period in 2023. · Research and development travel expenses increased by $107,351 in the year ended December 31, 2024, compared to the same period in 2023. · Research and development rent expenses increased by $99,898 in the year ended December 31, 2024, compared to the same period in 2023. · Property tax expenses increased by $98,181 in the year ended December 31, 2024, compared to the same period in 2023. · Research and development consulting expenses increased by $65,261 in the year ended December 31, 2024, compared to the same period in 2023. · Research and development software expenses increased by $64,318 in the year ended December 31, 2024, compared to the same period in 2023. · Laboratory and wafer fabrication materials and supplies expenses increased by $59,090 in the year ended December 31, 2024, compared to the same period in 2023. · These increases were offset by a $1,571,632 decrease in research and development non-cash stock option amortization expenses, a $216,115 decrease in research and development recruiting fees, and a $108,305 decrease in research and development employee relocation expenses in the year ended December 31, 2024, compared to the same period in 2023. 31 We expect to continue to incur substantial research and development expenses developing and commercializing our electro-optic materials platform. These expenses will increase as a result of accelerated development effort to support commercialization of our non-linear optical polymer materials technology and create next-generation photonic EO device designs; working with semiconductor foundries; hiring additional technical and support personnel; engaging senior technical advisors; pursuing other potential business opportunities and collaborations; customer testing and evaluation; and incurring related operating expenses. General and administrative expenses increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to increases in general and administrative salary and benefits expenses, consulting fees, depreciation expense, investor relations expenses, and sales and marketing expenses, offset by decreases general and administrative non-cash stock option amortization expenses, and accounting expenses. · General and administrative salary and benefits expenses increased by $866,829 in the year ended December 31, 2024, compared to the same period in 2023. · General and administrative consulting fees increased by $215,707 in the year ended December 31, 2024, compared to the same period in 2023. · Depreciation expense increased by $103,624 in the year ended December 31, 2024, compared to the same period in 2023. · Investor relations expenses increased by $54,259 in the year ended December 31, 2024, compared to the same period in 2023. · Sales and marketing expenses increased by $52,623 in the year ended December 31, 2024, compared to the same period in 2023. · These increases were offset by a $263,822 decrease in general and administrative non-cash stock option amortization expense and a $183,722 decrease in accounting fees in the year ended December 31, 2024, compared to the same period in 2023. Other Income For the Year Ended December 31, 2024 For the Year Ended December 31, 2023 Change from Prior Year Percent Change from Prior Year Other Income $ 554,102 $ 187,233 $ 366,869 196 % Other income increased for the year ended December 31, 2024, as compared to year ended December 31, 2023, primarily due to a $519,368 decrease in commitment fee associated with the purchase of shares by an institutional investor for sale under a stock purchase agreement, a $280,433 increase in interest income on money market account, and a recognition of a $210,274 loss on retirement of certain expired patent applications and patents. Other income increased for the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to an increase in interest income earned on money market account of $568,137 and a gain on disposal of fixed assets of $215,509, offset by an increase in commitment fee associated with the purchase of shares by an institutional investor for sale under a stock purchase agreement in the amount of $463,869. Net Loss For the Year Ended December 31, 2024 For the Year Ended December 31, 2023 Change from Prior Year Percent Change from Prior Year Net Loss $ 22,535,041 $ 21,038,032 $ 1,497,009 7 % Net loss was $22,535,041 and $21,038,032 for the year ended December 31, 2024 and 2023, respectively, for an increase of $1,497,009 due primarily to increases in salary and benefits expenses, depreciation expense, prototype device development and wafer fabrication expenses, and consulting fees, recognition of loss on retirement of certain expired patent applications and patents, travel expenses, rent expense, property tax expenses, software expenses, laboratory and wafer fabrication materials and supplies expenses, investor relations expenses, and sales and marketing expenses. These increases were offset by decreases in non-cash stock option amortization expense, commitment fee associated with the purchase of shares by an institutional investor for sale under a stock purchase agreement, recruiting fees, accounting fees, and employee relocation expenses, and an increase in interest income on money market account. 32 Significant Accounting Policies Our Company’s accounting policies are more fully described in Note 1 of Notes to Financial Statements. As disclosed in Note 1 of Notes to Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on our management’s best knowledge of current events and actions our Company may undertake in the future, actual results could differ from the estimates. Liquidity and Capital Resources Our primary source of operating cash inflows was (i) proceeds from the sale of common stock to Lincoln Park (institutional investor) pursuant to purchase agreements with Lincoln Park and proceeds from sale of common stock by Roth Capital (investment banking company) pursuant to the at the market sale agreement with Roth Capital as described in Note 10 to the Financial Statements and (ii) proceeds received pursuant to the exercise of options and warrants. On July 2, 2021, our Company filed a $100 million universal shelf registration statement which became effective on July 9, 2021, and expired on July 8, 2024. On July 26, 2024, the Company filed a new $100 million universal shelf registration statement which became effective on August 5, 2024. On October 4, 2021, our Company entered into the 2021 purchase agreement with Lincoln Park to sell up to $33 million of registered common stock over a 36-month period. All of the registered shares under the October 4, 2021 purchase agreement with Lincoln Park have been issued as of December 31, 2023. On February 28, 2023, our Company entered into the 2023 Purchase Agreement with Lincoln Park to sell up to $30 million of registered common stock over a 36-month period. As of the date of this filing, $0 remains on the 2023 Purchase Agreement. On March 17, 2025, our Company entered into the 2025 Purchase Agreement with Lincoln Park to sell up to $30 million of registered common stock over a 36-month period, subject to the conditions set forth therein. As of the date of this filing, $30 million remains on the 2025 Purchase Agreement. On December 9, 2022, our Company entered into the at the market sale agreement with Roth Capital, as sales agent, whereby pursuant to the at the market sale agreement, our Company may offer and sell up to $35 million in shares of our registered common stock, from time to time through Roth Capital. As of the date of this filing, $31.5 million remains available to our Company pursuant to the at the market sale agreement. During the year ended December 31, 2024, the Company received $12,366,965 in proceeds pursuant to the 2023 Purchase Agreement with Lincoln Park, $1,779,976 in proceeds pursuant to the at the market sale agreement with Roth Capital, $337,350 in proceeds pursuant to the exercise of options and warrants and $63,884 in cash collections from customer contracts, of which $50,000 related to the proceeds received under a material supply and license agreement and $13,884 – to the proceeds received for a contact for processing work on the devices supplied by a customer. During the year ended December 31, 2023, the Company received $19,993,359 in proceeds pursuant to the 2021 purchase agreement and 2023 Purchase Agreement with Lincoln Park, $1,515,878 in proceeds pursuant to the at the market sale agreement with Roth Capital, $1,013,924 in proceeds pursuant to the exercise of options and warrants and $50,000 in a proceed received under a material supply and license agreement of which $39,875 is recorded as a contract liability as of December 31, 2023. During the year ended December 31, 2024, our primary sources of cash outflows from operations included payroll, rent, utilities, payments to vendors including prototypes development and foundries expenses, laboratory and wafer fabrication materials and supplies expenses, and third-party service providers. During the year ended December 31, 2023, our primary sources of cash outflows from operations included payroll, rent, utilities, payments to vendors including prototypes development and foundries expenses and third-party service providers. Sources and Uses of Cash Our future expenditures and capital requirements will depend on numerous factors, including: the progress of our research and development efforts; the rate at which we can, directly or through arrangements with original equipment manufacturers, introduce and sell products incorporating our polymer materials technology; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of our products and competing technological developments; and our ability to establish cooperative development, joint venture and licensing arrangements. We expect that we will incur approximately $1,727,000 of expenditures per month over the next 12 months. 33 We expect the proceeds received pursuant to the 2023 and the 2025 Lincoln Park purchase agreements and, the at the market sale agreement with Roth Capital, the exercise of options and warrants, and commercial operations to provide us with sufficient funds to maintain our operations over the next 12 months. Our current cash position enables us to finance our operations through April 2026 before we will be required to replenish our cash reserves. Our cash requirements are expected to increase at a rate consistent with our Company’s revenue growth as we expand our activities and operations with the objective of increasing our revenue stream from the commercialization of our electro-optic polymer technology. We currently have no debt to service. We expect that our cash used in operations will continue to increase during 2025 and beyond because of the following planned activities: · The addition of management, sales, marketing, technical and other staff to our workforce; · Increased spending for the expansion of our research and development efforts, including purchases of additional laboratory and production equipment; · Increased spending in marketing as our products are introduced into the marketplace; · Partnering with commercial foundries to implement our electro-optic polymers into accepted PDKs by the foundries; · Developing and maintaining collaborative relationships with strategic partners; · Developing and improving our manufacturing processes and quality controls; and  · Increases in our general and administrative activities related to our operations as a reporting public company and related corporate compliance requirements.  2023 and 2025 Purchase Agreements with Lincoln Park On February 28, 2023, our Company entered into the 2023 Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us up to $30 million of our common stock (subject to certain conditions) from time to time over a 36-month period. On March 17, 2025, our Company entered into the 2025 Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us up to $30 million of our common stock (subject to certain conditions) from time to time over a 36-month period. Pursuant to the 2025 Purchase Agreement, subject to the conditions set forth therein, Lincoln Park is obligated to make purchases as the Company directs in accordance with the 2025 Purchase Agreement, which may be terminated by the Company at any time, without cost or penalty. Sales of shares will be made in specified amounts and at prices that are based upon a look back formula for market prices of our common stock immediately preceding the sales to Lincoln Park. There are no trading volume requirements or restrictions on the 2025 Purchase Agreement, and we will control the timing and amount of any sales of our common stock to Lincoln Park. Lincoln Park has no right to require any sales by us, but is obligated to make purchases from us as we direct in accordance with the 2025 Purchase Agreement. We can also accelerate the amount of common stock to be purchased under certain circumstances. There are no limitations on the use of proceeds, financial or business covenants, restrictions on future financings (other than restrictions on the Company’s ability to enter into a similar type of agreement or equity line of credit during the term, excluding an at-the-market transaction with a registered broker-dealer), rights of first refusal, participation rights, penalties or liquidated damages in the 2025 Purchase Agreement. At the Market Sale Agreement – Roth Capital On December 9, 2022, we entered into the at the market sale agreement with Roth Capital, as sales agent. Pursuant to the at the market sale agreement, our Company may offer and sell up to $35 million in shares of our common stock, from time to time through Roth Capital. Upon delivery of a placement notice based on our Company’s instructions and subject to the terms and conditions of the at the market sale agreement, Roth Capital may sell the shares by methods deemed to be an "at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, including sales made directly on or through The Nasdaq Capital Market, on any other existing trading market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices, or by any other method permitted by law, including negotiated transactions, subject to the prior written consent of our Company. We are not obligated to make any sales of shares under this agreement. The Company or Roth Capital may suspend or terminate the offering of shares upon notice to the other party, subject to certain conditions. Roth Capital will act as sales agent on a commercially reasonable efforts basis consistent with its normal trading and sales practices and applicable state and federal law, rules and regulations and the rules of Nasdaq. We have agreed to pay Roth Capital commissions for its services of acting as agent of 3.0% of the gross proceeds from the sale of the shares pursuant to the at the market sale agreement. The amount of proceeds we receive from the at the market sale agreement, if any, will depend upon the number of shares of our common stock sold and the market price at which they are sold. There can be no assurance that we will be able to sell any shares under or fully utilize this agreement. Roth Capital is not required to sell any specific number of shares of our common stock under the agreement. We intend to use net proceeds from the at the market sale agreement for general corporate purposes, including, without limitation, sales and marketing activities, product development, making acquisitions of assets, businesses, companies or securities, capital expenditures, and for working capital needs. 34 We cannot assure you that we will meet the conditions of the 2025 Purchase Agreement with Lincoln Park in order to obligate Lincoln Park to purchase our shares of common stock, and we cannot assure you that we will be able to sell any shares under or fully utilize the at the market sale agreement with Roth Capital. In the event we fail to do so, and other adequate funds are not available to satisfy long-term capital requirements, or if planned revenues are not generated, we may be required to substantially limit our operations, which could result in our Company reducing some capital expenditures or reducing staff and discretionary costs. Analysis of Cash Flows For the year ended December 31, 2024 Net cash used in operating activities was $15,550,515 for the year ended December 31, 2024, primarily attributable to the net loss of $22,535,041 adjusted by $4,440,003 in options issued for services, $446,628 amortization of deferred compensation, $154,210 in common stock issued for services, $1,682,760 in depreciation expenses and patent amortization expenses, $192,487 amortization of right of use asset, $213,440 loss on disposal of property and equipment and retirement of certain expired patent applications and patents, $(15,189) in accounts receivable, $835,880 in prepaid expenses and other current assets, and ($965,693) in accounts payable, accrued bonuses, accrued expenses, contract liability and other liabilities. Net cash used in operating activities consisted of payments for research and development, legal, professional and consulting expenses, rent and other expenditures necessary to develop our business infrastructure. Net cash used by investing activities was $2,697,899 for the year ended December 31, 2024, consisting of $430,501 in cost for intangibles and $2,267,398 in asset additions for the Colorado headquarter facility and labs. Net cash provided by financing activities was $14,484,291 for the year ended December 31, 2024, and consisted of $337,350 in proceeds from exercise of options and warrants, $12,366,965 in proceeds from resale of common stock to an institutional investor and $1,779,976 in proceeds from at the market sale of common stock by an investment banking company. On December 31, 2024, our cash and cash equivalents totaled $27,667,964, our assets totaled $37,807,983, our liabilities totaled $4,384,078 and we had stockholders’ equity of $33,423,905. For the year ended December 31, 2023 Net cash used in operating activities was $12,236,024 for the year ended December 31, 2023, primarily attributable to the net loss of $21,038,032 adjusted by $6,459,387 in options issued for services, $262,697 amortization of deferred compensation, $673,578 in common stock issued for services, $1,119,141 in depreciation expenses and patent amortization expenses, $184,835 amortization of right of use asset, $215,509 gain on disposal of property and equipment, ($587,540) in prepaid expenses, $935,795 in accounts receivable, accounts payable, accrued bonuses, accrued expenses, deferred revenue and other liabilities. Net cash used in operating activities consisted of payments for research and development, legal, professional and consulting expenses, rent and other expenditures necessary to develop our business infrastructure. Net cash used by investing activities was $2,957,201 for the year ended December 31, 2023, consisting of $307,687 in cost for intangibles, $3,292,224 in asset additions for the Colorado headquarter facility and labs offset by $642,120 in a loan repayment and $590 in proceeds on sale of property and equipment. Net cash provided by financing activities was $22,523,161 for the year ended December 31, 2023, and consisted of $1,013,924 in proceeds from exercise of options and warrants, $19,993,359 in proceeds from resale of common stock to an institutional investor and $1,515,878 in proceeds from at the market sale of common stock by an investment banking company. On December 31, 2023, our cash and cash equivalents totaled $31,432,087, our assets totaled $41,783,585, our liabilities totaled $5,349,771 and we had stockholders’ equity of $36,433,814. Contractual Obligations See “Note 8–Leases” of the notes to the financial statements contained elsewhere within this Annual Report on Form 10-K for a discussion of our operating lease for office and laboratory space. 35