Lightwave Logic, Inc. 10-K

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities. Market Information Our common stock is traded on the OTCQX under the symbol “LWLG”. Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Shareholders As of March 31, 2021, there were approximately 106 holders of our common stock, including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners. Dividends No cash dividends have been declared or paid on our common stock to date and we currently intend to use all available funds to fund the development and growth of our business. Securities Authorized for Issuance under Equity Compensation Plans Equity Compensation Plans as of December 31, 2020. Equity Compensation Plan Information   Number of securities to be issued upon exercise of outstanding options, warrants and rights   Weighted-average exercise price of outstanding options, warrants and rights   Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))   Plan category (a) (b) (c) Equity compensation plans approved by security holders (1) 8,207,500 (1) $0.85 4,242,500 Equity compensation plans not approved by security holders (2) 1,815,000 $0.77 0 Total 10,022,500 $0.84 4,242,500 (1) Reflects shares of common stock to be issued pursuant to our 2016 Equity Incentive Plan and our 2007 Employee Stock Plan, both of which are for the benefit of our directors, officers, employees and consultants. We have reserved 8,000,000 shares of common stock for such persons pursuant to our 2016 Equity Incentive Plan. We terminated our 2007 Employee Stock Plan in June 2016 and no additional awards are made under that plan. (2) Comprised of common stock purchase warrants we issued for services. 36 Index Recent Sales of Unregistered Securities During the period covered by this report, our Company has sold the following securities without registering the securities under the Securities Act: Date Security July 2020 Warrants — right to buy 100,000 shares of common stock at $.67 per share issued for services. December 2020 Common Stock — 2,073,052 shares of Common Stock at $.80 per share pursuant to warrant exercises. No underwriters were utilized, and no commissions or fees were paid with respect to any of the above transactions. These persons were the only offerees in connection with these transactions. We relied on Section 4(a)(2) and Rule 506 of Regulation D of the Securities Act since the transaction does not involve any public offering. Item 6. Selected Financial Data. Not Applicable. 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 herein and the "Forward-Looking Statements" explanation included herein. COVID-19 During this uncertain time, our critical priorities are the health and safety of our employees and contractors, all of whom began working from home and reduced travel to essential business needs starting in late March. We currently are operating under the guidelines of the State of Colorado Department of Public Health and Environment and the Governor of Colorado’s Executive Order, Safer-at Home, as amended. We began to incrementally bring certain employees back to work at our facilities on May 4, 2020 under the directives of the Governor’s Executive Order, and under the guidelines of the local and state health departments. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local authorities, or that we determine are in the best interests of our employees and stockholders. The COVID-19 pandemic has had and continues to have a significant impact on local, state, national and global economies. The actions taken by governments, as well as businesses and individuals, to limit the spread of the disease has significantly disrupted the Company’s normal activities. Numerous businesses, including some of our contractors, collaborative partners and suppliers, have either shut down or are operating on a limited basis with employees working from home, some employees have been furloughed or laid off and social distancing has been mandated through stay-at-home orders, and continues with the Safer-at-Home orders, as amended. The Company expects these actions to have a significant impact on the Company’s results of operations, particularly with respect to research and development, and financial position. The full extent of the impact to the Company due to the impact of the COVID-19 pandemic cannot be currently determined. The extent to which the COVID-19 pandemic will impact the Company will depend on future developments, which are highly uncertain and cannot be reasonably predicted, including the duration of the outbreak, the increase or reduction in governmental restrictions to businesses and individuals, the potential for a resurgence of the virus and other factors. The longer the COVID-19 pandemic continues, the greater the potential negative financial effect on the Company. Overview Lightwave Logic, Inc. is a development stage company moving toward commercialization of next generation electro-optic photonic devices made on its P 2 IC TM technology platform which uses in-house proprietary high-activity and high-stability organic polymers. Electro-optical devices convert data from electric signals into optical signals for multiple applications. Our differentiation at the device level is in higher speed, lower power consumption, simplicity of manufacturing and reliability. We have demonstrated higher speed and lower power consumption in packaged devices, and during 2019, we developed new materials that promise to further lower power consumption. We are currently focused on testing and demonstrating the simplicity of manufacturability and reliability of our devices, including in conjunction with the silicon photonics manufacturing ecosystem. 37 Index We are initially targeting applications in data communications and telecommunications markets and are exploring other applications for our polymer technology platform. Business Strategy Our business strategy anticipates 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; or (iii) the production and direct sale of our own electro-optic device components. Our objective is to be a leading provider of proprietary technology and know-how in the electro-optic device market. In order to meet this objective, we intend to: • Further the development of proprietary organic electro-optic polymer material systems   • Develop photonic devices based on our P 2 IC TM technology   • Continue to develop proprietary intellectual property   • Grow our commercial device development capabilities   • 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   • Continue to add high-level personnel with industrial and manufacturing experience in key areas of our materials and device development programs.   Create Organic Polymer-Enabled Electro-Optic Modulators We intend to utilize our proprietary optical polymer technology to create an initial portfolio of commercial electro-optic polymer product devices 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. We expect our initial modulator products will operate at data rates at least 50 Gbaud (capable of 50 Gbps with standard data encoding of NRZ and 100 Gbps with more complex PAM-4 encoding). Our devices are highly linear, enabling the performance required to take advantage of the more advance complex encoding schemes. We are currently developing our polymer technology to operate at the next industry node of 100Gbaud. Capital Requirements As a development stage company, we do not generate revenues. 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. Results of Operations Comparison of year ended December 31, 2020 to year ended December 31, 2019 Revenues As a development stage company, we had no revenues during the years ended December 31, 2020 and December 31, 2019. The Company is in various stages of photonic device and material development and evaluation. We expect the next revenue stream to be in product development agreements and prototype devices prior to moving into full commercialization. 38 Index Operating Expenses Our operating expenses were $6,599,974 and $6,319,407 for the years ended December 31, 2020 and 2019, respectively, for an increase of $280,567. This increase is primarily due to increases in wages and salaries, investor relation expenses, depreciation, legal fees, director and officer insurance expense, research and development non-cash stock option and warrant amortization, other tax expenses, internet expenses and research and development rent offset by decreases in travel expenses, general and administrative non-cash stock option and warrant amortization, laboratory and wafer fabrication materials and supplies, office expenses, shareholders meeting expenses and general and administrative consulting expenses. Included in our operating expenses for the year ended December 31, 2020 was $4,529,498 for research and development expenses compared to $4,319,295 for the year ended December 31, 2019, for an increase of $210,203. This is primarily due to increases in research and development salaries and wages, depreciation, research and development non-cash stock option and warrant amortization and research and development rent offset by decreases in laboratory and wafer fabrication materials and supplies and travel expenses. Research and development expenses currently consist primarily of compensation for employees and consultants engaged in internal research, product development activities; material and device development operations, prototypes, electro-optic device designs, development and internal material and device testing; prototype device fabrication; costs; and related operating expenses. We expect to continue to incur substantial research and development expense to develop and commercialize our photonic devices, electro-optic materials platform and PIC development. These expenses will increase as a result of accelerated development effort to support commercialization of our non-linear optical polymer materials platform; to build photonic device prototypes; hiring additional technical personnel; engaging senior technical advisors; pursuing other potential business opportunities and collaborations; customer testing and evaluation; and incurring related operating expenses. Research and development wages and salaries increased $201,863 from $1,943,700 for the year ended December 31, 2019 to $2,145,563 for the year ended December 31, 2020. The reason for the variation was primarily due to an increase in full time technical personnel working on device and material development. Depreciation expense increased $83,754 from $606,127 for the year ended December 31, 2019 to $689,881 for the year ended December 31, 2020. The primary reason for the increase was due to the addition of capital equipment for the fabrication of wafers in the Company’s facility. Research and development non-cash stock option amortization increased $23,016 from $326,253 for the year ended December 31, 2019 to $349,269 for the year ended December 31, 2020. The reason for the variation was due to stock options and warrants vesting schedules. Research and development rent increased $9,332 from $184,343 for the year ended December 31, 2019 to $193,675 for the year ended December 31, 2020. The primary reason for the increase was due to increase in facility operating expenses and rent. Laboratory and wafer fabrication materials and supplies decreased $60,077 from $460,367 for the year ended December 31, 2019 to $400,290 for the year ended December 31, 2020. The primary reason for the decrease was the scale back of operations due to the COVID-19 pandemic. Research and development travel expenses decreased $59,469 from $95,456 for the year ended December 31, 2019 to $35,987 for the year ended December 31, 2020. The primary reason for the decrease was the scale back of travel due to the COVID-19 pandemic. General and administrative expense consists primarily of compensation and support costs for management staff, and for other general and administrative costs, including executive, sales and marketing, investor relations, accounting and finance, legal, consulting and other operating expenses. 39 Index General and administrative expenses increased $70,364 to $2,070,476 for the year ended December 31, 2020 compared to $2,000,112 for the year ended December 31, 2019. The increase is primarily due to increases in investor relation expenses, legal fees, director and officer insurance expense, other tax expenses, general and administrative wages and salaries and internet expenses offset by decreases in general and administrative non-cash stock option and warrant amortization, travel expenses, office expenses, shareholders meeting expenses and general and administrative consulting expenses. Investor relation expenses increased $100,753 to $145,261 for the year ending December 31, 2020 from $44,508 for the year ended December 31, 2019. The primary reason for the increase was the engagement of an investor relations firm. Legal fees increased $41,318 from $139,276 for the year ended December 31, 2019 to $180,594 for the year ended December 31, 2020. The primary reason for the variance was an overall increase in legal work. Director and officer insurance expenses increased $30,245 to $184,239 for the year ended December 31, 2020 from $153,994 for the year ended December 31, 2019. The primary reason for the increase was an increase in insurance premiums due to the COVID-19 pandemic. Other tax expenses increased $20,786 to $81,571 for the year ending December 31, 2020 from $60,785 for the year ending December 31, 2019. The primary reason for the increase was due to personal property tax on capital equipment. General and administrative wages and salaries increased $20,761 from $575,471 for the year ended December 31, 2019 to $596,232 for the year ended December 31, 2020. The primary reason for the increase was due primarily to increase in salary and fringe benefit costs. Internet expenses increased $13,014 from $5,747 for the year ending December 31, 2019 to $18,761 for the year ending December 31, 2020. The primary reason for the increase was due to the update of the Company website. General and administrative non-cash stock option amortization decreased $68,695 from $354,614 for the year ended December 31, 2019 to $285,919 for the year ended December 31, 2020. The reason for the variation was due to stock options and warrants vesting schedules. General and administrative travel expenses decreased $43,962 from $71,634 for the year ended December 31, 2019 to $27,672 for the year ended December 31, 2020. The primary reason for the decrease was the scale back of travel due to the COVID-19 pandemic. Office expenses decreased $20,759 from $72,414 for the year ending December 31, 2019 to $51,655 for the year ending December 31, 2020. The primary reason for the decrease was the scale back of operations due to the COVID-19 pandemic. Shareholders’ meeting expenses decreased $12,612 from $54,992 for the year ending December 31, 2019 to $42,380 for the year ending December 31, 2020. The primary reason for the decrease was that the 2020 annual shareholders meeting was a virtual meeting due to the COVID-19 pandemic. General and administrative consulting fees decreased $11,042 to $0 for the year ending December 31, 2020 from $11,042 for the year ended December 31, 2019. The primary reason for the decrease was due to a reduction in consulting fees. We expect general and administrative expense to increase in future periods as we increase the level of corporate and administrative activity, including increases associated with our operation as a public company; and significantly increase expenditures related to the future production and sales of our products. Other Income (Expense) Other expenses decreased $291,970 to $115,590 for the year ending December 31, 2020 from $407,560 for the year ending December 31, 2019, relating to the commitment fee associated with the purchase of shares by an institutional investor for sale under a stock purchase agreement. 40 Index Net Loss Net loss was $6,715,564 and $6,726,967 for the years ended December 31, 2020 and 2019, respectively, for a decrease of $11,403, due primarily to decreases in commitment fee associated with the purchase agreement, travel expenses, general and administrative non-cash stock option and warrant amortization, laboratory and wafer fabrication materials and supplies, office expenses, shareholders meeting expenses and general and administrative consulting expenses offset by increases in wages and salaries, investor relation expenses, depreciation, legal fees, director and officer insurance expense, research and development non-cash stock option and warrant amortization, other tax expenses, internet expenses and research and development rent. 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. Recently Adopted Accounting Pronouncements . In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and subsequent related updates. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from operating leases. The Company adopted the standard effective January 1, 2019 under the optional transition method which allows the entity to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption. The standard had a material impact on the balance sheet. Liquidity and Capital Resources For the year ended December 31, 2020 During the year ended December 31, 2020, net cash used in operating activities was $4,873,863 and net cash used in investing activities was $217,984, which was due primarily to the Company’s research and development activities and general and administrative expenditures. Net cash provided by financing activities for the year ended December 31, 2020 was $6,162,093. At December 31, 2020, our cash and cash equivalents totaled $3,306,590, our assets totaled $7,366,778, our liabilities totaled $1,591,332, and we had stockholders’ equity of $5,775,446. For the year ended December 31, 2019 During the year ended December 31, 2019, net cash used in operating activities was $4,765,845 and net cash used in investing activities was $305,670, which was due primarily to the Company’s research and development activities and general and administrative expenditures. Net cash provided by financing activities for the year ended December 31, 2019 was $5,133,234. At December 31, 2019, our cash and cash equivalents totaled $2,236,344, our assets totaled $6,824,856, our liabilities totaled $1,917,142, and we had stockholders’ equity of $4,907,714. 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 $700,000 of expenditures per month over the next 12 months. We expect our Lincoln Park financing (described below) to provide us with sufficient funds to maintain our operations over that period of time. Our current cash position enables us to finance our operations through December 2021 before we will be required to replenish our cash reserves pursuant to the Lincoln Park financing. Our cash requirements are expected to increase at a rate consistent with the Company’s path to revenue growth as we expand our activities and operations with the objective of commercializing our electro-optic polymer technology. We currently have no debt to service. 41 Index On January 21, 2019, our Company entered into the Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us up to $25,000,000 of our Common Stock (subject to certain limitations) from time to time over a 36-month period. Pursuant to the Purchase Agreement, Lincoln Park is obligated to make purchases as the Company directs in accordance with the 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 the market prices of our Common Stock immediately preceding the sales to Lincoln Park. We expect this financing to provide us with sufficient funds to maintain our operations for the foreseeable future. With the additional capital, we expect to achieve a level of revenues attractive enough to fulfill our development activities and adequate enough to support our business model for the foreseeable future. We cannot assure you that we will meet the conditions of the Purchase Agreement with Lincoln Park in order to obligate Lincoln Park to purchase our shares of common stock. 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. This limitation of operations may include reductions in capital expenditures and reductions in staff and discretionary costs. There are no trading volume requirements or restrictions under the 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 Purchase Agreement. We can also accelerate the amount of Common Stock to be purchased under certain circumstances. There are no limitations on use of proceeds, financial or business covenants, restrictions on future funding, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. Lincoln Park may not assign or transfer its rights and obligations under the purchase agreement. We expect that our cash used in operations will continue to increase during 2021 and beyond as a result 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;   • 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.   Analysis of Cash Flows For the year ended December 31, 2020 Net cash used in operating activities was $4,873,863 for the year ended December 31, 2020, primarily attributable to the net loss of $6,715,564 adjusted by $95,774 in warrants issued for services, $539,414 in options issued for services, $116,366 in common stock issued for services, $784,419 in depreciation expenses and patent amortization expenses, ($194,636) in prepaid expenses, $89,664 in accounts payable and accrued expenses and $410,700 in proceeds from Paycheck Protection Plan refundable advance. 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 $217,984 for the year ended December 31, 2020, consisting of $59,923 in cost for intangibles and $158,061 in asset additions primarily for the new Colorado headquarter facility and labs. Net cash provided by financing activities was $6,162,093 for the year ended December 31, 2020 and consisted of $1,658,442 in proceeds from exercise of warrants, $5,173,300 in proceeds from resale of common stock to an institutional investor offset by $669,649 repayment of equipment purchased. 42 Index For the year ended December 31, 2019 Net cash used in operating activities was $4,765,845 for the year ended December 31, 2019, primarily attributable to the net loss of $6,726,967 adjusted by $80,140 in warrants issued for services, $600,727 in options issued for services, $407,792 in common stock issued for services, $698,694 in depreciation expenses and patent amortization expenses, $165,410 in prepaid expenses and 8,359 in accounts payable and accrued expenses. 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 $305,670 for the year ended December 31, 2019, consisting of $82,195 in cost for intangibles and $223,475 in asset additions primarily for the new Colorado headquarter facility and labs. Net cash provided by financing activities was $5,133,234 for the year ended December 31, 2019 and consisted of $5,638,960 in proceeds from resale of common stock to an institutional investor offset by $505,726 repayment of equipment purchased. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. Item 8. Financial Statements and Supplementary Data Our Financial Statements of are attached as Appendix A (following Exhibits) and included as part of this Form 10-K Report. A list of our Financial Statements is provided in response to Item 15 of this Form 10-K Report. Item 9. Changes In And Disagreements With Accountants On Accounting and Financial Disclosure Not Applicable.