Item 7. Management’s Discussion and Analysis
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
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 Governor of Colorado’s Executive Order, Safer-at Home, 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™ technology
platform which we have detailed as: 1) Polymer Stack™, 2) Polymer Plus™, and Polymer Slot™. Our polymer technology
platform 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.
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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 2021, we continue to make advances in techniques to translate material properties
to efficient, reliable devices. 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. In 2021 we discussed the addition of silicon-based
foundry partners to help scale in volume our polymer modulator devices. Silicon-based foundries are large 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, and also allows us to efficiently utilize our capital.
Our extremely strong patent portfolio
allows us to optimize our business model in three areas: 1) Traditional focus on product development, 2) Patent licensing, 3) Technology
transfer to foundries.
We are initially targeting applications
in data communications and telecommunications markets and are exploring other applications that include automotive/LIDAR, sensing, displays
etc., 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; and (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
· 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
· 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.
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Results of Operations
The
following is a discussion and analysis of the Company’s results of operations for the year ended December 31, 2021 compared with
the year ended December 31, 2020. For the discussion related to the results of operations for the year ended December 31, 2020 compared
with the year ended December 31, 2019, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,
which was filed with the Securities and Exchange Commission on March 31, 2021.
Comparison of year ended December
31, 2021 to year ended December 31, 2020
Revenues
As a development stage company,
we had no revenues during the year ended December 31, 2021 and December 31, 2020. Our Company is in various stages of photonic device
and materials development and evaluation with potential customers and strategic partners. Our Company expects to obtain a revenue stream
from technology licensing agreements, technology transfer agreements and the production and direct sale of its own electro-optic device
components.
Operating Expenses
For the
For the
Percent
Year Ending
Year Ending
Change from
Change from
December 31, 2021
December 31, 2020
Prior Year
Prior Year
Research and development
$ 12,476,040
$ 4,590,545
$ 7,885,495
172 %
General and administrative
4,520,403
2,009,429
2,510,974
125 %
$ 16,996,443
$ 6,599,974
$ 10,396,469
158 %
Research and development expenses
increased for the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to the research and development
expense for cashless option exercises and increases in research and development salary expenses, prototype device development expenses,
non-cash stock option and warrant amortization, laboratory and wafer fabrication materials and supplies, operations committee fees, depreciation
and research and development travel expenses. The research and development expense for cashless option exercises for the year ended
December 31, 2021 were $3,490,324. There was no expense for cashless option exercises for the year ended December 31, 2020. Research and
development salary expenses increased by $3,300,257 in the year ended December 31, 2021, compared to the same period in 2020 primarily
for additional salary expenses. Prototype device development expenses increased by $368,483 in the year ended December 31, 2021, compared
to the same period in 2020. Non-cash stock option and warrant amortization expenses increased by $349,059 in the year ended December
31, 2021, compared to the same period in 2020. Laboratory and wafer fabrication materials and supplies increased
by $128,481 in the year ended December 31, 2021, compared to the same period in 2020. Depreciation expenses increased by $92,404 in the
year ended December 31, 2021, compared to the same period in 2020. Research and development travel expenses increased by $41,741 in the
year ended December 31, 2021, compared to the same period in 2020.
We expect to continue to incur
substantial research and development expense developing and commercializing our photonic devices, and 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; to build photonic device prototypes; 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.
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General and administrative expenses
increased for the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to general and administrative
salary expenses, general and administrative expense for cashless option exercises and increases in investor expenses, general and administrative
consulting fees, non-cash stock option amortization, legal fees, general and administrative travel expenses and director and officer insurance.
General and administrative salary expenses increased by $2,015,959 in the year ended December 31, 2021, compared to the same period in
2020 primarily for additional salary expenses. The general and administrative expense for cashless option exercises for the year ended
December 31, 2021 were $182,501. There was no expense for cashless option exercises for the year ended December 31, 2020. Investor expenses
increased by $108,341 in the year ended December 31, 2021, compared to the same period in 2020 primarily for the expenses to uplist the
Company to the Nasdaq Capital Market. Compensation consulting expenses increased by $53,500 in the year ended December 31, 2021, compared
to the same period in 2020. Non-cash stock option amortization expenses increased by $49,739 in the year ended December 31, 2021, compared
to the same period in 2020. Legal expenses increased by $44,718 in the year ended December 31, 2021, compared to the same period in 2020
primarily for the expenses to uplist the Company to the Nasdaq Capital Market. General and administrative travel expenses increased by
$33,260 in the year ended December 31, 2021, compared to the same period in 2020. Director and officer insurance increased by $32,390
in the year ended December 31, 2021, compared to the same period in 2020.
Other Income (Expense)
For the
For the
Percent
Year Ending
Year Ending
Change from
Change from
December 31, 2021
December 31, 2020
Prior Year
Prior Year
Other Income/(Expense)
$ (1,634,938 )
$ (115,590 )
$ (1,519,348 )
1314 %
Other income (expenses) increased
for the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to an increase in commitment fee
in the amount of $1,943,098 associated with the purchase of shares by an institutional investor for sale under a stock purchase agreement
offset by the Paycheck Protection Program loan forgiveness January 22, 2021 in the amount of $410,700.
Net Loss
For the
For the
Percent
Year Ending
Year Ending
Change from
Change from
December 31, 2021
December 31, 2020
Prior Year
Prior Year
Net Loss
$ 18,631,381
$ 6,715,564
$ 11,915,817
177 %
Net loss was $18,631,381 and $6,715,564
for the year ended December 31, 2021 and 2020, respectively, for an increase of $11,915,817, due primarily to salary expenses, the expense
for cashless option exercises and increases in commitment fee, non-cash stock option and warrant amortization, prototype device development
expenses, laboratory and wafer fabrication materials and supplies, investor expenses, operations committee fees, depreciation, compensation
consulting fees, travel expenses, legal expenses and director and officer insurance.
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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 proceeds from the sale of common stock to an institutional investor (Lincoln Park) pursuant to purchase
agreements with the institutional investor as described in Note 9 to the Financial Statements and proceeds received pursuant to the exercise
of options and warrants.
All of
the registered shares under the January 21, 2019 purchase agreement with the institutional investor have been issued as of June 30, 2021. On
July 2, 2021, our Company filed a $100 million universal shelf registration statement which became effective on July 9, 2021, and on October
4, 2021, our Company entered into a new purchase agreement (the “ Purchase Agreement ”) with the institutional investor
to sell up to $33 million of common stock over a 36-month period, with $13,448,832 remaining on the Purchase Agreement as of the date
of this filing.
During
the year ended December 31, 2021, we received $30,350,674 in proceeds pursuant to the purchase agreements with the institutional investor
and $2,379,225 in proceeds pursuant to the exercise of options and warrants. During 2020, we received $5,173,300 in proceeds pursuant
to the January 21, 2019 purchase agreement with the institutional investor and $1,658,442 in proceeds from exercise of
warrants. Additionally, on April 24, 2020, we received $410,700 in loan funding from the Paycheck Protection Program, as described
in Note 7 to the Financial Statements. The loan was forgiven by the Small Business Administration in its entirety on January 22,
2021.
During
the year ended December 31, 2021, our primary sources of cash outflows from operations included payroll, payroll taxes related to cashless
option exercise, rent, utilities, payments to vendors and third-party service providers. During the year ended December 31, 2020, our
primary sources of cash outflows from operations included payroll, rent, utilities, payments to vendors 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 $1,015,000 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 2023 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 our
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.
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On October
4, 2021 , our Company entered into the Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from
us up to $33,000,000 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 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 Purchase
Agreement.
We expect that our cash used in
operations will continue to increase during 2022 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;
· 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.
Analysis of Cash Flows
For the year ended December 31, 2021
Net cash used in operating activities
was $10,038,626 for the year ended December 31, 2021, primarily attributable to the net loss of $18,631,381 adjusted by $11,001 in warrants
issued for services, $1,022,985 in options issued for services, $2,059,464 in common stock issued for services, $878,520 in depreciation
expenses and patent amortization expenses, ($410,700) in Paycheck Protection Program loan forgiveness, $334,877 in prepaid expenses, $1,023,785
in accounts payable, accrued bonuses and accrued expenses and $3,672,823 in cashless option exercise expense. 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 $1,116,179 for the year ended December 31, 2021, consisting of $18,649 in cost for intangibles and $1,097,530 in asset additions primarily
for the Colorado headquarter facility and labs.
Net cash provided by financing activities
was $31,280,827 for the year ended December 31, 2021 and consisted of $2,379,225 in proceeds from exercise of options and warrants, $30,
350,674 in proceeds from resale of common stock to an institutional investor offset by $1,435,965 in cashless option exercise tax payments
and $13,107 repayment of equipment purchased.
On December
31, 2021, our cash and cash equivalents totaled $23,432,612, our assets totaled $27,228,575, our liabilities totaled $2,024,303 and we
had stockholders’ equity of $25,204,272.
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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.