Lightwave Logic(LWLG) - 2018 Q4 - Annual Report

Part I Business Lightwave Logic develops proprietary electro-optic polymer systems and PICs for telecommunications and data centers, targeting high-speed data communication markets - Lightwave Logic is a development-stage company focused on creating advanced organic electro-optic polymer systems and Photonic Integrated Circuits (PICs) for the telecommunication and data center markets[20] - The company's core technology is based on proprietary organic polymers designed to be more stable, cost-efficient, and higher-performing than legacy inorganic crystalline materials[21][35] - Key product development milestones include achieving modulator performance suitable for 50Gbps data rates, which enables 400Gbps systems using PAM-4 encoding[41][64] - The company's intellectual property portfolio consists of 45 granted patents and was significantly enhanced by the 2018 acquisition of polymer technology assets from BrPhotonics[54][55] - In 2018, the company consolidated its operations into a new 13,420 sq. ft. facility in Englewood, Colorado, which includes advanced cleanrooms and laboratories to streamline R&D[65][128] - The business strategy includes generating revenue through technology licensing, joint ventures, or direct sales of its electro-optic device components[94] Risk Factors The company faces significant risks including substantial operating losses, capital needs, market acceptance challenges, and reliance on key personnel - The company has a history of substantial operating losses, incurring a net loss of $5.8 million in 2018, and anticipates continued losses as it is still in the research and development phase[131] - There is a significant risk that the company may not be able to secure additional capital required to continue operations beyond June 2019, which could force it to limit its activities[137] - The company's products face a lengthy and expensive customer qualification process, which can take several months or more without any guarantee of future sales[149] - The telecommunications market, a key target, has historically not accepted polymer modulators, and the data communications market is highly competitive with established technologies like silicon photonics and Indium Phosphide[153][154] - The company's success is highly dependent on key personnel, particularly CEO Dr. Michael Lebby and President/COO James S. Marcelli[172] - The complexity of the company's products may lead to errors or defects, which could require costly redesigns and damage the company's reputation with potential customers[175] Unresolved Staff Comments Not applicable Properties The company's principal executive offices and R&D facility are located in a 13,420 square foot leased space in Englewood, Colorado - The company's main facility is a 13,420 square foot space in Englewood, Colorado, which houses its executive offices, laboratories, and research and development operations[198] - The facility includes a 1,000 sq. ft. class 1,000 cleanroom, a 500 sq. ft. class 10,000 cleanroom, and a 220 sq. ft. class 100 cleanroom[128] Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not aware of any material litigation or threatened litigation[199] Mine Safety Disclosures Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the OTCQB under "LWLG", with approximately 108 stockholders and no cash dividends paid to date - The company's common stock is traded on the OTCQB under the symbol "LWLG"[203] - As of March 15, 2019, there were approximately 108 holders of the company's common stock[204] - No cash dividends have been declared or paid on common stock to date[205] Equity Compensation Plan Information as of December 31, 2018 | Plan category | 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 | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 6,755,000 | $0.86 | 765,000 | | Equity compensation plans not approved by security holders | 1,677,500 | $0.80 | 0 | | Total | 8,432,500 | $0.85 | 765,000 | Selected Financial Data Not applicable Management's Discussion and Analysis of Financial Condition and Results of Operations Lightwave Logic, a development-stage company, reported no revenue and a net loss of $5.77 million in 2018, with increased operating expenses and cash used in operations - The company is in the development stage and generated no revenues in 2018 or 2017[251] Comparison of Fiscal 2018 to Fiscal 2017 | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Loss | ($5,772,958) | ($5,749,382) | | Operating Expenses | $5,601,016 | $5,523,538 | | Research and Development | $3,794,565 | $3,519,129 | | General and Administrative | $1,806,451 | $2,004,409 | - The increase in operating expenses was primarily due to higher salaries from increased technical personnel, depreciation on new equipment, and rent for the new consolidated facility, offset by a decrease in non-cash stock-based compensation[252][256][257][259][262] Cash Flow Summary | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($4,400,965) | ($4,409,696) | | Net Cash Used in Investing Activities | ($1,432,363) | ($265,532) | | Net Cash Provided by Financing Activities | $4,525,626 | $6,200,711 | - The company believes it has sufficient funds to finance operations through June 2019, relying on its cash position and a purchase agreement with Lincoln Park Capital for up to $25 million in common stock purchases over 36 months[284][285] Quantitative and Qualitative Disclosures About Market Risk Not applicable Financial Statements and Supplementary Data This section indicates the company's audited financial statements are attached as an appendix to the Form 10-K report - The company's Financial Statements are attached as Appendix A and are included as part of the Form 10-K Report[294] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management evaluated and concluded that the company's disclosure controls and procedures were effective as of the end of the period[296] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[297] - The independent registered public accounting firm, Morison Cogen LLP, issued an unqualified opinion on the company's internal control over financial reporting as of December 31, 2018[300] Other Information Not applicable Part III Directors, Executive Officers and Corporate Governance The company's leadership includes key executives and a seven-member Board of Directors with an Audit Committee and adopted Code of Ethics - The executive team is led by Dr. Michael Lebby, CEO, and James S. Marcelli, President & COO[305] - The Board of Directors consists of seven members and is divided into three classes with staggered three-year terms[316] - The company has an Audit Committee comprised of Ronald A. Bucchi and Siraj Nour El-Ahmadi, with Ronald A. Bucchi identified as the audit committee financial expert[322] - A Code of Ethics and Business Conduct has been adopted and is available on the company's website[318] Executive Compensation Executive compensation primarily consists of base salary and equity incentives, with specific compensation details for key executives and directors in 2018 - The primary elements of executive compensation are annual base salary and long-term equity incentive compensation in the form of stock options[325] Summary Compensation Table (2018) | Name and Principal Position | Salary ($) | Option Awards ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Dr. Michael S. Lebby, CEO | 265,000 | 38,448 | 2,840 | 306,288 | | James S. Marcelli, President | 250,000 | — | 2,355 | 252,355 | - Employment agreements for CEO Dr. Lebby and President Mr. Marcelli specify base salaries ($265,000 and $250,000 respectively), stock option grants, and severance provisions for termination without cause or non-renewal[348][350] - Non-employee director compensation in 2018 consisted primarily of stock option awards, with Dr. Frederick Leonberger also receiving $108,000 in cash for serving on the Operations Committee[354][357] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 15, 2018, Mary Goetz was the only beneficial owner of more than 5% of common stock, with directors and officers holding 7.97% Security Ownership of Management (as of March 15, 2018) | Name and Title | Amount of Beneficial Ownership | % Owned | | :--- | :--- | :--- | | Michael Lebby, CEO & Director | 712,643 | * | | James S. Marcelli, President & Director | 1,553,400 | 1.92% | | Thomas E. Zelibor, Chair of the Board | 1,401,824 | 1.73% | | Joseph A. Miller, Jr., Director | 506,800 | * | | Ronald A. Bucchi, Director | 827,400 | 1.02% | | Siraj Nour El-Ahmadi, Director | 480,000 | * | | Frederick Leonberger, Director | 955,000 | 1.18% | | Directors and Officers as a Group (7 Persons) | 6,437,067 | 7.97% | - Mary Goetz is the only reported beneficial owner of more than 5% of the company's common stock, with an ownership of 5.59%[359] Certain Relationships and Related Transactions, and Director Independence The company discloses a related party transaction with a director and identifies independent directors according to NASDAQ listing rules - A related party transaction exists with director Dr. Frederick J. Leonberger, who has served as a senior advisor to the company through his consulting firm, EOvation Advisors LLC[368] - The Board has determined that directors Joseph A. Miller, Jr., Ronald A. Bucchi, and Siraj Nour El-Ahmadi are independent[370] Principal Accounting Fees and Services The company incurred total fees of $87,000 from its independent accounting firm, Morison Cogen, LLP, for audit and tax services in 2018 Accounting Fees (Morison Cogen, LLP) | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | Audit Fees | $81,000 | $56,675 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $6,000 | $6,000 | | All Other Fees | $0 | $0 | | Total | $87,000 | $62,675 | Part IV Exhibits, Financial Statement Schedules This section lists the audited financial statements and all exhibits filed as part of the Form 10-K report - This section provides a list of the audited financial statements and all exhibits filed with the Form 10-K[379] Form 10-K Summary None Financial Statements Report of Independent Registered Public Accounting Firm Morison Cogen LLP issued an unqualified opinion on Lightwave Logic's financial statements and internal control over financial reporting for 2018 - The auditor, Morison Cogen LLP, expressed an unqualified opinion that the financial statements are presented fairly in all material respects[393] - The auditor also expressed an unqualified opinion that the Company maintained effective internal control over financial reporting as of December 31, 2018[393] Financial Statements Tables The financial statements for 2018 show the development-stage company with no revenue, a $5.8 million net loss, and decreased total assets Balance Sheet Data (in thousands) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2,175 | $3,482 | | Total Current Assets | $2,512 | $4,067 | | Total Assets | $5,251 | $5,850 | | Liabilities & Equity | | | | Total Current Liabilities | $344 | $649 | | Total Liabilities | $344 | $833 | | Total Stockholders' Equity | $4,907 | $5,017 | Statement of Operations Data (in thousands) | | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net Sales | $0 | $0 | | Research and development | $3,795 | $3,519 | | General and administrative | $1,806 | $2,004 | | Loss from Operations | ($5,601) | ($5,524) | | Net Loss | ($5,773) | ($5,749) | | Basic and Diluted Loss per Share | ($0.08) | ($0.08) | Statement of Cash Flows Data (in thousands) | | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | ($4,401) | ($4,362) | | Net cash used in investing activities | ($1,432) | ($266) | | Net cash provided by financing activities | $4,526 | $6,153 | Notes to Financial Statements The notes detail accounting policies, development-stage status, reliance on equity financing, asset valuations, and significant net operating loss carryforwards - The company is a development-stage technology company with significant risks, including the need for future funding to operationalize its technology[412][413] - Management believes it has sufficient funds to finance operations through June 2019, relying on its cash position and a purchase agreement with an institutional investor for up to $25 million[437] - As of December 31, 2018, the company had net operating loss carryforwards of approximately $44 million available to offset future taxable income, expiring through 2038[455] - Total stock-based compensation expense recognized in 2018 was $466,078, down from $1,211,672 in 2017[470] - As of December 31, 2018, there were outstanding options and warrants to purchase an aggregate of 18,964,867 shares of common stock[472]