Our future expenditures and capital requirements will depend on numerous
factors, including: the impact of the COVID-19 pandemic; 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. From late March through May 1, 2020, the
Company curtailed most operations due to the COVID-19 pandemic. On April 24,
2020, the Company received $410,700 in loan funding from the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act) Paycheck Protection Program,
administered by the U.S. Small Business Administration (See Note 8). We expect
that we will incur approximately $588,000 of expenditures per month over the
next 12 months. Our current cash position enables us to finance our operations
through November 2020 before we will be required to replenish our cash reserves
pursuant to the Lincoln Park financing. Subject to any additional impact of the
COVID-19 pandemic, we expect our Lincoln Park financing (described in Note 10)
to provide us with sufficient funds to maintain our operations over that period
of time and until May 2022. 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 other
than the loan under the Paycheck Protection Program. The loan is eligible for
forgiveness as part of the CARES Act if certain requirements currently in effect
are met. The Company continues to evaluate the requirements of the CARES Act
that allow for forgiveness; and anticipates the loan to be entirely forgiven
pursuant to loan forgiveness standards currently in effect.
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
June 30, December 31,
2020 2019
Insurance $ 207,815 $ 89,828
Research & Development Credit 126,066 158,612
Prototype Devices 95,846 27,810
Other 90,159 58,756
Rent 36,525 36,525
Prepaid Material - 1,018
$ 556,411 $ 372,549
8
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Index
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
2020 2019
Office equipment $ 84,751 $ 84,751
Lab equipment 3,742,933 3,733,057
Furniture 33,128 33,128
Leasehold improvements 229,401 229,401
4,090,213 4,080,337
Less: Accumulated depreciation 2,018,214 1,663,834
$ 2,071,999 $ 2,416,503
Depreciation expense for the six months ending June 30, 2020 and 2019 was
$354,381 and $258,318. Depreciation expense for the three months ending June 30,
2020 and 2019 was $176,088 and $139,897. During the three and six months ending
June 30, 2020 and 2019, the Company did not retire or sell property and
equipment.
NOTE 5 - INTANGIBLE ASSETS
This represents legal fees and patent fees associated with the prosecution of
patent applications. The Company has recorded amortization expense on patents
granted, which are amortized over the remaining legal life. Maintenance patent
fees are paid to a government patent authority to maintain a granted patent in
force. Some countries require the payment of maintenance fees for pending patent
applications. Maintenance fees paid after a patent is granted are expensed, as
these are considered ongoing costs to "maintain a patent". Maintenance fees paid
prior to a patent grant date are capitalized to patent costs, as these are
considered "patent application costs". No amortization expense has been recorded
on the remaining patent applications since patents have yet to be granted.
On June 11, 2018, the Company purchased patents for $315,000.
Patents consist of the following:
June 30, December 31,
2020 2019
Patents $ 1,296,178 $ 1,267,077
Less: Accumulated amortization 369,316 327,596
$ 926,862 $ 939,481
Amortization expense for the six months ending June 30, 2020 and 2019 was
$41,720 and $40,574. Amortization expense for the three months ending June 30,
2020 and 2019 was $20,842 and $20,164. There were no patent costs written off
for the three and six months ending June 30, 2020 and 2019.
NOTE 6 - LONG TERM EQUIPMENT PURCHASE PAYABLE
Outstanding long term equipment purchase payable is comprised of the following:
Interest June 30, December 31,
Final Year of Maturity Classification Rate 2020 2019
Current 0.00 % $ 289,978 $ 630,329
2021 Long term 0.00 % - 52,427
$ 289,978 $ 682,756
9
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Index
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
NOTE 7 - COMMITMENTS
On October 30, 2017, the Company entered into a new lease to lease approximately
13,420 square feet of office, laboratory and research and development space
located in Colorado for the Company's new principal executive offices and
research and development facility. The term of the lease is sixty- one (61)
months, beginning on November 1, 2017 and ending on November 30, 2022. The term
shall be extended for an additional twenty-four (24) months, subject to certain
conditions, waivable solely by Landlord in its sole and absolute discretion.
Base rent for the first year of the lease term is approximately $168,824, with
an increase in annual base rent of approximately 3% in each subsequent year of
the lease term. As specified in the lease, the Company paid the landlord (i) all
base rent for the period November 1, 2017 and ending on October 31, 2019, in the
sum of $347,045; and (ii) the estimated amount of tenant's proportionate share
of operating expenses for the same period in the sum of $186,293. Commencing on
November 1, 2019, monthly installments of base rent and one-twelfth of
landlord's estimate of tenant's proportionate share of annual operating expenses
shall be due on the first day of each calendar month. The lease also provides
that (i) on November 1, 2019 landlord shall pay the Company for the cost of the
cosmetic improvements in the amount of $3.00 per rentable square foot of the
premises, and (ii) on or prior to November 1, 2019, the Company shall deposit
with Landlord the sum of $36,524 as a security deposit which shall be held by
landlord to secure the Company's obligations under the lease. The lease contains
an option to extend the term to October 31, 2024. On October 30, 2017, the
Company entered into an agreement with the tenant leasing the premise from the
landlord ("Original Lessee") whereby the Original Lessee agreed to pay the
Company the sum of $260,000 in consideration of the Company entering into the
lease and landlord agreeing to the early termination of the Original Lessee's
lease agreement with landlord. The consideration of $260,000 was received on
November 1, 2017.
Due to the adoption of the new lease standard, the Company has capitalized the
present value of the minimum lease payments commencing November 1, 2019,
including the additional option period using an estimated incremental borrowing
rate of 6.5%. The minimum lease payments do not include common area annual
expenses which are considered to be nonlease components.
As of January 1, 2019 the operating lease right-of-use asset and operating lease
liability amounted to $885,094 with no cumulative-effect adjustment to the
opening balance of retained earnings/accumulated deficit. The Company has
elected not to recognize right-of-use assets and lease liabilities arising from
short-term leases.
There are no other material operating leases.
The Company is obligated under an operating lease for office and laboratory
space. The aggregate minimum future lease payments under the operating leases,
including the extended term are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
2020 $ 98,279
2021 201,501
2022 207,563
2023 213,781
2024 182,624
903,748
Less discounted interest (120,763 )
TOTAL $ 782,985
10
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Index
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
NOTE 7 - COMMITMENTS (CONTINUED)
Rent expense amounting to $64,718 and $21,573 is included in research and
development and general and administrative expenses for the six months ended
June 30, 2020. Rent expense amounting to $56,818 and $18,939 is included in
research and development and general and administrative expenses for the six
months ended June 30, 2019. Rent expense amounting to $32,359 and $10,786 is
included in research and development and general and administrative expenses for
the three months ended June 30, 2020. Rent expense amounting to $28,409 and
$9,470 is included in research and development and general and administrative
expenses for the three months ended June 30, 2019.
NOTE 8 - PPP ADVANCE
On April 24, 2020, the Company received $410,700 in loan funding from the
Paycheck Protection Program, established pursuant to the recently enacted
Coronavirus Aid, Relief, and Economic Security Act and administered by the U.S.
Small Business Administration. The unsecured loan is evidenced by a promissory
note of the Company dated April 23, 2020 in the principal amount of $410,700, to
Community Banks of Colorado, a division of NBH Bank, the lender. The loan
proceeds have been used to cover payroll costs, rent and utility costs. The loan
is eligible for forgiveness as part of the CARES Act if certain requirements
currently in effect are met. The Company continues to evaluate the requirements
of the CARES Act that allow for forgiveness; and anticipates the loan to be
entirely forgiven pursuant to loan forgiveness standards currently in effect.
The Company expects to apply for loan forgiveness within 24 weeks of the loan
issuance.
NOTE 9 - INCOME TAXES
There is no income tax benefit for the losses for the six months ended June 30,
2020 and 2019 since management has determined that the realization of the net
deferred tax asset is not assured and has created a valuation allowance for the
entire amount of such benefits.
The Company's policy is to record interest and penalties associated with
unrecognized tax benefits as additional income taxes in the statement of
operations. As of January 1, 2020, the Company had no unrecognized tax benefits,
or any tax related interest or penalties. There were no changes in the Company's
unrecognized tax benefits during the period ended June 30, 2020. The Company did
not recognize any interest or penalties during 2019 related to unrecognized tax
benefits. With few exceptions, the U.S. and state income tax returns filed for
the tax years ending on December 31, 2016 and thereafter are subject to
examination by the relevant taxing authorities.
NOTE 10 - STOCKHOLDERS' EQUITY
Preferred Stock
Pursuant to the Company's Articles of Incorporation, the Company's board of
directors is empowered, without stockholder approval, to issue series of
preferred stock with any designations, rights and preferences as they may from
time to time determine. The rights and preferences of this preferred stock may
be superior to the rights and preferences of the Company's common stock;
consequently, preferred stock, if issued could have dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the common stock. Additionally, preferred stock, if issued,
could be utilized, under special circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company's business or a
takeover from a third party.
11
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Index
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock Options and Warrants
2016 Purchase Agreement
In January 2016, the Company signed a Purchase Agreement with an institutional
investor to sell up to $20,000,000 of common stock. The Company also entered
into a registration rights agreement with the institutional investor whereby the
Company agreed to file a registration statement related to the transaction with
the U.S. Securities and Exchange Commission registering 5,000,000 shares of the
Company's common stock. The registration statement was filed on March 25, 2016.
The registration statement became effective April 7, 2016. The Company
registered an additional 5,000,000 shares pursuant to a registration statement
filed on April 19, 2017 which became effective June 15, 2017. The Company
registered an additional 5,000,000 shares pursuant to a registration statement
filed on May 2, 2018 which became effective May 11, 2018. Under the Purchase
Agreement and at Company's sole discretion, the institutional investor has
committed to invest up to $20,000,000 in common stock over a 36-month period.
The Company issued 350,000 shares of restricted common stock to the
institutional investor as an initial commitment fee valued at $237,965, fair
value, and 650,000 shares of common stock are reserved for additional commitment
fees to the institutional investor in accordance with the terms of the Purchase
Agreement. During the three month period ending March 31, 2019, the
institutional investor purchased 1,550,000 shares of common stock for proceeds
of $1,011,585 and the Company issued 32,879 shares of common stock as additional
commitment fee, valued at $24,162, fair value. The 2016 Purchase Agreement
expired April, 2019.
2019 Purchase Agreement
In January 2019, the Company signed a Purchase Agreement with the institutional
investor to sell up to $25,000,000 of common stock. The Company registered
9,500,000 shares pursuant to a registration statement filed on January 30, 2019
which became effective February 13, 2019. The Company issued 350,000 shares of
common stock to the institutional investor as an initial commitment fee valued
at $258,125, fair value, and 812,500 shares of common stock are reserved for
additional commitment fees to the institutional investor in accordance with the
terms of the Purchase Agreement. The Company registered an additional 6,000,000
shares pursuant to a registration statement filed on January 24, 2020 which
became effective February 4, 2020. During the period January 2019 through June
30, 2020, the institutional investor purchased 10,525,000 shares of common stock
for proceeds of $7,389,300 and the Company issued 240,158 shares of common stock
as additional commitment fee, valued at $188,463, fair value, leaving 572,342 in
reserve for additional commitment fees. During the six month period ending June
30, 2020, the institutional investor purchased 4,375,000 shares of common stock
for proceeds of $2,761,926 and the Company issued 89,767 shares of common stock
as additional commitment fee, valued at $62,958, fair value. During the three
month period ending June 30, 2020, the institutional investor purchased
2,250,000 shares of common stock for proceeds of $1,409,813 and the Company
issued 45,820 shares of common stock as additional commitment fee, valued at
$31,950, fair value. During July through August 2020, the institutional investor
purchased 750,000 shares of common stock for proceeds of $512,000 and the
Company issued 16,640 shares of common stock as additional commitment fee,
valued at $11,871, fair value, leaving 555,702 in reserve for additional
commitment fees.
NOTE 11 - STOCK BASED COMPENSATION
During 2007, the Board of Directors of the Company adopted the 2007 Employee
Stock Plan ("2007 Plan") that was approved by the shareholders. Under the Plan,
the Company is authorized to grant options to purchase up to 10,000,000 shares
of common stock to directors, officers, employees and consultants who provide
services to the Company. The Plan is intended to permit stock options granted to
employees under the 2007 Plan to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock
Options"). All options granted under the 2007 Plan, which are not intended to
qualify as Incentive Stock Options are deemed to be non-qualified options
("Non-Statutory Stock Options"). Effective June 24, 2016, the 2007 Plan was
terminated. As of June 30, 2020, options to purchase 4,450,000 shares of common
stock have been issued and are outstanding.
12
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Index
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
NOTE 11 - STOCK BASED COMPENSATION (CONTINUED)
During 2016, the Board of Directors of the Company adopted the 2016 Equity
Incentive Plan ("2016 Plan") that was approved by the shareholders at the 2016
annual meeting of shareholders on May 20, 2016. Under the 2016 Plan, the Company
is authorized to grant awards of incentive and non-qualified stock options and
restricted stock to purchase up to 3,000,000 shares of common stock to
employees, directors and consultants. Effective May 16, 2019, the number of
shares of the Company's common stock available for issuance under the 2016 Plan
was increased from 3,000,000 to 8,000,000 shares. As of June 30, 2020, options
to purchase 3,670,000 shares of common stock have been issued and are
outstanding and 4,321,250 shares of common stock remain available for grants
under the 2016 Plan.
Both plans are administered by the Board of Directors or its compensation
committee which determines the persons to whom awards will be granted, the
number of awards to be granted, and the specific terms of each grant. Subject to
the provisions regarding Ten Percent Shareholders, the exercise price per share
of each option cannot be less than 100% of the fair market value of a share of
common stock on the date of grant. Options granted under the 2016 Plan are
generally exercisable for a period of 10 years from the date of grant and may
vest on the grant date, another specified date or over a period of time.
The Company uses the Black-Scholes option pricing model to calculate the
grant-date fair value of an award, with the following assumptions for 2020: no
dividend yield in all years, expected volatility, based on the Company's
historical volatility, 70.5% to 78%, risk-free interest rate between 0.68% to
1.82% and expected option life of 10 years. The expected life is based on the
estimated average of the life of options using the "simplified" method, as
prescribed in FASB ASC 718, due to insufficient historical exercise activity
during recent years.
As of June 30, 2020, there was $304,749 of unrecognized compensation expense
related to non-vested market-based share awards that is expected to be
recognized through March 2022.
Share-based compensation was recognized as follows:
For the Six For the Six
Months Ending Months Ending
June 30, 2020 June 30, 2019
2007 Employee Stock Option Plan $ - $ -
2016 Equity Incentive Plan 354,958 350,823
Warrants 50,677 40,829
Total share-based compensation $ 405,635 $ 391,652
The following tables summarize all stock option and warrant activity of the
Company during the six months ended June 30, 2020:
Non-Qualified Stock Options and Warrants
Outstanding and Exercisable
Weighted
Average
Number of Exercise Exercise
Shares Price Price
Outstanding, December
31, 2019 16,302,517 $0.57 - $1.69 $ 0.85
Granted 460,000 $0.51 - $0.83 $ 0.78
Expired (2,816,199 ) $0.85 - $1.02 $ 0.93
Forfeited (8,750 ) $1.10 $ 1.10
Outstanding, June 30,
2020 13,937,568 $0.51 - $1.69 $ 0.83
Exercisable, June 30,
2020 13,274,445 $0.51 - $1.69 $ 0.83
13
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Index
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019
NOTE 11 - STOCK BASED COMPENSATION (CONTINUED)
The aggregate intrinsic value of options and warrants outstanding and
exercisable as of June 30, 2020 was $488,381. The aggregate intrinsic value is
calculated as the difference between the exercise price of the underlying
options and warrants and the closing stock price of $0.765 for the Company's
common stock on June 30, 2020. No options or warrants were exercised during the
six and three month period ending June 30, 2020 and 2019.
Non-Qualified Stock Options and Warrants Outstanding
Number Outstanding
Currently Exercisable Weighted Average Weighted Average
Range of at June 30, Remaining Exercise Price of Options and
Exercise Prices 2020 Contractual Life Warrants Currently Exercisable
$0.51 - $1.69 13,274,445 4.06 Years $0.83
NOTE 12 - RELATED PARTY
At June 30, 2020 the Company had a legal accrual to related party of $50,399,
director fees accrued in the amount of $20,000 and travel and office expense
accruals of officers in the amount of $4,861. At December 31, 2019 the Company
had a legal accrual to related party of $10,152 and travel and office expense
accruals of officers in the amount of $4,653.
During July 2018, the Company issued a warrant to purchase 100,000 shares of
common stock at a purchase price of $1.15 per share for professional services to
be rendered over a twelve month period commencing July 1, 2018. The warrant was
valued at $62,637, fair value upon issuance, using the Black-Scholes Option
Pricing Formula. The expense is being recognized based on service terms of the
agreement over a twelve month period. For the six and three months ending June
30, 2019, the Company recognized $31,319 and $15,660 of expense.
NOTE 13 - RETIREMENT PLAN
The Company established a 401(k) retirement plan covering all eligible employees
beginning November 15, 2013. For the six months ending June 30, 2020 and 2019, a
contribution of $27,828 and $21,157 was charged to expense for all eligible
non-executive participants. For the three months ending June 30, 2020 and 2019,
a contribution of $14,748 and $11,614 was charged to expense for all eligible
non-executive participants.
14
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Index
Item 2Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management. This information should also be read in
conjunction with our audited historical financial statements which are included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019,
filed with the Securities and Exchange Commission on March 16, 2020.
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
P2ICTM 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.
We are initially targeting applications in data communications and
telecommunications markets and are exploring other applications for our polymer
technology platform.
Materials Development
Our Company designs and synthesizes organic chromophores for use in its own
proprietary electro-optic polymer systems and photonic device designs. A polymer
system is not solely a material, but also encompasses various technical
enhancements necessary for its implementation. These include host polymers,
poling methodologies, and molecular spacer systems that are customized to
achieve specific optical properties. Our organic electro-optic polymer systems
compounds are mixed into solution form that allows for thin film application.
Our proprietary electro-optic polymers are designed at the molecular level for
potentially superior performance, stability and cost-efficiency. We believe they
have the potential to replace more expensive, higher power consuming,
slower-performance materials and devices used in fiber-optic communication
networks.
15
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Index
Our patented and patent pending molecular architectures are based on a
well-understood chemical and quantum mechanical occurrence known as aromaticity.
Aromaticity provides a high degree of molecular stability that enables our core
molecular structures to maintain stability under a broad range of operating
conditions.
We expect our patented and patent-pending optical materials along with trade
secrets and licensed materials, to be the core of and the enabling technology
for future generations of optical devices, modules, sub-systems and systems that
we will develop or potentially out-license to electro-optic device
manufacturers. Our Company contemplates future applications that may address the
needs of semiconductor companies, optical network companies, Web 2.0 media
companies, high performance computing companies, telecommunications companies,
aerospace companies, and government agencies.
Device Design and Development
Electro-optic Modulators
Our Company designs its own proprietary electro-optical modulation devices.
Electro-optical modulators convert data from electric signals into optical
signals that can then be transmitted over high-speed fiber-optic cables. Our
modulators are electro-optic, meaning they work because the optical properties
of the polymers are affected by electric fields applied by means of electrodes.
Modulators are key components that are used in fiber optic telecommunications,
data communications, and data centers networks etc., to convey the high data
flows that have been driven by applications such as pictures, video streaming,
movies etc., that are being transmitted through the Internet. Electro-optical
modulators are expected to continue to be an essential element as the appetite
and hunger for data increases every year.
Polymer Photonic Integrated Circuits (P2ICTM)
Our Company also designs its own proprietary polymer photonic integrated
circuits (otherwise termed a polymer PIC). A polymer PIC is a photonic device
that integrates several photonic functions on a single chip. We believe that our
technology can enable the ultra-miniaturization needed to increase the number of
photonic functions residing on a semiconductor chip to create a progression like
what was seen in the computer integrated circuits, commonly referred to as
Moore's Law. One type of integration is to combine several instances of the same
photonic functions such as a plurality of modulators to create a 4 channel
polymer PIC. In this case, the number of photonic components would increase by a
factor of 4. Another type is to combine different types of devices including
from different technology bases such as the combination of a semiconductor laser
with a polymer modulator. Our P2IC™ platform encompasses both these types of
architecture.
Current photonic technology today is struggling to reach faster device speeds.
Our modulator devices, enabled by our electro-optic polymer material systems,
work at extremely high frequencies (wide bandwidths) and possess inherent
advantages over current crystalline electro-optic material contained in most
modulator devices such as lithium niobate (LiNbO3), indium phosphide (InP),
silicon (Si), and gallium arsenide GaAs). Our advanced electro-optic polymer
platform is creating a new class of modulators and associated PIC platforms that
can address higher data rates in a lower cost, lower power consuming manner,
with much simpler modulation techniques.
Our electro-optic polymers can be integrated with other materials platforms
because they can be applied as a thin film coating in a fabrication clean room
such as may be found in semiconductor foundries. Our polymers are unique in that
they are stable enough to seamlessly integrate into existing CMOS, Indium
Phosphide (InP), Gallium Arsenide (GaAs), and other semiconductor manufacturing
lines.
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 P2ICTM 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
16
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•
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.
Our Proprietary Products in Development
As part of a two-pronged marketing strategy, our Company is developing several
optical devices, which are in various stages of development and that utilize our
polymer optical materials. They include:
Ridge Waveguide Modulator
Our ridge electro-optic waveguide modulator was designed and fabricated in our
in-house laboratory. The fabrication of our first in-house device is significant
to our entire device program and is an important starting point for modulators
that are being developed for target markets. We have multiple generations of new
materials that we will soon be optimizing for this specific design. In September
2017 we announced that our initial alpha prototype ridge waveguide modulator,
enabled by our P2IC™ polymer system, demonstrated bandwidth performance levels
that will enable 50 Gbaud modulation in fiber-optic communications. This device
demonstrated true amplitude (intensity) modulation in a Mach-Zehnder modulator
structure incorporating our polymer waveguides. This important achievement will
allow users to utilize arrays of 4 x 50 Gbaud (4x 100 Gbps) polymer modulators
using PAM-4 encoding to access 400 Gbps data rate systems. These ridge waveguide
modulators are currently being packaged with our partner into prototype
packages.
These prototype packages will enable potential customers to evaluate the
performance at 50 Gbaud. Once a potential customer generates technical feedback
on our prototype, we expect to be asked to optimize the performance to their
specifications. Assuming this is successful, we expect to enter a qualification
phase where our prototypes will be evaluated more fully.
In parallel, we are developing modulators for scalability to higher data rates
above 50 Gbaud. In September 2018, we showed in conference presentations the
potential of our polymer modulator platform to operate at over 100 GHz
bandwidth. This preliminary result corresponds to 100 Gbaud data rates using a
simple NRZ data encoding scheme or 200 Gbps with PAM-4 encoding. With 4 channel
arrays in our P2IC™ platform, the Company thus has the potential to address both
400 Gbps and 800 Gbps markets. While customers may start the engagement at 50
Gbaud, we believe potential customers recognize that scalability to higher
speeds is an important differentiator of the polymer technology.
We believe the ridge waveguide modulator represents our first commercially
viable device and targets the fiber optics communications market. We have
completed internal market analysis and are initially targeting interconnect
reach distances of greater than 10km. In these markets, the system network
companies are looking to implement modulator-based transceivers that can handle
aggregated data rates 100 Gbps and above. The market opportunity for greater
than 10km is worth over $1B over the next decade.
Advanced Modulator Structures
As part of supporting further improvement and scalability of our platform, we
continue to explore more advanced device structures. Our functional polymer
photonics slot waveguide modulator utilizes an existing modulator structure with
one of our proprietary electro-optic polymer material systems as the enabling
material layer and is functional as an operating prototype device.
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Preliminary testing and initial data on our polymer photonics slot waveguide
modulators demonstrated several promising characteristics. The tested polymer
photonic chip had a 1-millimeter square footprint, enabling the possibility of
sophisticated integrated optical circuits on a single silicon substrate. In
addition, the waveguide structure was approximately 1/20 the length of a typical
inorganic-based silicon photonics modulator waveguide.
With the combination of our proprietary electro-optic polymer material and the
extremely high optical field concentration in the slot waveguide modulator, the
test modulators demonstrated less than 2.2 volts to operate. Initial speeds
exceeded 30-35 GHz in the telecom, 1550 nanometer frequency band. This is
equivalent to 4 x 10Gbps, inorganic, lithium niobate modulators that would
require approximately 12-16 volts to move the same amount of information.
We are continuing our collaborative development of our polymer photonic slot
waveguide modulators with an associated third-party research. We are now
designing slot modulators to operate at data rates greater than 50 Gbaud.
Our Long-Term Device Development Goal - Multichannel Polymer Photonic Integrated
Circuit (P2IC™)
Our P2IC™ platform is positioned to address markets with aggregated data rates
of 100 Gbaud, 400 Gbaud, 800 Gbaud and beyond. Our P2IC™ platform will contain a
number of photonic devices that may include, over and above polymer-based
modulators, photonic devices such as lasers, multiplexers, demultiplexers,
detectors, fiber couplers.
While our polymer-based ridge waveguide and slot modulators are currently under
development to be commercially viable products, our long-term device development
goal is to produce a platform for the 400 Gbps and beyond transceiver market.
This has been stated in our photonics product roadmap that is publicly available
on our website. The roadmap shows a progression in speed from 50 Gbaud based
ridge waveguide modulators to 100 Gbaud based ridge waveguide modulators. The
roadmap shows a progression in integration in which the modulators are arrayed
to create a flexible, multichannel P2IC™ platform that spans 100 Gbps, 400 Gbps,
800 Gbps, and a scaling philosophy that will grow to 1.6 Tbps aggregated
data-rate markets.
We showed bandwidths of polymer-based modulator devices at a major international
conference (ECOC - European Conference on Optical Communications 2018) with
bandwidths that exceeded 100GHz. We noted that to achieve 100Gbaud, the
polymer-based modulator only needs to achieve 80GHz bandwidth. During ECOC 2019,
we showed environmental stability. We continue to develop our polymer materials
and device designs to optimize additional metrics. We are now optimizing the
device parameters for very low voltage operation.
Our Target Markets
Cloud computing and data centers
Big data is a general term used to describe the voluminous amount of
unstructured and semi-structured data a Company creates -- data that would take
too much time and cost too much money to load into a relational database for
analysis. Companies are looking to cloud computing in their data centers to
access all the data. Inherent speed and bandwidth limits of traditional
solutions and the potential of organic polymer devices offer an opportunity to
increase the bandwidth, reduce costs and improve speed of access.
Datacenters have grown to enormous sizes with hundreds of thousands and even
millions of servers in a single datacenter. The number of so-called "hyperscale"
datacenters are expected to continue to increase in number. Due to their size, a
single "datacenter" may consist of multiple large warehouse-size buildings on a
campus or even several locations distributed around a metropolitan area. Data
centers are confronted with the problem of moving vast amounts of data not only
around a single data center building, but also between buildings in distributed
data center architecture. Links within a single datacenter building may be
shorter than 500 meters, though some will require optics capable of 2 km.
Between datacenter buildings, there is an increasing need for high performance
interconnects over 10km in reach.
Our modulators are suitable for single-mode fiber optic links. We believe that
our single mode modulator solutions will be competitive at 500m to 10km link
distances, but it will be ideally suited at greater than 10km link distances.
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Telecommunications/Data Communications
The telecommunications industry has evolved from transporting traditional
analogue voice data over copper wire into the movement of digital voice and
data. Telecommunication companies are faced with the enormous increasing
challenges to keep up with the resulting tremendous explosion in demand for
bandwidth. The metropolitan network is especially under stress now and into the
near future. Telecommunications companies provide services to some data center
customers for the inter-data center connections discussed above. 5G mobile
upgrade, autonomous driving and IoT are expected to increase the need for data
stored and processed close to the end user in edge data centers. This
application similarly requires optics capable of very high speeds and greater
than 10 km reach.
Industry issues of scaling
The key issues facing the fiber-optic communications industry are the economic
progress and scalability of any PIC based technological platform. The polymer
platform is unique in that it is truly scalable. Scalable means being able to
scale up for high speed data rates, while simultaneously being able to scale
down in cost. This allows a competitive cost per data rate or cost per Gbps
metric to be achieved.
Fiber optic datacenter and high-performance computing customers want to achieve
the metric of $1/Gbps @ 400Gbps (this essentially means a single mode fiber
optic link that has a total cost of $400 and operates with a data rate of
400Gbps ? which also means that each transceiver at each end of the fiber optic
link must be able to be priced at $200), but as industry tries to match this
target, it is already falling behind as can be seen in the Figure below which
plots generic typical PIC based technology:
[[Image Removed: lwlg_10q002.gif]]
In the above figures that forecast $/Gbps to 2025 (where the left-hand graph is
a linear vertical scale, and the right-hand graph is a log scale), it can be
seen that the orange curve plots the customer expectation, while the other color
curves show $/Gbps improvement over time for various high-speed data rate
transceivers using PIC based technologies. A gap is appearing between what
customer expect and what the technologists can produce.
Polymers play an important role in PICs over the next decade as they can reduce
or close the gap between customer expectations and technical performance through
effective scaling increase of high performance with low cost. This is shown
below how polymers have the potential to scale to the needs of the customers
over the next 5years.
[[Image Removed: lwlg_10q004.gif]]
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Some of the things needed to achieve the scaling performance of polymers in
integrated photonics platform is within sight today:
1)
Increased r33 (which leads to very low Vpi in modulator devices) and we are
currently optimizing our polymers for this.
2)
Increase temperature stability so that the polymers can operate at broader
temperature ranges effective, where we have made significant progress over the
past few years.
3)
Low optical loss in waveguides and active/passive devices for improved optical
budget metrics which is currently an ongoing development program at our Company.
4)
Higher levels of hermeticity for lower cost packaging of optical sub-assemblies
within a transceiver module, where our advanced designs are being implemented
into polymer-based packages.
Recent Significant Events and Milestones Achieved
During February and March 2018, we moved our Newark, Delaware synthetic
laboratory and our Longmont, Colorado optical testing laboratory and corporate
headquarters to office, laboratory and research and development space located at
369 Inverness Parkway, Suite 350, Englewood, Colorado. The 13,420 square feet
Englewood facility includes fully functional 1,000 square feet of class 1,000
cleanroom, 500 square feet of class 10,000 cleanroom, chemistry laboratories,
and analytic laboratories. The Englewood facility streamlines all of our
Company's research and development workflow for greater operational
efficiencies.
During March 2018, our Company, together with our packaging partner,
successfully demonstrated packaged polymer modulators designed for 50Gbps, which
we believe will allow us to scale our P2IC™ platform with our Mach-Zehnder ridge
waveguide modulator design as well as other photonics devices competitively in
the 100Gbps and 400Gbps datacom and telecommunications applications market. We
are currently fine-tuning the performance parameters of these prototypes in
preparation for customer evaluations.
During June 2018, our Company Acquired the Polymer Technology Intellectual
Property Assets of BrPhotonics Productos Optoelectrónicos S.A., a Brazilian
corporation, which significantly advanced our patent portfolio of electro-optic
polymer technology with 15 polymer chemistry materials, devices, packaging and
subsystems patent and further strengthened our design capabilities to solidify
our market position as we prepare to enter the 400Gbps integrated photonics
marketplace with a highly competitive, scalable alternative to installed legacy
systems.
Also, during June 2018, our Company promoted polymer PICs and Solidified Polymer
PICs as Part of the Photonics Roadmap at the World Technology Mapping Forum in
Enschede, Netherlands, which includes our Company's technology of polymers and
polymer PICs that have the potential to drive not only 400Gbps aggregate data
rate solutions, but also 800Gbps and beyond.
In August 2018 we announced the completion (ahead of schedule) of our fully
equipped on-site fabrication facility, where we are expanding our high-speed
test and design capabilities. We also announced the continuation of the building
of our internal expertise with the hiring of world-class technical personnel
with 100Gbps experience.
In February 2019 we announced a major breakthrough in our development of clean
technology polymer materials that target the insatiable demand for fast and
efficient data communications in the multi-billion-dollar telecom and data
markets supporting Internet, 5G and IoT (Internet of Things) webscale services.
The improved thermally stable polymer has more than double the electro-optic
response of our previous materials, enabling optical device performance of well
over 100 GHz with extremely low power requirements. This addition to the family
of PerkinamineTM polymers will hold back run-away consumption of resources and
energy needed to support ever-growing data consumption demands. We continue to
conduct testing of the material and assessment of associated manufacturing
processes and device structures prior to release to full development.
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In March 2019 we created an Advisory Board comprised of three world-class
leaders in the photonics industry: Dr. Craig Ciesla, Dr. Christoph S. Harder,
and Mr. Andreas Umbach. The Advisory Board is working closely with our Company
leadership to enhance our Company's product positioning and promote our polymer
modulator made on our proprietary Faster by Design™ polymer P2IC™ platform. The
mission of the Advisory Board is initially to increase our Company's outreach
into the datacenter interconnect market and later to support expansion into
other billion-dollar markets. The Advisory Board members have each been chosen
for their combination of deep technical expertise, breadth of experience and
industry relationships in the fields of fiber optics communications, polymer and
semiconductor materials. Each of the Advisory Board members has experience at
both innovators like Lightwave Logic and large industry leaders of the type most
likely to adopt game-changing polymer-based products. In addition, they possess
operational experience with semiconductor and polymer businesses.
Also, in March 2019, our Company received the "Best Achievement in PIC Platform"
award for our 100 GHz polymer platform from the PIC International Conference.
The award recognizes innovative advances in the development and application of
key materials systems driving today's photonic integrated circuits (PICs)
and providing a steppingstone to future devices.
During the second quarter of 2019, our Company promoted its polymers at
CoInnovate in May and the World Technology Mapping Forum in June. CoInnovate is
a meeting of semiconductor industry experts. The World Technology Mapping Forum
is a group authoring a photonics roadmap out to 2030.
In September 2019 at the prestigious European Conference on Communications
(ECOC) in Dublin, Ireland, we showed measured material response over frequency
and the resulting optical data bits stream on our clean technology polymer
materials, the newest addition to our family of PerkinamineTM polymers, that
meet and exceed of our near-term target speed of 80 GHz We also released data
data demonstrating stability under elevated temperatures in the activated (poled
to create data carrying capability) state.
In October 2019, we reported that energy-saving polymer technology is
highlighted in the recently published Integrated Photonics Systems Roadmap -
International (IPSR-I). The roadmap validates the need for low-voltage,
high-speed technologies such as ours.
In May 2020, we announced that our latest electro-optic polymer material has
exceeded target performance metrics at 1310 nanometers (nm), a wavelength
commonly used in high-volume datacenter fiber optics. This material demonstrates
an attractive combination at 1310 nm of high electro-optic coefficient, low
optical loss and good thermal stability at 850 Celsius. The material is expected
to enable modulators with 80 GHz bandwidth and low drive power, and has an
electro-optic coefficient of 200 pm/V, an industry measure of how responsive a
material is to an applied electrical signal. This metric, otherwise known as
r33, is very important in lowering power consumption when the material is used
in modulator devices. This technology is applicable to shorter reach datacenter
operators, for whom decreasing power consumption is imperative to the bottom
line of a facility. We considered this a truly historic moment-not only in our
Company's history, but in our industry--as we have demonstrated a polymer
material that provides the basis for a world-class solution at the 1310 nm
wavelength, something which other companies have spent decades attempting to
achieve.
In July 2020, we announced the official launch of our new corporate website
www.lightwavelogic.com, reflecting ongoing efforts to provide up-to-date
information for investors and potential strategic partners. The revamped website
offers a clean, modern design integrated with helpful tools and investor
relations resources, including a new corporate explainer video, to illustrate
the target markets and advantages of Lightwave Logic's proprietary electro-optic
polymers.
In August 2020, we announced the addition of Dr. Franky So, a leading authority
in the OLED industry, to our Advisory Board. Dr. So is the Walter and Ida
Freeman Distinguished Professor in the Department of Materials Science and
Engineering at North Carolina State University. Previously, he was the Head of
Materials and Device research for OLEDs at OSRAM Opto Semiconductors, as well as
Motorola's corporate research lab in the 1990s. Dr. So was an early researcher
in electro-optic (EO) polymer modulators at Hoechst Celanese. As a member of the
Company's advisory board, Dr. So will work closely with management to enhance
Lightwave's product positioning for, as well as the promotion of, its polymer
modulators made on its proprietary platform. In addition, he will provide
technical support and advisory services to the Lightwave materials and device
teams.
As we move forward to diligently meet our goals, we continue to work closely
with our packaging partner for the 50Gbaud and 100 Gbaud prototypes, and we are
advancing our reliability and characterization efforts to support our
prototyping. We are actively engaged with test equipment manufacturers of the
most advanced test equipment to test our state-of-the-art polymer devices. We
continue to engage with multiple industry bodies to promote our roadmap. We
continue to fine tune our business model with target markets, customers, and
technical specifications. Discussions with prospective customers are validating
that our modulators are ideally suited for the datacenter and telecommunications
markets that are over 10km in length. Details of what these prospective
customers are seeking from a prototype are delivered to our technical team.
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Index
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 three months ended June 30, 2020 to three months ended June 30,
2019
Revenues
As a development stage company, we had no revenues during the three months ended
June 30, 2020 and June 30, 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 production.
Operating Expenses
Our operating expenses were $1,632,273 and $1,573,687 for the three months ended
June 30, 2020 and 2019, respectively, for an increase of $58,586. This is
primarily due to increases in depreciation, legal fees, investor relation
expenses, accounting fees, product prototype development and material testing
expense, product development consulting expenses, general and administrative
wages and salaries, research and development rent and utility expenses offset by
decreases in laboratory and wafer fabrication materials and supplies, travel
expenses, shareholder meeting expenses, research and development non-cash stock
option and warrant amortization and repair and maintenance expenditures.
Included in our operating expenses for the three months ended June 30, 2020 was
$1,057,470 for research and development expenses compared to $1,069,460 for the
three months ended June 30, 2019, for a decrease of $11,990. This is primarily
due to decreases in laboratory and wafer fabrication materials and supplies,
travel expenses, non-cash stock option and warrant amortization and repair and
maintenance expenditures offset by increases in depreciation, product prototype
development and material testing expense, product development consulting
expenses and rent and utility 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.
Laboratory and wafer fabrication materials and supplies decreased $43,707 from
$121,660 for the three months ended June 30, 2019 to $77,953 for the three
months ended June 30, 2020. The primary reason for the decrease was the scale
back of operations due to the COVID-19 pandemic.
Travel expenses decreased $18,470 from $19,246 for the three months ended June
30, 2019 to $776 for the three months ended June 30, 2020. The primary reason
for the decrease was the scale back of travel due to the COVID-19 pandemic.
Research and development non-cash stock option amortization decreased $10,419
from $89,412 for the three months ended June 30, 2019 to $78,993 for the three
months ended June 30, 2020. The reason for the variation was due to stock
options and warrants vesting schedules.
Repair and maintenance expenses decreased $6,457 from $11,094 for the three
months ended June 30, 2019 to $4,637 for the three months ended June 30, 2020.
The primary reason for the decrease was the scale back of operations due to the
COVID-19 pandemic.
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Index
Depreciation expense increased $36,089 from $137,125 for the three months ended
June 30, 2019 to $173,214 for the three months ended June 30, 2020. The primary
reason for the increase was due to the addition of capital equipment for wafers
fabricated the Company's facility.
Product prototype development and material testing expense increased $17,399
from ($6,193) for the three months ended June 30, 2019 to $11,206 for the three
months ended June 30, 2020. The primary reason for the increase was due to a
vendor adjustment in the prior year.
Product development consulting expenses increased $12,460 from $96,663 for the
three months ended June 30, 2019 to $109,123 for the three months ended June 30,
2020. The primary reason for the increase was due to product design and
simulations.
Rent and utilities increased $10,315 from $43,715 for the three months ended
June 30, 2019 to $54,030 for the three months ended June 30, 2020. The primary
reason for the increase was due to increase in facility operating expenses and
rent.
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.
General and administrative expenses increased $70,576 to $574,803 for the three
months ended June 30, 2020 compared to $504,227 for the three months ended June
30, 2019. The increase is primarily due to increases in legal fees, investor
relation expenses, accounting fees and general and administrative wages and
salaries offset by decreases in shareholder meeting expenses and travel
expenses.
Legal fees increased $25,119 from $26,362 for the three months ended June 30,
2019 to $51,481 for the three months ended June 30, 2020. The primary reason for
the variance was an overall increase in patent legal work.
Investor relation expenses increased $23,235 to $34,485 for the three months
ending June 30, 2020 from $11,250 for the three months ended June 30, 2019. The
primary reason for the increase was the engagement of an investor relations
firm.
Accounting fees increased $18,500 from $39,000 for the three months ending June
30, 2019 to $57,500 for the three months ending June 30, 2020. The primary
reason for the increase was due to services related to the Coronavirus Aid,
Relief and Economic Security Act Paycheck Protection Program loan and other
services performed.
General and administrative wages and salaries increased $12,426 from $138,700
for the three months ended June 30, 2019 to $151,126 for the three months ended
June 30, 2020. The primary reason for the increase was due primarily to increase
in salary and fringe benefit costs.
Shareholder meeting expenses decreased $11,318 from $50,830 for the three months
ending June 30, 2019 to $39,512 for the three months ending June 30, 2020. The
primary reason for the decrease was that the 2020 annual shareholder meeting was
a virtual meeting due to the COVID-19 pandemic.
Travel expenses decreased $11,283 from $13,562 for the three months ended June
30, 2019 to $2,279 for the three months ended June 30, 2020. The primary reason
for the decrease was the scale back of travel due to the COVID-19 pandemic.
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 $10,487 to $31,655 for the three months ending June 30,
2020 from $42,142 for the three months ending June 30, 2019, relating to the
commitment fee associated with the purchase of shares by an institutional
investor for sale under a stock purchase agreement.
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Index
Net Loss
Net loss was $1,663,928 and $1,615,829 for the three months ended June 30, 2020
and 2019, respectively, for an increase of $48,099, due to increases in
depreciation, legal fees, investor relation expenses, accounting fees, product
prototype development and material testing expense, product development
consulting expenses, general and administrative wages and salaries, research and
development rent and utility expenses offset by decreases in laboratory and
wafer fabrication materials and supplies, travel expenses, shareholder meeting
expenses, research and development non-cash stock option and warrant
amortization, commitment fee associated with the purchase agreement and repair
and maintenance expenditures.
Comparison of six months ended June 30, 2020 to six months ended June 30, 2019
Revenues
As a development stage company, we had no revenues during the six months ended
June 30, 2020 and June 30, 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 production.
Operating Expenses
Our operating expenses were $3,428,469 and $3,294,171 for the six months ended
June 30, 2020 and 2019, respectively, for an increase of $134,298. This is
primarily due to increases in depreciation, salaries and wages, investor
relation expenses, other tax expenses, accounting fees, product prototype
development and material testing expense, research and development rent and
utilities, internet expenses and research and development non-cash stock option
and warrant amortization offset by decreases in laboratory and wafer fabrication
materials and supplies, product development and general and administrative
consulting expenses, travel expenses, shareholder meeting expenses and office
expenses.
Included in our operating expenses for the six months ended June 30, 2020 was
$2,247,241 for research and development expenses compared to $2,221,514 for the
six months ended June 30, 2019, for an increase of $25,727. This is primarily
due to increases in depreciation, research and development salaries and wages,
product prototype development and material testing expense, rent and utilities
and research and development non-cash stock option and warrant amortization
offset by decreases in laboratory and wafer fabrication materials and supplies,
product development consulting expenses 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.
Depreciation expense increased $95,996 from $252,510 for the six months ended
June 30, 2019 to $348,506 for the six months ended June 30, 2020. The primary
reason for the increase was due to the addition of capital equipment for wafers
fabricated the Company's facility.
Wages and salaries increased $42,871 from $1,023,205 for the six months ended
June 30, 2019 to $1,066,076 for the six months ended June 30, 2020. The reason
for the variation was primarily due to an increase in full time technical
personnel working on device and material development.
Product prototype development and material testing expense increased $14,417
from $28,307 for the six months ended June 30, 2019 to $42,724 for the six
months ended June 30, 2020. The primary reason for the increase was materials,
wafers and packaged modulators testing.
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Index
Rent and utilities increased $12,753 from $87,968 for the six months ended June
30, 2019 to $100,721 for the six months ended June 30, 2020. The primary reason
for the increase was due to increase in facility operating expenses and rent.
Research and development non-cash stock option amortization increased $10,461
from $179,906 for the six months ended June 30, 2019 to $190,367 for the six
months ended June 30, 2020. The reason for the variation was due to stock
options and warrants vesting schedules.
Laboratory and wafer fabrication materials and supplies decreased $68,263 from
$256,146 for the six months ended June 30, 2019 to $187,883 for the six months
ended June 30, 2020. The primary reason for the decrease was the scale back of
operations due to the COVID-19 pandemic.
Product development consulting expenses decreased $42,569 from $245,698 for the
six months ended June 30, 2019 to $203,129 for the six months ended June 30,
2020. The primary reason for the decrease was due to the end of a research and
development project.
Travel expenses decreased $32,297 from $50,375 for the six months ended June 30,
2019 to $18,078 for the six months ended June 30, 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.
General and administrative expenses increased $108,571 to $1,181,228 for the six
months ended June 30, 2020 compared to $1,072,657 for the six months ended June
30, 2019. The increase is primarily due to increases in investor relation
expenses, other tax expenses, accounting fees, general and administrative wages
and salaries and internet expenses offset by decreases in shareholder meeting
expenses, office expenses, general and administrative travel expenses and
general and administrative consulting expenses.
Investor relation expenses increased $58,360 to $75,860 for the six months
ending June 30, 2020 from $17,500 for the six months ended June 30, 2019. The
primary reason for the increase was the engagement of an investor relations
firm.
Other tax expenses increased $22,826 to $30,175 for the six months ending June
30, 2020 from $7,349 for the six months ending June 30, 2019. The primary reason
for the increase was due to personal property tax on capital equipment.
Accounting fees increased $20,000 from $78,000 for the six months ending June
30, 2019 to $98,000 for the six months ending June 30, 2020. The primary reason
for the increase was due to services related to the Coronavirus Aid, Relief and
Economic Security Act Paycheck Protection Program loan and other services
performed.
General and administrative wages and salaries increased $19,265 from $282,497
for the six months ended June 30, 2019 to $301,762 for the six months ended June
30, 2020. The primary reason for the increase was due primarily to increase in
salary and fringe benefit costs.
Internet expenses increased $11,506 from $1,748 for the six months ending June
30, 2019 to $13,254 for the six months ending June 30, 2020. The primary reason
for the increase was due to the update of the Company website.
Shareholder meeting expenses decreased $13,951 from $54,245 for the six months
ending June 30, 2019 to $40,294 for the six months ending June 30, 2020. The
primary reason for the decrease was that the 2020 annual shareholder meeting was
a virtual meeting due to the COVID-19 pandemic.
Office expenses decreased $13,443 from $43,768 for the six months ending June
30, 2019 to $30,325 for the six months ending June 30, 2020. The primary reason
for the decrease was the scale back of operations due to the COVID-19 pandemic.
Travel expenses decreased $13,206 from $30,924 for the six months ended June 30,
2019 to $17,718 for the six months ended June 30, 2020. The primary reason for
the decrease was the scale back of travel due to the COVID-19 pandemic.
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General and administrative consulting fees decreased $11,042 to $0 for the six
months ending June 30, 2020 from $11,042 for the six months ended June 30, 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 $277,803 to $62,633 for the six months ending June 30,
2020 from $340,436 for the six months ending June 30, 2019, relating to the
commitment fee associated with the purchase of shares by an institutional
investor for sale under a stock purchase agreement.
Net Loss
Net loss was $3,491,102 and $3,634,607 for the six months ended June 30, 2020
and 2019, respectively, for an decrease of $143,505, due primarily to decreases
in commitment fee associated with the purchase agreement, laboratory and wafer
fabrication materials and supplies, product development and general and
administrative consulting expenses, travel expenses, shareholder meeting
expenses and office expenses offset by increases in depreciation, salaries and
wages, investor relation expenses, other tax expenses, accounting fees, product
prototype development and material testing expense, research and development
rent and utilities, internet expenses and research and development non-cash
stock option and warrant amortization.
Significant Accounting Policies
We believe our significant accounting policies affect our more significant
estimates and judgments used in the preparation of our financial statements. Our
Annual Report on Form 10-K for the year ended December 31, 2019 contains a
discussion of these significant accounting policies.
Liquidity and Capital Resources
For the six months ended June 30, 2020
During the six months ended June 30, 2020, net cash used in operating activities
was $2,344,201 and net cash used in investing activities was $38,978, 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 six months ended June 30, 2020 was $2,369,148. At June 30, 2020, our cash
and cash equivalents totaled $2,222,313, our assets totaled $6,560,570, our
liabilities totaled $1,913,439, and we had stockholders' equity of $4,647,131.
For the six months ended June 30, 2019
During the six months ended June 30, 2019, net cash used in operating activities
was $2,437,489 and net cash used in investing activities was $131,844, 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 six months ended June 30, 2019 was $2,597,723. At June 30, 2019, our cash
and cash equivalents totaled $2,203,015, our assets totaled $6,815,015, our
liabilities totaled $1,991,138, and we had stockholders' equity of $4,823,877.
Sources and Uses of Cash
Our future expenditures and capital requirements will depend on numerous
factors, including: the impact of the COVID-19 pandemic; 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. From late March through May 1, 2020, the
Company curtailed most operations due to the COVID-19 pandemic. We expect that
we will incur approximately $588,000 of expenditures per month over the next 12
months.
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Subject to any additional impact of the COVID-19 pandemic, we expect our Lincoln
Park financing (described below) to provide us with sufficient funds to maintain
our operations over that period of time. However, any additional funds provided
by our Lincoln Park financing may not be available on terms that are acceptable
to us, or at all. Market volatility resulting from the COVID-19 pandemic or
other factors could adversely impact our ability to access capital as and when
needed. If adequate funds are not available to us on a timely basis, we may be
required to delay or limit our operations, including research and development
efforts relating to the commercializing our electro-optic polymer technology.
Our current cash position enables us to finance our operations through November
2020 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 other than the loan under the
Paycheck Protection Program (described below), and we anticipate the loan to be
entirely forgiven pursuant to loan forgiveness standards currently in effect.
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.
On April 23, 2020, the Company received $410,700 in loan funding from the
Paycheck Protection Program, established pursuant to the recently enacted
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and
administered by the U.S. Small Business Administration. The unsecured loan is
evidenced by a promissory note of the Company dated April 23, 2020 in the
principal amount of $410,700, to Community Banks of Colorado, a division of NBH
Bank, the lender. The loan is eligible for forgiveness as part of the CARES Act
if certain requirements currently in effect are met. The Company continues to
evaluate the requirements of the CARES Act that allow for forgiveness; and
anticipates the loan to be entirely forgiven pursuant to loan forgiveness
standards currently in effect.
We expect that our cash used in operations will continue to increase during 2020
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.
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Analysis of Cash Flows
For the six months ended June 30, 2020
Net cash used in operating activities was $2,344,201 for the six months ended
June 30, 2020, primarily attributable to the net loss of $3,491,102 adjusted by
$50,677 in warrants issued for services, $354,958 in options issued for
services, $62,958 in common stock issued for services, $396,101 in depreciation
expenses and patent amortization expenses, ($183,862) in prepaid expenses,
$55,369 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 $38,978 for the six months ended June
30, 2020, consisting of $29,101 in cost for intangibles and $9,877 in asset
additions primarily for the new Colorado headquarter facility and labs.
Net cash provided by financing activities was $2,369,148 for the six months
ended June 30, 2020 and consisted of $2,761,926 in proceeds from resale of
common stock to an institutional investor offset by $392,778 repayment of
equipment purchased.
For the six months ended June 30, 2019
Net cash used in operating activities was $2,437,489 for the six months ended
June 30, 2019, primarily attributable to the net loss of $3,634,607 adjusted by
$40,829 in warrants issued for services, $350,823 in options issued for
services, $340,560 in common stock issued for services, $298,892 in depreciation
expenses and patent amortization expenses, $157,094 in prepaid expenses and
$8,920 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 $131,844 for the six months ended June
30, 2019, consisting of $34,036 in cost for intangibles and $97,808 in asset
additions primarily for the new Colorado headquarter facility and labs.
Net cash provided by financing activities was $2,597,723 for the six months
ended June 30, 2019 and consisted of $2,819,210 in proceeds from resale of
common stock to an institutional investor offset by $221,487 repayment of
equipment purchased.
Contractual Obligations
There have been no material changes outside the ordinary course of business in
our contractual commitments during the three months ended June 30, 2020.
Off-Balance Sheet Arrangements
As of June 30, 2020, we do not have an interest in any off-balance sheet
arrangements as defined in Item 303(a)(4) of Regulation S-K that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources that is material to
investors.
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