Business Context and Reporting Period
Company: Lightwave Logic, Inc. (formerly Third-Order Nanotechnologies, Inc.)
Reporting Period: Fiscal year ended December 31, 2010
Business Stage: Development stage research and development company.
Core Technology: The company develops Application Specific Electro-Optic Polymers (ASEOP) and Non-Linear All-Optical Polymers (NLAOP). These materials are engineered at the molecular level to convert electrical signals to optical signals (and vice versa) for high-speed telecommunications, data communications, and computing. The company claims its proprietary "aromaticity" based molecular designs offer superior thermal stability (up to 350°C) and performance compared to traditional crystalline materials or competitive polymer technologies.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Sales | $3,200 | $0 |
| Operating Expenses | $3,716,071 | $2,720,884 |
| Net Loss | $(3,713,232) | $(2,721,871) |
| Cash and Cash Equivalents (Year End) | $953,867 | $459,989 |
| Total Assets | $1,471,633 | $878,664 |
| Total Liabilities | $116,012 | $131,676 |
| Stockholders' Equity | $1,355,621 | $746,988 |
| Cash Used in Operating Activities | $(1,436,681) | $(1,107,975) |
| Cash Provided by Financing Activities | $2,039,000 | $1,587,872 |
Note: The company has no debt listed on the balance sheet. Liquidity is maintained through equity financing and warrant exercises.
Material Changes vs. Prior Period
- Revenue Generation: The company recorded its first-ever revenue of $3,200 in 2010, compared to zero in 2009, attributed to a development revenue project.
- Expense Increase: Operating expenses increased by approximately $995,000 (36.6%) year-over-year. This was driven primarily by:
- Non-cash amortization of warrants ($580,167) related to the employment agreement with the new Non-Executive Chair.
- Increased investor relations expenses ($80,769 increase).
- Higher laboratory development and testing costs.
- Stock-Based Compensation: Non-cash stock compensation increased significantly by $888,305 to $1.32 million, largely due to warrant amortization for the new Chair and a financial advisory board member.
- Capital Raise: The company raised $1.5 million via a private placement of common stock and $539,000 from warrant exercises in 2010, compared to $855,000 from stock sales and $675,000 from warrant exercises in 2009.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance:
- The company anticipates continuing to incur operating losses through at least 2011.
- Management estimates sufficient funds to finance operations through August 2011, with a need for additional financing thereafter.
- Expected expenditures for the next 12 months exceed $1.5 million.
- Strategic focus remains on commercializing 40 Gb/s and 100 Gb/s modulators and expanding partnerships with universities (e.g., University of Alabama, CUNY) and industry partners (e.g., Photon-X, LLC).
Risks and Contingencies:
- Going Concern: Independent auditors have expressed substantial doubt about the company's ability to continue as a going concern due to significant losses and negative cash flow. Continued operations depend on securing adequate financing.
- SEC Investigation: The company is subject to an ongoing SEC investigation regarding a $1 million private offering in 2005. The SEC has not indicated if enforcement action will be taken, but the matter remains unresolved.
- Commercialization Risk: All products are in the development stage. There is no assurance that the technology will achieve market acceptance or that the company can manufacture products at competitive prices.
- Intellectual Property: The company relies heavily on patents and patent applications. Failure to secure protection or infringement claims could materially harm the business.
Investor Verification Checklist
- Cash Runway: Verify the current cash balance and burn rate to confirm if the "August 2011" liquidity runway estimate remains valid.
- SEC Status: Confirm the current status of the SEC investigation regarding the 2005 private offering and any potential penalties or settlements.
- Revenue Validation: Scrutinize the $3,200 revenue figure to understand the nature of the contract and its scalability.
- Stock Dilution: Review the outstanding options and warrants (approx. 6.98 million options/warrants outstanding as of Dec 31, 2010) to assess potential dilution from future financing needs.
- Patent Portfolio: Verify the status of the two patents granted in March 2011 (US 7,919,619 and US 7,894,695) and the 27 pending applications to ensure core IP protection.