UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________to________________________
Commission file number: 0-52567
Lightwave Logic, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
369 Inverness Parkway, Suite 350, Englewood, CO
(Address of principal executive offices)
82-049-7368
(I.R.S. Employer
Identification No.)
80112
(Zip Code)
(Registrant’s Telephone Number, including Area Code): 720-340-4949
Securities registered pursuant to Section 12(b) of the Act
Title of each class registered
Name of each exchange
on which registered
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $0.001
(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Non-accelerated filer ¨
Accelerated filer þ
Smaller reporting company þ
Emerging growth company ¨
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of
1934). Yes ¨ No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately
$84,578,680 as of June 30, 2018.
As of March 18, 2019, there were 80,759,209 shares outstanding of the registrant’s common stock, $.001 par value.
Table of Contents
Business
Risk Factors
Unsolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART I
PART II
PART III
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
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Forward-Looking Statements
This report on Form 10-K contains forward-looking statements. Forward-looking statements involve risks and
uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you
can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting
uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions,
known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future
results, performances or achievements expressed or implied by the forward-looking statements. You should not place undue
reliance on these forward-looking statements.
Factors that are known to us that could cause a different result than projected by the forward-looking statement,
include, but are not limited to:
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inability to generate revenue or to manage growth;
lack of available funding;
lack of a market for or market acceptance of our products;
competition from third parties;
general economic and business conditions;
intellectual property rights of third parties;
changes in the price of our stock and dilution;
regulatory constraints and potential legal liability;
ability to maintain effective internal controls;
security breaches, cybersecurity attacks and other significant disruptions in our information technology
systems;
changes in technology and methods of marketing;
delays in completing various engineering and manufacturing programs;
changes in customer order patterns and qualification of new customers;
changes in product mix;
success in technological advances and delivering technological innovations;
shortages in components;
production delays due to performance quality issues with outsourced components;
those events and factors described by us in Item 1.A “Risk Factors”;
other risks to which our Company is subject; and
other factors beyond the Company's control.
Any forward-looking statement made by us in this report on Form 10-K is based only on information currently
available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any
forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new
information, future developments or otherwise.
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Item 1.
Business.
PART I
Our Company
We were incorporated under the laws of the State of Nevada on June 24, 1997 and in 2004 we acquired PSI-TEC
Corp., and in 2006 we merged with PSI-TEC Corp. PSI-TEC Corp. was incorporated under the laws of the State of Delaware
on September 12, 1995. In 2008 we changed our name to Lightwave Logic, Inc. Unless the context otherwise requires, all
references to the “Company,” “we,” “our” or “us” and other similar terms means Lightwave Logic, Inc., a Nevada
corporation.
Our principal executive office is located at 369 Inverness Parkway, Suite 350, Englewood, CO 80112, and our
telephone number is (720) 340-4949. Our website address is www.lightwavelogic.com. No information found on our website
is part of this report. Also, this report includes the names of various government agencies and the trade names of other
companies. Unless specifically stated otherwise, the use or display by us of such other parties' names and trade names in this
report is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, any of these other
parties.
Overview
Lightwave Logic, Inc. is a development stage company whose P2ICTM technology addresses advanced
telecommunication, data communications, and data center markets utilizing its advanced organic electro-optic polymer
systems. The Company currently has development activities in both polymer materials as well as device design.
Materials Development
The 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.
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. The 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
The 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.
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Polymer Photonic Integrated Circuits (P2ICTM)
The 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.
Glossary
Glossary of select technology terms to provide you with a better understanding our Company’s technology and
devices:
Electro-optic devices - Electro-optic devices convert data from electric signals into optical signals for use in
communications systems and in optical interconnects for high-speed data transfer.
Electro-optic material - Electro-optic material
in high-speed fiber-optic
is
telecommunication systems. Electro-optic materials are materials that are engineered at the molecular level. Molecular level
engineering is commonly referred to as “nanotechnology.”
the core active
ingredient
Electro-optic modulators - Electro-optic (E/O) modulators are electro-optic devices that perform electric-to-optic
conversions within the infrastructure of the Internet. Data centers may also benefit from this technology through devices that
could significantly increase bandwidth and speed while decreasing costs. Polymer E/O modulators can be designed and
fabricated with multiple structures such as Ridge waveguide and slot waveguide. The waveguides allow the light to be
efficiently coupled into and out of the modulators, and provide a basis for integrating modulators together.
Photonic Devices - Photonic devices are components for creating, manipulating or detecting light. This can include
modulators, laser diodes, light-emitting diodes, solar and photovoltaic cells, displays and optical amplifiers. Other examples
are devices for modulating a beam of light and for combining and separating beams of light of different wavelength.
Polymers - Polymers, also known as plastics, are large carbon-based molecules that bond many small molecules
together to form a long chain. Polymer materials can be engineered and optimized using nanotechnology to create a system in
which unique surface, electrical, chemical and electro-optic characteristics can be controlled. Materials based on polymers
are used in a multitude of industrial and consumer products, from automotive parts to home appliances and furniture, as well
as scientific and medical equipment.
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Our Business Opportunity
Lightwave Logic, Inc. is developing next generation proprietary photonic devices that are based on our advanced
electro-optical polymer material systems. Current legacy technology is based on inorganic crystalline materials, which has
allowed for the proliferation of data over fiber optic cables. However, there are inherent molecular deficiencies that have
prevented this technology from scaling down in price and up in functionality, especially in terms of $/Gbps. This is primarily
due to a closed valence structure that does not allow for the molecular improvements. The valence or valency of an element is
a measure of its combining power with other atoms when it forms chemical compounds or molecules. Also, the physical
properties of a crystal do not allow for its implementation into highly miniaturize slot structures that are in simple terms the
pathways that light travels through in the device.
Organic polymer materials on the other hand, have free electrons that allow for limitless potential to combine with
other molecular structures, which allows for multiple options and combinations to improving performance characteristics.
Importantly, because they can be applied to optical structures in thin-film liquid form, it is possible to imbue electro-optic
ability to highly miniaturized slot structures. Organic polymer materials are also vastly cheaper to manufacture in comparison
to growing exotic crystals that are prone to contamination and further must be sliced into thin wafers. Our Company believes
that the combination of less expensive manufacturing cost, ease of application, and better scalability, together with a lower
cost of ownership due to marked less heat dissipation (requiring less cooling), will create enormous demand for our products.
Many companies’ early attempts at developing commercially reliable organic polymers were stymied due to the
difficulty of creating organic molecules that could remain electro-optically active after being subjected to the high heat of
semiconductor manufacturing temperatures (such as silicon CMOS, InP, GaAs etc.). These early attempts also encountered
difficulty synthesizing materials that could withstand photochemical bleaching (loss of sensitivity to specific frequencies) and
material degradation due to high operating temperatures.
Over the last several years, our Company has made various scientific breakthroughs that have allowed for the
synthesis of proprietary organic polymer materials that can withstand extremely high process temperatures of 1750C.
Additionally, these materials have demonstrated photochemical stability, even after being subjected to tensor light for over
4,000 hours and exhibited little electro optic degradation even after 2,500 hours of continuous exposure to temperatures at
1100C – exceeding typical commercial operating temperatures of approximately 850C, as found in data center applications.
After successfully achieving material test results that either met or exceeded commercial requirements (subsequently
confirmed by an outside entity), in late 2016, the Company began production of its first photonic prototype device, a ridge
waveguide modulator.
Our First Product – The Ridge Waveguide Modulator
A ridge waveguide modulator is a type of modulator where the waveguide is fabricated within a layer of our electro-
optic polymer system. Various cladding materials and electrodes are layered over the core polymer. The polymer materials
are then part of an integrated photonics platform that can house other photonic devices, such as lasers, waveguides etc.
In April 2017 we achieved bandwidth suitable for 25Gbps data rates in an all-organic polymer ridge waveguide
intensity modulator prototype, a significant improvement over our initial 10Gbps device modulator prototype that was
announced in 2016. This breakthrough was significant because a 25Gbps data rate is important to the optical networking
industry because this data rate is a major node to achieve 100 Gbps (using 4 channels of 25 Gbps). In July 2017 we advanced
our high-speed modulation performance to satisfy 28Gbps data rates for QSFP28 standards and 100Gbps data center
applications.
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In September 2017 we achieved outstanding performance of our ridge waveguide Mach-Zehnder modulators ahead
of schedule, with bandwidth performance levels that will enable 50Gbps modulation in fiber-optic communications. This
important achievement will allow users to utilize arrays of 4 x 50Gbps polymer modulators using PAM-4 encoding to access
400Gbps data rate systems. Pulse-Amplitude Modulation (PAM-4) is an encoding scheme that can double the amount of data
that can be transmitted.
We are now optimizing our high-performance modulators against typical specifications that are required by the fiber
communications industry. Furthermore, we are packaging our modulators with our packaging partner so that potential
customers can evaluate our high-performance modulators in their systems. One of the most under-evaluated processes of
developing high speed devices onto a new and novel technology platform is robustness and reliability. We have already made
extensive progress with our polymer materials on this front, and now we are integrating our robust polymer materials onto an
integrated photonics platform to provide customers with a more miniaturized, higher performance solution for their data rich
systems.
We have also shown that with standard simulation and modeling of our devices, there is a potential to scale the high-
speed performance beyond that of 50Gbps, thus providing a technology platform for even greater data rates in the future.
This means that our technology platform using polymers is both scalable in high performance as well as scalable in
miniaturization and low cost, something that the fiber communications industry has been searching for a long time.
While our initial focus is to address data communications and telecommunications network applications along with
cloud computing/data center needs, we believe that in the future we will have additional opportunities to address other
applications such as: backplane optical interconnects, photovoltaic cells, medical applications, satellite reconnaissance,
navigation systems, radar applications, optical filters, spatial light modulators; and all-optical switches.
Electro-Optic Polymer Production – Our Approach vs. the BLA Approach
Our Electro-Optic Material Approach
Our core material expertise relates to the production of high-performance, high-stability electro-optic polymers for
high-speed (wide bandwidth) telecommunication and datacommunications applications. More specifically, it lies in a less
mainstream, yet firmly established, scientific phenomenon called aromaticity. Aromaticity causes a high degree of molecular
stability. It is a molecular arrangement wherein atoms combine into multi-membered rings and share their electrons among
each other. Aromatic compounds are stable because the electronic charge distributes evenly over a great area preventing
hostile moieties, such as oxygen and free radicals, from finding an opening to attack.
Previous and Current Competitive Organic Electro-Optic Polymer Efforts
For the past several decades, diverse corporate interests, including, to our knowledge, IBM, Lockheed Martin,
DuPont, AT&T Bell Labs, Honeywell, Motorola, HP, 3M, and others in addition to numerous universities and U.S.
Government Agencies, have attempted to produce high-performance, high-stability electro-optic polymers for high-speed
(wide bandwidth) telecommunication applications. These efforts were largely unsuccessful due, in our opinion, to the
industry's singular adherence to an industry pervasive engineering model known as the Bond Length Alternation ("BLA")
theory model, which none of our patented molecular designs rely upon. The BLA model, like all other current industry-
standard molecular designs, consists of molecular designs containing long strings of atoms called polyene chains. Longer
polyene chains provide higher electro-optic performance, but are also more susceptible to environmental threats, which result
in unacceptably low-performing, thermally unstable electro-optic polymers.
As a result, high frequency modulators engineered with electro-optic polymers designed on the BLA model or any
other polyene chain design models are unstable over typical operating temperature ranges, and often exhibit performance
degradation within days, hours or even minutes. Similarly, lower frequency modulators exhibit comparable failings, but to a
lesser extent. These flaws, in most cases, have prevented commercial quality polymer-based modulators from entering the
commercial marketplace. The thermal stability of these devices does not generally meet the minimum Telcordia GR-468
operating temperature range (-40 degrees Celsius to +85 degrees Celsius) much less the harsher MILSPEC 883D (military
specification) range of -55 degrees Celsius to 150 degrees Celsius. While many new applications do not require full military
specifications for polymers, many potential customers prefer to see polymer operate at or near these conditions to convey
confidence in the material system. We understand from initial conversations with data center architects and designers that the
temperature specifications that our materials achieve are compliant with their equipment design needs.
We are aware of other academic and commercial development efforts—some by larger companies with vastly more
financial resources than we possess. However, we believe that no one yet has developed organic polymer materials that have
demonstrated the combination of thermal stability, photochemical stability that can meet or exceed commercial
specifications.
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Our Electro-Optic Photonic P2ICTM Device Approach
Our electro-optic devices are built around our proprietary organic polymer material systems that we believe will
enable better performance than the current embedded legacy technology built around inorganic materials. We also believe
that the inherent flexibility of being able to apply our organic polymer materials in liquid thin-film form will accelerate the
move toward ultra-miniaturization of Polymer Photonic Integrated Circuits (P2ICTM) by increasing the number of photonic
circuits on a single chip. Polymer photonics (previously referred in industry as silicon organic hybrid (SOH)) is the
application of polymers on to a platform such as silicon where there are both active and passive photonic component designs.
In polymer photonics, polymer devices such as modulators, waveguides, and multiplexers can be fabricated on to a silicon
platform that acts as a package as well as a base for mounting lasers (which are needed to source the light).
Our initial device, a ridge waveguide modulator, though highly miniaturized utilizes conventional design and
fabrication techniques in the industry. Our future devices will utilize silicon photonics (SiP) technology, which can support
highly miniaturized slot waveguides structures etched in large format, low cost, and less expensive silicon wafers coated with
our organic electro-optic polymers. The low-cost structure compares well to compound semiconductor technologies such as
GaAs (Gallium arsenide) and InP (Indium Phosphide), which suffer from small format wafers that do not allow the
economies of scale in high volume fabrication plants. The degree of miniaturization possible of the slot modulator using SiP
is not technically feasible to accomplish with inorganic crystalline materials. Although this may not always remain the case,
presently there are nearly insurmountable technical difficulties that are inherent to a crystalline molecule.
Although we believe that our polymers will be the key differentiating factor in Polymer photonic devices, we do not
currently possess the technical skills and instrumentation necessary to fabricate and test PICs at this dramatically reduced
scale and intend to seek an external partner to assist with development.
Our Intellectual Property
Our research and development efforts over the last 10 years have yielded our Company an extensive patent portfolio
as well as critical trade secrets, unpatented technology and proprietary knowledge related to our optical polymer materials.
Our intellectual property portfolio has expanded significantly over the last year as we are developing our P2IC™ into
prototypes. We have filed more than 12 patents during 2017 and 2018 and are currently in the process of readying a number
of other inventions for formal filings in early 2019. We expect to continue innovating with our P2IC platform during 2019,
and expect to at least maintain this level of invention at our Company during the whole of 2019. For 2018 our focus was to
establish the world’s first unique PerkinamineTM polymer based integrated photonics circuit portfolio of patents to support
our working prototypes.
Also in 2018, we 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 patents 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.
In addition to the 12 patents we filed during 2017 and 2018, we expect to file new patents in the first half of 2019. In
total, our patent portfolio consists of 45 granted patents that include 35 from the US, 1 from Canada, 5 from the EU, 2 from
Japan and 2 from China.
Our materials patent portfolio has also strengthened significantly in 2017 with the filing of additional new patent
applications on our core PerkinamineTM molecular compounds as well as recent, innovative inventions that are expected to
protect our P2IC polymer PIC platform from potential competition.
Included in our patent portfolio are the following nonlinear optic chromophore designs:
Stable Free Radical Chromophores, processes for preparing the same
Stable Free Radical Chromophores, processes for preparing the same
Tricyclic Spacer Systems for Nonlinear Optical Devices
Anti-Aromatic Chromophore Architectures
Heterocyclical Anti-Aromatic Chromophore Architectures
Heterocyclical Chromophore Architectures
Heterocyclical Chromophore Architectures with Novel Electronic Acceptor Systems
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• Multi-fiber/port hermetic capsule sealed by metallization and method
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Our strategic plan is to utilize our core proprietary technology and leverage our proprietary optical 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, aerospace companies and government agencies.
We rely on a combination of patents, patent applications, trademarks, trade secrets and contractual provisions to
protect our technologies. Further, employees are required to surrender any inventions or intellectual property developed as
part of their employment agreements. We also have a policy of requiring prospective business partners to enter into non-
disclosure agreements (NDAs) before disclosure of any of our confidential or proprietary information. Our Company can
make no assurances that we will be able to effectively protect our technologies and know-how or that third parties will not be
able to develop similar technologies and know-how independently.
The anti-aromatic nature of these structures dramatically improves the "zwitterionic-aromatic push-pull" of the
systems, providing for low energy charge transfer. Low energy charge transfer is important for the production of extremely
high electro-optic character.
Heterocyclical Steric Hindering System This patent describes a nitrogenous heterocyclical structure for the
integration of steric hindering groups that are necessary for the nanoscale material integration. Due to the [pi]-orbital
configuration of the nitrogen bridge, this structure has been demonstrated not to interfere with the conductive nature of the
electronic conductive pathway and thus is non-disruptive to the electro-optic character of the core molecular construction.
The quantum mechanical design of the system is designed to establish complete molecular planarity (flatness) for optimal
performance.
Totally Integrated Material Engineering System This patent covers material integration structures under a design
strategy known as Totally Integrated Material Engineering. These integration structures provide for the "wrapping" of the
core molecule in sterically hindering groups that maximally protect the molecule from environmental threats and maximally
protect it from microscopic aggregation (which is a major cause of performance degradation and optical loss) within a
minimal molecular volume. These structures also provide for the integration of polymerizable groups for integration of
materials into a highly stable cross-linked material matrix.
Recent Significant Events and Milestones Achieved
In December 2016 we achieved high-speed modulation in our first all-organic polymer ridge waveguide intensity
modulator prototype, which constituted one of the most significant moments in the history of our Company. Our initial
"alpha" prototype device, enabled by our P2IC™ polymer system, demonstrated bandwidth suitable for data rates up to about
10 Gbps. This performance exceeds the telecom OC-48 standard (2.5 Gbps). This device demonstrated true amplitude
(intensity) modulation in a Mach-Zehnder modulator structure incorporating our polymer waveguides.
In April 2017 we achieved bandwidth suitable for 25Gbps data rates in an all-organic polymer ridge waveguide
intensity modulator prototype, a significant improvement over our initial 10Gbps device modulator prototype. This
breakthrough was significant because a 25Gbps data rate is important to the optical networking industry because this data rate
is a major node to achieve 100 Gbps (using 4 channels of 25 Gbps). In July 2017 we advanced our high-speed modulation
performance to satisfy 28Gbps data rates for QSFP28 standards and 100Gbps data center applications.
In September 2017 we achieved outstanding performance of our ridge waveguide Mach-Zehnder modulators ahead
of schedule, with bandwidth performance levels that will enable 50Gbps modulation in fiber-optic communications. This
important achievement will allow users to utilize arrays of 4 x 50Gbps polymer modulators using PAM-4 encoding to access
400Gbps data rate systems. Pulse-Amplitude Modulation (PAM-4) is an encoding scheme that can double the amount of data
that can be transmitted.
During February and March 2018, we moved our Newark, Delaware synthetic laboratory and our Longmont,
Colorado optical testing laboratory and corporate headquarters to our new office, laboratory and research and development
space located at 369 Inverness Parkway, Suite 350, Englewood, Colorado. The new 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, 220 square
feet of class 100 cleanroom, chemistry laboratories, and analytic laboratories. The new Englewood facility streamlines all of
our Company’s research and development workflow for greater operational efficiencies.
6
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. Since June 2018, we have made significant
progress on integrating this technology into our P2IC (polymer photonic integrated circuit) platform.
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 anticipate we
will continue rigorous testing of the material and its performance in device structures during the remainder of this year before
releasing it into full device development.
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 will work 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 will initially be 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.
As we move forward to diligently to meet our goals, we continue to work closely with our packaging partner for the
50Gbaud prototypes, and we are advancing our reliability and characterization efforts to support our prototyping. We are
actively engaged with test equipment manufacturers to deliver the most advanced test equipment for our state-of-the-art
polymer results. 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.
The Global Photonic Device Market
General Overview
Lightwave Logic has been reviewing the latest market data as well as its own internal data for its business strategy,
and below we detail the global market dynamics both in terms of data traffic as well as how PIC based technologies will
grow in the fiber communications segment of the market.
7
As we have already seen with products such as smart phones, lap top computers, and personal digital assistants
(PDAs), Internet traffic is one of the important metrics that is being used to show activity in fiber communications, and
particularly telecommunications as well as datacommunications (which includes datacenters and high-performance
computing). Internet Protocol (IP) traffic has typically been used to gauge the amount of data that is being used on the
Internet as shown in the graph below (sourced from Cisco VNI in 2018). The metric is Exabytes per month. An Exabyte is
1E18 which is 1000 Petabytes, or 1000,000 Terabytes or a billion Gigabytes of data. As seen from the graph which has a
strong growth of 22% CAGR (2015-2020), the majority of the traffic is being driven by video, traffic, and is fast approaching
the metric of Zetta which is 1E21 bytes of data. Some estimates are discussing the further metric of Yotta which is 1E24
bytes of data over the next decade, which is also expected to be driven for the most part by video.
Within the overall market trends of IP traffic growth, the Internet will need to be able to support high volumes of
data traffic. In order to do this, the fiber-optic infrastructure that allows data to be communicated between network nodes
such as datacenters, within datacenters, and optical network switches etc., has to be upgraded. Today, fiber-optic networks
are a combination of long, medium and short optical interconnects that range from 3 meters (or 1yard) to over 1000km
depending on application in the optical network. Optical components, typically known as photonics components are used to
build the fiber-optic infrastructure and consist of things like: laser diode, photodetectors, multipliers, modulators, transceivers
etc. These are known as discrete components, while a mix of these components that are integrated or connected on a single
substrate (such as silicon, InP, GaAs etc.) are called PICs (Photonic Integrated Components). The summary photonics market
has been reviewed in 2018 and is shown below. The summary photonics market is forecast to grow to $43B by 2025 with a
7% CAGR (20-25) that includes both discrete and PIC photonic components. The summary photonics components market is
forecasted to reach $23B in 2018.
Within the summary photonics components market, three major segments exist: WAN (wide area networks), access,
and Datacom. The WAN segment is forecast to grow to $27B by 2025 with a 19% CARG (20-25) and the Datacom segment
is forecast to grow to $12.1B by 2025 with 22% CAGR (20-25). As can be seen from the graph below, the growth of the
WAN and Datacom segments is forecasted to be very strong over the next decade and provide the engine for growth in the
overall global photonics components market.
8
One of the key metrics that is needed for any overall market analysis is how photonics components will grow over
the next decade from a PIC perspective. This is important as the trend to integrate photonics components is beginning to
accelerate. The trend has been driven by customer applications that require smaller photonic component solutions, lower
power, high data rates, larger buildings for longer interconnect lengths, and more economic in terms of $/Gbps. PIC
technologies, i.e. those technologies that include integrated photonics are forecasted to grow to ~$30B by 2025 with 16%
CAGR (20-25). These technologies include InP which is the current incumbent, GaAs, and other newer integrated technology
solutions such as SiP (silicon photonics), polymer photonics, and dielectric photonics. The forecast of ~$30B is
approximately 69% of the summary photonics components market by 2025, which represents a huge acceleration for PIC
based technologies over the next decade. This also means while PIC based technologies are $7B today with 24% of the
photonics components market, PIC based technologies become de facto by 2025.
While the rise of PIC based technologies is exciting, what also is exciting in the photonics component market is the
rise of fiber-optic transceivers. Transceivers are small boxes located at the end of each fiber-optic link that house photonics
components and PIC components which send and receive data. While the global overall photonic components market is
expected to reach $43B by 2025, the photonics transceivers sub-segment is forecasted to grow to $25B by this time. This
represents that transceivers will accelerate to 58% of the global overall photonics market by 2025 and become a major driver
for optical networking over the next decade.
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The key segments in photonics based fiber-optic transceivers achieved $12B in 2018 with growth from 9 different
segments that include: AOC, CATV, Fibre Channel, DWDM, Ethernet-datacom, WAN-client side, Radio etc., based
transceivers. Three of these segments are forecasted to grow very well to achieve revenues of $25B by 2025, with the biggest
contributions from DWDM, Ethernet-datacom, and WAN-client based transceivers.
The transceiver growth shows which sub-segments that will utilize small boxes at the ends of fiber-optic
interconnects, it is well known that transceiver trends over the past decade have been towards smaller boxes i.e. smaller
transceiver formats and footprints (such as SFF, SFP, QSFP, and many others), with higher densities of photonics
components designed into them. It is expected over the forecast period that transceivers will be an excellent platform for the
accelerating trends of PICs in both telecom and datacom applications. The graph below shows the PIC transceiver forecast to
2025. PIC transceivers are forecast to reach $20B by 2025 with 17% CARG (20-25) growing from ~$4B in 2018. What is
more interesting is that by about 2021, PIC transceivers will lead discrete photonic component transceivers from a revenue
standpoint. This means that the trend to integrate photonics components inside a transceiver is accelerating quickly, driven by
the customer interest for smaller, denser, and higher performance metrics of transceivers. This trend is ideal for our polymer
based integrated photonics platform to have a huge impact in the market segment over the next decade.
Within the PIC transceivers market there are a number of sub-segments that summate to $20B by 2025. The major
segments that drive this forecast are Ethernet, DWDM, and WAN-client-side applications as can be seen from the graph
below. In particular these segments are technologically driven by PIC based technologies that operate at 100Gbps and
400Gbps data rates that generally are considered high performance solutions.
10
Data rates and high performance of transceivers can be seen by the graph below which depicts PIC based
technologies in the Ethernet sub-segment. For Ethernet applications only, transceivers are driven by 100GE based PIC
technologies. The market is forecast with 100GE to grow to $4.5B by 2025 with 6% CAGR (20-25) and with 400GE to grow
to $0.98B by 2025 with 16% CAGR (20-25). This is a clear drive for the PIC based transceivers in the Ethernet application is
100GE over the forecast period and sets the scene for polymer based integrated photonics to have the opportunity to grow
extremely quickly.
As the Company is developing polymer based photonic devices such as fiber-optic modulators, these devices
translate electric signals into optical signals and allow laser based technology to operate effectively at 50Gbps and beyond.
Lasers with modulator are used in fiber communication systems to transfer data over fiber-optic networks today and are
expected to be a key driver in photonics components for PIC based technological solutions over the next decade. Optical data
transfer using lasers and modulators is significantly faster and more efficient than transfer technologies using only electric
signals, permitting more cost-effective use of bandwidth for broadband Internet and voice services.
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.
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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.
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 à 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:
In the above figures (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
in the Figure below how polymers have the potential to scale to the needs of the customers over the next 3-5years.
12
Some of the things needed to achieve the scaling performance of polymers in n integrated photonics platform is
within sight today:
1)
2)
3)
Increased r33 (which leads to very low Vpi in modulator devices) and we are currently optimizing our
polymers for this.
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.
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.
Our 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
Grow our commercial material manufacturing capabilities
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•
•
•
•
•
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• 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.
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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 P2IC™ platform will have the flexibility to allow multiple channels through integration. For example, where 4
modulated channels are expected each to operate at least 50 Gbaud per channel, the aggregate optical signal output could
carry 400 Gbps with PAM-4 advanced data encoding, and potentially 100Gbaud per channel. Pulse-Amplitude Modulation
(PAM-4) is an industry standard encoding scheme that can double the amount of data that can be transmitted with a given
device speed. This relationship between baudrate and bitrate by encoding scheme is described in a number of places,
including in a white paper publicly available on our website. We believe the capability of the electro-optic polymer
technology up to these speeds will be highly attractive to potential customers seeking to assure their own product roadmaps.
This will allow our Company to participate in opportunities that range up to 800Gbaud using a 4 channel P2IC™ platform,
and potentially 1600Gbaud (or 1.6Tbaud) with an 8 channel P2IC™ platform.
Continue to Expand Our Intellectual Property Portfolio and Reliance on Trade Secrets
We plan to continuously advance the development of unique organic electro-optic polymer materials along with
proprietary designs and device configurations. We intend to protect our technology by filing patent applications where
appropriate or by obtaining exclusive technology rights where available. However, in some cases, we will refrain from
protecting certain proprietary information with patents in favor of trade secrets.
Continue to Recruit Technical Expertise
In December 2011, we retained Dr. Frederick Leonberger, PhD as our Senior Advisor. Dr. Leonberger is the former
Chief Technology Officer of JDS Uniphase, Inc. We previously retained EOvation Advisors LLC, a technology and business
advisory firm founded by Dr. Frederick Leonberger, as a consultant to the Company. Dr. Leonberger is presently assisting
our Company with strategic planning and the design of optical modulators that we intend to develop. In May 2017, Dr.
Leonberger was elected to our Board of Directors and serves as a member of the operations committee and assists with the
technical direction and strategy of the Company.
In July 2018 we retained Dr. Karen Liu, a former industry analyst and marketing executive in datacom and telecom
fiber optic communications, as our Vice President of Sales and Marketing to advance our customer-facing position in the
datacom and telecom markets and to assist with engaging with customers on our 400Gbps and 800Gbps prototypes.
Our Research and Development Process
Our research and development process consist of the following steps:
• We develop novel polymer materials utilizing our patented and patent pending technology to meet certain
performance specifications. We then develop methods to synthesize larger quantities of such material.
• We conduct a full battery of tests at the completion of the synthesis of each new polymer material to evaluate
its characteristics. We also create development strategies to optimize materials to meet specifications for
specific applications. We model and simulate each new polymer material so that we can further understand
how to optimize the material for device operation.
• We integrate data from the material characterization and test results to fabricate devices. We analyze device-
testing results to refine and improve fabrication processes and methods. In addition, we investigate alternative
material and design variations to possibly create more efficient fabrication processes.
• We create an initial device design using simulation software. Following device fabrication, we run a series of
optical and electronic tests on the device.
We have and expect to continue to make significant operating and capital expenditures for research and
development. Our research and development expenses were $3,794,565 and $3,519,129 for the years ended December 31,
2018 and 2017, respectively.
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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 organic nonlinear optical materials. They include:
Ridge Waveguide Modulator
Our ridge electro-optic waveguide modulator was designed and fabricated in our Longmont, Colorado 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 50Gbps
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 50Gbps polymer modulators using PAM-4 encoding to access 400Gbps data rate systems. Pulse-Amplitude
Modulation (PAM-4) is an encoding scheme that can double the amount of data that can be transmitted. These ridge
waveguide modulators are currently being packaged with our partner and will be available for evaluation by potential
customers in 2019. In parallel, we are simulating and modeling the modulators for scalability to higher data rates above
50Gbps and lower cost structures that will be competitive with incumbent technology. This provides our technology platform
with higher levels of scalability and will provide potential customers with technological solutions that they are currently
looking for.
The ridge waveguide modulator represents our first commercially viable device, and targets metro networks
(< 10Km) within large scale telecommunications and data communications networks and represents at least a $300M per year
market opportunity for us.
Slot Waveguide Modulator
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.
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 four, 10Gb/sec, inorganic, lithium
niobate modulators that would require approximately 12-16 volts to move the same amount of information.
Our material also operates in the 1550 nanometer frequency band, which is suitable for data communications
applications. We continued with our collaborative development of our SOH/ Polymer photonic slot waveguide modulator in
2014 and continued our collaboration with an associated third-party research group in 2017 and expect to see initial results in
2019.
Our Long-Term Device Development Goal - Multichannel Integrated Nanophotonic Transceiver
While we consider our ridge waveguide and slot waveguide modulators currently under development to be
commercially viable products, in another sense they are intermediate steps in the development of our long-term goal a
multichannel integrated nanophotonic transceiver for application in data communications.
The transceiver consists of a silicon photonic chip fabricated with nonlinear polymer infused modulators (polymer
photonic), multiplexers, demultiplexers, detectors and grating fiber couplers to an external light source. The CMOS-
compatible optical modulators are key components for future silicon-based photonic transceivers. Our solution, the silicon-
organic hybrid (polymer photonic) platform has been proposed and is being prototyped. In the polymer photonic approach,
the optical signal is guided by a silicon waveguide while an organic cladding provides the electro-optic effect.
15
Other Potential Applications for Our Products
We believe that there are myriad potential applications for our organic polymer materials and devices outside of our
initial focus of data communications, telecommunications and data centers. These potential applications encompass areas as
diverse as military, space, optical computing, and life sciences. We believe that as viable organic polymer materials gain
acceptance, their increased flexibility, functionality and low cost will create new applications that may not yet be technically
feasible. Two such future applications with revolutionary potential are:
All-Optical Switches
An all-optical switch is one that enables signals in optical fibers or networks to be selectively switched from one
fiber or circuit to another. Many device designs have been developed and commercialized in today’s telecom networks to
effect optical switching by using mechanical or electrical control elements to accomplish the switching event. Future
networks will require all-optical switches that can be more rapidly activated with a low energy and short duration optical
(light) control pulse.
Multi-Channel Optical Modem
The availability of low cost electro-optic modulators will enable low cost multichannel optical modems that will use
many wavelengths in parallel and employ high efficiency modulation techniques such as QAM (quadrature amplitude
modulation). Such modems would enable an order of magnitude increase in the Internet capacity of legacy fiber. Our
Company is in the early feasibility stage of such a multichannel optical modem.
Our Past Government Program Participation
Our Company has been a participant in several vital government sponsored research and development programs
with various government agencies that protect the interests of our country. The following is a list of some of the various
divisions of government agencies that have provided us with advisory, financial and/or materials support in the pursuit of
high-speed electro-optic materials. We are not currently partnered with, strategically related to, or financially supported by
any governmental agency at this time, however, we may explore future opportunities as our Company grows and gains the
additional resources and personnel necessary to support these efforts. Our previous relationships included:
•
•
•
•
•
National Reconnaissance Office (NRO)
Properties Branch of the Army Research Laboratory on the Aberdeen Proving Grounds in Aberdeen,
Maryland.
Defense Advance Research Project Agency (DARPA)
Naval Air Warfare Center Weapons Division in China Lake, California
Air Force Research Laboratory at Wright-Patterson Air Force Base in Dayton, Ohio
Our Competition
Competitive Technologies - PIC Based Technologies
PIC technologies have historically been driven using III-V compound semiconductors, namely InP, although GaAs
remains a strong PIC platform, and is expected to strengthen via the VCSEL based 3D sensing applications. Indium
Phosphide has been used since the 1980s as the first PIC platform with laser modulator chips where both the laser and
modulator were fabricated monolithically. Since the 1980s, there have been InP based transmitters, receivers, and other
functional elements that all support the fiber-communications industry. In fact, over the past 3 decades, the fiber
communications industry has driven the increased performance, miniaturization and simplicity in packaging for PIC based
technologies. Also, back in the 1980s, ‘optoelectronics’ was the key word to describe having both electronic and photonic
functions or devices on a single chip. This was known in early publications as an optoelectronics integrated circuit (OEIC).
Today optoelectronics is synonymous with ‘photonics’, and hence the common-place use of ‘photonics integrated circuits’
for PICs.
16
In the below figure, it can be seen in red that the incumbent technology for PICs is InP. InP is capable of providing a
number of devices and opportunities in both electronics as well as photonics. InP main weakness from a function standpoint
is that although it can provide HFETs, JFETs, bipolar electronic devices, it has not been able to successfully penetrate LSI, or
VLSI with digital IC circuitry. Chips such as ASICs are not practically available with the InP platform – mostly due to
advancement in electronic transistor design, and also through limited maturity in large format wafer manufacturing. Today
the majority of InP fabrication is based on 4” or 100mm wafers, and only in the past year have folks been seriously looking at
6” or 150mm InP wafer infrastructure. From the photonics standpoint, there are very good reasons why InP is the incumbent
technology – it provides world class performance in lasers, modulators, simple electronics such as drivers and TIAs
(transimpedance amplifiers), as well as highly performing active and passive devices such as SOAs, waveguides, spot-size
converters, and mux/demux blocks such as AWG and Eschelle gratings.
Over the past decade, the rise of silicon-based photonics has accelerated quickly (as can be seen in blue in the
Figure). Silicon has a huge history in electronics, and it’s been said by many that if the existing infrastructure could be
utilized effectively, then the cost of producing photonics with similar fabrication, design, testing, and simulation tools, would
become competitive with the current incumbent technology: InP. As can be seen by the figure, silicon is capable of handling
many photonics devices in addition to all electronic functionality with CMOS and BiCMOS based technologies. The only
photonic device that remains impossible (at least for the time being) is the emitter or laser where light is generated. This has
spawned a new segment for silicon photonics (SiP) where engineers and scientists have developed creative ways to
implement InP into device, wafer, and epi-designs that are silicon based. These solutions are typically referred to as
heterogeneous solutions where both InP and silicon are utilized to create PIC platforms with emitter or laser-based
functionality.
17
While the red area of the Figure represents the incumbent technology InP, the blue areas, Silicon Photonics, the
middle areas that are shaded green represent PIC based technologies that can utilize either III-V compound semiconductor
platforms such as InP, GaAs, even GaN, as well as silicon platforms such as silicon wafers, and various combinations of
silicon-based materials such as SOI (silicon on insulator), SiGe etc. The green areas are represented by both polymers and
dielectric materials that can be deposited onto either silicon or III-V material wafers. These combinations of technology allow
flexibility in PIC designs where both polymers and dielectrics can provide a multitude of active and passive photonic devices
such as: waveguides (W/G), spot size converters (SSC), modulators (such as Mach Zehnder and slot types), multipliers and
demultipliers (Mux/Demux variants such as AWGs, MMI, and Echelle gratings). The interesting part of the polymer and
dielectric technology is that combinations of active and passive devices can be mixed and matched with either III-V
compound devices as well as silicon based, heterogeneous based devices to design more effective and efficient PICs. For
polymers, very low voltage can be utilized for low cost, low power consumption, very high-speed modulators that can be
deposited onto a semiconductor platform. For dielectric photonics, very low temperature sensitivity mux/demux devices
(such as athermal designs) can be deposited onto a semiconductor platform. As can be seen from the Figure, polymer and
dielectric technology suffers from that the fact that high density ICs and laser-based emitters are not available but could be
integrated with the appropriate designs for the PIC with III-V compound semiconductors and/or silicon based technology that
have both DSP/ASIC type circuits and laser emitters.
PIC technologies have a number various and broad applications as can be seen by the Figure below. In this Figure
applications range from fiber optic communications, self-driving vehicles, sensing, internet of things, bio-photonics,
healthcare, industrial, military, high performance computing etc.
PIC technologies are based upon semiconductor wafers (such as III-V compound semiconductors – InP, GaAs etc.)
as well as silicon wafers (which can be tailored to become SiGe heterogeneous, SOI, etc.). As these platforms are
semiconductor based, the wafers are processed in fabs or fabrication facilities to produce devices. As a general rule, silicon
has the largest wafers with 8” (200mm) and 12” (300mm) format discs. GaAs typically is running 3” (75mm), 4” (100mm)
and 6” (150mm) wafers in production fabs or fabrication plants around the world. There is an expectation that GaAs will
eventually move to 8” (200mm) wafers in the next 5 years. InP is in production today on 2” (50mm), 3” (75mm) and 4”
(100mm) wafers with an expectation to move to 6” (150mm) in the next 5 years. Heterogeneous solutions with silicon
photonics that utilize materials such as SiGe and InP are typically 8” (200mm) and 12” (300mm) format wafers. Polymer
photonics can be deposited on either III-V compound semiconductor wafers as well as silicon wafers which makes it suitable
for the next generation of PIC based technological platforms for the fiber communications industry.
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The supply chain for the PIC industry starts with the wafer development and continues through epitaxial growth,
device fabrication, optical sub-assembly, module or transceiver builds, and sub-systems which are implemented into optical
networking applications. Within these supply chain segments, a number of combinations of technology can be utilized. For
example, CMOS IC circuits can be fabricated onto silicon wafers together with silicon photonics, heterogeneous solutions,
that could have the advantage of polymer active devices, and dielectric passive devices on board. InP may be combined with
polymer photonics to house on-board or on-wafer emitters to source light for the optical signaling with modulators. Included
in the wafers can be combinations of electrical and optical circuitry. Electrical circuitry is usually set up as both as single as
well as multilevel interconnects. Optical circuitry is usually set up as a waveguide or optical layer as part of the device
fabrication design. PICs can interconnect electrical devices with photonic devices, and also increase chip functionality
through the use of electrical and optical active and passive device solutions. Polymer technologies can provide active device
function through for example Mach Zehnder modulators, as well as providing passive device function with waveguides,
multipliers, and demultipliers.
Competitors
The markets we are targeting for our electro-optic polymer technology are intensely competitive. Among the largest
fiber-optic component manufactures are Finisar, Lumentum, II-VI, NeoPhotonics, Molex, Avago. Additionally, the four
largest inorganic modulator component manufacturers hold approximately 85% of the electro-optic modulator component
market. They are Lumentum, Sumitomo, Fujitsu and ThorLabs. These companies are heavily invested in the production of
crystalline-based electro-optic modulator technologies, as well as the development of novel manufacturing techniques and
modulator designs.
Our Plan to Compete
We believe that as our organic polymer technology gains industry acceptance, we will be poised to obtain a
significant portion of the component manufacturing market. Electro-optic polymers demonstrate several advantages over
other technologies, such as inorganic-based technologies, due to their reduced manufacturing and processing costs, higher
performance and lower power requirements. Our patented organic polymers and future electro-optic photonic devices have
demonstrated significant stability advantages over our known competitor's materials.
We believe the principal competitive factors in our target markets are:
•
•
•
•
•
The ability to develop and commercialize highly stable optical polymer-based materials and optical devices in
commercial quantities.
The ability to obtain appropriate patent and proprietary rights protection.
Lower cost, high production yield for these products.
The ability to enable integration and implement advanced technologies.
Strong sales and marketing, and distribution channels for access to products.
We believe that our current business planning will position our Company to compete adequately with respect to
these factors. Our future success is difficult to predict because we are an early stage company with all of our potential
products still in development.
Many of our existing and potential competitors have substantially greater research and product development
capabilities and financial, scientific, marketing and human resources than we do. As a result, these competitors may:
Succeed in developing products that are equal to or superior to our potential products or that achieve greater
market acceptance than our potential products.
Devote greater resources to developing, marketing or selling their products.
Respond quickly to new or emerging technologies or scientific advances and changes in customer
requirements, which could render our technologies or potential products obsolete.
Introduce products that make the continued development of our potential products uneconomical.
Obtain patents that block or otherwise inhibit our ability to develop and commercialize our potential products.
•
•
• Withstand price competition more successfully than we can.
•
Establish cooperative relationships among themselves or with third parties that enhance their ability to address
the needs of our prospective customers.
Take advantage of acquisition or other opportunities more readily than we can.
•
•
•
•
19
Employees
We currently have 17 full-time employees, and we retain several independent contractors on an as-needed basis.
Based on our current development plan we expect to add 2 to 4 additional full-time employees in 2019. We believe that we
have good relations with our employees.
Properties and Laboratory Facilities
Our principal executive offices and research and development facility is located at our new office, laboratory and
research and development space located at 369 Inverness Parkway, Suite 350, Englewood, Colorado. The new 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, 220 square feet of class 100 cleanroom, chemistry laboratories, and analytic laboratories. The new Englewood
facility streamlines all of our Company’s research and development workflow for greater operational efficiencies.
Legal Proceedings
We are not currently a party to or engaged in any material legal proceedings and we are not aware of any litigation
or threatened litigation of a material nature. However, we may be subject to various claims and legal actions arising in the
ordinary course of business from time to time.
Item 1A.
Risk Factors.
Investing in our common stock is risky. In addition to the other information contained in this annual report, you
should consider carefully the following risk factors in evaluating our business and us. If any of the following events actually
occur, our business, operating results, prospects or financial condition could be materially and adversely affected. This could
cause the trading price of our common stock to decline and you may lose all or part of your investment. The risks described
below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial
may also significantly impair our business operations and could result in a complete loss of your investment.
We have incurred substantial operating losses since our inception and will continue to incur substantial operating
losses for the foreseeable future.
Since our inception, we have been engaged primarily in the research and development of our electro-optic polymer
materials technologies and potential products. As a result of these activities, we incurred significant losses and experienced
negative cash flow since our inception. We incurred a net loss of $5,772,958 for the year ended December 31, 2018 and
$5,749,382 for the year ended December 31, 2017. We anticipate that we will continue to incur operating losses through at
least 2019.
We may not be able to generate significant revenue either through customer contracts for our potential products or
technologies or through development contracts from the U.S. government or government subcontractors. We expect to
continue to make significant operating and capital expenditures for research and development and to improve and expand
production, sales, marketing and administrative systems and processes. As a result, we will need to generate significant
revenue to achieve profitability. We cannot assure you that we will ever achieve profitability.
We are subject to the risks frequently experienced by early stage companies.
The likelihood of our success must be considered in light of the risks frequently encountered by early stage
companies, especially those formed to develop and market new technologies. These risks include our potential inability to:
•
•
•
•
Establish product sales and marketing capabilities;
Establish and maintain markets for our potential products;
Identify, attract, retain and motivate qualified personnel;
Continue to develop and upgrade our technologies to keep pace with changes in technology and the growth of
markets using polymer based materials;
Develop expanded product production facilities and outside contractor relationships;
•
• Maintain our reputation and build trust with customers;
•
•
•
Scale up from small pilot or prototype quantities to large quantities of product on a consistent basis;
Contract for or develop the internal skills needed to master large volume production of our products; and
Fund the capital expenditures required to develop volume production due to the limits of our available
financial resources.
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If we fail to effectively manage our growth, and effectively transition from our focus on research and development
activities to commercially successful products, our business could suffer.
Failure to manage growth of operations could harm our business. To date, a large number of our activities and
resources have been directed at the research and development of our technologies and development of potential related
products. The transition from a focus on research and development to being a vendor of products requires effective planning
and management. Additionally, growth arising from the expected synergies from future acquisitions will require effective
planning and management. Future expansion will be expensive and will likely strain management and other resources.
In order to effectively manage growth, we must:
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•
•
Continue to develop an effective planning and management process to implement our business strategy;
Hire, train and integrate new personnel in all areas of our business; and
Expand our facilities and increase capital investments.
We cannot assure you that we will be able to accomplish these tasks effectively or otherwise effectively manage our
growth.
We will require additional capital to continue to fund our operations and if we do not obtain additional capital, we
may be required to substantially limit our operations.
Our business does not presently generate the cash needed to finance our current and anticipated operations. Based on
our current operating plan and budgeted cash requirements, we believe that we have sufficient funds to finance our operations
through June 2019; however, we will need to obtain additional future financing after that time to finance our operations until
such time that we can conduct profitable revenue-generating activities. We expect that we will need to seek additional
funding through public or private financings, including equity financings, and through other arrangements, including
collaborative arrangements. Poor financial results, unanticipated expenses or unanticipated opportunities could require
additional financing sooner than we expect. Other than with respect to the purchase agreement for $25 million (the “Purchase
Agreement”) we entered into with Lincoln Park Capital Fund, LLC (“Lincoln Park”), we have no plans or arrangements with
respect to the possible acquisition of additional financing, and such financing may be unavailable when we need it or may not
be available on acceptable terms.
Our forecast of the period of time through which our financial resources will be adequate to support our operations
is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of
factors, including the factors discussed elsewhere in this annual report. We have based this estimate on assumptions that may
prove to be wrong, and we could use our available capital resources sooner than we currently expect.
Additional financing may not be available to us, due to, among other things, our Company not having a sufficient
credit history, income stream, profit level, asset base eligible to be collateralized, or market for its securities. If we raise
additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders may
be reduced, and these securities may have rights superior to those of our common stock. If adequate funds are not available to
satisfy our long-term capital requirements, or if planned revenues are not generated, we may be required to substantially limit
our operations.
21
We are entering new markets, and if we fail to accurately predict growth in these new markets, we may suffer
substantial losses.
We are devoting significant resources to engineer next-generation organic nonlinear optical materials and devices
for future applications to be utilized by electro-optic device manufacturers, such as telecommunications component and
systems manufacturers, networking and switching suppliers, semiconductor companies, aerospace companies and
government agencies as well as our proprietary photonic devices, such as our Polymer Photonic Integrated Circuits P2ICTM.
We expect to continue to develop products for these markets and to seek to identify new markets. These markets change
rapidly, and we cannot assure you that they will grow or that we will be able to accurately forecast market demand, or lack
thereof, in time to respond appropriately. Our investment of resources to develop products for these markets may either be
insufficient to meet actual demand or result in expenses that are excessive in light of actual sales volumes. Failure to predict
growth and demand accurately in new markets may cause us to suffer substantial losses. In addition, as we enter new
markets, there is a significant risk that:
•
•
•
The market may not accept the price and/or performance of our products;
There may be issued patents we are not aware of that could block our entry into the market or could result in
excessive litigation; and
The time required for us to achieve market acceptance of our products may exceed our capital resources that
would require additional investment.
Our plan to develop relationships with strategic partners may not be successful.
Part of our business strategy is to maintain and develop strategic relationships with private firms, and to a lesser
extent, government agencies and academic institutions, to conduct research and development of products and technologies.
For these efforts to be successful, we must identify partners whose competencies complement ours. We must also
successfully enter into agreements with them on terms attractive to us, and integrate and coordinate their resources and
capabilities with our own. We may be unsuccessful in entering into agreements with acceptable partners or negotiating
favorable terms in these agreements. Also, we may be unsuccessful in integrating the resources or capabilities of these
partners. In addition, our strategic partners may prove difficult to work with or less skilled than we originally expected. If we
are unsuccessful in our collaborative efforts, our ability to develop and market products could be severely limited.
The failure to establish and maintain collaborative relationships may have a materially adverse affect on our business.
We plan to sell many of our products directly to commercial customers or through potential industry partners. For
example, we expect to sell our proprietary electro-optic polymer systems to electro-optic device manufacturers, such as
telecommunications component and systems manufacturers, networking and switching suppliers, semiconductor companies,
aerospace companies and government agencies. Our ability to generate revenues depends significantly on the extent to which
potential customers and other potential industry partners develop, promote and sell systems that incorporate our products,
which, of course, we cannot control. Any failure by potential customers and other potential industry partners to successfully
develop and market systems that incorporate our products could adversely affect our sales. The extent to which potential
customers and other industry partners develop, promote and sell systems incorporating our products is based on a number of
factors that are largely beyond our ability to control.
We may participate in joint ventures that expose us to operational and financial risk.
We may participate in one or more joint ventures for the purpose of assisting us in carrying out our business
expansion, especially with respect to new product and/or market development. We may experience with our joint venture
partner(s) issues relating to disparate communication, culture, strategy, and resources. Further, our joint venture partner(s)
may have economic or business interests or goals that are inconsistent with ours, exercise their rights in a way that prohibits
us from acting in a manner which we would like, or they may be unable or unwilling to fulfill their obligations under the joint
venture or other agreements. We cannot assure you that the actions or decisions of our joint venture partners will not affect
our operations in a way that hinders our corporate objectives or reduces any anticipated cost savings or revenue enhancement
resulting from these ventures.
22
If we fail to develop and introduce new or enhanced products on a timely basis, our ability to attract and retain
customers could be impaired and our competitive position could be harmed.
We plan to operate in a dynamic environment characterized by rapidly changing technologies and industry standards
and technological obsolescence. To compete successfully, we must design, develop, market and sell products that provide
increasingly higher levels of performance and reliability and meet the cost expectations of our customers. The introduction of
new products by our competitors, the market acceptance of products based on new or alternative technologies, or the
emergence of new industry standards could render our anticipated products obsolete. Our failure to anticipate or timely
develop products or technologies in response to technological shifts could adversely affect our operations. In particular, we
may experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent our
development, introduction or marketing of products. If we fail to introduce products that meet the needs of our customers or
penetrate new markets in a timely fashion our Company will be adversely affected.
Our future growth will suffer if we do not achieve sufficient market acceptance of our organic nonlinear optical
material products or our proprietary photonic devices.
We are developing our proprietary electro-optic polymer systems to be utilized by electro-optic device
manufacturers, such as telecommunications component and systems manufacturers, networking and switching suppliers,
semiconductor companies, aerospace companies and government agencies, as well as our proprietary photonic devices, such
as our Polymer Photonic Integrated Circuits P2ICTM. All of our potential products are still in the development stage, and we
do not know when a market for these products will develop, if at all. Our success depends, in part, upon our ability to gain
market acceptance of our products. To be accepted, our products must meet the technical and performance requirements of
our potential customers. OEMs, suppliers or government agencies may not accept polymer-based products. In addition, even
if we achieve some degree of market acceptance for our potential products in one industry, we may not achieve market
acceptance in other industries for which we are developing products.
Achieving market acceptance for our products will require marketing efforts and the expenditure of financial and
other resources to create product awareness and demand by customers. We may be unable to offer products that compete
effectively due to our limited resources and operating history. Also, certain large corporations may be predisposed against
doing business with a company of our limited size and operating history. Failure to achieve broad acceptance of our products
by customers and to compete effectively would harm our operating results.
Our potential customers require our products to undergo a lengthy and expensive qualification process, which does
not assure product sales.
Prior to purchasing our products, our potential customers will require that our products undergo extensive
qualification processes. These qualification processes may continue for several months or more. However, qualification of a
product by a customer does not assure any sales of the product to that customer. Even after successful qualification and sales
of a product to a customer, a subsequent revision to the product, changes in our customer’s manufacturing process or our
selection of a new supplier may require a new qualification process, which may result in additional delays. Also, once one of
our products is qualified, it could take several additional months or more before a customer commences volume production
of components or devices that incorporate our products. Despite these uncertainties, we are devoting substantial resources,
including design, engineering, sales, marketing and management efforts, to qualifying our products with customers in
anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, sales of our
products to a customer may be precluded or delayed, which may impede our growth and cause our business to suffer.
Obtaining a sales contract with a potential customer does not guarantee that a potential customer will not decide to
cancel or change its product plans, which could cause us to generate no revenue from a product and adversely affect
our results of operations.
Even after we secure a sales contract with a potential customer, we may experience delays in generating revenue
from our products as a result of a lengthy development cycle that may be required. Potential customers will likely take a
considerable amount of time to evaluate our products; it could take 12 to 24 months from early engagement by our sales team
to actual product sales. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to
cancel, curtail, reduce or delay its product plans, causing us to lose anticipated sales. In addition, any delay or cancellation of
a customer’s plans could materially and adversely affect our financial results, as we may have incurred significant expense
and generated no revenue. Finally, our customers’ failure to successfully market and sell their products could reduce demand
for our products and materially and adversely affect our business, financial condition and results of operations. If we were
unable to generate revenue after incurring substantial expenses to develop any of our products, our business would suffer.
23
Many of our products will have long sales cycles, which may cause us to expend resources without an acceptable
financial return and which makes it difficult to plan our expenses and forecast our revenue.
Many of our products will have long sales cycles that involve numerous steps, including initial customer contacts,
specification writing, engineering design, prototype fabrication, pilot testing, regulatory approvals (if needed), sales and
marketing and commercial manufacture. During this time, we may expend substantial financial resources and management
time and effort without any assurance that product sales will result. The anticipated long sales cycle for some of our products
makes it difficult to predict the quarter in which sales may occur. Delays in sales may cause us to expend resources without
an acceptable financial return and make it difficult to plan expenses and forecast revenues.
Successful commercialization of our current and future products will require us to maintain a high level of technical
expertise.
Technology in our target markets is undergoing rapid change. To succeed in our target markets, we will have to
establish and maintain a leadership position in the technology supporting those markets. Accordingly, our success will
depend on our ability to:
•
•
•
•
Accurately predict the needs of our target customers and develop, in a timely manner, the technology required
to support those needs;
Provide products that are not only technologically sophisticated but are also available at a price acceptable to
customers and competitive with comparable products;
Establish and effectively defend our intellectual property; and
Enter into relationships with other companies that have developed complementary technology into which our
products may be integrated.
We cannot assure you that we will be able to achieve any of these objectives.
One of our significant target markets is the telecommunications market, which historically has not accepted polymer
modulators.
One of our significant target markets is the telecommunications market, which demands high reliability optical
components. Historically, polymer modulators have not been accepted into this market even though polymer modulators have
achieved Telcordia™ based specifications. It is clear that the telecommunications market is demanding higher and higher
data rates for its optical components, and may again decide that polymer based modulators are not suitable even if higher data
rates, high reliability, and low power consumption are demonstrated
Another of our significant target markets is the data communications (datacenter and/or high performance
computing) market, which may be subject to heavy competition from other PIC based technologies such as silicon
photonics and Indium Phosphide.
Another of our significant target markets is the data communications (datacenter and/or high performance
computing) market, which may be subject to heavy competition from other PIC based technologies such as silicon photonics
and Indium Phosphide. As the demands for high performance, low cost ($/Gbps) is implemented into next generation
architectures, polymer modulators and polymer based PIC products may be subject to significant competition. Furthermore,
there is a potential that technologies such as silicon photonics and Indium Phosphide might reach the might reach the metric
of $1/Gbps at 400Gbps before ours. Customers may then be less willing to purchase new technology such as ours or invest in
new technology development such as ours for next generation systems.
24
Our inability to successfully acquire and integrate other businesses, assets, products or technologies could harm our
business and cause us to fail at achieving our anticipated growth.
We may grow our business through strategic acquisitions and investments, such as our acquisition of BrPhotonics’
polymer business, and we are actively evaluating acquisitions and strategic investments in businesses, products or
technologies that we believe could complement or expand our product offering, create and/or expand a client base, enhance
our technical capabilities or otherwise offer growth or cost-saving opportunities. From time to time, we may enter into letters
of intent with companies with which we are negotiating potential acquisitions or investments or as to which we are
conducting due diligence. Although we are currently not a party to any binding definitive agreement with respect to potential
investments in, or acquisitions of, complementary businesses, products or technologies, we may enter into these types of
arrangements in the future, which could materially decrease the amount of our available cash or require us to seek additional
equity or debt financing. We have limited experience in successfully acquiring and integrating businesses, products and
technologies. We may not be successful in negotiating the terms of any potential acquisition, conducting thorough due
diligence, financing the acquisition or effectively integrating the acquired business, product or technology into our existing
business and operations. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or
challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or
product architecture, regulatory compliance practices, revenue recognition or other accounting practices, or employee or
customer issues.
Additionally, in connection with any acquisitions we complete, we may not achieve the synergies or other benefits
we expected to achieve, and we may incur write-downs, impairment charges or unforeseen liabilities that could negatively
affect our operating results or financial position or could otherwise harm our business. If we finance acquisitions using
existing cash, the reduction of our available cash could cause us to face liquidity issues or cause other unanticipated problems
in the future. If we finance acquisitions by issuing convertible debt or equity securities, the ownership interest of our existing
stockholders may be diluted, which could adversely affect the market price of our stock. Further, contemplating or
completing an acquisition and integrating an acquired business, product or technology could divert management and
employee time and resources from other matters, which could harm our business, financial condition and operating results.
The exercise of options and warrants and other issuances of shares of common stock or securities convertible into
common stock will dilute your interest.
As of December 31, 2018, we have outstanding options and warrants to purchase an aggregate of 18,964,867 shares
of our common stock at exercise prices ranging from $0.57 - $1.69 per share with a weighted average exercise price of $0.91
per share. The exercise of options and warrants at prices below the market price of our common stock could adversely affect
the price of shares of our common stock. Additional dilution may result from the issuance of shares of our capital stock in
connection with any collaboration (although none are contemplated at this time) or in connection with other financing efforts,
including pursuant to the Purchase Agreement with Lincoln Park.
Any issuance of our common stock that is not made solely to then-existing stockholders proportionate to their
interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder by reducing his, her
or its percentage ownership of the total outstanding shares. Moreover, if we issue options or warrants to purchase our
common stock in the future and those options or warrants are exercised or we issue restricted stock, stockholders may
experience further dilution. Holders of shares of our common stock have no preemptive rights that entitle them to purchase
their pro rata share of any offering of shares of any class or series.
We may incur debt in the future that might be secured with our intellectual property as collateral, which could
subject our Company to the risk of loss of all of our intellectual property.
If we incur debt in the future, we may be required to secure the debt with our intellectual property, including all of
our patents and patents pending. In the event we default on the debt, we could incur the loss of all of our intellectual property,
which would materially and adversely affect our Company and cause you to lose your entire investment in our Company.
25
Our quarter-to-quarter performance may vary substantially, and this variance, as well as general market conditions,
may cause our stock price to fluctuate greatly and even potentially expose us to litigation.
We have generated no significant sales to date and we cannot accurately estimate future quarterly revenue and
operating expenses based on historical performance. Our quarterly operating results may vary significantly based on many
factors, including:
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•
•
•
•
•
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•
•
•
•
•
Fluctuating demand for our potential products and technologies;
Announcements or implementation by our competitors of technological innovations or new products;
Amount and timing of our costs related to our marketing efforts or other initiatives;
The status of particular development programs and the timing of performance under specific development
agreements;
Timing and amounts relating to the expansion of our operations;
Product shortages requiring suppliers to allocate minimum quantities;
Announcements or implementation by our competitors of technological innovations or new products;
The status of particular development programs and the timing of performance under specific development
agreements;
Our ability to enter into, renegotiate or renew key agreements;
Timing and amounts relating to the expansion of our operations;
Costs related to possible future acquisitions of technologies or businesses; or
Economic conditions specific to our industry, as well as general economic conditions.
Our current and future expense estimates are based, in large part, on estimates of future revenue, which is difficult to
predict. We expect to continue to make significant operating and capital expenditures in the area of research and development
and to invest in and expand production, sales, marketing and administrative systems and processes. We may be unable to, or
may elect not to, adjust spending quickly enough to offset any unexpected revenue shortfall. If our increased expenses were
not accompanied by increased revenue in the same quarter, our quarterly operating results would be harmed.
Our failure to compete successfully could harm our business.
The markets that we are targeting for our proprietary electro-optic polymer systems and photonic devices are
intensely competitive. Most of our present and potential competitors have or may have substantially greater research and
product development capabilities, financial, scientific, marketing, manufacturing and human resources, name recognition and
experience than we have. As a result, these competitors may:
•
•
•
Succeed in developing products that are equal to or superior to our potential products or that will achieve
greater market acceptance than our potential products;
Devote greater resources to developing, marketing or selling their products;
Respond more quickly to new or emerging technologies or scientific advances and changes in customer
requirements, which could render our technologies or potential products obsolete;
Introduce products that make the continued development of our potential products uneconomical;
Obtain patents that block or otherwise inhibit our ability to develop and commercialize our potential products;
•
•
• Withstand price competition more successfully than we can;
•
Establish cooperative relationships among themselves or with third parties that enhance their ability to address
the needs of our prospective customers.
The failure to compete successfully against these existing or future competitors could harm our business.
We may be unable to obtain effective intellectual property protection for our potential products and technology.
Our intellectual property, or any intellectual property that we have or may acquire, license or develop in the future,
may not provide meaningful competitive advantages. Our patents and patent applications, including those we license, may be
challenged by competitors, and the rights granted under such patents or patent applications may not provide meaningful
proprietary protection. For example, numerous patents held by third parties relate to polymer materials and electro-optic
devices. These patents could be used as a basis to challenge the validity or limit the scope of our patents or patent
applications. A successful challenge to the validity or limitation of the scope of our patents or patent applications could limit
our ability to commercialize our polymer materials technology and, consequently, reduce our revenues.
26
Moreover, competitors may infringe our patents or those that we license, or successfully avoid these patents through
design innovation. To combat infringement or unauthorized use, we may need to resort to litigation, which can be expensive
and time-consuming and may not succeed in protecting our proprietary rights. In addition, in an infringement proceeding a
court may decide that our patents or other intellectual property rights are not valid or are unenforceable, or may refuse to stop
the other party from using the intellectual property at issue on the ground that it is non-infringing. Policing unauthorized use
of our intellectual property is difficult and expensive, and we may not be able to, or have the resources to, prevent
misappropriation of our proprietary rights, particularly in countries where the laws may not protect these rights as fully as the
laws of the United States.
We also rely on the law of trade secrets to protect unpatented technology and know-how. We try to protect this
technology and know-how by limiting access to those employees, contractors and strategic partners with a need to know this
information and by entering into confidentiality agreements with these parties. Any of these parties could breach the
agreements and disclose our trade secrets or confidential information to our competitors, or these competitors might learn of
the information in other ways. Disclosure of any trade secret not protected by a patent could materially harm our business.
We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us
from commercializing our potential products.
Third parties may claim that our potential products or related technologies infringe their patents. Any patent
infringement claims brought against us may cause us to incur significant expenses, divert the attention of our management
and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial
damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing
or selling potential products that are claimed to infringe a patent covering a third party's intellectual property unless that party
grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all.
Even if we are able to obtain rights to a third party's patented intellectual property, these rights may be non-exclusive, and
therefore our competitors may obtain access to the same intellectual property. Ultimately, we may be unable to
commercialize our potential products or may have to cease some of our business operations as a result of patent infringement
claims, which could severely harm our business.
If our potential products infringe the intellectual property rights of others, we may be required to indemnify
customers for any damages they suffer. Third parties may assert infringement claims against our current or potential
customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of customers,
regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of these
customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on
commercially reasonable terms, we may be unable to continue selling such products.
Our technology may be subject to government rights.
We may have obligations to government agencies in connection with the technology that we have developed,
including the right to require that a compulsory license be granted to one or more third parties selected by certain government
agencies. It may be difficult to monitor whether these third parties will limit their use of our technology to these licensed
uses, and we could incur substantial expenses to enforce our rights to our licensed technology in the event of misuse.
The loss of certain of our key personnel, or any inability to attract and retain additional personnel, could impair our
ability to attain our business objectives.
Our future success depends to a significant extent on the continued service of our key management personnel,
particularly Dr. Michael Lebby, our Chief Executive Officer and James S. Marcelli our President, Chief Operating Officer,
Secretary and Principal Financial Officer. Accordingly, the loss of the services of either of these persons would adversely
affect our business and our ability to timely commercialize our products, and impede the attainment of our business
objectives.
Our future success will also depend on our ability to attract, retain and motivate highly skilled personnel to assist us
with product development and commercialization. Competition for highly educated qualified personnel in the polymer
industry is intense. If we fail to hire and retain a sufficient number of qualified management, engineering, sales and technical
personnel, we will not be able to attain our business objectives.
27
If we fail to develop and maintain the quality of our manufacturing processes, our operating results would be harmed.
The manufacture of our potential products is a multi-stage process that requires the use of high-quality materials and
advanced manufacturing technologies. Also, polymer-related device development and manufacturing must occur in a highly
controlled, clean environment to minimize particles and other yield and quality-limiting contaminants. In spite of stringent
quality controls, weaknesses in process control or minute impurities in materials may cause a substantial percentage of a
product in a lot to be defective. If we are not able to develop and continue to improve on our manufacturing processes or to
maintain stringent quality controls, or if contamination problems arise, our operating results would be harmed.
The complexity of our anticipated products may lead to errors, defects and bugs, which could result in the necessity to
redesign products and could negatively, impact our reputation with customers.
Products as complex as those we intend to market might contain errors, defects and bugs when first introduced or as
new versions are released. Delivery of products with production defects or reliability, quality or compatibility problems could
significantly delay or hinder market acceptance of our products or result in a costly recall and could damage our reputation
and adversely affect our ability to sell our products. If our products experience defects, we may need to undertake a redesign
of the product, a process that may result in significant additional expenses.
We may also be required to make significant expenditures of capital and resources to resolve such problems. There
is no assurance that problems will not be found in new products after commencement of commercial production, despite
testing by our suppliers, our customers and us.
If we decide to make commercial quantities of products at our facilities, we will be required to make significant
capital expenditures to increase capacity.
We lack the internal ability to manufacture products at a level beyond the stage of early commercial introduction. To
the extent we do not have an outside vendor to manufacture our products, we will have to increase our internal production
capacity and we will be required to expand our existing facilities or to lease new facilities or to acquire entities with
additional production capacities. These activities would require us to make significant capital investments and may require us
to seek additional equity or debt financing. We cannot assure you that such financing would be available to us when needed
on acceptable terms, or at all. Further, we cannot assure you that any increased demand for our potential products would
continue for a sufficient period of time to recoup our capital investments associated with increasing our internal production
capacity.
In addition, we do not have experience manufacturing our potential products in large quantities. In the event of
significant demand for our potential products, large-scale production might prove more difficult or costly than we anticipate
and lead to quality control issues and production delays.
We may not be able to manufacture products at competitive prices.
To date, we have produced limited quantities of products for research, development, demonstration and prototype
purposes. The cost per unit for these products currently exceeds the price at which we could expect to profitably sell them. If
we cannot substantially lower our cost of production as we move into sales of products in commercial quantities, our
financial results will be harmed.
We conduct significantly all of our research and development activities at our Englewood, CO facility, and
circumstances beyond our control may result in considerable interruptions.
We conduct significantly all of our research and development activities at our Englewood, CO facility, and although
we have an agreement with CU Boulder to use their facilities in case of any contingency, a disaster such as a fire, flood or
severe storm at or near one of our facilities could prevent us from further developing our technologies or manufacturing our
potential products, which would harm our business.
We are subject to regulatory compliance related to our operations.
We are subject to various U.S. governmental regulations related to occupational safety and health, labor and
business practices. Failure to comply with current or future regulations could result in the imposition of substantial fines,
suspension of production, alterations of our production processes, cessation of operations, or other actions, which could harm
our business.
28
We may be unable to export our potential products or technology to other countries, convey information about our
technology to citizens of other countries or sell certain products commercially, if the products or technology are
subject to United States export or other regulations.
We are developing certain polymer-based products that we believe the United States government and other
governments may be interested in using for military and information gathering or antiterrorism activities. United States
government export regulations may restrict us from selling or exporting these potential products into other countries,
exporting our technology to those countries, conveying information about our technology to citizens of other countries or
selling these potential products to commercial customers. We may be unable to obtain export licenses for products or
technology, if they become necessary. We currently cannot assess whether national security concerns would affect our
potential products and, if so, what procedures and policies we would have to adopt to comply with applicable existing or
future regulations.
We may incur liability arising from the use of hazardous materials.
Our business and our facilities are subject to a number of federal, state and local laws and regulations relating to the
generation, handling, treatment, storage and disposal of certain toxic or hazardous materials and waste products that we use
or generate in our operations. Many of these environmental laws and regulations subject current or previous owners or
occupiers of land to liability for the costs of investigation, removal or remediation of hazardous materials. In addition, these
laws and regulations typically impose liability regardless of whether the owner or occupier knew of, or was responsible for,
the presence of any hazardous materials and regardless of whether the actions that led to the presence were taken in
compliance with the law. In our business, we use hazardous materials that are stored on site. We use various chemicals in our
manufacturing process that may be toxic and covered by various environmental controls. An unaffiliated waste hauler
transports the waste created by use of these materials off-site. Many environmental laws and regulations require generators of
waste to take remedial actions at an off-site disposal location even if the disposal was conducted lawfully. The requirements
of these laws and regulations are complex, change frequently and could become more stringent in the future. Failure to
comply with current or future environmental laws and regulations could result in the imposition of substantial fines,
suspension of production, alteration of our production processes, cessation of operations or other actions, which could
severely harm our business.
Our data and information systems and network infrastructure may be subject to hacking or other cyber security
threats. If our security measures are breached and an unauthorized party obtains access to our proprietary business
information, our information systems may be perceived as being unsecure, which could harm our business and
reputation, and our proprietary business information could be misappropriated which could have an adverse effect on
our business and results of operations.
Our Company stores and transmits its proprietary information on its computer systems. Despite our security
measures, our information systems and network infrastructure may be vulnerable to cyber-attacks or could be breached due to
an employee error or other disruption that could result in unauthorized disclosure of sensitive information that has the
potential to significantly interfere with our business operations. Breaches of our security measures could expose us to a risk
of loss or misuse of this information, litigation and potential liability. Since techniques used to obtain unauthorized access or
to sabotage information systems change frequently and generally are not recognized until launched against a target, we may
be unable to anticipate these techniques or to implement adequate preventive measures in advance of such an attack on our
systems. In addition, we use a vendor that uses cyber or “Cloud” storage of information as part of their service or product
offerings, and despite our attempts to validate the security of such services, our proprietary information may be
misappropriated by third parties. In the event of an actual or perceived breach of our security, or the security of one of our
vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer damage to
our reputation or our business. Additionally, misappropriation of our proprietary business information could prove
competitively harmful to our business.
29
If we are unable to maintain effective internal controls, our business, financial position and results of operations could
be adversely affected.
If we are unable to maintain effective internal controls, our business, financial position and results of operations
could be adversely affected. We are subject to the reporting and other obligations under the Securities Exchange Act of 1934
(“Exchange Act”), including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which require annual
management assessments of the effectiveness of our internal control over financial reporting. Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States. Any failure to achieve and maintain effective
internal controls could have an adverse effect on our business, financial position and results of operations. In addition, our
independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial
reporting annually. If our independent registered public accounting firm is unable to attest to the effectiveness of our internal
control over financial reporting, investor confidence in our reported results will be harmed and the price of our securities may
fall. These reporting and other obligations place significant demands on our management and administrative and operational
resources, including accounting resources.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of the Company’s shareholders may be eligible to sell all or some of their shares of
common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act of 1933, as amended (the “Securities Act”), subject to certain limitations. In general, a non-affiliate
stockholder who has satisfied a six-month holding period may, under certain circumstances, sell its shares, without limitation.
Any substantial sale of the Company’s common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a
material adverse effect on the market price of our common stock.
There is a limited market for our common stock, which may make it more difficult for you to sell your stock.
Our Company’s common stock is quoted on the OTCMarkets (OTCQB) under the symbol "LWLG." The trading
market for our common stock is limited, accordingly, there can be no assurance as to the liquidity of any markets that may
develop for our common stock, your ability to sell our common stock, or the prices at which you may be able to sell our
common stock.
Our Company’s stock price may be volatile.
The market price of our Company’s common stock is likely to be highly volatile and could fluctuate widely in price
in response to various factors, many of which are beyond our control, including:
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Technological innovations or new products and services by our Company or our competitors;
Additions or departures of key personnel;
Sales of our Company’s common stock;
Our Company’s ability to integrate operations, technology, products and services;
Our Company’s ability to execute our business plan;
Operating results below expectations;
Loss of any strategic relationship;
Industry developments;
Economic and other external factors; and
Period-to-period fluctuations in our Company’s financial results.
You may consider any one of these factors to be material, and our stock price may fluctuate widely as a result of any
of the above listed factors.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. These market fluctuations may also materially and
adversely affect the market price of our Company’s common stock.
Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may
not be beneficial to existing common stockholders and with the ability to affect adversely stockholder voting power
and perpetuate their control over us.
30
Our amended articles of incorporation allow us to issue shares of preferred stock without any vote or further action
by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of
preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval,
including large blocks of preferred stock. As a result, our board of directors could authorize the issuance of a series of
preferred stock that would grant to holders thereof the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common stock or other preferred stockholders and the
right to the redemption of the shares, together with a premium, prior to the redemption of our common stock or existing
preferred stock, if any.
Preferred stock could be used to dilute a potential hostile acquirer. Accordingly, any future issuance of preferred
stock or any rights to purchase preferred stock may have the effect of making it more difficult for a third party to acquire
control of us. This may delay, defer or prevent a change of control or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings attributable to, and assets available for distribution to, the holders
of our common stock and could adversely affect the rights and powers, including voting rights, of the holders of our common
stock and preferred stock.
Our articles of incorporation and bylaws, and certain provisions of Nevada corporate law, as well as certain of our
contracts, contain provisions that could delay or prevent a change in control even if the change in control would be
beneficial to our stockholders.
Nevada law, as well as our amended articles of incorporation and bylaws, contain anti-takeover provisions that
could delay or prevent a change in control of our Company, even if the change in control would be beneficial to our
stockholders. These provisions could lower the price that future investors might be willing to pay for shares of our common
stock. These anti-takeover provisions:
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authorize our board of directors to create and issue, without stockholder approval, preferred stock, thereby
increasing the number of outstanding shares, which can deter or prevent a takeover attempt;
prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of
stockholders to elect director candidates;
empower our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as
a result of an increase in the number of directors or otherwise;
provide that our board of directors be divided into three classes, with approximately one-third of the directors
to be elected each year;
provide that our board of directors is expressly authorized to adopt, amend or repeal our bylaws; and
provide that our directors will be elected by a plurality of the votes cast in the election of directors.
Nevada Revised Statutes, the terms of our employee stock option agreements and other contractual provisions may
also discourage, delay or prevent a change in control of our Company. Nevada Revised Statutes sections 78.378 to 78.3793
provide state regulation over the acquisition of a controlling interest in certain Nevada corporations unless the articles of
incorporation or bylaws of the corporation provide that the provisions of these sections do not apply. Our articles of
incorporation and bylaws do not state that these provisions do not apply. The statute creates a number of restrictions on the
ability of a person or entity to acquire control of a Nevada company by setting down certain rules of conduct and voting
restrictions in any acquisition attempt, among other things. The statute contains certain limitations and it may not apply to our
Company. Our 2016 Equity Incentive Plan includes change-in-control provisions that allow us to grant options that may
become vested immediately upon a change in control. Our board of directors also has the power to adopt a stockholder rights
plan that could delay or prevent a change in control of our Company even if the change in control is generally beneficial to
our stockholders. These plans, sometimes called “poison pills,” are oftentimes criticized by institutional investors or their
advisors and could affect our rating by such investors or advisors. If our board of directors adopts such a plan, it might have
the effect of reducing the price that new investors are willing to pay for shares of our common stock.
Together, these charter, statutory and contractual provisions could make the removal of our management and
directors more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing
market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant
common stock beneficially owned by our founders, executive officers, and members of our board of directors, could limit the
price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential
acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an
acquisition.
Item 1B.
Unresolved Staff Comments.
Not Applicable.
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Item 2.
Properties.
Our principal executive offices and research and development facility is located at 369 Inverness Parkway, Suite
350, Englewood, Colorado. The 13,420 square feet 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, and serves as our
office, laboratory and research and development space. Our annual base rent during 2019 is approximately $32,432.
Item 3.
Legal Proceedings.
We are not aware of any litigation or threatened litigation of a material nature.
Item 4.
Mine Safety Disclosures.
Not Applicable.
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PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity
Securities.
Market Information
Our common stock is traded on the OTCQB under the symbol “LWLG”. Any over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Shareholders
As of March 15, 2019, there were approximately 108 holders of our common stock, including The Depository Trust
Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.
Dividends
No cash dividends have been declared or paid on our common stock to date and we currently intend to use all
available funds to fund the development and growth of our business.
Securities Authorized for Issuance under Equity Compensation Plans
Equity Compensation Plans as of December 31, 2018.
Equity Compensation Plan Information
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))
Plan category
(a)
Equity compensation plans
approved by security holders (1)
Equity compensation plans not
approved by security holders (2)
Total
6,755,000 (1)
1,677,500
8,432,500
(b)
$0.86
$0.80
$0.85
(c)
765,000
0
765,000
(1) Reflects shares of common stock to be issued pursuant to our 2016 Equity Incentive Plan and our 2007 Employee
Stock Plan, both of which are for the benefit of our directors, officers, employees and consultants. We have reserved
3,000,000 shares of common stock for such persons pursuant to our 2016 Equity Incentive Plan. We terminated our
2007 Employee Stock Plan in June 2016 and no additional awards are made under that plan.
(2) Comprised of common stock purchase warrants we issued for services.
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Recent Sales of Unregistered Securities
During the period covered by this report, our Company has sold the following securities without registering the
securities under the Securities Act:
Date
Security
April 2018
Common Stock – 100,000 shares of common stock at a purchase price of $0.615 per share issued
July 2018
Warrant – right to buy 150,000 shares of common stock at $1.15 per share issued for services.
pursuant to a warrant exercise.
No underwriters were utilized, and no commissions or fees were paid with respect to any of the above transactions.
These persons were the only offerees in connection with these transactions. We relied on Section 4(a)(2), 4(a)(5) and Rule
506 of Regulation D of the Securities Act since the transaction does not involve any public offering.
Item 6.
Selected Financial Data.
Not Applicable.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis of financial condition and results of operations provides
information that management believes is relevant to an assessment and understanding of our plans and financial condition.
The following selected financial information is derived from our historical financial statements and should be read in
conjunction with such financial statements and notes thereto set forth elsewhere herein and the "Forward-Looking
Statements" explanation included herein.
Overview
Lightwave Logic, Inc. is a development stage company whose P2ICTM technology addresses advanced
telecommunication, data communications, and data center markets utilizing its advanced organic electro-optic polymer
systems. The Company currently has development activities in both polymer materials as well as device design.
Materials Development
The 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.
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. The 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.
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Device Design and Development
Electro-optic Modulators
The 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)
The 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
Grow our commercial material manufacturing capabilities
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• Maintain/develop strategic relationships with major telecommunications and data communications companies
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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.
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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. We showed an
example packaged modulator at our Annual Shareholders Meeting in May 2018.
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.
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 continued with our collaborative development of our polymer photonic slot waveguide modulator in 2014 and
continued our collaboration with an associated third-party research group in 2017 and 2018. We are now designing slot
modulators to operate at data rates greater than 50 Gbaud.
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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 from: 10 Gbaud ridge waveguide modulators; to 25 Gbaud based ridge waveguide modulators; to 50 Gbaud
based ridge waveguide modulators, and potentially 100 Gbaud based ridge waveguide modulators. These modulators are then
arrayed to create a multichannel P2IC™ platform for the 100 Gbps, 400 Gbps, 800 Gbps, and potentially 1.6 Tbps aggregated
data-rate markets. As the performance of the modulator is capable of up to 100 Gbaud, the next major milestone on our
roadmap will be to create a multichannel polymer-based P2IC™ platform for the 400 Gbps market. This will be composed of
either 4 channels each carrying 100 Gbps, implemented either with NRZ modulation on 100 Gbaud modulators or PAM-4
modulation on 50 Gbaud modulators.
For our device goals, we are developing polymer materials that perform even faster at a serial single channel
100Gbps using a NRZ modulation format. We showed bandwidths of polymer-based modulator devices at a major
international conference (ECOC – European Conference on Optical Communications) this year with bandwidths that
exceeded 100GHz. We noted that to achieve 100Gbaud, the polymer-based modulator only has to achieve 80GHz bandwidth.
We were pleased with the polymer modulator performance, and 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.
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.
37
Recent Significant Events and Milestones Achieved
In December 2016 we achieved high-speed modulation in our first all-organic polymer ridge waveguide intensity
modulator prototype, which constituted one of the most significant moments in the history of our Company. Our initial
"alpha" prototype device, enabled by our P2IC™ polymer system, demonstrated bandwidth suitable for data rates up to about
10 Gbps. This performance exceeds the telecom OC-48 standard (2.5 Gbps). This device demonstrated true amplitude
(intensity) modulation in a Mach-Zehnder modulator structure incorporating our polymer waveguides.
In April 2017 we achieved bandwidth suitable for 25Gbps data rates in an all-organic polymer ridge waveguide
intensity modulator prototype, a significant improvement over our initial 10Gbps device modulator prototype. This
breakthrough was significant because a 25Gbps data rate is important to the optical networking industry because this data rate
is a major node to achieve 100 Gbps (using 4 channels of 25 Gbps). In July 2017 we advanced our high-speed modulation
performance to satisfy 28Gbps data rates for QSFP28 standards and 100Gbps data center applications.
In September 2017 we achieved outstanding performance of our ridge waveguide Mach-Zehnder modulators ahead
of schedule, with bandwidth performance levels that will enable 50Gbps modulation in fiber-optic communications. This
important achievement will allow users to utilize arrays of 4 x 50Gbps polymer modulators using PAM-4 encoding to access
400Gbps data rate systems. Pulse-Amplitude Modulation (PAM-4) is an encoding scheme that can double the amount of data
that can be transmitted.
During February and March 2018, we moved our Newark, Delaware synthetic laboratory and our Longmont,
Colorado optical testing laboratory and corporate headquarters to our new office, laboratory and research and development
space located at 369 Inverness Parkway, Suite 350, Englewood, Colorado. The new 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 new 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. Since June 2018, we have made significant
progress on integrating this technology into our P2IC (polymer photonic integrated circuit) platform.
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 anticipate we
will continue rigorous testing of the material and its performance in device structures during the remainder of this year before
releasing it into full device development.
38
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 will work 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 will initially be 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.
As we move forward to diligently to meet our goals, we continue to work closely with our packaging partner for the
50Gbaud prototypes, and we are advancing our reliability and characterization efforts to support our prototyping. We are
actively engaged with test equipment manufacturers to deliver the most advanced test equipment for our state-of-the-art
polymer results. 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.
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 fiscal 2018 to fiscal 2017
Revenues
As a development stage company, we had no revenues during the years ended December 31, 2018 and December
31, 2017. 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 $5,601,016 and $5,523,538 for the years ended December 31, 2018 and 2017,
respectively, for an increase of $77,478. This increase in operating expenses was due primarily to increases in salaries and
wages, depreciation, laboratory materials and supplies, rent and utility expenses, consulting expense, travel expenses, office
expenses, accounting fees, auditing fees, moving expenses, other tax expenses, director and officer insurance expenses, and
repair offset by decreases in non-cash stock option and warrant amortization, legal, laboratory material testing expense and
electro-optic device development, patent amortization and patent related expenses, royalty fees and recruiting fees.
Included in our operating expenses for the year ended December 31, 2018 was $3,794,565 for research and
development expenses compared to $3,519,129 for the year ended December 31, 2017, for an increase of $275,436. This is
primarily due to increases in research and development salaries and wages, depreciation, laboratory materials and supplies,
rent and utility expenses, travel expenses, product development consulting expenses, research and development moving
expenses, research and development office expenses and repair and maintenance expenses offset by decreases in non-cash
stock option amortization, laboratory material testing expense and electro-optic device development, patent amortization and
patent related expenses and royalty fees.
Research and development expenses currently consist primarily of compensation for employees and consultants
engaged in internal research, product development activities; laboratory operations, internal material and device fabrication
testing and prototype electro-optic device design, development and prototype device processing; costs; and related operating
expenses.
39
We expect to continue to incur substantial research and development expense to develop and commercialize our
photonic devices PIC development and electro-optic materials platform. These expenses will increase as a result of
accelerated development effort to support commercialization of our non-linear optical polymer materials technology; to build
photonic device prototypes in our in-house laboratories; hiring additional technical and support personnel; engaging a senior
technical advisor; pursuing other potential business opportunities and collaborations; customer testing and evaluation; and
incurring related operating expenses.
Wages and salaries increased $428,337 from $1,357,594 for the year ended December 31, 2017 to $1,785,931 for
the year ended December 31, 2018. The reason for the variation was primarily due to an increase in full time technical
personnel working on device and material development and change in research and development allocation.
Depreciation expense increased $213,905 from $177,638 for the year ended December 31, 2017 to $391,543 for the
year ended December 31, 2018. The primary reason for the increase was due to the addition of capital equipment for wafer
fabrication in the new facility.
Laboratory materials and supplies increased $139,698 from $202,304 for the year ended December 31, 2017 to
$342,002 for the year ended December 31, 2018. The primary reason for the increase was fabrication of prototype wafers and
devices, and e.o. polymer material systems.
Rent and utility expenses increased $69,793 from $151,932 for the year ended December 31, 2017 to $221,725 for
the year ended December 31, 2018. The primary reason for the increase was due to acquiring a larger facility in order to
consolidate all the Company’s operations into one facility.
Travel expenses increased by $53,967 to $114,258 for the year ended December 31, 2018 from $60,291 for the year
ended December 31, 2017. The increase was primarily due to employee travel for relocation planning and conferences.
Product development consulting expenses increased $47,290 from $372,981 for the year ended December 31, 2017
to $420,271 for the year ended December 31, 2018. The primary reason for the increase was due to engaging outside
consultants to speed up device development.
Moving expenses increased by $19,983 to $63,511 for the year ended December 31, 2018 from $43,528 for the year
ended December 31, 2017. The primary reason for the increase was the relocation to the new facility.
Office expenses increased by $18,596 to $25,361 for the year ended December 31, 2018 from $6,765 for the year
ended December 31, 2017. The increase was primarily due furnishing the new Colorado facility.
Repair and maintenance expenses increased by $13,726 to $44,459 for the year ended December 31, 2018 from
$30,733 for the year ended December 31, 2017. The primary reason for the increase was due to general maintenance in the
new Colorado facility.
Research and development non-cash stock option amortization decreased $493,210 from $713,783 for the year
ended December 31, 2017 to $220,573 for the year ended December 31, 2018. The reason for the variation in decreased
amortization was the vesting schedules.
Product prototype development and material testing expense decreased $155,149 from $219,650 for the year ended
December 31, 2017 to $64,501 for the year ended December 31, 2018. The decrease was primarily due to the move to the
new facility and transitioning of outside services in-house.
Patent amortization and patent related expenses decreased by $65,250 to $65,015 for the year ended December 31,
2018 from $130,265 for the year ended December 31, 2017. The primary reason for the decrease was lower cost in patent
application prosecution.
Royalty expenses decreased $30,000 to $0 for the year ended December 31, 2018 from $30,000 for the year ended
December 31, 2017. The primary reason for the decrease was the termination of a license agreement.
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.
40
General and administrative expenses decreased $197,958 to $1,806,451 for the year ended December 31, 2018 from
$2,004,409 for the year ended December 31, 2017. The decrease is primarily due to decreases in legal fees, general and
administrative non-cash stock option and warrant amortization and recruiting fees offset by increases in office expenses, rent
and utility expenses, accounting fees, general and administrative consulting, auditing fees, travel, moving expenses, general
and administrative salary and wages, other tax expenses and director and officer insurance expenses.
Legal fees decreased $262,429 to $91,007 for the year ended December 31, 2018 from $353,436 for the year ended
December 31, 2017. The primary reason for the variance was an overall decrease in general legal work.
General and administrative non-cash stock option and warrant amortization decreased $252,384 from $497,889 for
the year ended December 31, 2017 to $245,505 for the year ended December 31, 2018. The reason for the variation was due
to stock options and warrants vesting schedules.
Recruiting fees decreased $10,000 to $40,500 for the year ending December 31, 2018 from $50,500 for the year
ending December 31, 2017. The primary reason for the variance was due to a reduction in employment activity with a
recruiting firm.
Office expenses increased $60,826 from $44,598 for the year ended December 31, 2017 to $105,424 for the year
ended December 31, 2018. The reason for the variation was due to relocating into a larger facility.
Rent and utility expenses increased $43,134 from $43,552 for the year ended December 31, 2017 to $86,686 for the
year ended December 31, 2018. The primary reason was due to support of the new larger facility.
Accounting fees increased $40,666 to $145,750 for the year ended December 31, 2018 from $105,084 for the year
ended December 31, 2017. The primary reason for the increase was due to the additional work being an accelerated filer and
general accounting expense.
General and administrative consulting fees increased $40,124 from ($15,958) for the year ended December 31, 2017
to $24,166 for the year ended December 31, 2018. The primary reason for the increase was due to a non-cash consulting
expense.
Travel expenses increased $32,009 to $73,307 for the year ending December 31, 2018 from $41,298 for the year
ended December 31, 2017. The primary reason for the increase was due to travel expense to the new facility and conferences.
General and administrative wages and salaries increased $26,305 from $533,676 for the year ended December 31,
2017 to $559,981 for the year ended December 31, 2018. The primary reason for the increase was due to increase in fringe
benefit costs and additional head count.
Auditing fees increased $24,925 to $87,600 for the year ending December 31, 2018 from $62,675 for the year
ending December 31, 2017. The primary reason for the increase was due to the Company’s change in status to an Accelerated
Filer, which requires additional testing by the auditors.
Moving expenses increased $20,606 to $20,606 for the year ending December 31, 2018 from $0 for the year ending
December 31, 2017. The reason for the variation was due to moving to a new facility.
Other tax expenses increased $16,884 to $29,608 for the year ended December 31, 2018 from $12,724 for the year
ended December 31, 2017. The primary reason for the increase was due to sales and use tax on capital equipment for new
facility.
Director and officer insurance expense increased $14,207 from $131,787 for the year ended December 31, 2017 to
$145,994 for the year ended December 31, 2018. The primary reason for the increase was an increase in insurance premiums.
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.
41
Other Income (Expense)
Other expenses decreased $53,902 to $171,942 for the year ending December 31, 2018 from $225,844 for the year
ending December 31, 2017, 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 $5,772,958 and $5,749,382 for the years ended December 31, 2018 and 2017, respectively, for a
increase of $23,576, due primarily to increases in salaries and wages, depreciation, laboratory materials and supplies, rent and
utility expenses, consulting expenses, travel expenses, office expenses, accounting fees, auditing fees, moving expenses,
other tax expenses, director and officer insurance expenses and repair expenses offset by decreases in non-cash stock option
and warrant amortization, legal, laboratory material testing expense and electro-optic device development, patent
amortization and patent related expenses, commitment fee associated with the purchase of shares by an institutional investor
for resale under a stock purchase agreement, royalty fees and recruiting fees.
Significant Accounting Policies
Our Company's accounting policies are more fully described in Note 1 of Notes to Financial Statements. As
disclosed in Note 1 of Notes to Financial Statements, the preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on our
management’s best knowledge of current events and actions our Company may undertake in the future, actual results could
differ from the estimates.
Recently Adopted Accounting Pronouncements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic
842), Targeted Improvements. The amendments in this Update relieve businesses and organizations from having to present
prior comparative years’ results when they adopt the new standard. It also lets landlords and other lessors avoid breaking out
the parts of a rental contract that are not specifically being leased, such as the cost of snow removal services, and account for
them separately from the base rent. The amendments in this Update are the same as the effective dates and transition
requirements in ASU No. 2016-02, Leases.
The Company is in the process of evaluating the above ASUs and estimating lease liabilities and corresponding
right-of-use assets as of January 1, 2019.
Reclassifications. Certain reclassifications have been made to the 2017 financial statement in order to conform to the
2018 financial statement presentation.
Stock Based Compensation
Our Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award, with
the following assumptions for 2018: no dividend yield in all years, expected volatility, based on the Company’s historical
volatility, 60% to 90%, risk-free interest rate between 1.89% to 3.06% and expected option life of 5.0 to 10 years. Prior to
May 2018, 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. Starting in May 2018, the
expected life is based on the legal contractual life of options. The Company uses the Black-Scholes option pricing model to
calculate the grant-date fair value of an award, with the following assumptions for 2017: no dividend yield in all years,
expected volatility, based on the Company’s historical volatility, 39% to 87%, risk-free interest rate between 1.16% to 2.37%
and expected option life of .03 to 9.08 years.
As of December 31, 2018, there was $324,497 of unrecognized compensation expense related to non-vested market-
based share awards that is expected to be recognized through August 30, 2020.
42
Liquidity and Capital Resources
For the year ended December 31, 2018
During the year ended December 31, 2018, net cash used in operating activities was $4,400,965 and net cash used in
investing activities was $1,432,363, which was due primarily to the Company’s research and development activities and
general and administrative expenditures. Net cash provided by financing activities for the year ended December 31, 2018
was $4,525,626. At December 31, 2018, our cash and cash equivalents totaled $2,174,625, our assets totaled $5,251,264, our
liabilities totaled $344,202, and we had stockholders’ equity of $4,907,062.
For the year ended December 31, 2017
During the year ended December 31, 2017, net cash used in operating activities was $4,409,696 and net cash used in
investing activities was $265,532, which was due primarily to the Company’s research and development activities and
general and administrative expenditures. Net cash provided by financing activities for the year ended December 31, 2017 was
$6,200,711. At December 31, 2017, our cash and cash equivalents totaled $3,482,327, our assets totaled $5,849,770, our
liabilities totaled $833,055 and we had stockholders’ equity of $5,016,715.
Sources and Uses of Cash
Our future expenditures and capital requirements will depend on numerous factors, including: the progress of our
research and development efforts; the rate at which we can, directly or through arrangements with original equipment
manufacturers, introduce and sell products incorporating our polymer materials technology; the costs of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property rights; market acceptance of our products and
competing technological developments; and our ability to establish cooperative development, joint venture and licensing
arrangements. We expect that we will incur approximately $535,000 of expenditures per month over the next 12 months.
Based upon our current cash position and expenditures of approximately $585,000 per month over the next four months and
no debt service, we believe our Company has sufficient funds to finance its operations through June 2019. 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.
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.
43
We expect that our cash used in operations will continue to increase during 2019 and beyond as a result of the
following planned activities:
•
•
•
•
•
•
The addition of management, sales, marketing, technical and other staff to our workforce;
Increased spending for the expansion of our research and development efforts, including purchases of
additional laboratory and production equipment;
Increased spending in marketing as our products are introduced into the marketplace;
Developing and maintaining collaborative relationships with strategic partners;
Developing and improving our manufacturing processes and quality controls; and
Increases in our general and administrative activities related to our operations as a reporting public company
and related corporate compliance requirements.
Analysis of Cash Flows
For the year ended December 31, 2018
Net cash used in operating activities was $4,400,965 for the year ended December 31, 2018, primarily attributable to
the net loss of $5,772,958 adjusted by $78,390 in warrants issued for services, $387,688 in options issued for services,
$172,192 in common stock issued for services, $465,795 in depreciation expenses and patent amortization expenses, $10,084
net loss on disposal of equipment, $247,288 in prepaid expenses and $10,556 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 $1,432,363 for the year ended December 31, 2018, consisting of $397,479
in cost for intangibles and $1,037,384 in asset additions primarily for the new Colorado headquarter facility offset by
proceeds of $2,500 on the sale of equipment.
Net cash provided by financing activities was $4,525,626 for the year ended December 31, 2018 and consisted of
$4,863,535 in proceeds from resale of common stock to an institutional investor and $161,500 in proceeds from exercise of
warrants and options offset by $499,409 repayment of equipment purchased.
For the year ended December 31, 2017
Net cash used in operating activities was $4,409,696 for the year ended December 31, 2017, primarily attributable to
the net loss of $5,749,382 adjusted by $416,934 in warrants issued for services, $794,738 in options issued for services,
$270,343 in common stock issued for services, $325,946 in depreciation expenses and patent amortization expenses,
($447,977) in prepaid expenses and ($20,298) 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 $265,532 for the year ended December 31, 2017, consisting of $81,743 in
cost for intangibles and $183,789 in asset additions primarily for the new Colorado headquarter facility.
Net cash provided by financing activities was $6,200,711 for the year ended December 31, 2017 and consisted of
$5,722,060 proceeds from common stock and $502,500 proceeds from the exercise of warrants offset by $23,849 repayment
of equipment purchased.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8.
Financial Statements and Supplementary Data
Our Financial Statements of are attached as Appendix A (following Exhibits) and included as part of this Form 10-
K Report. A list of our Financial Statements is provided in response to Item 15 of this Form 10-K Report.
44
Item 9.
Changes In And Disagreements With Accountants On Accounting and Financial Disclosure
Not Applicable.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our Company evaluated the effectiveness and design and
operation of its disclosure controls and procedures. Our Company’s disclosure controls and procedures are the controls and
other procedures that we designed to ensure that our Company records, processes, summarizes, and reports in a timely
manner the information that it must disclose in reports that our Company files with or submits to the Securities and Exchange
Commission. Our principal executive officer and principal financial officer reviewed and participated in this evaluation.
Based on this evaluation, our Company made the determination that its disclosure controls and procedures were effective.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of
management, including our principal executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the framework in Internal Control -Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this
evaluation, management has concluded that our internal control over financial reporting was effective as of December 31,
2018.
The Company's internal control over financial reporting includes policies and procedures that (1) pertain to
maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements.
Our management, including our principal executive officer and principal financial officer, does not expect that our
disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. In addition, the design of any
system of controls is based in part on certain assumptions about the likelihood of future events, and controls may become
inadequate if conditions change. There can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Attestation Report of Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Morison Cogen LLP, audited our internal control over financial
reporting as of December 31, 2018. Their report dated March 18, 2019 expressed an unqualified opinion on our internal
control over financial reporting. That report appears in Item 15 of Part IV of this Annual Report on Form 10-K and is
incorporated by reference to this Item 9A.
Changes in Internal Control Over Financial Reporting
No change in our Company’s internal control over financial reporting occurred during our fourth fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
Not Applicable.
45
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
Identity of directors, executive officers and significant employees
Name
Age
Position
Michael Lebby
James S. Marcelli
Thomas E. Zelibor
Joseph A. Miller
Ronald A Bucchi
Siraj Nour El-Ahmadi
Frederick J. Leonberger
58
71
64
77
64
54
71
Director; Chief Executive Officer
Director; President; Chief Operating Officer,
Secretary
Chair of the Board of Directors
Director
Director
Director
Director
Business experience of directors, executive officers, and significant employees
Director Class/ Term
Class II Expires 2019
Class III Expires 2020
Class III Expires 2020
Class II Expires 2019
Class II Expires 2019
Class I Expires 2021
Class I Expires 2021
Dr. Michael Lebby. Dr. Lebby has served as our Chief Executive Officer since May 1, 2017 and as a director of our
Company since August 26, 2015. He also previously served a member of our Operations Committee until April 30, 2017.
Dr. Lebby is in charge of the overall general management of the Company and supervision of Company policies, setting the
Company’s strategies, formulating and overseeing the Company’s business plan, raising capital, expanding the Company’s
management team and the general promotion of the Company From June 2013 to 2015, Dr. Lebby has served as President
and CEO of OneChip Photonics, Inc., a privately held company headquartered in Ottawa, Canada, that is a leading provider
of low-cost, small-footprint, high-performance indium phosphide (InP)-based photonic integrated circuits (PICs) and PIC-
based optical sub-assemblies (OSAs) for the Data Center markets. Also, from 2013 to 2015 Dr. Lebby presently served as
part-time full professor, and chair of optoelectronics at Glyndwr University in Wales, UK, to bring forward advanced
materials, device, and integrated photonics based technologies for the datacenter and high performance computing markets.
During the period 2014 to 2016, Dr. Lebby focused on a foundry based model for InP-based photonic integrated circuits
(PICs) and optoelectronic integrated circuits (OEICs) in the datacenter segment and was been instrumental in assembling
California’s proposal (via USC) to the Federal Government for an integrated photonics manufacturing institute. Dr. Lebby
holds a Doctor of Engineering, a Ph.D., a MBA and a bachelor’s degree, all from the University of Bradford, United
Kingdom. Dr. Lebby has well over 200 issued utility patents with the USPTO. This number expands to over 450 if
international derivative patents are included.
Mr. James S. Marcelli. Mr. Marcelli has served as an officer and director of our Company since August 2008. Since
May 2012, Mr. Marcelli has served as our Company’s President and Chief Operating Officer, and he was named our
Secretary in March 2018. Previously, from August 2008 to April 2012, Mr. Marcelli served as our President and Chief
Executive Officer. Mr. Marcelli is in charge of the day-to-day operations of our Company and its movement to a fully
functioning commercial corporation, and also serves as our Company’s principal financial officer. Since 2000, Mr. Marcelli
has served as the president and chief executive officer of Marcelli Associates, a consulting company that offers senior
management consulting, mentoring, and business development services to start-up and growth companies. Business segments
Mr. Marcelli has worked with included an Internet networking gaming center, high-speed custom gaming computers, high
tech manufacturing businesses and business service companies.
46
Thomas E. Zelibor, Rear Admiral, USN (Ret). RADM Zelibor has served as our Chair of the Board of Directors
(non-executive) since May 1, 2017. Previously, has served as our Chief Executive Officer and Chair of the Board of
Directors (executive) from May 2012 to April 30, 2017. Mr. Zelibor also previously served as Chair of the Board of Directors
(non-executive) of our Company since October 2011 and has served as a director of our Company since July 2008. He also
previously served on our Operation Committee. Mr. Zelibor is currently the Chief Executive Officer of the Space Foundation
and a director of Nuvectra Corp. Mr. Zelibor previously served as the Chief Executive Officer and President of Zelibor &
Associates, LLC, a management-consulting firm and as the Chief Executive Officer and President of Flatirons Solutions
Corp. Prior to that time, Mr. Zelibor served in the U.S. Navy in a number of positions, including as the Dean of the College
of Operational and Strategic Leadership at the United States Naval War College where he was responsible for the adoption of
a corporate approach to leadership development; Director of Global Operations, United States Strategic Command; Director,
Space, Information Warfare, Command and Control on the Navy staff; Department of the Navy, Deputy Chief Information
Officer (CIO), Navy; Commander, Carrier Group Three and Commander, Naval Space Command. Mr. Zelibor earned his
bachelor’s degree from the United States Naval Academy and has been a participant in the Senior Leader in Residence
Program and a visiting scholar for the Zell Center for Risk Research at the Kellogg School of Management, Northwestern
University.
Dr. Joseph A. Miller, Jr. Dr. Miller has served as a director of our Company since May 10, 2011. From 2002 to May
2012, Dr. Miller served as Executive Vice President and Chief Technology Officer of Corning Incorporated, having joined
Corning Incorporated in 2001 as Senior Vice President and Chief Technology Officer. Prior to joining Corning Incorporated,
Dr. Miller was with E.I. DuPont de Nemours, Inc., where he served as Chief Technology Officer and Senior Vice President
for Research and Development since 1994. Dr. Miller began his career with DuPont in 1966. Dr. Miller is a director and
Non-executive Chairman of Nuvectra Corp., and he previously served as a director for Greatbatch, Inc. He holds a doctorate
degree in Chemistry from Penn State University.
Mr. Ronald A. Bucchi. Mr. Ronald A. Bucchi has served as a director of our Company since June 11, 2012, and he
currently serves a Chair of our Audit Committee. Mr. Bucchi is currently a self-employed C.P.A., CGMA with a specialized
practice that concentrates in CEO consulting, strategic planning, mergers, acquisitions, business sales and tax. He works with
domestic and international companies. Mr. Bucchi is a former member of the board of directors of First Connecticut Bancorp,
Inc., having served as Lead Director, Chair of the Audit Committee, Governance Chairman and a member of the Asset
Liability Committee and Loan Committee. The Bank sold in September of 2018. He is currently a member of the Advisory
Board of Baker Street Scientific, Inc., the Treasurer and a member of the Board of Directors of the Petit Family Foundation,
Inc. and the Farmington Bank Foundation, Inc. He has served on numerous other community boards and is past Chairman of
the Wheeler Clinic and the Wheeler YMCA. He is a member of the Connecticut Society of Certified Public Accountants,
American Institute of Certified Public Accountants, Chartered Global Management Accountant and the National Association
of Corporate Directors. Mr. Bucchi is a graduate of the Harvard Business School Executive Education program with
completed course studies in general board governance, audit and compensation and a graduate of Central Connecticut State
University where he received his B.S. in Accounting.
Mr. Siraj Nour El-Ahmadi. Mr. El-Ahmadi has served as a director of our Company since October 2, 2013, and he
currently serves a member of our Audit Committee. Since 2004, Mr. El-Ahmadi has served as Founder, President and Chief
Executive Officer of Menara Networks, a developer of innovative products and solutions that simplify layered optical
transport networks. Mr. El-Ahmadi has over 17 years of experience in optical transmission in particular and the telecom
industry in general. Prior to founding Menara, Mr. El-Ahmadi served as Vice President-Marketing & Product Management at
Nortel where he was responsible for the OPTera LH 4000 ULR product (acquired from Qtera) that achieved over $200M in
revenues in its first two years. Prior to that, Mr. El-Ahmadi was the Product Architect & Vice President of Product
Management at Qtera Corporation, a successful technology start-up acquired by Nortel in 2000 for $3.25 billion. Mr. El-
Ahmadi also held a Senior Manager position at Bell Northern Research and worked as a Transmission Engineer at WilTel
(WorldCom) where he evaluated and deployed the world first bidirectional EDFA and bi-directional WDM transmission.
Mr. El-Ahmadi holds a BS and MS in Electrical Engineering from the University of Oklahoma, is a member of Eta Kappa
Nu and is the inventor of 11 patents, issued or pending, in the area of optical communications. He has authored a number of
publications and is a frequent speaker at telecom and optical networking events and conferences.
47
Dr. Frederick J. Leonberger. Dr. Leonberger has served as a director of our Company since April 1, 2017. Since
2010, Dr. Leonberger has served as the Principal of EOvation Advisors LLC, a private technology and business advisory firm
and presently serves as a board member for various private photonics companies. Dr. Leonberger is a widely known
technologist and industry leader in the field of photonics and fiber optics. For nearly 40 years he has been a leading
contributor to the development of a variety of important optical devices, company leadership, product and business strategy,
and commercialization. The integrated optical modulator technology he and his colleagues pioneered has been used
pervasively for over 20 years to encode data at multi-Gb/s rates in long-haul fiber optic networks (the Internet
"superhighways"). He previously served as senior vice president and chief technology officer of JDS Uniphase Corporation
(JDSU, now Lumentum), a leading optical components company, from 1995 until his retirement in 2003, where he played a
lead role in technology strategy, mergers and acquisitions and intellectual property activities. Prior to JDSU, he was co-
founder and general manager of United Technologies Photonics (UTP), a high-speed optical modulator company, and held
research management positions at United Technologies Research Center (UTRC) and MIT Lincoln Laboratory. He is a
member of the National Academy of Engineering and the recipient of several industry awards.
The Board of Directors believes that each of the Directors named above has the necessary qualifications to be a
member of the Board of Directors. Each Director has exhibited during his prior service as a director the ability to operate
cohesively with the other members of the Board of Directors. Moreover, the Board of Directors believes that each director
brings a strong background and skill set to the Board of Directors, giving the Board of Directors as a whole competence and
experience in diverse areas, including corporate governance and board service, finance, management and industry experience.
Our bylaws provide that the number of directors who constitute our Board of Directors is determined by resolution
of the Board of Directors, but the total number of directors constituting the entire Board of Directors shall not be less than
three or more than nine. Our Board of Directors currently consists of seven directors. Our Board of Directors is divided into
three classes, as nearly equal in number as possible, designated: Class I, Class II and Class III, with staggered terms and with
each director serving for a term ending on the date of the third annual meeting following the annual meeting at which such
director was elected; provided that the term of each director shall continue until the election and qualification of a successor
and be subject to such director's earlier death, resignation or removal.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers and directors, and persons
who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in
ownership with the SEC. Executive officers, directors and greater-than-ten percent stockholders are required by SEC
regulations to furnish us with all Section 16(a) forms they file. To the best of our knowledge, based solely upon a review of
Forms 3 and 4 and amendments thereto furnished to our Company during its most recent fiscal year and Forms 5 and
amendments thereto furnished to our Company with respect to its most recent fiscal year, and any written representation
referred to in paragraph (b)(1) of Item 405 of Regulation S-K, all of our executive officers, directors and greater-than-ten
percent stockholders complied with all Section 16(a) filing requirements.
Code of Ethics
Our Company has adopted a Code of Ethics and Business Conduct that applies to all of the Company’s employees,
including its principal executive officer and principal financial officer. A copy of our Code of Ethics and Business Conduct is
available for review on the “Investors - Governance” page of our Company’s website www.lightwavelogic.com. The
Company intends to disclose any changes in or waivers from its Code of Ethics and Business Conduct by posting such
information on its website.
Nominating Committee
Our Board of Directors does not have a nominating committee. This is due to our development stage and smaller
sized Board of Directors. Instead of having such a committee, our entire Board of Directors historically has searched for and
evaluated qualified individuals to become nominees for membership on our Board of Directors. No material changes to the
procedures by which our stockholders may recommend nominees to our Board of Directors has occurred since we last
provided disclosure regarding these procedures in our Definitive Schedule 14A filed on April 13, 2018.
48
Audit Committee
Our Company has
in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. Our audit committee is governed by an audit
committee charter. A copy of our Audit Committee Charter is available for review on the “Investors - Governance” page of
our Company’s website www.lightwavelogic.com.
in place a separately designated standing audit committee
Our audit committee has reviewed and discussed the audited financial statements with management and has
discussed with its independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61,
as amended (AICPA, Professional Standards, Vol. 1, AU section 380) as adopted by the Public Company Accounting
Oversight Board in Rule 3200T. The audit committee has received the written disclosures and the letter from its independent
accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the
independent accountant’s communications with the audit committee concerning independence, and has discussed with its
independent accountant the independent accountant’s independence. Based on the review and discussions described above,
the audit committee recommended to the Board of Directors that the audited financial statements be included in our Annual
Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission.
Our audit committee is comprised of Ronald A. Bucchi and Siraj Nour El-Ahmadi. Mr. Bucchi serves as our audit
committee financial expert as that term is defined by the rules promulgated by the Securities and Exchange Commission. Mr.
Bucchi is an independent director, as defined below in Certain Relationships and Related Transactions, and Director
Independence.
Item 11.
Executive Compensation.
Compensation Discussion and Analysis
The Company’s entire Board of Directors currently participates in the review and determination of the compensation
packages of our executive officers because our Board of Directors currently has no standing compensation committee or
committee performing similar functions. A discussion of the policies and decisions that shape our executive compensation
program, including the specific objectives and elements, is set forth below.
Executive Compensation Objectives and Philosophy
The objective of our executive compensation program is to attract, retain and motivate talented executives who are
critical for the continued growth and success of our Company and to align the interests of these executives with those of our
shareholders. To this end, our compensation programs for executive officers are designed to achieve the following objectives:
•
•
•
•
•
•
•
•
attract talented and experienced executives to join the company;
motivate, reward and retain executives whose knowledge, skills and performance are critical to our success;
be “market-based” and reflect the competitive environment for personnel;
focus executive behavior on achievement of our corporate mission and long-term corporate objectives and
strategy;
be affordable, within the context of our operating expense model;
be fairly and equitably administered;
reflect our values; and
align the interests of management and shareholders by providing management with longer-term incentives
through equity ownership.
The Board of Directors reviews the allocation of compensation components regularly to help ensure alignment with
strategic and operating goals, competitive market practices and our changing business needs. The Board of Directors focuses
on simplicity and flexibility wherever possible. The Board of Directors does not apply a specific formula to determine the
allocation between cash and non-cash forms of compensation. Certain compensation components, such as base salaries,
benefits and perquisites, are intended primarily to attract and retain qualified executives. Other compensation elements, such
as long-term incentive opportunities, are designed to motivate and reward our long-term performance and to strongly align
named executive officers' interests with those of shareholders.
49
Elements of Executive Officer Compensation
The primary elements of our executive officer compensation program are: (i) annual base salary; and (ii) long-term
equity incentive compensation in the form of stock option grants, with the objective of aligning the executive officers' long-
term interests with those of the shareholders.
In establishing overall executive compensation levels and making specific compensation decisions for the executives
in 2018, the Board of Directors considered a number of criteria, including the executive's position, any applicable
employment agreement, prior compensation levels, scope of responsibilities, prior and current period performance,
attainment of individual and overall company performance objectives and retention concerns. In addition, the Board of
Directors considered the results of the advisory vote by shareholders on the "say-on-pay" proposal presented to shareholders
at the Company’s 2018 Annual Meeting of Shareholders where approximately 96% of the votes cast on the “say-on-pay”
proposal was voted for approval of the 2017 executive compensation. In determining our 2018 executive compensation
program, the Board of Directors reviewed the results of the say-on-pay vote and concluded that changes to the program were
not desired by our shareholders for 2018. Therefore, our 2018 executive compensation approach was overall generally in line
with the executive officer compensation approach previously approved by our shareholders.
The Board of Directors performs a review of compensation for our executive officers annually. As part of this
review, the Board of Directors takes into consideration its understanding of external market data, including companies
competing in our industry. The Board of Directors does not engage independent consultants to perform an analysis of the
current compensation program.
Generally, our Board of Directors reviews and approves compensation arrangements for executive officers annually
and in connection with the hiring of new executives. We do not have any formal or informal policy regarding compensation
arrangements for executive officers. Instead, the Board of Directors determines what it believes to be the appropriate level
and mix of the various compensation components based on recommendations from our chief executive officer, Company
performance against stated objectives and individual performance.
In considering compensation of executives, one of the factors the Board of Directors takes into account is the
anticipated tax treatment of various components of compensation. Our Board’s strategy is to be cost and tax efficient and the
Board intends to preserve corporate tax deductions where possible, while maintaining the flexibility in the future to approve
arrangements that it deems to be in our best interests and the best interests of our shareholders, even if such arrangements do
not always qualify for full tax deductibility. We do not believe Section 162(m) of the Internal Revenue Code, which
generally disallows a tax deduction for certain compensation in excess of $1 million to our named executive officers, will
have a material effect on us due to the current compensation levels of named executive officers.
Base Salary
Base salaries are reviewed at least annually by our Board of Directors and may be adjusted from time to time based
upon market conditions, individual responsibilities and Company and individual performance. We believe that a competitive
base salary is a necessary element of any compensation program that is designed to attract and retain talented and
experienced executives. We also believe that attractive base salaries can motivate and reward executives for their overall
performance. Base salaries are established in part based on the individual experience, skills and expected contributions of our
executives and our executives' performance during the prior year, in addition to affordability within the context of our
operating expense model.
Annual Non-Equity Incentive Compensation
Annual non-equity incentive compensation is typically not included as part of our named executive compensation
given that our Company is in the development stage.
50
Long-term Equity Incentive Compensation
Long-term incentive compensation allows the executive officers to share in any appreciation in the value of our
common stock. The Board of Directors believes that stock option participation aligns executive officers' interests with those
of the shareholders. The amounts of the awards are designed to reward past performance, create incentives to meet long-term
objectives and ensure that we retain executive talent over a longer period of time. Awards are based upon various factors,
including market conditions and incentives given by other companies in our industry.
Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed
exercise price, and stock option vest over time, subject to continued employment with our company over the vesting period.
Stock options generally vest quarterly over a period of one year. All stock options have an exercise price equal to fair market
value of our common stock on the date of grant, which is equal to our closing market price on such date.
Severance and Change in Control Benefits
Pursuant to employment agreements we have entered into with our executives and the terms of our 2016 Equity
Incentive Plan, our executives are entitled to certain benefits in the event of a change in control of our Company or the
termination of their employment under specified circumstances, including termination following a change in control. We
believe these benefits help us compete for and retain executive talent and are generally in line with severance packages
offered to executives by the companies in our peer group. We also believe that these benefits would serve to minimize the
distraction caused by any change in control scenario and reduce the risk that key talent would leave the Company before any
such transaction closes, which could reduce the value of the Company if such transaction failed to close.
Other Compensation
Generally, benefits available to executive officers are available to all employees on similar terms and include health
and welfare benefits, disability benefits and a 401(k) plan.
We provide the benefits above to attract and retain our executive officers by offering compensation that is
competitive with other companies similar in size and stage of development. These benefits represent a relatively small
portion of their total compensation.
The table below summarizes all compensation awarded to, earned by, or paid to our named executive officers for the
fiscal years ended December 31, 2018 and 2017.
Name and Principal Position
(a)
Dr. Michael S. Lebby(4)
CEO; Director
James S. Marcelli
President; COO; Sec., Director
Summary Compensation Table
Year
(b)
2018
2017
2018
2017
Salary
($)
(c)(1)
Bonus
($)
(d)
Stock
Awards
($)
(e)(2)
Option
Awards
($)
(f)(2)
All Other
Compensation
($)
(g)(3)
265,000 —
176,667 —
—
8,000
38,448
305,662
250,000 —
241,667 —
—
—
—
—
2,840
29,893
2,355
2,282
Total
($)
(h)
306,288
520,222
252,355
243,949
(1) The named executive officer’s compensation includes the amount for services rendered to the Company in his capacity
as both an officer and a director.
(2) The aggregate fair value of awards and options in columns (e) and (f) are computed in accordance with FASB ASC
718. The amounts shown in columns (f) do not reflect dollar amounts actually received by our named executive
officers.
(3) The amount in column (g) reflects a salary gross up for long term disability premium payments.
(4) Dr. Lebby became our Chief Executive Officer on May 1, 2017. The amounts in column (e) and (g) for 2017 include
compensation for serving on the Operations Committee of the Board of Directors in the amounts of $8,000 and
$28,000, respectively. Dr. Lebby resigned from the Operations Committee of the Board of Directors effective April 30,
2017. The amount in column (g) also includes a salary gross up for long term disability premium payments of $1,893.
At no time during the last fiscal year was any outstanding option otherwise modified or re-priced, and there was no
tandem feature, reload feature, or tax-reimbursement feature associated with any of the stock options we granted to our
executive officers or otherwise.
51
We grant stock awards and stock options to our executive officers based on their level of experience and
contributions to our Company. The aggregate fair value of awards and options are computed in accordance with FASB ASC
718 and are reported in the Summary Compensation Table above in the columns (e) and (f).
No plan-based awards were granted to our named executive officers:
The table below summarizes all of the outstanding equity awards for our named executive officers as of
December 31, 2018, our latest fiscal year end.
Outstanding Equity Awards At Fiscal Year-End
Number of
securities
underlying
unexercised
options(#)
exercisable
(b)
200,000
50,000
50,000
350,000
50,000
1,150,000
100,000
Number of
securities
underlying
unexercised
options(#)
unexercisable
(c)
—
—
—
—
—
—
—
Option Awards
Equity incentive
plan awards:
number of
securities
underlying
unexercised
unearned
options
(#)
(d)
—
—
—
—
—
—
—
Option
exercise
price
($)
(e)
0.69
0.68
0.85
0.70
0.67
0.70
1.00
Option
expiration
date
(f)
08/25/25
01/28/26
01/16/27
03/19/27
08/09/25
06/30/25
05/16/23
Name
(a)
Dr. Michael S. Lebby
CEO, Director(1)(3)
James S. Marcelli
President, COO, Sec.,
Director(2)(3)
(1) Dr. Lebby received an option to purchase up to: (i) 200,000 shares of common stock, of which 50,000 shares vested on
August 26, 2015 and the remaining shares vest in equal annual installments of 50,000 options per year commencing on
August 26, 2016; (ii) 50,000 shares of common stock, of which 20,000 shares vested on February 11, 2016 and the
remaining shares vested quarterly in equal installments of 10,000 options per quarter commencing on April 1, 2016;
(iii) 50,000 shares of common stock, of which 20,000 shares vested on January 17, 2017 and the remaining shares
vested quarterly in equal installments of 10,000 options per quarter commencing on April 1, 2017; (iv) 350,000 shares
of common stock, which vest quarterly over one year in equal installments of 87,500 shares per quarter beginning May
1, 2017.
(2) Mr. Marcelli received an option to purchase up to (i) 50,000 shares of common stock, of which 12,500 shares vested on
August 10, 2015 and the remaining shares vested quarterly in equal installments of 12,500 shares; (ii) 1,150,000 shares
of common stock at an exercise price of $.70 that vested immediately; and (iii) up to 100,000 shares of common stock,
of which 25,000 shares vested on August 1, 2013 and the remaining shares vested quarterly in equal installments of
25,000 shares commencing on October 1, 2013.
In the event of a change in control of our Company, such person’s options shall remain exercisable as set forth in their
stock option agreement.
(3)
Option Exercises and Stock Vested
No stock options, SARs and similar instruments were exercised, and no stock, including restricted stock, restricted
stock units and similar instruments vested, by or for any of our named executive officer during the last completed fiscal year.
52
Pension Benefits-Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation
No pension benefits were paid to any of our named executive officers during the last completed fiscal year. We do not
currently sponsor any non-qualified defined contribution plans or non-qualified deferred compensation plans.
Employee, Severance, Separation and Change in Control Agreements
Dr. Michael S. Lebby Employee Agreement- Chief Executive Officer
On March 20, 2017, we entered into an employment agreement with Dr. Michael S. Lebby (the “Lebby
Employment Agreement”). The term of the Lebby Employment Agreement commenced on May 1, 2017 for a period of 24
months, following which time the Lebby Employment Agreement will be renewed for successive 12-month periods at the
end of each term upon the written agreement of the parties that shall be delivered by each party to the other not less than 60
days prior to the expiration of the existing term. Pursuant to the Lebby Employment Agreement, Dr. Lebby’s 2017 base
compensation was $265,000 per year. Upon entering into the Lebby Employment Agreement, Dr. Lebby was granted (i)
350,000 stock options, which have an exercise price of $0.70 per share and are fully vested at this time. In the event of a
change in control of our Company, Dr. Lebby’s options shall remain exercisable as set forth in Dr. Lebby’s stock option
agreement.
If Dr. Lebby’s employment terminates upon the expiration of the term of the Lebby Employment Agreement, and
the Company elects for any reason not to renew the Lebby Employment Agreement for an additional 12-month term, then our
Company will continue to pay to Dr. Lebby the compensation described in the Lebby Employment Agreement for a period of
9 months the after the termination. If Dr. Lebby’s employment is terminated by the Company without cause during the term
of the Lebby Employment Agreement, the Company will pay to Dr. Lebby’s the compensation described in the Lebby
Employment Agreement for the remainder of the term of Lebby Employment Agreement or 12 months, whichever is longer.
Mr. James S. Marcelli Employee Agreement- President; Chief Operating Officer
On August 10, 2015, we entered into a new employment agreement with Mr. Marcelli, which was amended during
2015 and 2017 (collectively, the “Marcelli Employment Agreement”), which replaced his previous employment agreement,
as amended. The term of the Marcelli Employment Agreement commenced on January 1, 2014 and expires December 31,
2019, following which time the Marcelli Employment Agreement will be renewed for successive 12-month periods at the end
of each term upon the written agreement of the parties that shall be delivered by each party to the other not less than 60 days
prior to the expiration of the existing term. Pursuant to the Marcelli Employment Agreement, Mr. Marcelli’s 2017 base
compensation was $250,000 per year. Upon entering into the Marcelli Employment Agreement, Mr. Marcelli was granted (i)
50,000 stock options, which have an exercise price of $0.67 per share and are fully vested at this time. In the event of a
change in control of our Company, Mr. Marcelli’s options shall remain exercisable as set forth in Mr. Marcelli’s stock option
agreement.
If Mr. Marcelli’s employment terminates upon his death and key man life insurance is in place for Mr. Marcelli, our
Company will continue to pay the compensation described in the Marcelli Employment Agreement to his estate through the
remainder of the term of the Marcelli Employment Agreement, or 12 months, whichever is longer. If Mr. Marcelli’s
employment terminates upon the expiration of the term of the Marcelli Employment Agreement, and the Company elects for
any reason not to renew the Marcelli Employment Agreement for an additional 12-month term, then our Company will
continue to pay to Mr. Marcelli the compensation described in the Marcelli Employment Agreement for a period of 9 months
the after the termination. If Mr. Marcelli’s employment is terminated by the Company without cause during the term of the
Marcelli Employment Agreement, the Company will pay to Mr. Marcelli the compensation described in the Marcelli
Employment Agreement for the remainder of the term of Marcelli Employment Agreement or 12 months, whichever is
longer.
53
Compensation of Directors
Set forth below is a summary of the compensation of our directors during our December 31, 2018 fiscal year.
Fees Earned
or Paid in
Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive
Plan Compensation
($)
Non-Qualified
Deferred
Compensation
Earnings
($)
All
Other
Compensation
($)
Name
Michael Lebby (1)
Thomas E. Zelibor (2)
James S. Marcelli (3)
William C. Pickett, III (4)
Joseph A. Miller (5)
Ronald A. Bucchi (6)
Siraj Nour El-Ahmadi (7)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
34,530
—
27,586
34,530
34,530
34,530
Frederick Leonberger (8)
$108,000 —
57,659
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
—
34,530
—
27,586
34,530
34,530
34,530
165,659
(1) Dr. Lebby serves as an executive officer and a director but receives no additional compensation for serving as a
director.
(2) On January 22, 2018, Mr. Zelibor received an option to purchase up to up to 50,000 shares of common stock at an
exercise price of $1.22 that vest pursuant to the following schedule: 20,000 shares vested immediately; and the
remaining options vest in 3 equal quarterly installments of 10,000 options per year commencing on April 1, 2018.
(3) Mr. Marcelli serves as an executive officer and a director but receives no additional compensation for serving as a
director.
(4) Mr. Pickett served as a director until August 15, 2018. On January 22, 2018, Mr. Pickett received an option to purchase
up to 50,000 shares of common stock at an exercise price of $1.22 that vest pursuant to the following schedule: 20,000
shares vested immediately; and the remaining options vest in 3 equal quarterly installments of 10,000 options per year
commencing on April 1, 2018.
(5) On January 22, 2018, Dr. Miller received an option to purchase up to up to 50,000 shares of common stock at an
exercise price of $1.22 that vest pursuant to the following schedule: 20,000 shares vested immediately; and the
remaining options vest in 3 equal quarterly installments of 10,000 options per year commencing on April 1, 2018.
(6) On January 22, 2018, Mr. Bucchi received an option to purchase up to up to 50,000 shares of common stock at an
exercise price of $1.22 that vest pursuant to the following schedule: 20,000 shares vested immediately; and the
remaining options vest in 3 equal quarterly installments of 10,000 options per year commencing on April 1, 2018.
(7) On January 22, 2018, Mr. El-Ahmadi received an option to purchase up to up to 50,000 shares of common stock at an
exercise price of $1.22 that vest pursuant to the following schedule: 20,000 shares vested immediately; and the
remaining options vest in 3 equal quarterly installments of 10,000 options per year commencing on April 1, 2018.
(8) During 2018, Dr. Leonberger received $108,000 in cash compensation for serving on our Operations Committee. On
January 22, 2018, Dr. Leonberger received an option to purchase up to up to 50,000 shares of common stock at an
exercise price of $1.22 that vest pursuant to the following schedule: 20,000 shares vested immediately; and the
remaining options vest in 3 equal quarterly installments of 10,000 options per year commencing on April 1, 2018.
In the event of a change in control of our Company, all of the above person’s options become fully vested and/or
exercisable, as the case may be, immediately prior to such change in control, and shall remain exercisable as set forth in their
stock option agreement.
Compensation Policies and Practices as They Relate to Our Risk Management
No risks arise from our Company’s compensation policies and practices for our employees that are reasonably likely
to have a material adverse effect on our Company.
54
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of March 15, 2018, the names, addresses, amount and nature of beneficial
ownership and percent of such ownership of each person or group known to our Company to be the beneficial owner of more
than five percent (5%) of our common stock:
Security Ownership of Certain Beneficial Owners
Name and Address of Beneficial Owner (1)
Amount and Nature
of Beneficial Ownership (2)
% of Class Owned (3)
Mary Goetz
4,517,306
5.59%
In care of our Company at 369 Inverness Parkway, Suite 350, Englewood, CO 80112.
(1)
(2) To our best knowledge, as of the date hereof, such holders had the sole voting and investment power with respect to
the voting securities beneficially owned by them, unless otherwise indicated herein. Includes the person's right to
obtain additional shares of common stock within 60 days from the date hereof.
(4) Based on 80,759,209 shares of common stock outstanding on March 15, 2018. Does not include shares underlying: (i)
options to purchase shares of our common stock under our 2007 Employee Stock Plan and our 2016 Equity Incentive
Plan; or (ii) outstanding warrants to purchase shares of our common stock.
The following table sets forth, as of March 15, 2018, the names, addresses, amount and nature of beneficial
ownership and percent of such ownership of our common stock of each of our officers and directors, and officers and
directors as a group:
Security Ownership of Management
Name and Address (1)
Michael Lebby
Chief Executive Officer, Principal Executive Officer and Director
James S. Marcelli
President, Chief Operating Officer, Principal Financial Officer,
Secretary and Director
Thomas E. Zelibor
Chair of the Board of Directors
Joseph A. Miller, Jr.
Director
Ronald A. Bucchi
Director
Siraj Nour El-Ahmadi
Director
Frederick Leonberger
Director
Directors and Officers as a Group (7 Persons):
———————
* Less than 1%.
Amount and Nature
of Beneficial Ownership (2)
712,643 (5)
% Owned (3)(4)
*
1,553,400 (6)
1,401,824 (7)
506,800 (8)
827,400 (9)
480,000 (10)
955,000 (11)
1.92%
1.73%
*
1.02
*
1.18
6,437,067
7.97%
In care of our Company at 369 Inverness Parkway, Suite 350, Englewood, CO 80112.
(1)
(2) To our best knowledge, as of the date hereof, such holders had the sole voting and investment power with respect to the
voting securities beneficially owned by them, unless otherwise indicated herein. Includes the person's right to obtain
additional shares of common stock within 60 days from March 15, 2019.
(3) Based on 80,759,209 shares of common stock outstanding on March 15, 2019. Does not include shares underlying: (i)
options to purchase shares of our common stock under our 2007 Employee Stock Plan and our 2016 Equity Incentive
Plan and (ii) outstanding warrants to purchase shares of our common stock.
If a person listed on this table has the right to obtain additional shares of common stock within 60 days from March 15,
2019, the additional shares are deemed to be outstanding for the purpose of computing the percentage of class owned
by such person but are not deemed to be outstanding for the purpose of computing the percentage of any other person.
(4)
(5) Consists of 62,643 shares of common stock and an option to purchase up to 650,000 shares of common stock
exercisable within 60 days from March 15, 2019.
55
(6) Consists of 246,700 shares of common stock, an option to purchase up to 1,300,000 shares of common stock
exercisable within 60 days from March 15, 2019, and a warrant to purchase up to 6,700 shares of common stock
exercisable within 60 days from March 15, 2019.
(7) Consists of 50,124 shares of common stock, an option to purchase up to 1,345,000 shares of common stock exercisable
within 60 days from March 15, 2019 and a warrant to purchase up to 6,700 shares of common stock exercisable within
60 days from March 15, 2019.
(8) Consists of 13,400 shares of common stock, options to purchase up to 480,000 shares of common stock exercisable
within 60 days from March 15, 2019 and warrants to purchase up to 13,400 shares of common stock exercisable within
60 days from March 15, 2019.
(9) Consists of 174,000 shares of common stock, an option to purchase up to 640,000 shares of common stock exercisable
within 60 days from March 15, 2019 and warrants to purchase up to 13,400 shares of common stock exercisable within
60 days from March 15, 2019. Mr. Bucchi disclaims beneficial ownership of 53,000 shares held by his spouse.
(10) Consists of an option to purchase up to 480,000 shares of common stock exercisable within 60 days from March 15,
2019.
(11) Consists of an option to purchase up to 230,000 shares of common stock exercisable within 60 days from March 15,
2019 and warrants to purchase up to 725,000 shares of common stock exercisable within 60 days from March 15, 2019.
We are not aware of any arrangements that could result in a change of control.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding our compensation plans under which our equity securities are authorized for issuance can be
found in Part II –Item 5 of this report.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Dr. Frederick J. Leonberger, through EOvation Advisors LLC, has served as a senior advisor to our Company since
December 2011, with emphasis on modulator/technology development. In December 2017, the Company extended five
separate warrants it previously issued to Dr. Leonberger, each for a period of five additional years. Additional information
regarding Dr. Leonberger’s warrants is described in Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
Policies and Procedures for Related-Party Transactions
Our Company does not have any formal written policies or procedures for related party transactions, however in
practice, our Board of Directors reviews and approves all related party transactions and other matters pertaining to the
integrity of management, including potential conflicts of interest, trading in our securities, or adherence to standards of
business conduct.
Director Independence
Although we are currently traded on the OTCQB Market, our Board of Directors has reviewed each of the Directors’
relationships with the Company in conjunction with NASDAQ Listing Rule 5605(a)(2) that provides that an “independent
director” is ‘a person other than an Executive Officer or employee of the Company or any other individual having a
relationship which, in the opinion of the Company's board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.’ Our Board of Directors has affirmatively determined that
following directors, Joseph A. Miller, Jr., Ronald A. Bucchi, Siraj Nour El-Ahmadi and William C. Pickett III (who served as
a director until August 15, 2018) are (or were) independent directors in that they are independent of management and free of
any relationship that would interfere with their independent judgment as members of our Board of Directors. In making such
determination, our Board of Directors considered the relationships that each such non-employee director has with our
Company and all other facts and circumstances that our Board of Directors deemed relevant in determining their
independence, including the beneficial ownership of our capital stock by each non-employee director. The following
members of our Board of Directors, Thomas E. Zelibor, Dr. Michael Lebby, James S. Marcelli and Frederick J. Leonberger
are not independent directors pursuant to the standards described above.
Our Company does not have a separately designated nominating or compensation committee or committee
performing similar functions; therefore, our full Board of Directors currently serves in these capacities.
Item 14.
Principal Accounting Fees and Services.
Audit Fees.
56
The aggregate fees billed for the years ended December 31, 2018 and December 31, 2017 for professional services
rendered by Morison Cogen, LLP for the audit of the Company’s annual financial statements and review of financial
statements included in the Company’s Form 10-Q or services that are normally provided by Morison Cogen, LLP in
connection with statutory and regulatory filings or engagements were $81,000 for the year ended December 31, 2018 and
$56,675 for the year ended December 31, 2017.
Audit-Related Fees.
Fees billed for the years ended December 31, 2018 and December 31, 2017 for assurance and related services
rendered by Morison Cogen, LLP that are reasonably related to the performance of the audit or review of the Company’s
financial statements and are not reported under the category Audit Fees described above were $0 for the year ended
December 31, 2018 and $0 for the year ended December 31, 2017.
Tax Fees.
Fees billed for the years ended December 31, 2018 and December 31, 2017 for tax compliance services rendered by
Morison Cogen, LLP were $6,000 for the year ended December 31, 2018 and $6,000 for the year ended December 31, 2017.
All Other Fees.
Fees billed for the years ended December 31, 2018 and December 31, 2017 for products and services provided by
Morison Cogen, LLP, other than the services reported in the Audit Fees, Audit-Related Fees, and Tax Fees categories above
were $0 for the year ended December 31, 2018 and $0 for the year ended December 31, 2017.
Audit Committee Pre-Approval Policies.
The Company’s audit committee currently does not have any pre-approval policies or procedures concerning
services performed by Morison Cogen, LLP. All the services performed by Morison Cogen, LLP that are described above
were pre-approved by the Company’s audit committee.
None of the hours expended on Morison Cogen, LLP ‘s engagement to audit the Company’s financial statements
for the years ended December 31, 2018 and December 31, 2017 were attributed to work performed by persons other than
Morison Cogen, LLP’s full-time, permanent employees.
57
Item 15.
Exhibits, Financial Statement Schedules
PART IV
(a)
The following Audited Financial Statements are filed as part of this Form 10-K Report:
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statement of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
(b)
The following exhibits are filed as part of this report.
Exhibit No.
3.1
Description of Exhibit
Articles of Incorporation
3.2
3.3
3.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Certificate of Amendment to Articles of Incorporation
Certificate of Amendment to Articles of Incorporation
Restated Bylaws
Employee Agreement – Michael Lebby
Employee Agreement - James Marcelli
Employee Agreement Amendment - James Marcelli
Employee Agreement – Thomas E. Zelibor
Employment Agreement Amendment - Thomas E.
Zelibor
Employee Agreement Amendment – Thomas E.
Zelibor
Form of Executive Paid Time Off Waiver Agreement
Form of Director Agreement
Form of Director Indemnification Agreement
Form of Director’s Non-Disclosure Agreement
Operations Committee Charter
Statement of Operations Committee Work - Michael
Lebby
10.13
Statement of Operations Committee Work - Frederick
J. Leonberger
10.14
Consulting Agreement - EOvation Advisors, LLC
10.15
dated December 26, 2016
2007 Employee Stock Plan
58
Location
Incorporated by reference to Company’s Form 10-
SB as filed with the SEC on April 13, 2007
Incorporated by reference to Company’s Definitive
Schedule 14C Information Statement as filed with
the SEC on February 19, 2008
Incorporated by reference to Company’s Form S-1
Registration Statement as filed with the SEC on
August 3, 2015
Incorporated by reference to the Company's Form
10-K as filed with the SEC on March 16, 2018
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on March 22, 2017
Incorporated by reference to Company’s Form 10-Q
as filed with the SEC on August 12, 2015
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on March 22, 2017
Incorporated by reference to the Company’s Form
8-K as filed with the SEC on March 5, 2014
Incorporated by reference to the Company’s
Quarterly Report on Form 10-Q as filed with the
SEC on May 14, 2014
Incorporated by reference to the Company's Form
10-Q as filed with the SEC on November 16, 2015
Incorporated by reference to the Company's Form
10-K as filed with the SEC on March 16, 2018
Incorporated by reference to the Company's Form
10-K as filed with the SEC on March 16, 2018
Incorporated by reference to the Company's Form
10-K as filed with the SEC on March 16, 2018
Incorporated by reference to the Company's Form
10-K as filed with the SEC on March 16, 2018
Incorporated by reference to the Company's Form
10-Q as filed with the SEC on August 15, 2016
Incorporated by reference to the Company's Form
8-K as filed with the SEC on August 27, 2015
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on April 3, 2017
Incorporated by reference to the Company’s Form
S-1 as filed with the SEC on April 19, 2017
Incorporated by reference to Company’s Definitive
Schedule 14C Information Statement as filed with
the SEC on February 19, 2008
Incorporated by reference to Company’s Definitive
Schedule 14A Proxy Statement as filed with the
SEC on June 16, 2010
Incorporated by reference to the Company’s
Definitive Schedule 14A Proxy Statement as filed
with the SEC on August 8, 2012
Incorporated by reference to Company’s Definitive
Schedule 14A Proxy Statement as filed with the
SEC on July 22, 2014
Incorporated by reference to Appendix A to the
Company's Definitive Schedule 14A filed with the
SEC on April 20, 2016
Incorporated by reference to the Company’s Annual
Report on Form 10-K as filed with the SEC on
March 17, 2017
Incorporated by reference to the Company’s Annual
Report on Form 10-K as filed with the SEC on
March 17, 2017
Incorporated by reference to the Company’s Annual
Report on Form 10-K as filed with the SEC on
March 17, 2017
Incorporated by reference to the Company’s Form
8-K as filed with the SEC on December 12, 2013
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on November 2, 2017
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on November 2, 2017
Incorporated by reference to the Company's Form
8-K as filed with the SEC on February 1, 2016
Incorporated by reference to the Company's Form
8-K as filed with the SEC on February 1, 2016
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on June 15, 2018
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on January 22, 2019
Incorporated by reference to the Company’s
Current Report on Form 8-K as filed with the SEC
on January 22, 2019
Incorporated by reference to the Company's Form
10-K as filed with the SEC on March 16, 2018
10.16
2007 Employee Stock Plan Amendment
10.17
2007 Employee Stock Plan Amendment
10.18
2007 Employee Stock Plan Amendment
10.19
2016 Equity Incentive Plan
10.20
Form of Non-qualified Stock Option Award
Agreement - Employees
10.21
Form of Non-qualified Stock Option Award
Agreement - Executive Officers
10.22
Form of Non-qualified Stock Option Award
Agreement - Non Employee Directors
10.23
10.24
Lease Agreement - Longmont, CO Facility
Lease Agreement – Englewood, CO. Facility
10.25
Agreement - Atotech USA, LLC
10.26
10.27
10.28
10.29
10.30
10.31
14.1
23.1
31.1
31.2
Purchase Agreement, dated as of January 29, 2016, by
and between the Company and Lincoln Park Capital
Fund, LLC
Registration Rights Agreement, dated as of January
29, 2016, by and between the Company and Lincoln
Park Capital Fund, LLC
Asset Purchase Agreement dated June 11, 2018, by
and among the Company and BrPhotonics, et. al.
Purchase Agreement dated as of January 21, 2019, by
and between the Company and Lincoln Park Capital
Fund, LLC
Registration Rights Agreement, dated as of January
21, 2019, by and between the Company and Lincoln
Park Capital Fund, LLC
Code of Ethics and Business Conduct
Consent of Independent Registered Public Accounting
Filed herewith
Firm - Morison Cogen LLP
Certification pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended,
executed by the Principal Executive Officer of the
Company.
Certification pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended,
executed by the Principal Financial Officer of the
Company.
Filed herewith
Filed herewith
59
32.1
32.2
101
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, executed by the Principal
Executive Officer of the Company.
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, executed by the Principal
Financial Officer of the Company.
XBRL data files of Financial Statements and Notes
contained in this Annual Report on Form 10-K
Furnished herewith
Furnished herewith
Item 16.
Form 10-K Summary
None
60
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
LIGHTWAVE LOGIC, INC.
Registrant
By:
/s/ Michael Lebby
Michael Lebby,
Chief Executive Officer
(Principal Executive Officer)
Date: March 18, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
Chief Executive Officer, Principal Executive Officer,
March 18, 2019
Director
President, Chief Operating Officer, Principal Financial
March 18, 2019
Officer, Secretary, Director
Chair of the Board of Directors
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
/s/ Michael Lebby
Michael Lebby
/s/ James S. Marcelli
James S. Marcelli
/s/ Thomas E. Zelibor
Thomas E. Zelibor
/s/ Joseph A. Miller
Joseph A. Miller
/s/ Ronald A. Bucchi
Ronald A. Bucchi
Director
Director
/s/ Siraj Nour El-Ahmadi
Siraj Nour El-Ahmadi
Director
/s/ Frederick J. Leonberger
Frederick J. Leonberger
Director
61
LIGHTWAVE LOGIC, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENT OF STOCKHOLDERS' EQUITY
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
PAGE
F-2 - F-3
F-4
F-5
F-6
F-7
F-8 - F-18
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Lightwave Logic, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying balance sheets of Lightwave Logic, Inc. (the Company) as of December 31, 2018 and
2017, and the related statements of operations, stockholders’ equity, and cash flows for each of the two years in the period
ended December 31, 2018, and the related notes (collectively referred to as the financial statements). We also have audited
the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in
the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued
by COSO.
Basis for Opinion
The Company’s management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
F-2
To the Board of Directors and
Stockholders of Lightwave Logic, Inc.
(Continued)
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Morison Cogen LLP
We have served as the Company’s auditor since 2005.
Blue Bell, Pennsylvania
March 18, 2019
F-3
LIGHTWAVE LOGIC, INC.
BALANCE SHEETS
CURRENT ASSETS
Cash and cash equivalents
Prepaid expenses and other current assets
ASSETS
PROPERTY AND EQUIPMENT - NET
OTHER ASSETS
Intangible assets - net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Current portion of equipment purchase
Accounts payable and accrued expenses - related parties
Accrued expenses
December 31,
2018
December 31,
2017
$ 2,174,625 $ 3,482,327
584,919
4,067,246
337,631
2,512,256
1,800,769
1,176,749
938,239
605,775
$ 5,251,264 $ 5,849,770
$
150,741 $
178,482
13,824
1,155
344,202
54,208
493,597
8,770
92,186
648,761
LONG TERM EQUIPMENT PURCHASE - NET OF CURRENT PORTION
—
184,294
TOTAL LIABILITIES
344,202
833,055
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 1,000,000 authorized,
no shares issued or outstanding
Common stock $0.001 par value, 250,000,000 authorized,
79,176,330 and 74,068,259 issued and outstanding at
December 31, 2018 and December 31, 2017
Additional paid-in-capital
Accumulated deficit
TOTAL STOCKHOLDERS' EQUITY
—
—
79,177
74,068
62,356,854 56,698,658
(57,528,969 ) (51,756,011 )
4,907,062
5,016,715
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 5,251,264 $ 5,849,770
The accompanying notes are an integral part of these financial statements.
F-4
LIGHTWAVE LOGIC, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDING DECEMBER 31, 2018 AND 2017
NET SALES
COST AND EXPENSE
Research and development
General and administrative
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSE)
Interest income
Commitment fee
NET LOSS
Basic and Diluted Loss per Share
For the
For the
Year Ending Year Ending
December 31,
2018
December 31,
2017
$
— $
—
3,794,565
1,806,451
5,601,016
3,519,129
2,004,409
5,523,538
(5,601,016 )
(5,523,538 )
250
(172,192 )
250
(226,094 )
$ (5,772,958 ) $ (5,749,382 )
$
(0.08 ) $
(0.08 )
Basic and Diluted Weighted Average Number of Shares
76,395,750 70,876,576
The accompanying notes are an integral part of these financial statements.
F-5
LIGHTWAVE LOGIC, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDING DECEMBER 31, 2018 AND 2017
Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
BALANCE AT DECEMBER 31, 2016
68,077,288 $
68,078 $
48,998,073 $
(46,006,629 ) $
3,059,522
Common stock issued to institutional investor
Common stock issued for additional commitment shares
Exercise of warrants
Common stock issued for services
Options issued for services
Warrants issued for services
Net loss for the year ending December 31, 2017
5,300,000
185,974
469,000
35,997
—
—
—
5,300
186
469
35
—
—
—
5,716,760
225,907
502,031
44,215
794,738
416,934
—
—
—
—
—
—
—
(5,749,382 )
5,722,060
226,093
502,500
44,250
794,738
416,934
(5,749,382 )
BALANCE AT DECEMBER 31, 2017
74,068,259 $
74,068 $
56,698,658 $
(51,756,011 ) $
5,016,715
Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
BALANCE AT DECEMBER 31, 2017
74,068,259 $
74,068 $
56,698,658 $
(51,756,011 ) $
5,016,715
Common stock issued to institutional investor
Common stock issued for additional commitment shares
Exercise of options
Exercise of warrants
Options issued for services
Warrants issued for services
Net loss for the year ending December 31, 2018
4,750,000
158,071
100,000
100,000
—
—
—
4,750
159
100
100
—
—
—
4,858,785
172,033
99,900
61,400
387,688
78,390
—
—
—
—
—
—
(5,772,958 )
4,863,535
172,192
100,000
61,500
387,688
78,390
(5,772,958 )
BALANCE AT DECEMBER 31, 2018
79,176,330 $
79,177 $
62,356,854 $
(57,528,969 ) $
4,907,062
The accompanying notes are an integral part of these financial statements.
F-6
LIGHTWAVE LOGIC, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 2018 AND 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Warrants issued for services
Stock options issued for services
Common stock issued for services and fees
Depreciation and amortization and noncash patent expenses
Loss on disposal of property and equipment
(Increase) decrease in assets
Prepaid expenses and other current assets
(Decrease) increase in liabilities
Accounts payable
Accounts payable and accrued expenses-related parties
Accrued expenses
For the
For the
Year Ending Year Ending
December 31,
2018
December 31,
2017
$ (5,772,958 ) $ (5,749,382 )
78,390
387,688
172,192
465,795
10,084
416,934
794,738
270,343
325,946
—
247,288
(447,977 )
96,533
5,054
(91,031 )
(10,819 )
3,211
34,886
Net cash used in operating activities
(4,400,965 )
(4,362,120 )
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of intangibles
Purchase of property and equipment
Sale of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of options and warrants
Issuance of common stock, institutional investor
Repayment of equipment purchase payable
Net cash provided by financing activities
(397,479 )
(1,037,384 )
2,500
(81,743 )
(183,789 )
—
(1,432,363 )
(265,532 )
161,500
4,863,535
(499,409 )
502,500
5,722,060
(71,425 )
4,525,626
6,153,135
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,307,702 )
1,525,483
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
3,482,327
1,956,844
CASH AND CASH EQUIVALENTS - END OF YEAR
$ 2,174,625 $ 3,482,327
Supplemental Disclosure of Non-cash investing and financing activities:
Equipment acquisition funded by liability
Common stock for service, paid in advance
$
— $
—
749,316
36,250
The accompanying notes are an integral part of these financial statements.
F-7
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Nature of Business
Lightwave Logic, Inc. is a technology Company focused on the development of next generation photonic devices and non-
linear optical polymer materials systems for applications in high speed fiber-optic data communications and optical
computing markets. Currently the Company is in various stages of photonic device and materials development and evaluation
with potential customers and strategic partners. The Company expects to obtain a revenue stream from datacom and telecom
devices, sales of non-linear optical polymers, and product development agreements prior to moving into full-scale
production.
The Company’s current development activities are subject to significant risks and uncertainties, including failing to secure
additional funding to operationalize the Company’s technology now under development.
Lightwave Logic, Inc., (the “Company”) was organized under the laws of the State of Nevada in 1997 as Eastern Idaho
Internet Service, Inc. The Company was engaged in an unrelated business until June 30, 1998, at which time the principal
assets of that business were sold and operations were discontinued. The Company was inactive until the acquisition of PSI-
TEC Corporation (“PSI-TEC”) on July 14, 2004, which is when the Company commenced with its current business and
changed its name to PSI-TEC Holdings, Inc.
Merger
On July 14, 2004, the Company acquired PSI-TEC in a share exchange, which was considered to be a capital transaction in
substance rather than a business combination, and was accounted for as a change of capital structure under accounting
principles generally accepted in the United States. On October 20, 2006, the Company and PSI-TEC merged and the
Company changed its name to Third-Order Nanotechnologies, Inc. On March 10, 2008, the Company changed its name to
Lightwave Logic, Inc.
Basis of Presentation
The accompanying financial statements are presented in accordance with accounting principles generally accepted in the
United States of America.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and
actions the Company may undertake in the future, actual results could differ from the estimates.
Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all highly liquid instruments with maturities of three
months or less at the time of purchase to be cash equivalents.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments
consist primarily of cash. At December 31, 2018, the Company did have deposits with a financial institution that exceed the
Federal Depository Insurance coverage.
F-8
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Equipment is stated at cost. Depreciation is principally provided by use of straight-line methods for financial and tax
reporting purposes over the estimated useful lives of the assets, generally 5 years. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included
in operations.
Intangible Assets
Definite-lived intangible assets are stated at cost. Patents are amortized over their estimated useful lives, commencing from
the date of grant for the remaining legal lives of the patents. The patents generally have a term of up to 20 years from the date
of filing of the earliest related patent application. When certain patent applications are abandoned by the Company for claims
that are covered by patents already granted to the Company, the cost of patent applications are removed from the accounts
and the resulting expense is reflected in the statement of operations.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts payable and accrued expenses. The carrying values of cash,
accounts payable and accrued expenses approximate fair value because of their short maturities.
Income Taxes
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740,
“Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statement
and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Stock-based Payments
The Company accounts for stock-based compensation under the provisions of Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 718, "Compensation - Stock Compensation", which requires the measurement and
recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair
values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-
Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the
shorter of the vesting period or the requisite service periods using the straight-line method. The Company accounts for stock-
based compensation awards to nonemployees in accordance with FASB ASC 505-50, "Equity- Based Payments to Non-
Employees (“ASC 505-50”). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based
compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. All issuances of stock options or other equity instruments to non-employees
as consideration for goods or services received by the Company are accounted for based on the fair value of the equity
instruments issued. Any stock options issued to non-employees are recorded as an expense and additional paid in capital in
stockholders’ equity over the applicable service periods. Non-employee equity based payments are recorded as an expense
over the service period, as if the Company had paid cash for the services. At the end of each financial reporting period, prior
to vesting or prior to the completion of the services, the fair value of the equity based payments will be re-measured and the
non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity based payments
granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-
measurements until the equity based payments are fully vested or the service completed. As of June 30, 2018 the Company
changed its accounting policy for non-employee equity based payments by adopting FASB ASU 2018-07, which expands
Topic 718 to include transactions for acquiring goods and services, from nonemployees.
F-9
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss Per Share
The Company follows FASB ASC 260, “Earnings per Share”, resulting in the presentation of basic and diluted earnings per
share. Because the Company reported a net loss in 2018 and 2017, common stock equivalents, including stock options and
warrants were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same.
Recoverability of Long-Lived Assets
The Company follows FASB ASC 360, “Property, Plant, and Equipment”. Long-lived assets to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the asset’s
carrying amount.
Comprehensive Income
The Company follows FASB ASC 220.10, “Reporting Comprehensive Income.” Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain financial information that historically has not been
recognized in the calculation of net income. Since the Company has no items of other comprehensive income, comprehensive
loss is equal to net loss.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to
Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. Prior to this Update, Topic 718
applied only to share-based transactions to employees. Consistent with the accounting requirement for employee share-based
payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair
value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been
rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018,
including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of
Topic 606. The adoption of this pronouncement on June 30, 2018 had no material impact on the Company’s financial
statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this Update specify the
accounting for leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise
from leases. For public business entities, the amendments in this Update are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. The amendments in this
Update relieve businesses and organizations from having to present prior comparative years’ results when they adopt the new
standard. It also lets landlords and other lessors avoid breaking out the parts of a rental contract that are not specifically being
leased, such as the cost of snow removal services, and account for them separately from the base rent. The amendments in
this Update are the same as the effective dates and transition requirements in ASU No. 2016-02, Leases.
The Company is in the process of evaluating the above ASUs and estimating lease liabilities and corresponding right-of-use
assets as of January 1, 2019.
Reclassifications
Certain reclassifications have been made to the 2017 financial statement in order to conform to the 2018 financial statement
presentation.
F-10
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 2 – MANAGEMENT’S PLANS
As a technology company focusing on the development of the next generation photonic devices and non-linear optical
polymer materials systems, substantial net losses have been incurred since inception. The Company has satisfied capital
requirements since inception primarily through the issuance and sale of its common stock. As of March 18, 2019, the
Company has a cash position of approximately $2,200,000. Based upon the current cash position and expenditures of
approximately $585,000 per month and no debt service, management believes the Company has sufficient funds to finance its
operations through June 2019. In January 2016, the Company signed a purchase agreement (“Purchase Agreement”) with an
institutional investor to sell up to $20,000,000 of common stock. 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 with
the remaining available amount of $7,861,215 as of December 31, 2018. Since December 31, 2018, the Company has raised
an additional $1,011,585. 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.
NOTE 3 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
Insurance
Prepaid material
Rent
Other
Stock award
Deposits
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Office equipment
Lab equipment
Furniture
Leasehold improvements
Less: Accumulated depreciation
December 31,
2018
December 31,
2017
$
226,363 $
46,120
21,896
37,210
6,042
—
79,403
—
254,978
20,992
30,208
199,338
$
337,631 $
584,919
December 31,
2018
December 31,
2017
$
79,886 $
2,513,459
33,128
220,389
2,846,862
1,046,093
82,453
1,695,604
32,693
231,859
2,042,609
865,860
$ 1,800,769 $ 1,176,749
Depreciation expense for the years ending December 31, 2018 and 2017 was $400,780 and 182,006. During the year ending
December 31, 2018, the Company sold equipment for proceeds of $2,500 and a gain of $2,500. During the year ending
December 31, 2018, the Company retired property and equipment and recorded a loss on the retirement of $12,584. During
the year ended December 31, 2017, the Company did not sell or retire property and equipment.
F-11
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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.
Intangible assets consist of the following:
Patents
Less: Accumulated amortization
December 31,
2018
December 31,
2017
$ 1,184,882 $
246,643
787,403
181,628
$
938,239 $
605,775
Amortization expense for the years ending December 31, 2018 and 2017 was $65,015 and $95,341. There were no patent
costs written off for the years ended December 31, 2018. Patent costs in the amount of $48,599 previously capitalized for
possible filing of two provisional patents were written off to research and development expenses during the year ended
December 31, 2017. After review by the Company, it was decided to keep secret some aspects of its chromophore
development and protect them as Trade Secrets and Know-How.
NOTE 6 – LONG TERM EQUIPMENT PURCHASE PAYABLE
Outstanding long term equipment purchase payable is comprised of the following:
Final Year
of Maturity
Classification
Interest
Rate
December 31,
2018
December 31,
2017
2019
Current
Long term
NOTE 7 – COMMITMENTS
0.00 % $
0.00 %
$
178,482 $
—
178,482 $
493,597
184,294
677,891
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.
F-12
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 7 – COMMITMENTS (CONTINUED)
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. 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.
The Company is obligated under an operating lease for office and laboratory space. The aggregate minimum future lease
payments under the operating leases are as follows:
YEARS ENDING
DECEMBER 31,
2019
2020
2021
2022
AMOUNT
$
32,432
195,574
201,501
189,837
TOTAL
$
619,344
In June 2018, the lease for the facility located in Longmont Colorado was terminated.
Rent expense amounting to $149,131 and $51,791 is included in research and development and general and administrative
expenses for the year ended December 31, 2018. Rent expense approximating $121,228 and $25,348 is included in research
and development and general and administrative expenses for the year ended December 31, 2017.
NOTE 8 – INCOME TAXES
As discussed in Note 1, the Company utilizes the asset and liability method of accounting for income taxes in accordance
with FASB ASC 740.
The income tax (benefit) provision consists of the following:
Current
Deferred
Change in valuation allowance
2018
2017
$
— $
(1,503,000 )
1,503,000
—
5,063,000
(5,063,000 )
$
— $
—
F-13
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 8 – INCOME TAXES (CONTINUED)
The reconciliation of the statutory federal rate to the Company’s effective income tax rate is as follows:
2018
2017
Amount
%
Amount
%
Income tax benefit at U.S. federal income tax rate
State tax benefit, net of federal tax effect
Non-deductible share-based compensation
Tax rate change
Change in valuation allowance
$ (1,213,000 )
(346,000 )
56,000
—
1,503,000
(21 ) $ (1,955,000 )
(345,000 )
(6 )
1
250,000
7,113,000
—
(5,063,000 )
26
$
—
— $
—
(34 )
(6 )
4
124
(88 )
—
The components of deferred tax assets as of December 31, 2018 and 2017 are as follows:
Deferred tax asset for NOL carryforwards
Share-based compensation
Valuation allowance
2018
2017
$ 11,892,000 $ 10,440,000
1,822,000
(13,765,000 ) (12,262,000 )
1,873,000
$
— $
—
In December 2017, the Tax Cuts and Jobs Act was enacted, which reduces the U.S. statutory corporate tax rate from 34% to
21% for tax years beginning in 2018 which resulted in the re-measurement of the federal portion of the Company’s deferred
tax assets and valuation allowance as of December 31, 2017 from 34% to the new 21% tax rate.
The valuation allowance for deferred tax assets as of December 31, 2018 and 2017 was $13,765,000 and $12,262,000,
respectively. The change in the total valuation for the year ended December 31, 2018 was an increase of $1,503,000 and for
the year ended December 31, 2017 was a decrease of $5,063,000. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which the net operating losses and temporary differences become deductible. Management considered projected
future taxable income and tax planning strategies in making this assessment. The value of the deferred tax assets was offset
by a valuation allowance, due to the current uncertainty of the future realization of the deferred tax assets.
As of December 31, 2018, the Company had net operating loss carry forwards of approximately $44,044,000, expiring
through the year ending December 31, 2038. This amount can be used to offset future taxable income of the Company.
The timing and manner in which the Company can utilize operating loss carryforwards in any year may be limited by
provisions of the Internal Revenue Code regarding changes in ownership of corporations. Such limitation may have an
impact on the ultimate realization of its carryforwards and future tax deductions.
F-14
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 8 – INCOME TAXES (CONTINUED)
The Company follows FASB ASC 740.10, which provides guidance for the recognition and measurement of certain tax
positions in an enterprise’s financial statements. Recognition involves a determination of whether it is more likely than not
that a tax position will be sustained upon examination with the presumption that the tax position will be examined by the
appropriate taxing authority having full knowledge of all relevant information. The adoption of FASB ASC 740.10 did not
require an adjustment to the Company’s financial statements.
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, 2018, the Company had no unrecognized tax benefits and no charge during
2018, and accordingly, the Company did not recognize any interest or penalties during 2018 related to unrecognized tax
benefits. There is no accrual for uncertain tax positions as of December 31, 2018.
The Company files U.S. income tax returns and a state income tax return. With few exceptions, the U.S. and state income tax
returns filed for the tax years ending on December 31, 2015 and thereafter are subject to examination by the relevant taxing
authorities.
NOTE 9 – 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.
Common Stock Options and Warrants
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
period August 2016 through December 31, 2018, the institutional investor purchased 12,450,000 shares of common stock for
proceeds of $12,138,785 and the Company issued 394,526 shares of common stock as additional commitment fee, valued at
$432,205, fair value, leaving 255,474 in reserve for additional commitment fees. During the year ending December 31, 2018,
the institutional investor purchased 4,750,000 shares of common stock for proceeds of $4,863,535 and the Company issued
158,071 shares of common stock as additional commitment fee, valued at $172,192, fair value. During January, through
March 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, leaving
222,595 in reserve for additional commitment fees. 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.
F-15
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 10 – 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 December 31, 2018, options to
purchase 4,520,000 shares of common stock have been issued and are outstanding.
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. As of December 31, 2018, options to purchase
2,235,000 shares of common stock have been issued and are outstanding and 755,000 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 2018: no dividend yield in all years, expected volatility, based on the Company’s historical
volatility, 60% to 90%, risk-free interest rate between 1.89% to 3.06% and expected option life of 5.0 to 10 years. Prior to
May 2018, 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. Starting in May 2018, the
expected life is based on the legal contractual life of options. The Company uses the Black-Scholes option pricing model to
calculate the grant-date fair value of an award, with the following assumptions for 2017: no dividend yield in all years,
expected volatility, based on the Company’s historical volatility, 39% to 87%, risk-free interest rate between 1.16% to 2.37%
and expected option life of .03 to 9.08 years.
As of December 31, 2018, there was $324,497 of unrecognized compensation expense related to non-vested market-based
share awards that is expected to be recognized through August 30, 2020.
Share-based compensation was recognized as follows:
2007 Employee Stock Option Plan
2016 Equity Incentive Plan
Warrants
Total share-based compensation
2018
2017
$
15,149 $
372,539
78,390
18,322
776,416
416,934
$
466,078 $ 1,211,672
F-16
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 10 – STOCK BASED COMPENSATION (CONTINUED)
The following tables summarize all stock option and warrant activity of the Company during the years ended December 31,
2018 and 2017:
Non-Qualified Stock Options and Warrants
Outstanding and Exercisable
Number of
Shares
Exercise
Price
Weighted
Average
Exercise Price
Outstanding, December 31, 2016
18,101,367 $ 0.57 - $1.69 $
0.90
Granted
Expired
Forfeited
Exercised
1,770,000 $ 0.60 - $1.50 $
(772,500 ) $ 0.68 - $1.69 $
—
(469,000 ) $ 1.00. - $1.25 $
—
Outstanding, December 31, 2017
18,629,867 $ 0.57 - $1.69 $
Granted
Expired
Forfeited
Exercised
720,000 $ 1.07 - $1.27 $
(100,000 ) $
0.90 - $.90 $
(85,000 ) $ 0.92 - $1.22 $
(200,000 ) $ 0.615 - $1.00 $
Outstanding, December 31, 2018
18,964,867 $ 0.57 - $1.69 $
0.97
0.98
—
1.07
0.90
1.19
0.90
0.96
0.81
0.91
Exercisable, December 31, 2018
18,504,240 $ 0.57 - $1.69 $
0.90
The aggregate intrinsic value of options and warrants outstanding and exercisable as of December 31, 2018 was $183,350.
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 $0.71 for the Company’s common stock on December 31, 2018. The total intrinsic value of
options and warrants exercised during the year ended December 31, 2017 was $4,891,501. During the year ending December
31, 2018, 100,000 warrants were exercised for proceeds of $61,500. During the year ending December 31, 2018, 100,000
options were exercised for proceeds of $100,000. No options were exercised during 2017. During 2017, 335,000 warrants
were exercised to purchase shares of common stock at a price of $1.00 per share for proceeds of $335,000 and 134,000
warrants were exercised to purchase shares of common stock at a price of $1.25 per share for proceeds of $167,500.
Range of
Exercise Prices
$0.57 - $1.69
Non-Qualified Stock Options and Warrants Outstanding
Weighted Average
Remaining
Contractual Life
Number Outstanding
Currently Exercisable
at December 31, 2018
Weighted Average
Exercise Price of Options and
Warrants Currently Exercisable
18,504,240
3.53 Years
$0.90
F-17
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 11 – RELATED PARTY
At December 31, 2018 the Company had a legal and accounting service accrual to related party of $10,999 and travel and
office expense accruals of officers in the amount of $2,825. At December 31, 2017 the Company had a legal accrual to
related party of $4,725 and travel and office expense accruals of officers in the amount of $4,045.
In December 2016, the board of directors approved a grant to a senior advisor effective January 1, 2017 of a warrant to
purchase up to 275,000 shares of common stock at a purchase price of $0.60 per share. Using the Black-Scholes Option
Pricing Formula, the warrant was valued at $102,222, fair value. In March 2017, the warrant was amended to accelerate full
vesting and the revaluation of the warrant at $106,576, fair value, was expensed immediately.
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 year ending December 31, 2018, the
Company recognized $31,318 of expense. During July 2017, the Company issued a warrant to purchase 150,000 shares of
common stock at a purchase price of $1.48 per share for professional services to be rendered over a twelve month period
commencing July 1, 2017. The warrant was valued at $124,788, fair value upon issuance, using the Black-Scholes Option
Pricing Formula. The warrant was re-valued at $91,995, fair value at December 31, 2017. The expense is being recognized
based on service terms of the agreement over a twelve month period. For the years ending December 31, 2018 and 2017, the
Company recognized $47,072 and $45,997 of expense. During July 2016, the Company issued a warrant to purchase 150,000
shares of common stock at a purchase price of $0.63 per share for professional services to be rendered over a twelve month
period commencing July 1, 2016. The warrant was valued at $60,272, fair value, using the Black-Scholes Option Pricing
Formula The warrant was re-valued at $65,941, fair value at June 30, 2017. The expense is being recognized based on service
terms of the agreement over a twelve month period. For the years ending December 31, 2018 and 2017, the Company
recognized $0 and $40,238 of expense.
In December 2017, the Board of Directors approved extension of the warrants previously granted to a Board member
extending the term of outstanding warrants to purchase in the aggregate 725,000 shares of common stock at exercise prices
ranging from $0.60 per share to $0.98 per share. These warrants were scheduled to expire at various dates starting 2017 to
2021, with the new expiration dates ranging from 2022 to 2026. The total incremental compensation cost resulting from this
modification was $224,123 which was expensed during the year ended December 31, 2017. The Company used the Black-
Scholes option pricing model to calculate the increase in fair value, with the following assumptions: historical volatility from
39% to 87%, risk-free interest rate from 1.16% to 2.37% and expected option life from .03 to 9.08 years.
NOTE 12 – RETIREMENT PLAN
The Company established a 401(k) retirement plan covering all eligible employees beginning November 15, 2013. A
contribution of $24,587 was charged to expense and accrued for the year ending December 31, 2018 to all eligible non-
executive participants. . A contribution of $15,873 was charged to expense and accrued for the year ending December 31,
2017 to all eligible non-executive participants
NOTE 13 – SUBSEQUENT EVENTS
During February 2019, the Company issued three warrants each to purchase 25,000 shares of common stock at a purchase
price of $0.64 per share for Advisory Board Agreement services to be rendered over a twelve month period commencing
February 15, 2019. The warrants were each valued at $8,455, fair value, using the Black-Scholes Option Pricing Formula,
vesting over the next twelve months with each vesting 2,087 immediately, 2,083 vesting per month on the first day of the
next eleven months commencing March 1, 2019. The warrants expire in five years. The expense is being recognized based on
service terms of the agreement over a twelve month period.
F-18