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. The Company currently has a cash position of approximately
$2,225,000
. Based upon the current cash position and expenditures of approximately
$300,000
per month and no debt service, management believes the Company has sufficient funds currently to finance its
operations through June 2017. In January 2016, the Company signed a Purchase Agreement with an institutional investor to sell
up to
$20,000,000
of common stock. 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 went effective on April 7, 2016. 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 has raised
$964,200
as of September 30, 2016.
NOTE
3 –
PROPERTY AND EQUIPMENT
Property and equipment consists of
the following:
|
|
September
30,
2016
|
|
|
December
31,
2015
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
55,817
|
|
|
$
|
51,323
|
|
Lab equipment
|
|
|
757,775
|
|
|
|
722,555
|
|
Furniture
|
|
|
32,693
|
|
|
|
26,028
|
|
Leasehold Improvements
|
|
|
231,860
|
|
|
|
231,859
|
|
|
|
|
1,078,145
|
|
|
|
1,031,765
|
|
Less: Accumulated depreciation
|
|
|
637,874
|
|
|
|
536,703
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
440,271
|
|
|
$
|
495,062
|
|
Depreciation expense for the nine
months ending September 30, 2016 and 2015 was
$133,740
and
$115,491
. Depreciation expense for the three months ending September
30, 2016 and 2015 was
$44,113
and
$41,338
. During the second quarter of 2016, the Company sold equipment for proceeds of
$19,500
and a gain of
$644
.
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE
4 –
INTANGIBLE ASSETS
This represents legal fees and patent
fees associated with the prosecution of patent applications. The Company has recorded amortization expenses on the Spacer and
Chromophore patents granted by the United States Patent and Trademark Office in February 2011, April 2011 and September 2012,
which are amortized over the remaining legal life and Chromophore patent granted by the Australian Patent Office in November 2012
which is amortized over the remaining legal life. Certain patent applications are abandoned by the Company when the claims are
covered by patents already granted to the Company. Patent applications abandoned have been written off at full capitalized cost.
No amortization expense has been recorded on the remaining patent applications since patents have yet to be granted
Patents consists of the following:
|
|
September
30,
2016
|
|
|
December
31,
2015
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
732,962
|
|
|
$
|
690,162
|
|
Less: Accumulated amortization
|
|
|
82,314
|
|
|
|
70,395
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets - net
|
|
$
|
650,648
|
|
|
$
|
619,767
|
|
Amortization expense for the nine
months ending September 30, 2016 and 2015 was
$11,918
and
$11,146
. Amortization expense for the three months ending September
30, 2016 and 2015 was
$3,972
and
$3,715
. Expense for abandoned patents for claims covered by patents already granted to the Company
are recorded in research and development expenses and for the three months and nine months ending September 30, 2016 and 2015
were
$0
and
$0
.
NOTE
5 –
INCOME TAXES
There is no income tax benefit for
the losses for the three and nine months ended September 30, 2016 and 2015 since management has determined that the realization
of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount of such benefits.
The Company’s policy is
to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the statement of
operations. As of January 1, 2016, the Company had no unrecognized tax benefits, or any tax related interest or penalties.
There were no changes in the Company’s unrecognized tax benefits during the period ended September 30, 2016. The
Company did not recognize any interest or penalties during 2016 related to unrecognized tax benefits. With few exceptions,
the U.S. and state income tax returns filed for the tax years ending on December 31, 2012 and thereafter are subject to
examination by the relevant taxing authorities.
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE
6 –
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 October 2013, under the 2007
Employee Stock Option Plan, the Company issued an option to a new director to purchase
200,000
shares of common stock at a purchase price of
$0.93
per share for a directorship commencing November 1, 2013. The option was valued at
$174,106
using the Black-Scholes option pricing model. The option expires in
10
years
with
50,000
vesting in annual installments commencing November 1, 2013. The option is expensed over the vesting terms. For the nine
month ending September 30, 2016, the Company recognized
$32,675
of expense. For the three months ending September 30, 2016, the Company recognized
$10,971
of expense. As of September 30, 2016, the option to purchase
200,000
shares of common stock is still outstanding.
In March 2014, under the 2007
Employee Stock Option Plan, the Company issued
options to a new employee to purchase
30,000
shares of common stock at a purchase price of
$0.92
per share. The options were valued
at
$23,304
, fair value, using the Black-Scholes Option Pricing Formula. The options expire in
10
years vesting in quarterly equal
installments of
3,750
from date of employment. The options are expensed over the vesting terms. For the three and nine months
ending September 30, 2016, the Company recognized
$0
and
$1,552
of expense. As of September 30, 2016, the options to purchase
30,000
shares of common stock are still outstanding.
In March 2014, under the 2007
Employee Stock Option Plan, the Company issued
options to a new employee to purchase
75,000
shares of common stock at a purchase price of
$0.92
per share. The options were valued
at
$58,384
, fair value, using the Black-Scholes Option Pricing Formula. The options expire in
10
years vesting in quarterly equal
installments of
9,375
from date of employment. The options are expensed over the vesting terms. For the three and nine months
ending September 30, 2016, the Company recognized
$0
and
$4,363
of expense. As of September 30, 2016, the options to purchase
75,000
shares of common stock are still outstanding.
In March 2014, under the 2007
Employee Stock Option Plan, the Company issued
options to a new employee to purchase
50,000
shares of common stock at a purchase price of
$0.92
per share. The options were valued
at
$38,922
, fair value, using the Black-Scholes Option Pricing Formula. The options expire in
10
years vesting in quarterly equal
installments of
6,250
from date of employment. The options are expensed over the vesting terms. For the three and nine month ending
September 30, 2016, the Company recognized
$0
and
$3,331
of expense. As of September 30, 2016, the options to purchase
50,000
shares of common stock are still outstanding.
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE 6 – STOCKHOLDERS’
EQUITY (CONTINUED)
Common Stock Options and Warrants
(Continued)
In May 2014, under the 2007
Employee Stock Option Plan, the Company issued options
to a new director to purchase
200,000
shares of common stock at a purchase price of
$0.763
per share. The options were valued
at
$122,515
using the Black-Scholes Option Pricing Formula. The options expire in
10
years with
50,000
vesting immediately and
the remainder vesting in annual equal installments of
50,000
commencing on the one year anniversary of the date of grant. The
options are expensed over the vesting terms. For the nine month ending September 30, 2016, the Company recognized
$22,992
of expense.
For the three months ending September 30, 2016, the Company recognized
$7,720
of expense. As of September 30, 2016, the options
to purchase
200,000
shares of common stock are still outstanding.
During July 2015, the Company issued
a warrant to purchase
125,000
shares of common stock at a purchase price of
$0.70
per share for accounting services to be rendered
over a twelve month period commencing July 1, 2015. The warrant was valued at
$46,897
, fair value at December 31, 2015, using
the Black-Scholes Option Pricing Formula, vesting over the next twelve months with
10,416
vesting immediately,
10,416
vesting
per month on the first day of the next ten months and
10,424
vesting on the first day of the twelfth month of the corresponding
service agreement. The warrant expires in
five years
. The expense is being recognized based on service terms of the agreement
over a twelve month period. For the nine months ending September 30, 2016, the Company recognized
$23,452
of expense. For the
three months ending September 30, 2016, the Company recognized
$0
of expense. As of September 30, 2016, the warrants to purchase
125,000
shares of common stock are still outstanding.
During August 2015, under the 2007
Employee Stock Option Plan, the Company issued an option to an employee to purchase
50,000
shares of common stock at a purchase
price of
$0.67
per share. The option was valued at
$19,930
, fair value, using the Black-Scholes Option Pricing Formula. The option
expires in
10
years and vests
12,500
immediately and the remaining in equal quarterly installments of
12,500
over the next three
quarters. The option is expensed over the vesting terms. For the nine month ending September 30, 2016, the Company recognized
$7,203
of expense. For the three months ending September 30, 2016, the Company recognized
$0
of expense. As of September 30, 2016,
the options to purchase
50,000
shares of common stock are still outstanding.
During August 2015, under
the 2007 Employee Stock Option Plan, the Company issued options to three employees to purchase an aggregate of
75,000
shares of common stock at a purchase price of
$0.69
per share. The options were valued at
$32,734
,
fair value, using the Black-Scholes Option Pricing Formula. The options expire in
10
years and vest
15,000
immediately and the remaining in equal quarterly installments of
15,000
over the next four quarters. The options are expensed over the vesting terms. For the nine month ending September 30, 2016,
the Company recognized
$17,142
of expense. For the three months ending September 30, 2016, the Company recognized
$4,053
of expense. As of September 30, 2016, the options to purchase
75,000
shares of common stock are still outstanding.
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE 6 – STOCKHOLDERS’
EQUITY (CONTINUED)
Common Stock Options and Warrants
(Continued)
During August 2015, under the 2007
Employee Stock Option Plan, the Company issued an option to a new director to purchase
200,000
shares of common stock at a purchase
price of
$0.69
per share. The option was valued at
$90,615
, fair value, using the Black-Scholes Option Pricing Formula. The option
expires in
10
years and vests
50,000
immediately and the remaining in equal annual installments of
50,000
over the next three
years. The option is expensed over the vesting terms. For the nine month ending September 30, 2016, the Company recognized
$16,944
of expense. For the three months ending September 30, 2016, the Company recognized
$5,648
of expense. As of September 30, 2016,
the options to purchase
200,000
shares of common stock are still outstanding.
During October 2015, under the 2007
Employee Stock Option Plan, the Company issued options to a new employee to purchase
35,000
shares of common stock at a purchase
price of
$0.74
per share. The option was valued at
$16,393
, fair value, using the Black-Scholes Option Pricing Formula. The options
expire October 12, 2025 with
4,375
shares vesting on the anniversary date of the third month of employment and the remaining vesting
in seven equal installments of
4,375
at the end of every three month period thereafter. The option is expensed over the vesting
terms. For the nine month ending September 30, 2016, the Company recognized
$6,147
of expense. For the three month ending September
30, 2016, the Company recognized
$2,052
of expense. As of September 30, 2016, the options to purchase
35,000
shares of common
stock are still outstanding.
During November 2015, under the 2007
Employee Stock Option Plan, the Company granted options effective January 1, 2016 to the Chief Executive Officer to purchase
100,000
shares of common stock at a purchase price of
$0.86
per share. The options expire November 9, 2025 with
12,500
shares vesting
on January 1, 2016 and the remaining vesting quarterly in equal installments of
12,500
options commencing April 1, 2016. The options
were valued at
$33,108
, fair value, using the Black-Scholes Option Pricing Formula. The option is expensed over the vesting terms.
For the nine month ending September 30, 2016, the Company recognized
$16,510
of expense. For the three month ending September
30, 2016, the Company recognized
$4,139
of expense. As of September 30, 2016, the options to purchase
100,000
shares of common
stock are still outstanding.
In December 2015, the board of directors
approved a grant to a senior advisor effective January 1, 2016 of a warrant to purchase up to
125,000
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
$44,868
, fair value.
The warrant expires in
5
years and vests
31,250
immediately and the remaining in equal monthly installments of
9,375
over the
next 10 months. The warrant is expensed over the vesting terms. For the nine months ending September 30, 2016, the Company recognized
$35,584
of expense. For the three months ending September 30, 2016, the Company recognized
$12,298
of expense. As of September
30, 2016, the warrant to purchase
125,000
shares of common stock is still outstanding.
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE 6 – STOCKHOLDERS’
EQUITY (CONTINUED)
Common Stock Options and Warrants
(Continued)
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 became
effective April 7, 2016. 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 agreement. During three and nine month period ending September 30 2016, the institutional investor purchased
1,400,000
shares of common stock for proceeds of
$964,200
and the Company issued
31,338
shares of common stock as additional commitment fee, valued at
$22,177
,
fair value, leaving
618,662
in reserve for additional commitment fees. During October and November 2016, the institutional investor purchased
500,000
shares of common stock for proceeds of
246,320
and the Company issued
9,897
shares of common stock as additional commitment fee, valued at
$6,241
,
fair value, leaving
608,765
in reserve for additional commitment fees.
In February 2016, under the 2007
Employee Stock Option Plan, the Company issued options to the Company’s six independent directors to each purchase
50,000
shares of common stock at a purchase price of
$0.68
per share. The options were each valued at
$21,475
,
fair value, using the Black-Scholes Option Pricing Formula. The options expire in
10
years with an aggregate of
20,000
vesting immediately and the remaining vest in quarterly equal installments of
10,000
commencing April 1, 2016. The options are expensed over the vesting terms. For the nine month ending September 30, 2016,
the Company recognized
$128,562
of expense. For the three months ending September 30, 2016, the Company recognized
$25,770
of expense. As of September 30, 2016, the options to purchase
300,000
shares of common stock are still outstanding.
For the three months ending September
30, 2016 the Company issued
8,517
shares, with a fair value of
$6,000
, to a director serving as a member of the Company’s
Operations Committee commencing August 2015. For the three months ending September 30, 2016, the Company recognized
$6,000
of
expense. For the nine months ending September 30, 2016 the Company issued
28,744
shares, with a fair value of
$18,000
. For the
nine months ending September 30, 2016, the Company recognized
$18,000
of expense. During October 2016, the Company issued
3,182
additional shares of common stock valued at
$2,000
.
In May 2016, under the 2007
Employee Stock Option Plan, the Company issued an
option to a director to purchase
200,000
shares of common stock at a purchase price of
$0.60
per share. The option was valued
at
$67,376
, fair value, using the Black-Scholes Option Pricing Formula. The option expires in
10
years and vests immediately.
The option is expensed over the vesting terms. For the nine month ending September 30, 2016, the Company recognized
$67,376
of
expense. For the three months ending September 30, 2016, the Company recognized
$0
of expense. As of September 30, 2016, the option
to purchase
200,000
shares of common stock is still outstanding.
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE 6 – STOCKHOLDERS’
EQUITY (CONTINUED)
Common Stock Options and Warrants
(Continued)
In May 2016, under the 2007
Employee Stock Option Plan, the Company issued an
option to an employee to purchase
5,000
shares of common stock at a purchase price of
$0.60
per share. The option was valued at
$1,738
, fair value, using the Black-Scholes Option Pricing Formula. The option expires in
10
years and
vesting in quarterly equal
installments
of
625
commencing August 4, 2016. The option is expensed over the vesting terms. For the nine month ending September
30, 2016, the Company recognized
$354
of expense. For the three months ending September 30, 2016, the Company recognized
$223
of expense. As of September 30, 2016, the option to purchase
5,000
shares of common stock is still outstanding.
During the three month period ending
June 30, 2016, an option issued in May 2011 to purchase
200,000
shares of common stock at an exercise price of
$1.12
expired and
warrants issued in April 2011 to purchase
150,000
shares of common stock at an exercise price of
$1.18
expired.
In July 2016, under the
2016 Equity Incentive Plan, the board of directors approved a grant to a new employee of an option to purchase up to
15,000
shares of common stock at a purchase price of
$0.63
per share. Using the Black-Scholes Option Pricing Formula, the option was valued at
$6,216
,
fair value. The option expires in
10
years and vests
1,875
on September 27, 2016 and the remaining in equal quarterly installments of
1,875
over the next
21
months. The option is expensed over the vesting terms. For the three month and nine months ending September 30, 2016,
the Company recognized
$803
of expense. As of September 30, 2016, the option to purchase
15,000
shares of common stock is still outstanding.
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 accounting 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, vesting over the next twelve months with
12,500
vesting immediately,
12,500
vesting per month on the first day
of the next ten months and
12,500
vesting on the first day of the twelfth month of the corresponding service agreement. The warrant
expires in
five years
. The expense is being recognized based on service terms of the agreement over a twelve month period. For
the three and nine months ending September 30, 2016, the Company recognized
$14,768
of expense. As of September 30, 2016, the
warrants to purchase
150,000
shares of common stock are still outstanding.
Effective June 24, 2016, the 2007
Employee Stock Plan was terminated. The Board of Directors approved a new 2016 Equity Incentive Plan in the amount of
3,000,000
shares on April 15, 2016, which the Company’s shareholders approved on May 20, 2016.
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE
7 –
STOCK BASED COMPENSATION
The Company uses the
Black-Scholes
option pricing model to calculate the grant-date fair value of an award, with the following assumptions for 2016:
no
dividend
yield, expected volatility, based on the Company’s historical volatility,
65%
to
78%
, risk-free interest rate
1.05%
to
1.80%
and expected option life of
5
to
5.6
years.
As of September 30, 2016, there was
$153,669
of unrecognized compensation expense related to non-vested market-based share awards that is expected to be recognized
through September 2018.
The following tables summarize all
stock option and warrant activity of the Company during the nine months ended September 30, 2016:
|
|
Non-Qualified
Stock Options and Warrants
Outstanding and Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Shares
|
|
|
Price
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
18,528,367
|
|
|
$0.63
-
$1.69
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
895,000
|
|
|
$0.60
-
$0.86
|
|
|
$
|
0.66
|
|
Expired
|
|
|
(385,000
|
)
|
|
$1.00
-
$1.18
|
|
|
$
|
1.13
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
19,038,367
|
|
|
$0.60
-
$1.69
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2016
|
|
|
18,545,242
|
|
|
$0.60
-
$1.69
|
|
|
$
|
0.91
|
|
The aggregate intrinsic value of
options and warrants outstanding and exercisable as of September 30, 2016 was
$26,575
. 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
$.665
for the
Company’s common stock on September 30, 2016.
No
options or warrants were exercised during the three and nine months periods
ending September 30, 2016.
Non-Qualified
Stock Options and Warrants Outstanding
|
|
|
Number Outstanding
|
|
Weighted Average
|
|
Weighted Average
|
Range of
|
|
Currently Exercisable
|
|
Remaining
|
|
Exercise Price of Options and
|
Exercise Prices
|
|
at June 30, 2016
|
|
Contractual Life
|
|
Warrants Currently Exercisable
|
|
|
|
|
|
|
|
$0.60
-
$1.69
|
|
18,545,242
|
|
4.38 Years
|
|
$0.91
|
LIGHTWAVE LOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
NOTE
8 –
RELATED PARTY
At September 30, 2016 the Company
had a legal accrual to related party of
$4,300
and travel and office expense accruals of officers in the amount of
$3,651
. At
December 31, 2015 the Company had a legal accrual to related party of
$1,420
and travel and office expense accruals of officers
in the amount of
$3,649
.
NOTE
9 –
RETIREMENT PLAN
The Company established a 401(k)
retirement plan covering all eligible employees beginning November 15, 2013. A contribution of
$15,000
was charged to expense
and accrued for the nine months ending September 30, 2016 to all eligible non-executive participants. A contribution of
$5,000
was charged to expense and accrued for the three months ending September 30, 2016 to all eligible non-executive participants.
There were
no
contributions charged to expense in 2015.
NOTE
10 –
SUBSEQUENT EVENTS
During November 2016, under the 2016
Equity Incentive Plan, the Company issued options to an employee to purchase
15,000
shares of common stock at a purchase price
of
$0.60
per share. The option was valued at
$5,674
, fair value, using the
Black-Scholes
Option Pricing Formula. The options
expire November 9, 2026
10 Years
with
1,875
shares vesting on December 1, 2016 and the remaining vesting in seven equal quarterly installments
of
1,875
. The option is expensed over the vesting terms.
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Lightwave Logic, Inc. (the “
Company
”)
is a development stage, electro-optical device and organic nonlinear materials company. Our primary area of expertise is the chemical
synthesis of chromophore dyes used in the development of organic Application Specific Electro-Optic Polymers (ASEOP) and organic
Non-Linear All-Optical Polymers (NLAOP) that have high electro-optic and optical activity. Our family of materials are thermally
and photo-chemically stable, which we believe could have utility across a broad range of applications in devices that address markets
such as telecommunication, data communications, high-speed computing and photovoltaic cells. Secondarily, our Company is developing
proprietary electro-optical and all-optical devices utilizing the advanced capabilities of our materials for applications in the
fields mentioned above.
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. We expect
our patented and patent-pending optical materials (chromophores), when combined with selected polymers to make ASEOP and NLAOP
material systems and when completed and tested, to be the core of the future generations of optical devices, modules, sub-systems
and systems that we will develop or be licensed by electro-optic device manufacturers, such as telecommunications component and
systems manufacturers, networking and switching suppliers, semiconductor companies, aerospace companies and government agencies.
Our ASEOP material systems are property-engineered
at the molecular level (nanotechnology level) to meet the exacting thermal, environmental and performance specifications demanded
by electro-optic devices. We believe that our patented and patent pending technologies will enable us to design polymer based material
systems that are free from the numerous diverse and inherent flaws that plague competitive polymer technologies employed by other
companies and research groups. We engineer our polymer based material systems with the intent to have temporal, thermal, chemical
and photochemical stability within our patented and patent pending molecular chromophore architectures.
Our non-linear all optical NLAOP material systems
have demonstrated resonantly enhanced third-order properties approximately 2,630 times larger than fused silica, which means that
they are highly photo-optically active in the absence of an RF circuit. In this way they differ from other polymer technologies
and are considered more advanced next-generation materials.
Our revenue model relies substantially on the
assumption that we will be able to successfully develop our polymer based material systems and photonic device products, which
will use our polymer based material systems, for applications within the industries named below. When appropriate, we intend to
create specific materials for each of these applications and use our proprietary knowledge base to continue to enhance its discoveries.
|
•
|
Cloud computing and data centers
|
|
•
|
Telecommunications/data communications
|
|
•
|
Backplane optical interconnects
|
|
•
|
Satellite reconnaissance
|
|
•
|
Spatial light modulators
|
To be successful, we must, among other things:
|
•
|
Develop and maintain collaborative relationships with strategic partners;
|
|
•
|
Continue to expand our research and development efforts for our products;
|
|
•
|
Develop and continue to improve on our manufacturing processes and maintain stringent quality controls;
|
|
•
|
Produce commercial quantities of our products at commercially acceptable prices;
|
|
•
|
Rapidly respond to technological advancements;
|
|
•
|
Attract, retain and motivate qualified personnel; and
|
|
•
|
Obtain and retain effective intellectual property protection for our products and technology.
|
We believe that Moore's Law (a principle which
states the number of transistors on a silicon chip doubles approximately every eighteen months) will create markets for our high-performance
electro-optic materials and photonic device products.
Plan of Operation
Since inception, we have been engaged primarily
in the research and development of our electro-optic polymer based material systems and photonic device products. We are devoting
significant resources to engineer next-generation electro-optic polymer based material systems 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, government agencies and internal device development. We expect to continue
to develop products that we intend to introduce to these rapidly changing markets and to seek to identify new markets. We expect
to continue to make significant operating and capital expenditures for research and development activities.
As we move from a development stage company
to a product supplier, we expect that our financial condition and results of operations will undergo substantial change. In particular,
we expect to record both revenue and expense from product sales, to incur increased costs for sales and marketing and to increase
general and administrative expense. Accordingly, the financial condition and results of operations reflected in our historical
financial statements are not expected to be indicative of our future financial condition and results of operations.
Some of our more significant milestones that
we achieved during 2014-2016 include:
In January 2014 we created a new methodology
to combine multiple chromophores into a single polymer host that significantly improves their ability to generate more powerful
organic, nonlinear electro-optical polymer systems. The new synthetic chemistry process can enable multiple chromophores (dyes)
to work in concert with each other within a single polymer host. This proprietary process has created two new material systems,
which have demonstrated outstanding electro-optic values. In addition, we now have a significant amount of data on the thermal
aging of our materials. We have demonstrated that our materials can withstand more than 2,000 hours at 110 degrees C with little
to no change in electro-optic activity in our materials, which is a significant milestone. To our knowledge, this is something
that has not been achieved before in any polymer. We are also concurrently creating prototype waveguides with our proprietary material
system.
In February 2014 we received our first purchase
order for our advanced organic nonlinear electro-optic polymer from Boulder Nonlinear Systems (BNS) of Boulder, Colorado in connection
with the development of a next generation LADAR system. A LADAR system is a radar system that utilizes a pulse laser to calculate
the distance to a target, but is also capable of rendering a 3-D image. In the event BNS continues to move forward with the development
of this LADAR system, we expect to receive additional purchase orders from BNS.
In March 2014 we began the process of manufacturing
an advanced design Silicon Organic Hybrid Transceiver prototype and we released the completed chip design to the OpSIS Center at
the University of Delaware who contracted with a third party to produce the initial silicon chips, which were delivered to us in
December 2014 and January 2015. We will look at similar designs to these chips for utilization in our Silicon Organic Transceiver
as our device development program continues. The initial application will target inter and intra-data center interconnections of
more than 500 meters.
In April 2014 we entered into a sole worldwide
license agreement with Corning Incorporated enabling us to integrate Corning's organic electro-optical chromophores into our portfolio
of electro-optic polymer materials. The agreement allows us to use the licensed patents within a defined license field that includes
communications, computing, power, and power storage applications utilizing the nonlinear optical properties of their materials.
In August 2014 the University of Colorado successfully
fabricated and tested a bleached electro-optic waveguide modulator designed and fabricated through a sponsored collaborative research
agreement. The results of this initial bleached waveguide modulator correlated well with previous electro-optic thin film properties.
These initial results of our first in-house device were significant to our entire device program and were an important starting
point for our current modulators being developed for target markets.
In October 2014 we submitted an order with Reynard
Corporation to produce gold-layered fused silica substrates for our bleached waveguide modulators to be coated with several of
our organic electro-optical polymers, which we received in early November 2014 and performance tested throughout December 2014.
In May, 2015, we subsequently decided to eliminate this product from our commercial development plans due to its limited commercial
value, low speed characteristics, difficulty to mass-produce and limited ability to integrate with existing architectures. In lieu
of this development program, a commercially viable prototype ridge waveguide modulator program was started to replace the bleached
waveguide development. We believe that the ridge waveguide modulator represents a viable telecom device opportunity for the Company
that does not have the inherent limitations seen in bleached waveguide structures.
In May 2015 we achieved operating capability
of our in-house Class 100 Clean Room where we do thin film processing and expect to complete the development of prototype photonic
devices enabled by our advanced organic electro-optic polymer material systems in a timelier manner. Additionally, the Joint Institute
for Laboratory Astrophysics (JILA) certified three of our employees, which allows us access to JILA’s world-class semiconductor
facility located at the University of Colorado, Boulder. Access to this facility provides us with better control over the quality
of our development work and the speed at which it progresses.
In August 2015 we completed 2,000+ hours of
thermal aging tests on several blends of materials created by our multi-chromophore process, which included lengthy exposure to
high temperatures (85
0
C and 110
0
C). The data collected indicated minimal loss of electro-optical activity
(R
33
) of our materials, which means that our organic polymers are expected to provide decades of operational performance. These
results exceed previously published efforts for other organic polymers and are an important part of our commercialization effort
as we begin to implement these material systems into advanced photonic devices for the telecom and datacom markets.
Additionally, in August 2015, we completed 500+
hours of photochemical stability testing of our material candidates by exposing them to the visible light spectrum. The data collected
indicated no discernible change in the chemical structures in an oxygen free environment. An accepted industry standard
is 2,000 hours. This stability testing was begun to help us understand more clearly the processing and manufacturing requirements
of our future commercial products, and provide initial assurances to expect the same results as we move these materials into actual
photonic device structures.
In October 2015, we successfully surpassed 2,000
hours of photochemical stability testing of our material candidates with little to no change in the electro-optic characteristics
(R
33
) of our material; and, in January 2016, we successfully surpassed 4,000 hours of photochemical stability testing
of our material candidates with little to no change in the optical density of our material. These photochemical stability test
results, along with the thermal stability at 110°C, should enable the Company to demonstrate that organic polymers can compete
head-to-head with inorganic crystalline legacy telecom and datacom devices which currently provide the backbone for the entire
infrastructure that converts almost incalculable amounts of electronic (binary) data into pulses of light and back on a daily basis.
In November
of 2015, we successfully fabricated ridge waveguide structures from our core
electro-optic
polymer
material system. At the same time we successfully developed a proprietary methodology to segment individual chips from our silicon
wafers that contain our ridge waveguide devices. These critical steps in our process provide us with a clear path towards a commercial
telecommunication device. These same processes can be used for the fabrication of modulators to be used in data centers. The individual
chips are being analyzed and passively tested in our Longmont, CO optical test facility. We continue to move towards completion
of an operating organic polymer-enabled ridge waveguide modulator prototype using our new multi-chromophore material systems.
In February 2016, we
successfully
guided laser single-mode light through 16 of our passive single-mode ridge waveguides made entirely out of our advanced organic
electro-optic
polymer systems, which are the building block of waveguide modulators
that achieve high-speed modulator performance. As a result, our commercialization effort entered the next phases of development:
passive-waveguide loss measurements, followed by the development and active testing of electro-optic modulators. Utilizing continuous-wave
input laser light, electro-optic modulators convert digital (binary) electrical data into output pulses of light that can be transported
across fiber optical communication networks. Active testing is accomplished by applying an electrical signal to a modulator and
evaluating the resulting output optical signal.
In April 2016, we
successfully
achieved modulation of light in our first in-house all-polymer ridge waveguide modulator prototype. This important step towards
commercialization proved that our proprietary organic
electro-optic
polymer systems
could modulate light in an in-house designed and produced polymer ridge waveguide modulator. We expect this significant achievement
to eventually lead to high-speed, low input voltage modulators capable of penetrating the current market. We are still testing
and modifying the poling profiles in prototype devices to duplicate the results seen in previous Teng-Man R
33
material
testing.
In May 2016, we broadened our photonic device
development to include our new P
2
IC™ (Polymer Photonics Integrated Circuit) design platform.
The
P
2
IC™ design platform utilizes high-speed ridge waveguide and slot waveguide modulator designs that scale up in
performance as well as down in cost structure. Furthermore, the Lightwave Logic P
2
IC™ design platform combines
the best of Polymer Photonics with the best of Silicon Photonics (SiP) to create a powerful, yet scalable platform that addresses
the desires of both the telecom and datacom industries.
In August 2016, we gained enormous industry
exposure for our first organic electro-optic polymer-enabled prototype photonic device when our board member, Michael Lebby, Ph.D.,
presented to the Prestigious European Conference on Optical Communication (ECOC) Exhibition, the scientific and economic case
for our Company's high-performance polymer photonics for next-generation photonic integrated circuits as future competition for
installed legacy photonic devices and emerging silicon photonic systems. We expect to demonstrate our prototype during the last
quarter of 2016.
In August 2016, we obtained highly
successful independent third party verification of our organic polymer thin film properties from Metricon, a company that
specializes in making precision instruments designed to obtain optical measurements on thin film materials and optical
waveguides. Metricon concluded a battery of scientific tests to verify the inherent properties of several of our advanced
organic electro-optic polymer materials, which are currently being implemented into a series of photonic devices.
Measurements by Metricon of several planar waveguide samples determined that our polymer thin film materials at 1550 nm
(Telecom frequency band) should exceed industry requirements that target overall device loss at <4 dB/cm. Additionally,
Metricon was also able to provide very accurate refractive index measurements on our Company’s materials, which is very
important for designing high-speed multi-layer polymer modulators.
Presently, we are continuing to move towards completion of
our operating organic electro-optic polymer-enabled ridge waveguide modulator prototype using our new multi-chromophore
material systems.
We ultimately intend to use our next-generation
electro-optic polymer material systems and non-linear all-optical polymer material systems for future applications vital to the
following industries. We expect to create specific materials for each of these applications as appropriate:
|
•
|
Cloud computing and data centers
|
|
•
|
Telecommunications/data communications
|
|
•
|
Backplane optical interconnects
|
|
•
|
Satellite reconnaissance
|
|
•
|
Spatial light modulators
|
In an effort to maximize our future revenue
stream from our electro-optic polymer material systems and non-linear all-optical polymer material systems, our business model
anticipates that our revenue stream will be derived from one or some combination of the following: (i) technology licensing for
specific product applications; (ii) joint venture relationships with significant industry leaders; (iii) the production and direct
sale of our own photonic device components; or (iv) the vertical integration of our modulator into a transceiver device. Our objective
is to be a leading provider of proprietary technology and know-how in the photonic device markets. In order to meet this objective,
subject to successful testing of our technology and having available financial resources, we intend to:
|
•
|
Develop electro-optic polymer material systems and non-linear all-optical polymer material systems and photonic devices;
|
|
•
|
Continue to develop proprietary intellectual property;
|
|
•
|
Streamline our product development process;
|
|
•
|
Develop a comprehensive marketing plan;
|
|
•
|
Maintain/develop strategic relationships with government agencies, private firms, and academic institutions; and
|
|
•
|
Continue to attract and retain high-level science and technology personnel to our Company.
|
Our Proprietary Products in Development
As part of a two-pronged marketing strategy,
our Company is developing several devices, which are in various stages of development that utilize our organic nonlinear optical
materials. They include:
|
•
|
Ridge waveguide modulator
|
|
•
|
Slot waveguide modulator
|
|
•
|
100 Gbps telecommunications modulator
|
|
•
|
200 Gbps datacomm/telecomm photonic transceiver
|
|
•
|
Integrated photonic system
|
Additionally, we must continue to create and
maintain an infrastructure, including operational and financial systems, and related internal controls, and recruit qualified personnel.
Our failure to do so could adversely affect our ability to support our operations.
Capital Requirements
As a development stage company, we do not generate
revenues. We have incurred substantial net losses since inception. We have satisfied our capital requirements since inception primarily
through the issuance and sale of our common stock.
Results of Operations
Comparison of three months ended September
30, 2016 to three months ended September 30, 2015
Revenues
As a development stage company, we had no revenues during the three
months ended September 30, 2016 and September 30, 2015. The Company is in various stages of material and photonic device development
and evaluation. 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.
Operating Expenses
Our operating expenses were $943,326 and $1,929,924
for the three months ended September 30, 2016 and 2015, respectively, for a decrease of $986,598. This decrease in operating expenses
is primarily due to decreases in non-cash stock option and warrant amortization, legal expenses, disposal of material and obsolete
equipment, investor relations expenses, laboratory materials and supplies and research and development salaries and wages offset
by increases in research and development consulting fees and general and administrative salaries and wages.
Included in our operating expenses for the three
months ended September 30, 2016 was $589,038 for research and development expenses compared to $1,047,963 for the three months
ended September 30, 2015, for a decrease of $458,925. The decrease in research and development expenses is primarily due to decreases
in non-cash stock option and warrants amortization, disposal of material and obsolete equipment, laboratory materials and supplies
and salaries and wages, offset by an increase in consulting 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 testing and prototype electro-optic device design, development and prototype device processing;
costs; and related operating expenses.
We expect to continue to incur substantial research
and development expenses to develop and commercialize our photonic devices and electro-optic materials platform. These expenses
will increase as a result of accelerated development effort to support commercialization of our non-linear optical polymer materials
technology; to build photonic device prototypes 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.
Research and development non-cash stock option
amortization decreased $486,466 from $530,032 for the three months ended September 30, 2015 to $43,566 for the three months ended
September 30, 2016.
Disposal of material and obsolete equipment
decreased $21,706 from $22,379 for the three months ended September 30, 2015 to $673 for the three months ended September 30, 2016.
Laboratory materials and supplies decreased
$8,042 from $48,340 for the three months ended September 30, 2015 to $40,298 for the three months ended September 30, 2016.
Wages and salaries, including benefits decreased
$7,148 from $281,258 for the three months ended September 30, 2015 to $274,110 for the three months ended September 30, 2016.
Consulting expenses increased $67,101 from $11,926
for the three months ended September 30, 2015 to $79,027 for the three months ended September 30, 2016.
General and administrative expense consists
primarily of compensation and support costs for management staff, and for other general and administrative costs, including executive,
sales and marketing, investor relations, accounting and finance, legal, consulting and other operating expenses.
General and administrative expenses decreased
$527,673 to $354,288 for the three months ended September 30, 2016 compared to $881,961 for the three months ended September 30,
2015. The decrease is due primarily to decreases in non-cash stock option and warrant amortization, legal expenses and investor
relations expenses offset by an increase in salaries and wages.
General and administrative non-cash stock option
amortization decreased $503,301 from $548,180 for the three months ended September 30, 2015 to $44,879 for the three months ended
September 30, 2016.
Legal fees decreased $29,979 to $15,001 for
the three months ending September 30, 2016 from $44,980 for the three months ended September 30, 2015.
Investor relation expenses decreased $12,513
to $4,780 for the three months ending September 30, 2016 from $17,293 for the three months ended September 30, 2015.
Wages and salaries, including benefits increased
$10,045 from $149,550 for the three months ended September 30, 2015 to $159,595 for the three months ended September 30, 2016.
We expect general and administrative expense
to increase in future periods as we increase the level of corporate and administrative activity, including increases associated
with our operation as a public company; and significantly increase expenditures related to the future production and sales of our
products.
Other Income (Expense)
Other expense increased $22,177 to $22,177 for
the three months ending September 30, 2016 from $0 for the three months ending September 30, 2015, relating to the commitment fee
associated with the purchase of shares by an institutional investor for sale under a stock purchase agreement during the three-month
period.
Net Loss
Net loss was $965,441 and $1,929,861 for the
three months ended September 30, 2016 and 2015, respectively, for a decrease of $964,420, due primarily to decreases in non-cash
stock option and warrant amortization, legal expenses, disposal of material and obsolete equipment, investor relations expenses,
laboratory materials and supplies and research and development salaries and wages offset by increases in research and development
consulting, commitment fee associated with the purchase of shares by an institutional investor for sale under a stock purchase
agreement and general and administrative salaries and wages.
Comparison of nine months ended September 30, 2016 to nine months
ended September 30, 2015
Revenues
As a development stage company, we had no revenues during the nine
months ended September 30, 2016 and September 30, 2015. The Company is in various stages of material and photonic device development
and evaluation. 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.
Our operating expenses were $3,041,967 and $4,047,715
for the nine months ended September 30, 2016 and 2015, respectively, for a decrease of $1,005,748. The decrease in operating expenses
is primarily due to decreases in non-cash stock option and warrant amortization, outsourced testing and product development expenses,
investor relations expenses, laboratory materials and supplies, disposal of material and obsolete equipment and research and development
travel expenses offset by increases in research and development consulting expenses, salaries and wages, legal and depreciation.
Included in our operating expenses for the nine
months ended September 30, 2016 was $1,784,871 for research and development expenses compared to $2,312,662 for the nine months
ended September 30, 2015, for a decrease of $527,791. The decrease in research and development expenses is primarily due to decreases
in non-cash stock option and warrant amortization, outsourced testing and product development expenses, laboratory materials and
supplies, disposal of material and obsolete equipment and travel expenses offset by increases in consulting expenses, salaries
and wages and depreciation.
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 testing and prototype electro-optic device design, development and prototype device processing;
costs; and related operating expenses.
We expect to continue to incur substantial research
and development expense to develop and commercialize our photonic devices and electro-optic materials platform. These expenses
will increase as a result of accelerated development effort to support commercialization of our non-linear optical polymer materials
technology; to build photonic device prototypes 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.
Non-cash stock compensation and stock option
and warrant amortization decreased $458,605 from $703,335 for the nine months ended September 30, 2015 to $244,730 for the nine
months ended September 30, 2016.
Laboratory material testing expense and electro-optic
device development decreased $152,654 from $245,768 for the nine months ended September 30, 2015 to $93,114 for the nine months
ended September 30, 2016.
Laboratory materials and supplies decreased
$42,224 from $159,307 for the nine months ended September 30, 2015 to $117,083 for the nine months ended September 30, 2016.
Disposal of material and obsolete equipment
decreased $21,246 from $23,817 for the nine months ended September 30, 2015 to $2,571 for the nine months ended September 30, 2016.
Travel expenses decreased $19,107 from $62,429
for the nine months ending September 30, 2015 to $43,322 for the nine months ending September 30, 2016.
Consulting expenses increased $139,158 from
$57,493 for the nine months ending September 30, 2015 to $196,651 for the nine months ending September 30, 2016.
Wages and salaries increased $18,851 from $800,043
for the nine months ended September 30, 2015 to $818,894 for the nine months ended September 30, 2016.
Depreciation expense increased $18,323 from
$110,317 for the nine months ended September 30, 2015 to $128,640 for the nine months ended September 30, 2016.
General and administrative expense consists
primarily of compensation and support costs for management staff, and for other general and administrative costs, including executive,
sales and marketing, investor relations, accounting and finance, legal, consulting and other operating expenses.
General and administrative expenses decreased
$477,957 to $1,257,096 for the nine months ended September 30, 2016 compared to $1,735,053 for the nine months ended September
30, 2015. The decrease is due primarily to decreases in non-cash stock option and warrant amortization and investor relations expenses
offset by increases in salaries and wages and legal expenses.
General and administrative non-cash stock option
and warrant amortization decreased by $497,014 to $155,028 for the nine months ended September 30, 2016 compared to $652,042 for
the nine months ended September 30, 2015.
Investor relations expenses decreased by $53,910
from $87,238 for the nine months ended September 30, 2015 to $33,328 for the nine months ended September 30, 2016.
Salaries and wages increased $37,151 from $446,100
for the nine months ending September 30, 2015 to $483,251 for the nine months ending September 30, 2016.
Legal fees increased $21,225 from $140,188 for
the nine months ended September 30, 2015 to $161,413 for the nine months ended September 30, 2016.
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.
Other Income (Expense)
Other expense increased $260,142 to $260,142
for the nine months ending September 30, 2016 from $0 for the nine months ending September 30, 2015, relating to the commitment
fee associated with the purchase of shares by an institutional investor for sale under a stock purchase agreement during the nine-month
period.
Net Loss
Net loss was $3,301,918 and $4,047,528 for the
nine months ended September 30, 2016 and 2015, respectively, for a decrease of $745,610, due primarily to decreases in non-cash
stock option and warrant amortization, outsourced testing and product development expenses, investor relations expenses, laboratory
materials and supplies, disposal of material and obsolete equipment and research and development travel expenses offset by increases
in research and development consulting expenses, salaries and wages, legal, commitment fee associated with the purchase of shares
by an institutional investor for sale under a stock purchase agreement and depreciation.
Significant Accounting Policies
Our discussion and analysis of our financial
condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates based upon historical experience and various other assumptions
that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from
these estimates.
We believe our significant accounting policies
affect our more significant estimates and judgments used in the preparation of our financial statements. Our Annual Report on Form
10-K for the year ended December 31, 2015 contains a discussion of these significant accounting policies.
There
have been no significant changes in our significant accounting policies since December 31, 2015.
See our Note 1 in
our unaudited financial statements for the nine months ended September 30, 2016 as set forth herein for a complete discussion of
our Company’s accounting policies.
Liquidity and Capital Resources
For the nine months ended September 30, 2016
During the nine months ended September 30, 2016,
net cash used in operating activities was $2,271,725 and net cash used in investing activities was $121,104, 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 nine months ended September 30, 2016 was $964,200. At September 30, 2016, our cash and cash equivalents totaled
$2,302,076, our assets totaled $3,560,474, our liabilities totaled $213,224, and we had stockholders’ equity of $3,347,250.
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 $3,600,000 of expenditures over the next 12
months. 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 during 2016.
Our business does not presently generate the
cash needed to finance our current and anticipated operations. We believe we have raised sufficient capital to finance our operations
through June 2017; 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. Such future sources of financing may include cash from
equity offerings, exercise of stock options, warrants and proceeds from debt instruments; but we cannot assure you that such equity
or borrowings will be available or, if available, will be at rates or prices acceptable to us.
On January 29, 2016, we signed a purchase agreement
with Lincoln Park Capital Fund, LLC (“Lincoln Park”) to sell up to $20,000,000 of common stock whereby subject to certain
conditions and at our sole discretion, Lincoln Park has committed to purchase up to $20,000,000 of our common stock over a 36-month
period. In April 2016 our registration statement became effective, which registered for resale by Lincoln Park under the purchase
agreement 5,000,000 shares of our common stock, 350,000 of which were previously issued as a commitment fee and 4,650,000 of which
may be sold by us to Lincoln Park during the term of the purchase agreement. 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 stock the purchase agreement.
We expect that our cash used in operations will
increase during 2016 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 nine months ended September 30, 2016
Net cash used in operating activities was $2,271,725
for the nine months ended September 30, 2016, primarily attributable to the net loss of $3,301,918 adjusted by $73,804 in warrants
issued for services, $325,954 in options issued for services, $278,142 in common stock issued for services, $145,658 in depreciation
expenses and patent amortization expenses, $97,012 in prepaid expenses and $110,267 in accounts payable and accrued expenses and
$644 gain on disposal of property and equipment. 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 $121,104
for the nine months ended September 30, 2016, consisting of $42,799 for intangibles, $97,805 in asset additions primarily for the
new lab facility and $19,500 in proceeds from sale of equipment.
Net cash provided by financing activities was
$964,200 for the nine months ended September 30, 2016 and consisted of $964,200 in proceeds from the sale of common stock to an
institutional investor.
Inflation and Seasonality
We do not believe that our operations are significantly
impacted by inflation. Our business is not seasonal in nature.