LWLG - Lightwave Logic: Product Commercialization Progress Seems Slow

2024-01-21 03:29:17 ET

Summary

• It’s been over 18 months since I last covered Lightwave Logic and the company still has no revenues despite a commercial agreement in May 2023.
• I’m pessimistic about the commercialization of the products in the coming years and I think the stock is likely to continue losing momentum.
• Yet, it could be best for risk-averse investors to avoid Lightwave Logic stock as the short squeeze risk seems high.

Introduction

In 2021 and 2022, I wrote a total of 3 articles on SA about electro-optic photonic technology company Lightwave Logic (LWLG). The latest of them was in May 2022 and in it I said that it had made negligible progress towards the commercialization of its products and that it could run out of cash by early 2024.

Considering we’re into 2024, I think this could be a good time to revisit Lightwave Logic. In my view, the balance sheet looks strong thanks to institutional equity investments over the past two years, but the company has made little progress towards a commercial launch of its products. My rating on the stock is sell. Let’s review.

Overview of the business and financials

In case you are unfamiliar with Lightwave Logic or my earlier coverage, here's a short description of the business. The company was established in 2004 and is involved in the development of electro-optic photonic devices. The general idea behind this technology is that electro-optical devices can convert data from electric signals into optical signals and this could be the future of the internet and data centers thanks to higher data transfer speeds and lower energy usage. Lightwave Logic claims that its technology platform uses in-house proprietary high-activity and high-stability organic polymers, and that its modulator devices can work at extremely high frequencies, possessing inherent advantages over current crystalline electro-optic material that is present in most modulator devices (pages 20 and 21 of the Q3 2023 financial report here ).

Lightwave Logic has a significant intellectual property portfolio that includes over 70 patents issued and pending (slide 13 of the corporate presentation here ) as well as a fabrication facility in Colorado. It claims that it’s currently working with commercial foundries to implement its electro-optic polymers into accepted process development kits by the foundries (page 21 of the Q3 2023 financial report). In May 2023, Lightwave Logic secured its maiden commercial agreement which includes a 4-year supply and license deal for its patented electro-optic polymer materials for use in manufacturing photonic devices. According to the December 2023 corporate presentation, it seems that commercialization of the company’s products is just around the corner (slide 15 of the corporate presentation).

Here is where the red flags start to appear though - no names of prospects or foundry partners are known, and this has been the case for years now. In addition, revenues have been just around the corner for several years now. Allow me to show you a few examples. In May 2017, Lightwave Logic claimed that it was rapidly accelerating toward turning into a world-class polymer device revenue-generating enterprise after achieving high-speed modulation enabling 25Gbps in its polymer-based optical modulator. In August 2018, the company said that it was on track with plans to commercialize its 50Gbps polymer modulator technical platform. As I mentioned in my May 2022 article about Lightwave Logic, the company mentioned in its Q1 2022 financial report that it believed its Polymer Stack ridge waveguide modulator was its first commercially viable device (page 19 of the Q1 2022 financial report here ). You can find the same wording in the Q3 2023 financial report (page 22) and it seems this product is still being packaged only into prototype packages.

Turning our attention to the Q3 2023 financial results, we can see that Lightwave Logic has no revenues from grants, which is unusual for a research lab. Regarding that May 2023 commercial agreement, there were no revenues from it in Q2 and Q3 and I’m concerned that its value could be inconsequential as the up-front licensing fee was just $50,000 (page 10 of the Q3 2023 financial report). Lightwave Logic currently spends around $1.3 million per month on research and development while general and administrative costs are about $0.4 million per month.

Looking at the balance sheet, cash and equivalents stood at $30.9 million as of September 2023 (page 2 of the Q3 2023 financial report). Yet, I don’t expect Lightwave Logic to run out of cash considering it often pays for services with shares and stock options and it has proved time and time again that it can raise funds through institutional equity investments.

Overall, I’m skeptical that electro-optical devices are the future of the internet. At least not anytime soon. The technology sounds interesting but just like nuclear fusion energy, it’s likely decades away from commercialization. Lightwave Logic has been optimistic about the commercial launch of its products for several years, but its financial statements still continue to show zero revenues. While the balance sheet is strong, I doubt the company can generate significant revenues in the coming few years. With that comes a loss of momentum for its stock and I continue to be bearish.

So, how do you play this one? Well, I think there is a good short-selling opportunity here. Data from Fintel shows that the short borrow fee rate is just 5.42% and hedging the risk through long-dated call options seems relatively cheap.

That being said, I’m concerned that the short squeeze risk could be high as the short interest is 19.25% of the float and it takes over 28 days to cover. In light of this, it could be best for risk-averse investors to avoid Lightwave Logic stock.

Looking at the upside risks, I think that the major one besides the short squeeze risk is that the share prices of microcap companies can soar for spurious and unknown reasons. Lightwave Logic itself is a good example of this as its share price has spiked several times over the past few years, most notably in late 2021.

Investor takeaway

Lightwave Logic had no revenues for the first nine months of 2023 and I’m pessimistic about the commercialization of its products in the coming years in light of a history of underdelivering. In my view, the stock is likely to continue losing momentum over the coming months but the short interest level here is high and this creates significant short squeeze risk. In my view, risk-averse investors should avoid this stock.

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