LWLG - Lightwave Logic: Remains A Battleground
2023-11-06 09:26:20 ET
Summary
- Lightwave Logic is an interesting company with unusual trading dynamics as a battleground stock.
- Timelines for product release and profitability are uncertain, and additional financing is required posing reflexivity risks.
- The stock is highly shorted, which makes the situation volatile and could trigger some dangers in financing terms and cause more dilution.
- However, in high-optionality stocks like LWLG, volatility is actually positive, and short squeezes could give the company opportunities to finance more efficiently.
- Finally, some commercial agreements being signed is good and somewhat proves out the technology. But investors need to understand that reflexivity risks are very serious.
Lightwave Logic ( LWLG ) is an interesting company for more than just its patents and technology, it is interesting because it features pretty unusual trading dynamics and a shareholder structure that is important to consider as we remain in a reflexivity risk environment. Based on the latest disclosures available, all we can say is that timelines are still highly uncertain and the company is virtually guaranteed to have to go to market which will cause dilution, in addition to about 10% outstanding dilution that is part of capping upside if things go well from warrants and options. The company is vulnerable to short attacks, which heightens reflexivity risks. On the other hand, it is also a battleground where retail support could lead to a squeeze and help the company achieve better termed financing. Addition to the Russel 2000 ( IWM ) is nice, but what really matters to shareholders is reflexivity risks and imminent needs of financing.
Key Matters
LWLG is an interesting company, and the management discloses quite a lot of helpful information on their patents and technology. We gave a short primer in our previous article:
LWLG has lots of patents and is working on products that are based on its own material science, which is more flexible than the key methods for making electro-optic products with inorganic chemistry, so easily contaminated crystals of various types for affecting light, and more resistant than other polymer-based paradigms to more trying environments and higher bandwidth connectivity.
The markets are large, including datacenters, and the volumes are, in principal, substantial with the possibility for substantial pricing power. Some analysts speculated on this on the last call, and CEO Michael Lebby described the figures that independent researchers came up with in terms of the market size and timelines.
Now that just shows you the size of the market in 2030. This is here to shows you how they see this market building. They see in 2025, there's going to be about, was it about 80,000. That's going to be about 80,000. Here it's going to be about 3 million. If we can get all of the 80,000, then we've attained our obtainable market. We may get more than 80,000 and then we'll be going into this market. That just gives you—this is our view of what we think is obtainable given our resources.
Timelines remain long for when these products actually hit the market and when LWLG will start making money. Lebby thought that 2035 was too conservative, and that obtainable markets could be captured by 2030, which is not too far but will require financing to get there.
LWLG works with foundries and is assessing and helping foundries out with applying their technologies, and report solid performance by the chips sent back. Apparently, some concrete things are happening, but the company has been opaque on the matter.
I'll finish with one slide, and this is the one slide that's probably going to generate a lot of Q&A. It's the press release that came out this morning. Unfortunately, we didn't have time to get it ready for everybody to come in this morning. But I just want to focus on one thing. I mean, okay, the title is Lightwave Logic begins Commercialization of its EO Polymer Materials.
Michael Lebby
This is in reference to a press release wh ere they disclose that a licensing agreement has been signed.
Some basic ideas for the formulation of the deal were also given, showing that it is quite traditional, but details are naturally quite sparse.
For us, it's huge. It's really huge. We're supplying the material. There's a license initiation fee, there are royalties per unit. There's some minimums as you go up in years and there's some minimum sales volumes. I haven't gone into any of the details, but certainly, we've been talking to a number of folks and gone across the finish line, and that's what the PR was this morning.
Michael Lebby
Our Take
We don't want to comment on the technology as there are very sophisticated holders out there, but we can give our financial take. Firstly, there are around 10 million shares that could be issued in connection with options, warrants and stock compensation plans, meaning around 10% dilution. Additionally, the company will need more financing. The 10-K details the sales agreements they have to get more equity financing. As of the 10-K, they still hadn't exercised the first $30 million. Now they have. There is another $30 million to raise in connection with another purchase agreement. Then more will likely need to be raised after that, as $30 million covers about 1.5-2 years at current cash burn rates. We highly doubt that the company can stop burning cash in the next four years, after which point the market will still need to be interested in buying primary issuances otherwise there's trouble. Even within this 4-year period, at every exercise of selling agreements for the shares, dilution will occur. Moreover, the company expects cash burn to grow over time so we are being charitable, and timelines will be shorter.
The stock is highly shorted, currently with almost 20% short interest. This means that if the company's stock price collapses in a moment where it desperately needs financing, this could death spiral the business' and make it difficult to do further equity raises, in addition to incurring a large dilution in the moment. Conversely, a short squeeze could be good for speculators and possibly average up the equity financing terms for the company, and have a real effect - reflexivity goes both ways. However, it's not like the company can fully take advantage of a short squeeze in its equity financing.
On balance, it is probably better that this is a battleground stock than not, as short squeeze possibilities actually limit the company's real financial dangers and could bring on a charity loop that wishes the business into a more solid going concern status, much like what happened with Tesla ( TSLA ) half a decade ago around the major short events on the stock. However, like all cash burners, especially with shallow cash reserves, reflexivity is a serious risk for the value of ownership of today's shareholders, and could jeopardise the company depending on the situation in the economy and the funding environment. We are still in danger of higher for longer dynamics and a recession massively bringing down overall equity market values, especially in the small cap space.
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Lightwave Logic: Remains A Battleground