WASHINGTON, D.C. 20549
Securities registered or to be registered pursuant to Section 12(b) of the Act: None.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: Common Stock, no par value.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: Not Required.
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Note – Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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.
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 during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).. ☒
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,”
“accelerated filer,” and “emerging growth company” in the Exchange Act.
If an emerging growth company that prepares its financial statements in accordance
with U.S. GAAP, indicate by check mark 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 which basis of accounting the registrant has used to prepare
the financial statements included in this filing:
If “Other” has been checked in response to the previous question,
indicate by check mark which financial statement item the registrant has elected to follow.
POET Technologies Inc. is organized under the Business
Corporations Act (Ontario). In this Annual Report, the “Company”, “we”, “our”, “POET”
and “us” refer to POET Technologies Inc. and its subsidiaries (unless the context otherwise requires). We refer you
to the documents attached as exhibits hereto for more complete information than may be contained in this Annual Report. Our principal
Canadian corporate offices are located at Suite 1107, 120 Eglinton Avenue East, Toronto, Ontario M4P 1E2, Canada. Our U.S office
is located in the U.S. at Suite 107, 780 Montague Expressway, San Jose, CA, 95131. Our telephone number in Toronto is (416) 368-9411.
We file reports and other information with the Securities
and Exchange Commission (“SEC”) located at 100 F Street NE, Washington, D.C. 20549. You may obtain copies of our filings
with the SEC by accessing their website located at www.sec.gov. We also file reports under Canadian regulatory requirements on
SEDAR; you may access our reports filed on SEDAR by accessing the website www.sedar.com.
This Annual Report (including the consolidated audited financial
statements for the years ended December 31, 2018, 2017 and 2016 attached thereto, together with the auditors’ report thereon),
and the exhibits thereto shall be deemed to be incorporated by reference as exhibits to the Registration Statement of the Company
on Form F- 10, as amended (File No. 333-227873), and to be a part thereof from the date on which this report was filed, to the
extent not superseded by documents or reports subsequently filed or furnished.
POET Technologies is a developer and manufacturer of optical light
source products for the sensing and data communications markets. Integration of optics and electronics is fundamental to increasing
functional scaling and lowering the cost of current photonic solutions. POET believes that its approach to hybrid integration of
devices, utilizing a novel dielectric platform and proven advanced wafer-level packaging techniques enables substantial improvements
in device cost, efficiency and performance. Optical engines based on this integrated approach have applications ranging from data
centers to telecommunication networks to consumer products.
During the year ended December 31, 2018, the Company generated revenues of $3,888,185 and gross profit of $2,412,216. The Company currently operates at a loss.
The loss for 2018 was $16,322,779. 100% of the Company’s revenue in 2018 was generated from the sale of sensing products
and non-recurring engineering (“NRE”) revenue through the Company’s subsidiary DenseLight Semiconductor Pte. Ltd. (“DenseLight”).
During 2018, the Company spent $8,692,804 on research
and development activities directly related to the development and commercialization of the POET Optical Interposer Platform
(“POIP”) and the development of photonic sensing products. $11,689,204 was spent on selling, marketing and
administration expenses which included non-cash operating costs of $6,584,741, of which $2,562,624 related to depreciation
and amortization, and $4,022,117 related to the fair value stock-based compensation. The 2018 loss included other income of
$1,505,790 of which $1,481,260 related to the recovery of certain qualifying expenses from the Economic Development Board
(“EDB”) in Singapore. The recovery includes both collected recoveries and an amount to be received in 2019. EDB
recoverable for the year ended December 31, 2018 was $1,905,593. The Company also had deferred income tax recovery of
$297,940 for the year ended December 31, 2018.
On February 1, 2019, the Company signed a non-binding Letter of Intent (LOI)
for the sale of all the outstanding shares of DenseLight. Key terms of the LOI include proposed cash consideration in the range
of $26 - $30 million, including a $4 million earn-out provision, no-shop and confidentiality clauses, and an undertaking to enter
into key operating agreements, including a preferred supply agreement and a long-term strategic cooperation agreement among the
parties. The parties expect to complete the signing of the definitive transaction agreements on or before September 15, 2019. The
broad terms of the LOI and the consummation of any transaction are subject to further due diligence, the negotiation of definitive
agreements and obtaining required approvals by all parties, including but not limited to the TSX Venture Exchange and a majority
of the Company's shareholders.
On February 1, 2019, management committed to a plan to
sell its subsidiary, DenseLight. The decision was taken in line with a strategy to focus on the Company's opportunities related
to its Optical Interposer. The divestiture of DenseLight will immediately reduce the Company's operating losses and cash burn,
while allowing the Company to pursue a "fab-light" strategy with a less capital-intensive business model that is focused
on growing the Optical Interposer business through targeted investments in the design, development and sale of vertical market
solutions
The Company’s balance sheet as of December 31, 2018 reflects assets
with a book value of $25,137,903 compared to $25,205,772 as of December 31, 2017. Twenty-seven percent (27%) of the book value
as of December 31, 2018, or $6,888,264, was in current assets consisting primarily of cash and other current assets, compared to
thirty-two percent (32%), or $7,950,712 as of December 31, 2017.
The Company’s working capital of $3,847,842 is not sufficient to support
its operating and investing activities over the next 12 months. The Company has several sources of financing that it is considering
in order to continue as a going concern. These sources of financing include internal cash generation from operations, financing
via public offering, assumption of debt or a combination of all three sources.
In order to provide internal financing, the Company negotiated multiple NRE
contracts in excess of US$3 million with large suppliers of networking and datacom equipment. These NRE contracts extend into 2019
and will generate immediate high margin cash flow.
During 2018, the Company purchased US$3.7 million of new equipment. The payment
terms for the new equipment were negotiated both prior to placing purchase orders and re-negotiated subsequent to taking possession
of the equipment. While the Company took possession of the new equipment, it was permitted to defer a portion of purchase cost
without penalty or interest cost to 2019.
On March 21, 2018, the Company strengthened its working capital position relative
to December 31, 2017 by completing a “bought deal” public offering of 25,090,700 units at a price of $0.425 (CAD$0.55)
per unit for gross proceeds of $10,663,548 (CAD$13,799,885). Each unit consists of one common share and one-half common share purchase
warrant. Each whole warrant entitles the holder to purchase one common share of the Company at a price of $0.58 (CAD$0.75) per
share until March 21, 2020. The broker was paid a cash commission of $639,813 (6%) of the gross proceeds and received 1,505,442
compensation options. Each compensation option is exercisable into one compensation unit of the Company at a price of $0.425 (CAD$0.55)
per compensation unit until March 21, 2020 with each compensation unit comprising one common share and one-half compensation share
purchase warrant. Each whole compensation share purchase warrant entitles the broker to purchase one common share of the Company
at a price of $0.425 (CAD$0.55) per share until March 21, 2020. The Company paid an additional $492,177 in other costs related
to this financing. The Company received $9,531,558 net of share issue costs. Additionally, the Company raised $1,116,445 from the
exercise of warrants and stock options.
On November 28, 2018, the Company filed a preliminary short form base shelf
prospectus where it advised shareholders of its intent to raise a maximum US$50 million through a public offering of either equity
securities, debt securities or a combination of both. The Company has met with multiple investment bankers in both Canada and the
United States who have expressed an interest in assisting the Company with a capital raise.
As at December 31, 2018, the Company has accumulated losses of $(133,195,932)
and working capital of $3,847,842. During the year ended December 31, 2018, the Company had negative cash flows from operations
of $9,288,588. The Company has prepared a cash flow forecast which indicates that it does not have sufficient cash to meet its
minimum expenditure commitments and therefore needs to raise additional funds to continue as a going concern for the next twelve
months from the issuance of this Annual Report on Form 20-F . As a result, there is substantial doubt about the Company's ability
to continue as a going concern for the next twelve months from the issuance of this Annual Report on Form 20-F.
To address the future funding requirements, management has undertaken the
following initiatives:
In line with its needs for additional financing, on April
3, 2019, the Company closed the first tranche of a private placement of convertible debentures that raised gross proceeds of CAD$1,929,000
(the "Debentures"). The Debentures are unsecured, bear interest at 12% per annum, compounded annually with 1% payable
at the beginning of each month and mature on April 3, 2021. Insiders of the Company subscribed for over 47% of the first tranche
of Convertible Debentures, including the Company’s board of directors, senior management team and financial advisors, IBK
Capital. Successive tranche closings in the coming months are each subject to approval by the TSX Venture Exchange.
Additionally, the Company arranged for a credit facility
(the “Bridge Loan”) to be provided by Espresso Capital Ltd which will grant the Company access to a maximum US$5,000,000.
The Company signed the loan documents on April 18, 2019 and was advanced US$2,000,000 on April 23, 2019. In partial consideration
of the US$5,000,000 gross credit facility available to the Company, and in connection with the initial advance of US2,000,000,
the Company issued to Espresso Capital warrants for the purchase of 3,289,500 common shares at a price of C$0.35 per share. The
Warrants expire on April 18, 2020.
In this Annual Report, unless otherwise specified, all dollar
amounts are expressed in United States Dollars (“US$”, “USD” or “$”).
This Annual Report on Form 20-F and other publicly available documents,
including the documents incorporated herein and therein by reference contain forward- looking statements and information within
the meaning of U.S. and Canadian securities laws. Forward-looking statements and information can generally be identified by the
use of forward- looking terminology or words, such as, “continues”, “with a view to”, “is designed
to”, “pending”, “predict”, “potential”, “plans”, “expects”, “anticipates”,
“believes”, “intends”, “estimates”, “projects”, and similar expressions or variations
thereon, or statements that events, conditions or results “can”, “might”, “will”, “shall”,
“may”, “must”, “would”, “could”, or “should” occur or be achieved and
similar expressions in connection with any discussion, expectation, or projection of future operating or financial performance,
events or trends. Forward- looking statements and information are based on management’s current expectations and assumptions,
which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Our actual results, performance and achievements may
differ material from those expressed in, or implied by, the forward-looking statements and information in this Annual Report as
a result of various risks, uncertainties and other factors, many of which are difficult to predict and generally beyond the control
of the Company, including without limitation:
For all of the reasons set forth above, investors should
not place undue reliance on forward-looking statements. Other than any obligation to disclose material information under applicable
securities laws or otherwise as maybe required by law, we undertake no obligation to revise or update any forward-looking statements
after the date hereof.
Data relevant to estimated market sizes for our technologies under
development are presented in this Annual Report. These data have been obtained from a variety of published resources including
published scientific literature, websites and information generally available through publicized means. The Company attempts to
source reference data from multiple sources whenever possible for confirmatory purposes. However, the Company has not independently
verified the accuracy and completeness of this data.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISORS
A. Not Required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Required.
ITEM 3. KEY INFORMATION
|
A.
|
Selected Financial Data
|
The selected financial data of the Company for the years ended
December 31, 2018, 2017 and 2016 was derived from the audited annual consolidated financial statements of the Company, which have
been audited by Marcum LLP, independent registered public accounting firm. Selected financial data of the Company for the years
ended December 31, 2015 and 2014 was derived from the consolidated financial statements of the Company, which are not included
in this Annual Report.
The information contained in the selected financial data
for the 2018, 2017 and 2016 years is qualified in its entirety by reference to the Company’s audited consolidated financial
statements and related notes included under the heading “ITEM 17”. Financial Statements” and should be read in
conjunction with such financial statements and related notes and with the information appearing under the heading “ITEM 5”.
Operating and Financial Review and Prospects.”
Except where otherwise indicated, all amounts are presented in accordance with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board (“IASB”).
Since its formation, the Company has financed its operations
from public and private sales of equity securities, proceeds received upon the exercise of warrants and stock options, research
and development contracts from U.S. government agencies, sales of the Company’s photonic products and, prior to 2012, by
sales of solar energy equipment products. The Company has never been profitable, so its ability to finance operations has been
dependent on equity financings. While the Company has been generating cash flow from the sale of its photonic sensing products
and NRE, we believe that it will also need to rely on the sale of our equity securities, debt securities or a combination of both
to provide funds for its activities. See ITEM 3.D. “Risk Factors.”
The Company has not declared any dividends since incorporation
and does not anticipate that it will do so in the foreseeable future.
Consolidated Statements of Operations Under
International
Financial Reporting Standards
(US$)
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
|
$
|
3,888,185
|
|
|
$
|
2,794,044
|
|
|
$
|
1,861,747
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
1,475,969
|
|
|
|
1,342,691
|
|
|
|
946,001
|
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
2,412,216
|
|
|
|
1,451,353
|
|
|
|
915,746
|
|
|
|
-
|
|
|
|
-
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing and administration
|
|
|
11,689,204
|
|
|
|
10,870,741
|
|
|
|
11,421,604
|
|
|
|
8,614,109
|
|
|
|
9,677,705
|
|
Research and development
|
|
|
8,692,804
|
|
|
|
5,442,873
|
|
|
|
3,165,825
|
|
|
|
3,532,492
|
|
|
|
2,277,927
|
|
Impairment loss
|
|
|
156,717
|
|
|
|
-
|
|
|
|
63,522
|
|
|
|
-
|
|
|
|
-
|
|
Loss on disposal of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
46,738
|
|
|
|
-
|
|
|
|
-
|
|
Other income, including interest
|
|
|
(1,505,790
|
)
|
|
|
(1,766,524
|
)
|
|
|
(66,872
|
)
|
|
|
(76,431
|
)
|
|
|
(169,832
|
)
|
Operating expenses
|
|
|
19,032,935
|
|
|
|
14,547,090
|
|
|
|
14,630,817
|
|
|
|
12,070,170
|
|
|
|
11,785,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations
|
|
|
(16,620,719
|
)
|
|
|
(13,095,737
|
)
|
|
|
(13,715,071
|
)
|
|
|
(12,070,170
|
)
|
|
|
(11,785,800
|
)
|
Change in fair value contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
(283,130
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss before income tax recovery
|
|
|
(16,620,719
|
)
|
|
|
(13,095,737
|
)
|
|
|
(13,431,941
|
)
|
|
|
(12,070,170
|
)
|
|
|
(11,785,800
|
)
|
Income tax recovery
|
|
|
(297,940
|
)
|
|
|
(297,940
|
)
|
|
|
(207,257
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss for the year
|
|
|
(16,322,779
|
)
|
|
|
(12,797,797
|
)
|
|
|
(13,224,684
|
)
|
|
|
(12,070,170
|
)
|
|
|
(11,785,800
|
)
|
Deficit, beginning of year
|
|
|
(116,873,153
|
)
|
|
|
(104,075,356
|
)
|
|
|
(90,850,672
|
)
|
|
|
(78,780,502
|
)
|
|
|
(66,994,702
|
)
|
Deficit, end of year
|
|
$
|
(133,195,932
|
)
|
|
$
|
(116,873,153
|
)
|
|
$
|
(104,075,356
|
)
|
|
$
|
(90,850,672
|
)
|
|
$
|
(78,780,502
|
)
|
Basic and diluted loss per share:
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.08
|
)
|
Certain prior period figures have been reclassified
to conform with the current period’s presentation
Consolidated Statements
of Financial Position
Under International Financial Reporting Standards
(US$)
|
|
December 31,
|
Assets
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Cash and cash equivalents
|
|
$
|
2,567,868
|
|
|
$
|
4,974,478
|
|
|
$
|
14,376,282
|
|
|
$
|
14,409,996
|
|
|
$
|
11,287,864
|
|
Short-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
589,275
|
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable
|
|
|
946,944
|
|
|
|
493,925
|
|
|
|
292,849
|
|
|
|
-
|
|
|
|
-
|
|
Prepaids and other current assets
|
|
|
2,936,619
|
|
|
|
1,957,727
|
|
|
|
758,917
|
|
|
|
150,923
|
|
|
|
243,501
|
|
Inventory
|
|
|
436,833
|
|
|
|
524,582
|
|
|
|
1,116,880
|
|
|
|
-
|
|
|
|
-
|
|
Property and equipment
|
|
|
9,299,513
|
|
|
|
8,278,170
|
|
|
|
9,364,210
|
|
|
|
947,107
|
|
|
|
1,058,860
|
|
Patents and licenses
|
|
|
466,714
|
|
|
|
456,250
|
|
|
|
449,676
|
|
|
|
426,813
|
|
|
|
260,721
|
|
Intangible assets
|
|
|
802,409
|
|
|
|
839,637
|
|
|
|
876,865
|
|
|
|
-
|
|
|
|
-
|
|
Goodwill
|
|
|
7,681,003
|
|
|
|
7,681,003
|
|
|
|
7,681,003
|
|
|
|
-
|
|
|
|
-
|
|
Total Assets
|
|
$
|
25,137,903
|
|
|
$
|
25,205,772
|
|
|
$
|
35,505,957
|
|
|
$
|
15,934,839
|
|
|
$
|
12,850,946
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
3,040,422
|
|
|
$
|
810,593
|
|
|
$
|
1,624,344
|
|
|
$
|
515,421
|
|
|
$
|
451,724
|
|
Deferred tax liability
|
|
|
1,000,427
|
|
|
|
1,298,367
|
|
|
|
1,596,307
|
|
|
|
-
|
|
|
|
-
|
|
Deferred rent
|
|
|
1,814
|
|
|
|
24,031
|
|
|
|
42,665
|
|
|
|
-
|
|
|
|
-
|
|
Total Liabilities
|
|
|
4,042,663
|
|
|
|
2,132,991
|
|
|
|
3,263,316
|
|
|
|
515,421
|
|
|
|
451,724
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
112,028,194
|
|
|
|
103,616,221
|
|
|
|
103,357,862
|
|
|
|
81,027,171
|
|
|
|
61,688,953
|
|
Warrants
|
|
|
8,303,738
|
|
|
|
5,985,378
|
|
|
|
5,985,378
|
|
|
|
2,013,747
|
|
|
|
6,458,659
|
|
Contributed surplus
|
|
|
36,042,754
|
|
|
|
32,102,967
|
|
|
|
29,062,874
|
|
|
|
25,618,159
|
|
|
|
23,616,664
|
|
Accumulated other comprehensive loss
|
|
|
(2,083,514
|
)
|
|
|
(1,758,632
|
)
|
|
|
(2,088,117
|
)
|
|
|
(2,388,987
|
)
|
|
|
(584,552
|
)
|
Deficit
|
|
|
(133,195,932
|
)
|
|
|
(116,873,153
|
)
|
|
|
(104,075,356
|
)
|
|
|
(90,850,672
|
)
|
|
|
(78,780,502
|
)
|
Total Equity
|
|
|
21,095,240
|
|
|
|
23,072,781
|
|
|
|
32,242,641
|
|
|
|
15,419,418
|
|
|
|
12,399,222
|
|
Total Liabilities and Equity
|
|
$
|
25,137,903
|
|
|
$
|
25,205,772
|
|
|
$
|
35,505,957
|
|
|
$
|
15,934,839
|
|
|
$
|
12,850,946
|
|
|
B.
|
Capitalization and Indebtedness
|
Not Required.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not Required.
We are subject to various risks, including those described below,
which could materially adversely affect our business, financial condition and results of operations and, in turn, the value of
our securities. In addition, other risks not presently known to us or that we currently believe to be immaterial may also adversely
affect our business, financial condition and results of operations, perhaps materially. The risks discussed below also include
forward-looking statements and information within the meaning of U.S. and Canadian securities laws that involve risks and uncertainties.
The Company’s actual results may differ materially from the results discussed in the forward-looking statements and information
Factors that might cause such differences include those discussed. Before making an investment decision with respect to any of
our securities, you should carefully consider the following risks and uncertainties described below and elsewhere in this Annual
Report. See also “Cautionary Statement Regarding Forward-Looking Statements.”
Risks Related to Our Business
We have agreed in principle
to divest our major operating asset, have adopted a new “fab-light” strategy, and plan to focus on the Optical Interposer
as our main business, any or all of which may have a material adverse effect on the results of our operations, financial position
and cash flows, and pose further risks to the successful operation of our business over the short and long-term, as well as to
the interpretation of our financial results by shareholders and our share price.
There are substantial risks associated
with our proposed sale of our DenseLight business located in Singapore and adoption of a “fab-light” strategy, including
the immediate loss of all or a substantial part of our revenue, the loss of control over an internal development asset, and the
loss of key technical knowledge available from personnel who will no longer be employed by the Company, whom we may have to replace.
At the present time we have executed
a non-binding Letter of Intent (LOI) for the DenseLight sale and are in the process of negotiating definitive agreements. We cannot
guarantee that we will reach a final agreement and any material renegotiation of the terms represented in the LOI may result in
significant write-offs, including those related to goodwill and other intangible assets, which may have a material adverse effect
on our results of operations and financial position. The negotiation process itself is a diversion of management’s attention
from other business concerns, which also may have a material adverse effect on the business. If we do not reach agreement with
the current potential buyer, we have committed to seek other buyers as part of our “fab-light” strategy, which would
be a time- consuming process that may continue to divert management’s attention from other business concerns and which we
cannot guarantee would be successful. If we are not successful in selling DenseLight or if there is material delay in the sale
or a substantial reduction in the price at which it can be sold, then our financial position and cash flows will be adversely affected,
we may have to repay any borrowings on the secured credit facility (see next risk factor) or absorb a substantial increase in interest
cost, and may not be able to sustain operations at their current levels or at all.
We have some previous experience
with managing development without an internal development resource under a similar “fab-light” strategy which was not
successful, and there is no guarantee that our new approach to operating a company with our chosen strategy will be successful.
Further, our strategy will be solely dependent on the future market acceptance and sale of Optical Interposer-based solutions,
which are not yet fully developed and which no customer has yet adopted in a production product.
We cannot guarantee that the
measures we have taken to protect POET’s intellectual property in the Optical Interposer while performing development activities
at our DenseLight facility have been effective or that some or all of the proprietary information and know-how on which the Optical
Interposer is based has not been learned by the engineers working on Optical Interposer related projects. Following divestment,
we will have little or no control over any leakage of such proprietary information or know-how either within or outside the DenseLight
operation. In addition, we anticipate engaging with DenseLight to complete certain development projects, which will further expose
our intellectual property to parties that we cannot control. Further, we cannot guarantee that DenseLight or any other third-party
that we rely on to perform development, manufacturing, packaging or testing services will perform as expected and produce the devices
we will need to grow our Optical Interposer business.
As “discontinued operations”
our reported financial statements will immediately reflect the fact that all of our sales have been produced from our DenseLight
operating unit. We may elect not to allocate any revenue to POET based on our current interpretation of the LOI and shareholders
and analysts may form a poor opinion about the future prospects of the Company based on having little no revenue. If our development
projects and discussions with customers for the adoption of all or portions of our Optical Interposer solutions are not successful,
we may report little or no revenue for some period of time following the divestment of DenseLight. These and other factors may
have a material adverse effect on the results of our operations and our share price.
There can be no assurance that
we will be successful in addressing these or any other significant risks we may encounter in the divestment of DenseLight, the
adoption of a “fab-light” strategy or the focus of our business solely on the Optical Interposer.
We may not be able to generate
sufficient cash to service our recently acquired debt obligations.
We recently sold unsecured convertible
debentures and secured financing with a bridge lender in the form of a secured credit facility. Our ability to make payments on
our debt will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter, and
is subject to prevailing economic conditions and financial, business and other factors, many of which are beyond our control. In
addition, we have certain covenants in the secured credit facility that if not met would result in an significant increase in our
interest cost and there are conditions which if not met would prevent us from accessing any additional funds from this facility.
We cannot assure you that we will be able to generate sufficient cash flow or that we will be able to borrow funds from another
source in amounts sufficient to enable us to service our debt or to meet our working capital requirements. If we are not able to
generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, we may be required to sell equity
or assets, reduce expenditures, refinance all or a portion of our existing debt or obtain additional financing. We cannot assure
you that we will be able to refinance our debt, sell assets or equity or borrow more funds on terms acceptable to us, if at all.
The process of developing new, technologically advanced
products in semiconductor manufacturing and photonics products is highly complex and uncertain, and we cannot guarantee a positive
result.
The development of new, technologically advanced products is a
complex and uncertain process requiring frequent innovation, highly-skilled engineering and development personnel and significant
capital, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products successfully or on a timely basis. Further, we cannot
assure you that our new products will gain market acceptance or that we will be able to respond effectively to product introductions
by competitors, technological changes or emerging industry standards. We also may not be able to develop the underlying core technologies
necessary to create new products and enhancements, license these technologies from third parties, or remain competitive in our
markets.
Customer demand is difficult to forecast accurately
and, as a result, we may be unable to match production with customer demand.
We make planning and spending decisions, including determining
the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and
other resource requirements, based on our estimates of product demand and customer requirements. Our products are typically sold
pursuant to individual purchase orders. While our customers may provide us with their demand forecasts, they are typically not
contractually committed to buy any quantity of products beyond firm purchase orders. Furthermore, many of our customers may increase,
decrease, cancel or delay purchase orders already in place without significant penalty. The short-term nature of commitments by
our customers and the possibility of unexpected changes in demand for their products reduce our ability to accurately estimate
future customer requirements. If any of our customers decrease, stop or delay purchasing our products for any reason, we will likely
have excess manufacturing capacity or inventory and our business and results of operations would be harmed.
If our customers do not qualify our products for use
on a timely basis, our results of operations may suffer.
Prior to the sale of new products, our customers typically
require us to “qualify” our products for use in their applications. At the successful completion of this qualification
process, we refer to the resulting sales opportunity as a “design win.” Additionally, new customers often audit our
manufacturing facilities and perform other evaluations during this qualification process. The qualification process involves product
sampling and reliability testing and collaboration with our product management and engineering teams in the design and manufacturing
stages. If we are unable to accurately predict the amount of time required to qualify our products with customers, or are unable
to qualify our products with certain customers at all, then our ability to generate revenue could be delayed or our revenue would
be lower than expected and we may not be able to recover the costs associated with the qualification process or with our product
development efforts, which would have an adverse effect on our results of operations.
The markets in which we operate are highly competitive,
which could result in lost sales and lower revenues.
The market for optical components and modules is highly competitive
and this competition could result in our existing customers moving their orders to our competitors. We are aware of a number of
companies that have developed or are developing optical component products, including LEDs, lasers, pluggable components, modules
and subsystems, among others, that compete (or may in the future compete) directly with our current and proposed product offerings.
Some of our current competitors, as well as some
of our potential competitors, have longer operating histories, greater name recognition, broader customer relationships and industry
alliances and substantially greater financial, technical and marketing resources than we do. We may not be able to compete successfully
with our competitors and aggressive competition in the market may result in lower prices for our products and/or decreased gross
margins. Any such development could have a material adverse effect on our business, financial condition and results of operations.
Our products, including those sold by predecessor
company, OPEL Solar, could contain defects that may cause us to incur significant costs or result in a loss of customers or subject
us to claims for which we may not be fully insured.
Our predecessor company, Opel Solar, sold solar systems
and products between 2007 and 2012, and some of those products may still be under warranty. We have not undertaken to quantify
the size of that warranty obligation and it is not recorded on our balance sheet because it is not determinable. Although we carry
product liability insurance, this insurance may not adequately cover our costs arising from defects or warranty claims related
to those products.
Our current products sold by DenseLight are complex and undergo
quality testing as well as formal qualification by our customers. Our customers’ testing procedures are limited to evaluating
our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons, such as the
occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated
under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result
from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant
costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. Our products
are typically embedded in, or deployed in conjunction with, our customers’ products, which incorporate a variety of components,
modules and subsystems and may be expected to interoperate with modules produced by third parties. As a result, not all defects
are immediately detectable and when problems occur, it may be difficult to identify the source of the problem. We will continue
to face this risk going forward because our products are widely deployed in many demanding environments and applications worldwide.
In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by
warranty to maintain customer relationships. Any significant product failure could result in litigation, damages, repair costs
and lost future sales of the affected product and other products, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems, all of which would harm our business. Although we carry
product liability insurance, this insurance may not adequately cover our costs arising from defects in our products or otherwise.
The business that we acquired did not have a history of
profitable operations. Our ability to successfully manage our manufacturing operations is essential to our overall success, and
if we fail to do so, our financial results will suffer.
At the time of the acquisition of DenseLight Semiconductors,
Pte. Ltd. in May of 2016, the company had been operating at a loss for several years and was at a minimum staffing level. Since
the acquisition we have committed substantial capital and management attention to improving the operation, increasing sales and
driving to profitability. Even though substantial changes in the management and personnel have been made, the results to date have
been less than anticipated and more improvement will be required in order to make the DenseLight operation profitable. We cannot
guarantee that our efforts to improve the DenseLight operation will be successful, and if they are not, the operation will continue
to need capital and attention from the senior management of the Company and our financial results may suffer as a result.
If we encounter manufacturing problems or if manufacturing
at our Singapore operation is discontinued for any reason, including an industrial or workplace accident, we may lose sales and
damage our customer relationships, or be subject to claims for which we may not be fully insured.
We may experience delays, disruptions or quality control
problems in our manufacturing operations. These and other factors may cause less than acceptable yields at our wafer fabrication
facility. Manufacturing yields depend on a number of factors, including the quality of available raw materials, the degradation
or change in equipment calibration and the rate and timing of the introduction of new products. Changes in manufacturing processes
required as a result of changes in product specifications, changing customer needs and the introduction of new products may significantly
reduce our manufacturing yields, resulting in low or negative margins on those products. In addition, because of our wafer size,
we use equipment that is not readily available on the open market and for which spare parts and qualified service people may not
be available. If any of our key equipment were to be damaged or destroyed for any reason, our manufacturing process would be severely
disrupted. Any such manufacturing problems would likely delay product shipments to our customers, which would negatively affect
our sales, competitive position and reputation.
Our operations in Singapore are subject to government
regulations that protect the workplace safety of employees. We strive to maintain an accident-free workplace, but we cannot guarantee
that industrial accidents will not take place, or that we will not be subject to liability for these and other workplace related
claims. We have obtained insurance policies to protect the Company against claims for workplace related claims, but we cannot guarantee
that these and other insurance policies carried by the Company will be sufficient to cover the full costs of such claims, which
could have a material adverse effect on the Company.
We have limited operating history in the datacom
market, and our business could be harmed if this market does not develop as we expect.
The initial target market for our Optical Interposer-based optical
engine is the datacom market and we have no experience in selling products in this market. We may not be successful in developing
a product for this market and even if we do, it may never gain widespread acceptance by large data center operators. If our expectations
for the growth of the datacom market are not realized, our financial condition or results of operations may be adversely affected.
We depend on a limited number of suppliers and
key contract manufacturers who could disrupt our business and technology development activities if they stopped, decreased, delayed
or were unable to meet our demand for shipments of their products or manufacturing of our products.
We depend on a limited number of suppliers of epitaxial
wafers and contract manufacturers for our Indium Phosphide (“InP”) development and production activities. Some of these
suppliers are sole source suppliers. We typically have not entered into long-term agreements with our suppliers. As a result, these
suppliers generally may stop supplying us materials and other components at any time. Our reliance on a sole supplier or limited
number of suppliers could result in delivery problems, reduced control over technology development, product development, pricing
and quality, and an inability to identify and qualify another supplier in a timely manner. Some of our suppliers that may be small
or under-capitalized may experience financial difficulties that could prevent them from supplying us materials and other components.
In addition, our suppliers, including our sole source suppliers, may experience manufacturing delays or shut downs due to circumstances
beyond their control such as earthquakes, floods, fires, labor unrest, political unrest or other natural disasters. A Change in
supplier could require technology transfer that could require multiple iterations of test wafers. This could result in significant
delays in resumption of production.
Any supply deficiencies relating to the quality or quantities
of materials or equipment we use to manufacture our products could materially and adversely affect our ability to fulfill customer
orders and our results of operations. Lead times for the purchase of certain materials and equipment from suppliers have increased,
and in some cases have limited our ability to rapidly respond to increased demand and may continue to do so in the future. To the
extent we introduce additional contract manufacturing partners, introduce new products with new partners and/or move existing internal
or external production lines to new partners, we could experience supply disruptions during the transition process. In addition,
due to our customers’ requirements relating to the qualification of our suppliers and contract manufacturing facilities and
operations, we cannot quickly enter into alternative supplier relationships, which prevents us from being able to respond immediately
to adverse events affecting our suppliers.
Our international business and operations expose us
to additional risks.
Products shipped to customers located outside Canada
and the United States account for a majority of our revenues. In addition, we have significant tangible assets located outside
Canada and the United States. Our manufacturing facilities are located in Singapore. Conducting business outside Canada and the
United States subjects us to a number of additional risks and challenges, including:
|
•
|
periodic changes in a specific country's or region's economic conditions, such as recession;
|
|
•
|
licenses and other trade barriers;
|
|
•
|
the provision of services may require export licenses;
|
|
•
|
environmental regulations;
|
|
•
|
certification requirements;
|
|
•
|
fluctuations in foreign currency exchange rates;
|
|
•
|
inadequate protection of intellectual property rights in some countries;
|
|
•
|
preferences of certain customers for locally produced products;
|
|
•
|
potential political, legal and economic instability, foreign conflicts, and the impact of regional
and global infectious illnesses in the countries in which we and our customers, suppliers and contract manufacturers are located;
|
|
•
|
Canadian and U. S. and foreign anticorruption laws;
|
|
•
|
seasonal reductions in business activities in certain countries or regions; and
|
|
•
|
fluctuations in freight rates and transportation disruptions.
|
These factors, individually or in combination, could impair our
ability to effectively operate one or more of our foreign facilities or deliver our products, result in unexpected and material
expenses, or cause an unexpected decline in the demand for our products in certain countries or regions. Our failure to manage
the risks and challenges associated with our international business and operations could have a material adverse effect on our
business.
If we fail to attract and retain key personnel, our
business could suffer.
Our future success depends, in part, on our ability to
attract and retain key personnel, including executive management. Competition for highly skilled technical personnel is extremely
intense and we may face difficulty identifying and hiring qualified engineers in many areas of our business. We may not be able
to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Our future
success also depends on the continued contributions of our executive management team and other key management and technical personnel,
each of whom would be difficult to replace. The loss of services of these or other executive officers or key personnel or the inability
to continue to attract qualified personnel could have a material adverse effect on our business.
Our prior acquisitions created a large amount
of goodwill, which may be impaired in the future and as a result may adversely affect our financial results. In addition, past
and any future acquisitions involve numerous risks and may adversely affect our financial condition and results of operations.
As part of our business strategy, we have in the past
and may in the future pursue acquisitions of companies that we believe could enhance or complement our current product portfolio,
augment our technology roadmap or diversify our revenue base. Acquisitions involve numerous risks, any of which could harm our
business, including:
|
•
|
difficulties integrating the acquired business;
|
|
•
|
unanticipated costs, capital expenditures, liabilities or changes to product development efforts;
|
|
•
|
difficulties integrating the business relationships with suppliers and customers of the acquired business with our existing
operations;
|
|
•
|
acts or omissions by the acquired company prior to the acquisition that may subject us to unknown risks or liabilities;
|
|
•
|
risks associated with entering markets in which we have little or no prior experience;
|
|
•
|
potential loss of key employees, particularly those of the acquired organizations; and
|
|
•
|
diversion of financial and management resources from our existing business;
|
Our prior acquisitions have resulted, and future acquisitions
may result in the recording of goodwill and other intangible assets subject to potential impairment in the future, adversely affecting
our operating results. We may not achieve the anticipated benefits of an acquisition if we fail to evaluate it properly, and we
may incur costs in excess of what we anticipate. A failure to evaluate and execute an acquisition appropriately or otherwise adequately
address these risks may adversely affect our financial condition and results of operations.
Our predecessor company received and our current
companies receive and expect to receive in the future subsidies and other types of funding from government agencies in the locations
in which we operate. The funding agreements stipulate that if we do not comply with various covenants, including eligibility requirements,
and/or do not achieve certain pre-defined objectives, those government agencies may reclaim all or a portion of the funding provided.
If this were to occur, we would either not be in a position to repay the claimed amounts or would have to borrow large sums in
order to do so or refinance with dilutive financing, which could adversely affect our financial condition.
Our predecessor company, Opel Solar and its wholly-owned subsidiary
ODIS, received research and development grants from the United States Air Force and from NASA; our recently acquired subsidiary
company, DenseLight Semiconductor, Pte, Ltd. is expected to receive funding for new product development activities conducted in
Singapore from the Economic Development Board; and we expect that our recently acquired subsidiary company BB Photonics U.K., may
also apply for certain grants to defer the cost of development in the U.K. The rules for eligibility vary widely across government
agencies, are complex and may be subject to different interpretations. Furthermore, some of the grants set pre-defined development
or spending objectives, which we may not achieve. We cannot guarantee that one or more agencies will not seek repayment of all
or a portion of the funds provided, and if this were to occur, we could have to borrow large sums or refinance with dilutive financing
in order to make the repayments, which would adversely affect our financial condition.
Uncertainties in the interpretation and application of the 2017 Tax Cuts
and Jobs Act could materially affect our tax obligations and effective tax rate.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of
2017, or the “2017 Tax Act,” was signed into law and includes several key tax provisions that affected us, including
a reduction of the statutory corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, elimination
of certain deductions, and changes to how the United States imposes income tax on multinational corporations, among others. The
2017 Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments
to be made in interpretation of the provisions of the 2017 Tax Act, significant estimates in calculations, and the preparation
and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting
bodies will continue to interpret or issue guidance on how provisions of the U.S. Tax Act will be applied or otherwise administered.
As future guidance is issued, we may make adjustments to amounts that we have previously recorded that may materially impact our
financial statements in the period in which the adjustments are made
A significant disruption in, or breach in security of, our information
technology systems or violations of data protection laws could materially adversely affect our business and reputation.
In the ordinary course of business, we collect and store
confidential information, including proprietary business information belonging to us, our customers, suppliers, business partners
and other third parties and personally identifiable information of our employees. We rely on information technology systems to
protect this information and to keep financial records, process orders, manage inventory, coordinate shipments to customers, and
operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due
to power outages, hardware failures, telecommunication failures and user errors. If we experience a disruption in our information
technology systems, it could result in the loss of sales and customers and significant incremental costs, which could materially
adversely affect our business. We may also be subject to security breaches caused by computer viruses, illegal break-ins or hacking,
sabotage, or acts of vandalism by disgruntled employees or third parties. The risk of a security breach or disruption, particularly
through cyberattack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased
as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our information
technology network and systems have been and, we believe, continue to be under constant attack. Accordingly, despite our security
measures or those of our third-party service providers, a security breach may occur, including breaches that we may not be able
to detect. Security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure
of confidential.
We have a history of large operating losses. We may not be able to achieve
or sustain profitability in the future and as a result we may not be able to maintain sufficient levels of liquidity.
The Company’s balance sheet as of December 31, 2018 reflects assets
with a book value of $25,137,903 compared to $25,205,772 as of December 31, 2017. Twenty-seven percent (27%) of the book value
as of December 31, 2018, or $6,888,264, was in current assets consisting primarily of cash and other current assets, compared to
thirty-two percent (32%), or $7,950,712 as of December 31, 2017.
The Company’s working capital of $3,847,842 is not sufficient to support its operating and investing
activities over the next 12 months.
The Company has several
sources of financing that it is considering in order to continue as a going concern for the next twelve months from the issuance
of this Annual Report on Form 20-F. These sources of financing include internal cash generation from operations, financing via
public offering, assumption of debt or a combination of all three sources.
In order to provide internal financing, the Company negotiated multiple non-recurring
engineering (NRE) contracts in excess of US$3 million with large suppliers of networking and datacom equipment. These NRE contracts
extend into 2019 and will generate immediate high margin cash flow.
During 2018, the Company purchased US$3.7 million of new equipment. The payment
terms for the new equipment were negotiated both prior to placing purchase orders and re-negotiated subsequent to taking possession
of the equipment. While the Company took possession of the new equipment, it was permitted to defer a portion of purchase cost
without penalty or interest cost to 2019.
On March 21, 2018, the Company strengthened its working capital position relative
to December 31, 2017 by completing a “bought deal” public offering of 25,090,700 units at a price of $0.425 (CAD$0.55)
per unit for gross proceeds of $10,663,548 (CAD$13,799,885). Each unit consists of one common share and one-half common share purchase
warrant. Each whole warrant entitles the holder to purchase one common share of the Company at a price of $0.58 (CAD$0.75) per
share until March 21, 2020. The broker was paid a cash commission of $639,813 (6%) of the gross proceeds and received 1,505,442
compensation options. Each compensation option is exercisable into one compensation unit of the Company at a price of $0.425 (CAD$0.55)
per compensation unit until March 21, 2020 with each compensation unit comprising one common share and one-half compensation share
purchase warrant. Each whole compensation share purchase warrant entitles the broker to purchase one common share of the Company
at a price of $0.425 (CAD$0.55) per share until March 21, 2020. The Company paid an additional $492,177 in other costs related
to this financing. The Company received $9,531,558 net of share issue costs. Additionally, the Company raised $1,116,445 from the
exercise of warrants and stock options.
On November 28, 2018, the Company filed a preliminary short form base shelf
prospectus where it advised shareholders of its intent to raise a maximum US$50 million through a public offering of either equity
securities, debt securities or a combination of both. The Company has met with multiple investment bankers in both Canada and the
United States who have expressed an interest in assisting the Company with a capital raise.
As at December 31, 2018, the Company has accumulated losses of $(133,195,932) and
working capital of $3,847,842. During the year ended December 31, 2018, the Company had negative cash flows from operations of
$9,288,588. The Company has prepared a cash flow forecast which indicates that it does not have sufficient cash to meet its minimum
expenditure commitments and therefore needs to raise additional funds to continue as a going concern for the next twelve months
from the issuance of this Annual Report on Form 20-F. As a result, there is substantial doubt about the Company's ability to continue
as a going concern for the next twelve months from the issuance of this Annual Report on Form 20-F.
To address the future funding requirements, management has undertaken the following
initiatives:
|
1.
|
Entered into discussions to secure debt financing.
|
|
2.
|
Initiated a strict working capital monitoring program.
|
|
3.
|
Continued its focus on maintaining an appropriate level of corporate overheads in line with the Company's available cash resources.
|
|
4.
|
Filed a preliminary short-form prospectus to raise a maximum $50 million through a public offering of either equity securities,
debt securities or a combination of both.
|
|
5.
|
Initiated a plan for raising capital in Canada via the private placement of convertible debt.
|
In line with its needs for additional financing, on April
3, 2019, the Company closed the first tranche of a private placement of convertible debentures that raised gross proceeds of CAD$1,929,000
(the "Debentures"). The Debentures are unsecured, bear interest at 12% per annum, compounded annually with 1% payable
at the beginning of each month and mature on April 3, 2021. Insiders of the Company subscribed for over 47% of the first tranche
of Convertible Debentures, including the Company’s board of directors, senior management team and financial advisors, IBK
Capital. Successive tranche closings in the coming months are each subject to approval by the TSX Venture Exchange.
Additionally, the Company arranged for a credit facility
(the “Bridge Loan”) to be provided by Espresso Capital Ltd which will grant the Company access to a maximum US$5,000,000.
The Company signed the loan documents on April 18, 2019 and was advanced US$2,000,000 on April 23, 2019. In partial consideration
of the US$5,000,000 gross credit facility available to the Company, and in connection with the initial advance of US2,000,000,
the Company issued to Espresso Capital warrants for the purchase of 3,289,500 common shares at a price of C$0.35 per share. The
Warrants expire on April 18, 2020.
The optical communications industry is subject to significant
operational fluctuations. In order to remain competitive, we incur substantial costs associated with research and development,
qualification, production capacity and sales and marketing activities in connection with products that may be purchased, if at
all, long after we have incurred such costs. In addition, the rapidly changing industry in which we operate, the length of time
between developing and introducing a product to market, frequent changing customer specifications for products, customer cancellations
of products and general down cycles in the industry, among other things, make our prospects difficult to evaluate. As a result
of these factors, it is possible that we may not (i) generate sufficient positive cash flow from operations; (ii) raise funds through
the issuance of equity, equity-linked or convertible debt securities; or (iii) otherwise have sufficient capital resources to meet
our future capital or liquidity needs. There are no guarantees we will be able to generate additional financial resources beyond
our existing balances.
We may not be able to obtain additional capital when
desired, on favorable terms or at all.
We operate in a market that makes our prospects difficult to evaluate
and, to remain competitive, we will be required to make continued investments in capital equipment, facilities and technology.
We expect that substantial capital will be required to continue technology and product development, to expand our manufacturing
capacity if we need to do so and to fund working capital for anticipated growth. If we do not generate sufficient cash flow from
operations or otherwise have the capital resources to meet our future capital needs, we may need additional financing to implement
our business strategy.
If we raise additional funds through the issuance of
our common stock or convertible securities, the ownership interests of our stockholders could be significantly diluted. These newly
issued securities may have rights, preferences or privileges senior to those of existing stockholders. Additional financing may
not, however, be available on terms favorable to us, or at all, if and when needed, and our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly
limited. If we cannot raise required capital when needed, including under our Short Form Prospectus filed with the Canadian Securities
Exchange and the SEC in October 2016 and refiled in November 2018, we may be unable to continue technology and product development,
meet the demands of existing and prospective customers, adversely affecting our sales and market opportunities and consequently
our business, financial condition and results of operations.
We may be subject to disruptions or failures in information
technology systems and network infrastructures that could have a material adverse effect on our business and financial condition.
We rely on the efficient and uninterrupted operation
of complex information technology systems and network infrastructures to operate our business. A disruption, infiltration or failure
of our information technology systems as a result of software or hardware malfunctions, system implementations or upgrades, computer
viruses, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents
could cause a breach of data security, loss of intellectual property and critical data and the release and misappropriation of
sensitive competitive information and partner, customer, and employee personal data. Any of these events could harm our competitive
position, result in a loss of customer confidence, cause us to incur significant costs to remedy any damages and ultimately materially
adversely affect our business and financial condition.
If we fail to protect, or incur significant costs
in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially
harmed.
Our success depends on our ability to protect our intellectual
property and other proprietary rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition
laws, as well as license agreements and other contractual provisions, to establish and protect our intellectual property and other
proprietary rights. We have applied for patent registrations in Canada, the U.S. and other countries, some of which have been issued.
We cannot guarantee that our pending applications will be approved by the applicable governmental authorities. Moreover, our existing
and future patents and trademarks may not be sufficiently broad to protect our proprietary rights or may be held invalid or unenforceable
in court. A failure to obtain patents or trademark registrations or a successful challenge to our registrations in Canada, the
U.S. or other countries may limit our ability to protect the intellectual property rights that these applications and registrations
intended to cover.
Policing unauthorized use of our technology is difficult
and we cannot be certain that the steps we have taken will prevent the misappropriation, unauthorized use or other infringement
of our intellectual property rights. Further, we may not be able to effectively protect our intellectual property rights from misappropriation
or other infringement in foreign countries where we have not applied for patent protections, and where effective patent, trademark,
trade secret and other intellectual property laws may be unavailable, or may not protect our proprietary rights as fully as Canadian
or U.S. law. We may seek to secure comparable intellectual property protections in other countries. However, the level of protection
afforded by patent and other laws in other countries may not be comparable to that afforded in Canada and the U.S.
We also attempt to protect our intellectual property,
including our trade secrets and know-how, through the use of trade secret and other intellectual property laws, and contractual
provisions. We enter into confidentiality and invention assignment agreements with our employees and independent consultants. We
also use non- disclosure agreements with other third parties who may have access to our proprietary technologies and information.
Such measures, however, provide only limited protection, and there can be no assurance that our confidentiality and non-disclosure
agreements will not be breached, especially after our employees end their employment, and that our trade secrets will not otherwise
become known by competitors or that we will have adequate remedies in the event of unauthorized use or disclosure of proprietary
information. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products, otherwise
obtain and use our intellectual property, or may independently develop similar or equivalent trade secrets or know-how. If we fail
to protect our intellectual property and other proprietary rights, or if such intellectual property and proprietary rights are
infringed or misappropriated, our business, results of operations or financial condition could be materially harmed.
In the future, we may need to take legal actions to prevent
third parties from infringing upon or misappropriating our intellectual property or from otherwise gaining access to our technology.
Protecting and enforcing our intellectual property rights and determining their validity and scope could result in significant
litigation costs and require significant time and attention from our technical and management personnel, which could significantly
harm our business. We may not prevail in such proceedings, and an adverse outcome may adversely impact our competitive advantage
or otherwise harm our financial condition and our business.
We may be involved in intellectual property disputes in
the future, which could divert management’s attention, cause us to incur significant costs and prevent us from selling or
using the challenged technology.
Participants in the markets in which we sell our products
have experienced frequent litigation regarding patent and other intellectual property rights. There can be no assurance that third
parties will not assert infringement claims against us and we cannot be certain that our products would not be found infringing
on the intellectual property rights of others. Regardless of their merit, responding to such claims can be time consuming, divert
management’s attention and resources and may cause us to incur significant expenses. Intellectual property claims against
us could result in a requirement to license technology from others, discontinue manufacturing or selling the infringing products,
or pay substantial monetary damages, each of could result in a substantial reduction in our revenue and could result in losses
over an extended period of time.
If we fail to obtain the right to use the intellectual property
rights of others that are necessary to operate our business, and to protect their intellectual property, our business and results
of operations will be adversely affected.
From time to time we may choose to or be required to
license technology or intellectual property from third parties in connection with the development of our products. We cannot assure
you that third party licenses will be available to us on commercially reasonable terms, if at all. Generally, a license, if granted,
would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse
impact on our results of operations. Our inability to obtain a necessary third-party license required for our product offerings
or to develop new products and product enhancements could require us to substitute technology of lower quality or performance standards,
or of greater cost, either of which could adversely affect our business. If we are not able to obtain licenses from third parties,
if necessary, then we may also be subject to litigation to defend against infringement claims from these third parties. Our competitors
may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive
disadvantage.
If we fail to maintain effective internal control
over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.
Preparing our consolidated financial statements involves
a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant
management judgment. One or more of these elements may result in errors that may not be detected and could result in a material
misstatement of our consolidated financial statements. The Sarbanes-Oxley Act in the U.S. requires, among other things, that as
a publicly traded company we disclose whether our internal control over financial reporting and disclosure controls and procedures
are effective. As long as we qualify as an “emerging growth company” under the JOBS Act, we will not have to provide
an auditor’s attestation report on our internal controls. During the course of any evaluation, documentation or attestation,
we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify
in a timely manner or at all as a result of the deferred implementation of this additional level of review.
Our internal controls cannot guarantee that no accounting
errors exist or that all accounting errors, no matter how immaterial, will be detected because a control system, no matter how
well designed and operated, can provide only reasonable, but not absolute assurance that the control system’s objectives
will be met. If we are unable to implement and maintain effective internal control over financial reporting, our ability to accurately
and timely report our financial results could be adversely impacted. This could result in late filings of our annual and quarterly
reports under the Canadian Securities Act and the Securities Exchange Act of 1934, or the Exchange Act, restatements of our consolidated
financial statements, a decline in our stock price, suspension or delisting of our common stock by the TSX Venture Exchange, or
other material adverse effects on our business, reputation, results of operations or financial condition.
Our ability to use our net operating losses and certain
other tax attributes may be limited.
As of December 31, 2018, we had accumulated net operating
losses (NOLs), of approximately $133 million. Varying jurisdictional tax codes have restrictions on the use of NOLs, if a corporation
undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, R&D credits and other
pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater
than 50% change in equity ownership. Based upon an analysis of our equity ownership, we do not believe that we have experienced
such ownership changes and therefore the annual utilization of our NOLs may not be subject to such limitation at this time. However,
should we experience additional ownership changes, our NOL carry forwards may be limited.
We are subject to governmental export and import controls
that could subject us to liability or impair our ability to compete in international markets.
We are subject to export and import control laws, trade
regulations and other trade requirements that limit which raw materials and technology we can import or export and which products
we sell and where and to whom we sell our products. Specifically, the Bureau of Industry and Security of the U.S. Department of
Commerce is responsible for regulating the export of most commercial items that are so called dual-use goods that may have both
commercial and military applications. A limited number of our products are exported by license under certain classifications. Export
Control Classification requirements are dependent upon an item’s technical characteristics, the destination, the end-use,
and the end-user, and other activities of the end-user. Should the regulations applicable to our products change, or the restrictions
applicable to countries to which we ship our products change, then the export of our products to such countries could be restricted.
As a result, our ability to export or sell our products to certain countries could be restricted, which could adversely affect
our business, financial condition and results of operations. Changes in our products or any change in export or import regulations
or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons
or technologies targeted by such regulations, could result in delayed or decreased sales of our products to existing or potential
customers. In such event, our business and results of operations could be adversely affected.
Our manufacturing operations are subject to environmental
regulation that could limit our growth or impose substantial costs, adversely affecting our financial condition and results of
operations.
Our properties, operations and products are subject to
the environmental laws and regulations of the jurisdictions in which we operate and sell products. These laws and regulations govern,
among other things, air emissions, wastewater discharges, the management and disposal of hazardous materials, the contamination
of soil and groundwater, employee health and safety and the content, performance, packaging and disposal of products. Our failure
to comply with current and future environmental laws and regulations, or the identification of contamination for which we are liable,
could subject us to substantial costs, including fines, clean-up costs, third-party property damages or personal injury claims,
and make significant investments to upgrade our facilities or curtail our operations. Identification of presently unidentified
environmental conditions, more vigorous enforcement by a governmental authority, enactment of more stringent legal requirements
or other unanticipated events could give rise to adverse publicity, restrict our operations, affect the design or marketability
of our products or otherwise cause us to incur material environmental costs, adversely affecting our financial condition and results
of operations.
We are exposed to risks and increased expenses and business
risk as a result of Restriction on Hazardous Substances, or RoHS directives.
Following the lead of the European Union (“EU”),
various governmental agencies have either already put into place or are planning to introduce regulations that regulate the permissible
levels of hazardous substances in products sold in various regions of the world. For example, the RoHS directive for EU took effect
on July 1, 2006. The labeling provisions of similar legislation in China went into effect on March 1, 2007. Consequently, many
suppliers of products sold into the EU have required their suppliers to be compliant with the new directive. We anticipate that
our customers may adopt this approach and will require our full compliance, which will require a significant amount of resources
and effort in planning and executing our RoHS program, it is possible that some of our products might be incompatible with such
regulations. In such events, we could experience the following consequences: loss of revenue, damages reputation, diversion of
resources, monetary penalties, and legal action.
Failure to comply with the U.S. Foreign Corrupt
Practices Act could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices
Act, which generally prohibits companies operating in the U.S. from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately
and fairly represent our transactions and have an adequate system of internal accounting controls. Non-U.S. companies, including
some that may compete with us, may not be subject to these prohibitions, and therefore may have a competitive advantage over us.
If we are not successful in implementing and maintaining adequate preventative measures, we may be responsible for acts of our
employees or other agents engaging in such conduct. We could suffer severe penalties and other consequences that may have a material
adverse effect on our financial condition and results of operations.
Natural disasters or other catastrophic events could
harm our operations.
Our operations in the U.S., Canada and Singapore could
be subject to significant risk of natural disasters, including earthquakes, hurricanes, typhoons, flooding and tornadoes, as well
as other catastrophic events, such as epidemics, terrorist attacks or wars. For example, our wafer fabrication facility in Singapore
is in an area that is susceptible to hurricanes. Any disruption in our manufacturing facilities arising from these and other natural
disasters or other catastrophic events could cause significant delays in the production or shipment of our products until we are
able to arrange for third parties to manufacture our products. We may not be able to obtain alternate capacity on favorable terms
or at all. Our property insurance coverage with respect to natural disaster is limited and is subject to deductible and coverage
limits. Such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. The occurrence
of any of these circumstances may adversely affect our financial condition and results of operation.
Goodwill Impairment Risk
POET’s Board and management are required to analyze
on an annual basis whether any intangibles should be impaired, based on a calculation of the likely future cash flows from those
assets. The annual impairment test was done by management in the fiscal fourth quarter. Both DenseLight and BB Photonics are regarded
by POET’s Board and management as a single unit contributing to the Corporation’s development of an Optical Interposer
platform. At the time of their acquisition in mid-2016, the combined purchase price exceeded their combined asset values, resulting
in the creation of Goodwill, valued as of December 31, 2018 at $7,681,003. At the time of the initial valuation, no value was attributed
to DenseLight’s Intellectual Property, which POET’s Board and management now expect to be a major contributor to the
Corporation’s anticipated future cash flows. POET’s Board and management annually assesses the anticipated future cash
flows of the Corporation related to this Goodwill and determines if an impairment is necessary. No provision for impairment was
required as of the most recently completed financial year.
Risks Related to Our Common Stock
Our stock price has been and may continue to be volatile.
The trading price for our common stock on the TSX Venture
Exchange (“TSXV”) has been and is likely to continue to be highly volatile. Although we have registered our stock with
the SEC, the U.S. market for our shares has been slow to develop, and if and as such a market develops, prices on that market are
also likely to be highly volatile. The market prices for securities of early stage technology companies have historically been
highly volatile.
Factors that could adversely affect our stock price include:
• fluctuations in our operating results and our financial condition;
• announcements of new products, partnerships
or technological collaborations and announcements of the results or further actions in respect of any products, partnerships or
collaborations, including termination of same;
• innovations by us or our competitors;
• governmental regulation;
• developments in patent or other proprietary rights;
• the results of technology and product development testing by us, our
partners or our competitors;
• litigation;
• general stock market and economic conditions;
• number of shares available for trading (float); and
• inclusion in or dropping from stock indexes.
As of April 22, 2019, our 52-week high and low closing
market prices for our common stock on the TSXV were CA$0.56 and CA$0.23.
We have historically obtained, and expect to continue
to obtain, additional financing primarily by way of sales of equity, which may result in significant dilution to existing shareholders.
We have not earned profits, so the Company’s ability to
finance operations is chiefly dependent on equity financings. Since 2012 we raised approximately US$60.5 million (net of share
issue costs) in equity financing through private placements or the exercise of stock options and warrants in support of the Company’s
business, which has resulted in significant dilution to existing shareholders. Further equity financings will also result in dilution
to existing shareholders, and such dilution could be significant.
Future sales of common stock or warrants, or the prospect
of future sales, may depress our stock price.
Sales of a substantial number of shares of common stock or warrants, or the perception that sales could occur,
could adversely affect the market price of our common stock. Additionally, as of April 22, 2019, there were outstanding options
to purchase up to 26,969,384 shares of our common stock that are currently exercisable and additional outstanding options to purchase
up to 17,834,345 shares of common stock that are exercisable over the next several years. As of April 22, 2019, there were outstanding
warrants to purchase 48,034,350 shares of our stock and broker compensation units to purchase 1,505,442 units. Each compensation
unit is convertible into one common share and one-half common share purchase warrant. The holders of these options, warrants and
compensation units have an opportunity to profit from a rise in the market price of our common stock with a resulting dilution
in the interests of the other shareholders. The existence of these options, warrants and compensation units may adversely affect
the terms on which we may be able to obtain additional financing. The weighted average exercise price of issued and outstanding
options is CAD$0.70, the weighted average exercise price of warrants is CAD$0.56 and the weighted average exercise price of the
compensation units is CAD$0.55, which compares to the CAD$0.32 market price at closing on April 22, 2019.
Dilution through exercise of share options could adversely
affect the Company’s shareholders.
Because the success of the Company is highly dependent upon its employees, the Company has granted to some or
all of its key employees, directors and consultants options to purchase common shares as non-cash incentives. To the extent that
significant numbers of such options may be granted and exercised, the interests of the other stockholders of the Company may be
diluted. As of April 22, 2019, there were 44,803,729 share purchase options outstanding with a weighted average exercise price
of CAD$0.70, 48,034,350 share purchase warrants outstanding with a weighted average exercise price of CAD$0.56 and 1,505,442 compensation
units outstanding with a weighted average price of CAD$0.55. If all of these securities were exercised, an additional 94,143,521
common shares would become issued and outstanding. This represents an increase of 32.7% in the number of shares issued and outstanding
and would result in significant dilution to current shareholders.
The risks associated with penny stock classification
could affect the marketability of the Company’s common shares and shareholders could find it difficult to sell their shares.
The Company’s common shares are subject to “penny
stock” rules as defined in Exchange Act Rule 3a51-1. The SEC adopted rules that regulate broker-dealer practices in connection
with transactions in penny stocks. Transaction costs associated with purchases and sales of penny stocks are likely to be higher
than those for other securities. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities
listed on certain U.S. national securities exchanges, provided that current price and volume information with respect to transactions
in such securities is provided by the exchange).
The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information
about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer
with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.
In addition, the penny stock rules require that prior
to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the Company’s
common shares in the United States and shareholders may find it more difficult to sell their shares.
The rights of our shareholders may differ from
the rights typically afforded to shareholders of a U.S. corporation.
We are incorporated under the Business Corporations Act (Ontario)
(the “OBCA”). The rights of holders of our common shares are governed by the laws of the Province of Ontario, including
the OBCA, by the applicable laws of Canada, and by our Articles of Continuance and all amendments thereto (collectively, the “Articles”),
and our by-laws (the “By-laws”). These rights differ in certain respects from the rights of shareholders in typical
U.S. corporations. The principal differences include without limitation the following:
Under the OBCA, we have a lien on any common share registered
in the name of a shareholder or the shareholder’s legal representative for any debt owed by the shareholder to us. Under
U.S. state law, corporations generally are not entitled to any such statutory liens in respect of debts owed by shareholders.
With regard to certain matters, we must obtain approval
of our shareholders by way of at least 66 2/3% of the votes cast at a meeting of shareholders duly called for such purpose being
cast in favor of the proposed matter. Such matters include without limitation: (a) the sale, lease or exchange of all or substantially
all of our assets out of the ordinary course of our business; and (b) any amendments to our Articles including, but not limited
to, amendments affecting our capital structure such as the creation of new classes of shares, changing any rights, privileges,
restrictions or conditions in respect of our shares, or changing the number of issued or authorized shares, as well as amendments
changing the minimum or maximum number of directors set forth in the Articles. Under U.S. state law, the sale, lease, exchange
or other disposition of all or substantially all of the assets of a corporation generally requires approval by a majority of the
outstanding shares, although in some cases approval by a higher percentage of the outstanding shares may be required. In addition,
under U.S. state law the vote of a majority of the shares is generally sufficient to amend a company’s certificate of incorporation,
including amendments affecting capital structure or the number of directors.
Pursuant to our By-laws, two persons present in person
or represented by proxy and each entitled to vote thereat shall constitute a quorum for the transaction of business at any meeting
of shareholders. Under U.S. state law, a quorum generally requires the presence in person or by proxy of a specified percentage
of the shares entitled to vote at a meeting, and such percentage is generally not less than one-third of the number of shares entitled
to vote.
Under rules of the Ontario Securities Commission, a meeting
of shareholders must be called for consideration and approval of certain transactions between a corporation and any “related
party” (as defined in such rules). A “related party” is defined to include, among other parties, directors and
senior officers of a corporation, holders of more than 10% of the voting securities of a corporation, persons owning a block of
securities that is otherwise sufficient to affect materially the control of the corporation, and other persons that manage or direct,
to a substantial degree, the affairs or operations of the corporation. At such shareholders’ meeting, votes cast by any related
party who holds common shares and has an interest in the transaction may not be counted for the purposes of determining whether
the minimum number of required votes have been cast in favor of the transaction. Under U.S. state law, a transaction between a
corporation and one or more of its officers or directors can generally be approved either by the shareholders or a by majority
of the directors who do not have an interest in the transaction.
Neither Canadian law nor our Articles or By-laws limit
the right of a non-resident to hold or vote common shares of the Company, other than as provided in the Investment Canada Act (the
“Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”).
The Investment Act generally prohibits implementation of a direct reviewable investment by an individual, government or agency
thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act
(a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment
is likely to be of net benefit to Canada. An investment in the common shares of the Company by a non-Canadian (other than a “WTO
Investor,” as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control
of the Company, and the value of the assets of the Company were CA$5.0 million or more (provided that immediately prior to the
implementation of the investment the Company was not controlled by WTO Investors). An investment in common shares of the Company
by a WTO Investor (or by a non- Canadian other than a WTO Investor if, immediately prior to the implementation of the investment
the Company was controlled by WTO Investors) would be reviewable under the Investment Act if it were an investment to acquire direct
control of the Company and the value of the assets of the Company equaled or exceeded certain threshold amounts determined on an
annual basis. The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person
or entity from a member of the WTO; (b) a state- owned enterprise (SOE); or (c) from a country considered a “Trade Agreement
Investor” under the Investment Act. A different threshold also applies if the Canadian business carries on a cultural business.
The 2019 threshold for WTO investors that are SOEs will be $416 million based on the book value of the Canadian business' assets,
up from $398 million in 2018. The 2019 thresholds for review for direct acquisitions of control of Canadian businesses by private
sector investor WTO investors ($1 billion) and private sector trade- agreement investors ($1.5 billion) remain the same and are
both based on the "enterprise value" of the Canadian business being acquired.
A non-Canadian, whether a WTO Investor or otherwise,
would be deemed to acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of the common
shares of the Company. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an
acquisition of control of the Company, unless it could be established that the Company is not controlled in fact by the acquirer
through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a “national” of a
country (other than Canada) that is a member of the WTO (“WTO Member”) or has a right of permanent residence in a WTO
Member. A corporation or other entity will be a “WTO Investor” if it is a “WTO Investor-controlled entity,”
pursuant to detailed rules set out in the Investment Act. The U.S. is a WTO Member. Certain transactions involving our common shares
would be exempt from the Investment Act, including:
• an acquisition of our common shares if the acquisition were made in connection
with the person’s business as a trader or dealer in securities;
• an acquisition of control of the Company
in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose
related to the provisions of the Investment Act; and
• an acquisition of control
of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct
or indirect control of the Company, through the ownership of voting interests, remains unchanged. Under U.S. law, except in limited
circumstances, restrictions generally are not imposed on the ability of non- residents to hold a controlling interest in a U.S.
corporation.
As a “foreign private issuer”, the Company is
exempt from certain sections of the Exchange Act which results in shareholders having less complete and timely data than if the
Company were a domestic U.S. issuer.
As a “foreign private issuer,” as defined
under the U.S. securities laws, we are exempt from certain sections of the Exchange Act. In particular, we are exempt from Section
14 proxy rules that are applicable to domestic U.S. issuers. The submission of proxy and annual meeting of shareholder information
(prepared to Canadian standards) on Form 6-K has typically been more limited than the submissions required of U.S. issuers and
results in shareholders having less complete and timely data, including, among others, with respect to disclosure of: (i) personal
and corporate relationships and age of directors and officers; (ii) material legal proceedings involving the Company, affiliates
of the Company, and directors, officers promoters and control persons; (iii) the identity of principal shareholders and certain
significant employees; (iv) related party transactions; (v) audit fees and change of auditors; (vi) voting policies and procedures;
(vii) executive compensation; and
(viii)
composition of the Compensation Committee. In addition, due to the Company’s status as a foreign private issuer, the
officers, directors and principal shareholders of the Company are exempt from the short-swing insider disclosure and profit recovery
provisions of Section 16 of the Exchange Act. The foregoing exemption results in shareholders having less data in this regard than
is available with respect to U.S. issuers.
If the Company is characterized as a passive foreign
investment company, our U.S. shareholders may suffer adverse tax consequences.
As more fully described below in ITEM 10.E. “Taxation”
— United States Federal Income Tax Considerations — Passive Foreign Investment Company Status”, if for any taxable
year our passive income, or the value of our assets that produce (or are held for the production of) passive income, exceed specified
levels, we may be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes.
This characterization could result in adverse U.S. tax consequences to our U.S. shareholders, including gain on the disposition
of our common shares being treated as ordinary income and any resulting U.S. federal income tax being increased by an interest
charge. Rules similar to those applicable to dispositions generally will apply to certain “excess distributions” in
respect of our common shares.
The actual allocation of proceeds from any financing
undertaken may differ from the Company’s initial or current intentions.
The Company has discretion in the use of the net proceeds
from any offering of equity securities. The Company may elect to allocate proceeds differently from its initial or current intentions.
The failure by the Company’s management to apply these funds effectively could have a material adverse effect on its business.
Warrants included with financings
Warrants offered with financings are not listed on any
exchange. Investors may be unable to sell the warrants at the prices desired or at all. There is no existing trading market for
the warrants and there can be no assurance that a liquid market will develop or be maintained for the warrants, or that an investor
will be able to sell any of the warrants at a particular time (if at all). The liquidity of the trading market in the warrants,
and the market price quoted for the warrants, may be adversely affected by, among other things:
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•
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changes in the overall market for the warrants;
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•
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changes in the Corporation's financial performance or prospects;
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•
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changes or perceived changes in the Corporation's creditworthiness;
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•
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the prospects for companies in the industry generally;
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•
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the number of holders of the warrants;
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•
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the interest of securities dealers in making a market for the warrants; and
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prevailing interest rates.
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ITEM 4. INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
|
The legal and commercial name of the Company is POET
Technologies Inc. The Company was originally incorporated under the British Columbia Company Act on February 9, 1972 as Tandem
Resources Ltd. On November 14, 1985, Tandem Resources Ltd. amalgamated with Stanmar Resources Ltd. and Keezic Resources Ltd., to
continue as one company under the name Tandem Resources Ltd. under the British Columbia Company Act. By Articles of Continuance
dated January 3, 1997, Tandem Resources Ltd. was continued under the OBCA. By Articles of Amendment dated September 26, 2006, Tandem
Resources Ltd. changed its name to OPEL International Inc. By Certificate of Continuance dated January 30, 2007, OPEL International
Inc. was continued under the New Brunswick Business Corporations Act. By Articles of Continuance dated November 30, 2010, OPEL
International Inc. was continued under the OBCA and changed its name to OPEL Solar International Inc. By Articles of Amendment
dated August 25, 2011, OPEL Solar International Inc. changed its name to OPEL Technologies Inc. By Articles of Amendment dated
July 23, 2013, OPEL Technologies Inc. changed its name to POET Technologies Inc.
On May 11, 2016, in an all-stock transaction, the Company
acquired all the issued and outstanding shares of DenseLight Semiconductor Pte. Ltd. (DenseLight), a privately held Singapore company
that provides optical solutions. DenseLight designs, manufactures and sells optical light source products. DenseLight was acquired
for $10,500,000 of the Company’s stock. The Company issued 13,611,150 common shares to the former shareholders of DenseLight.
On June 22, 2016, in an all-stock transaction, the Company acquired
all the issued and outstanding shares of BB Photonics Inc., a privately held US Company with a wholly owned subsidiary, BB Photonics
UK Ltd. Both companies design integrated photonics solutions for the data communications market. BB Photonics and its subsidiary
were acquired for consideration of $1,550,000. The acquisition was settled with the issuance of 1,996,090 common shares of the
Company to the former shareholders of BB Photonics.
The following is a graphic description of the Company and
its subsidiaries:
OPEL Solar Inc. and ODIS Inc.
OPEL Solar, Inc. (OPEL)
OPEL is a wholly-owned subsidiary of POET Technologies and is the assignee for
all patents and patent applications filed by the Company.
ODIS Inc. (“ODIS”)
ODIS is a wholly owned subsidiary of OPEL Solar, Inc. and is the developer of
the POET platform semiconductor process IP for fabrication of integrated circuit devices containing both electronic and optical
elements in a single package ("hybrid integration").
BB Photonics Inc. and BB Photonics UK Ltd.
BB Photonics develops photonic integrated components
for the datacenter market utilizing embedded dielectric technology that is intended to enable on-chip athermal wavelength control
which lowers the total solution cost of datacenter photonic integrated circuits.
DenseLight Semiconductor Pte. Ltd.
DenseLight designs, manufactures, and delivers photonic
optical light source products and solutions to the communications, medical, instrumentations, industrial, defense, and security
industries. DenseLight processes compound semiconductor-based optoelectronic devices and photonic integrated circuits through its
in-house wafer fabrication and assembly & test facilities.
On February 4, 2019 the Company announced that it signed a non-binding
Letter of Intent (LOI) for the sale of the capital stock of its Singapore-based DenseLight subsidiary. Key terms of the non-binding
LOI include proposed cash consideration in the range of US$26 - $30 million (CAD$34.5 – CAD$40 million), including a US$4
million (CAD$5.3 million) earn-out provision, no-shop and confidentiality clauses, and an undertaking to enter into key operating
agreements, including a preferred supply agreement and a long-term strategic cooperation agreement among the parties. The parties
expect to complete the signing of the definitive transaction agreements on or before September 15, 2019.
The Company operates geographically in the United States,
Canada and Singapore
Capital Expenditures
Our capital expenditures for the last three years, which
principally consist of purchases of research and development equipment and instrumentation and patents are as follows:
Period
|
|
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Capital Expenditure
|
|
Purpose
|
Fiscal 2018
|
|
$
|
3,785,760
|
|
|
Instruments, equipment and patents
|
Fiscal 2017
|
|
$
|
1,030,340
|
|
|
Instruments, equipment and patents
|
Fiscal 2016
(1)
|
|
$
|
10,985,852
|
|
|
Instruments, equipment and patents
|
(1) As part of the acquisition
of DenseLight and BB Photonics, the Company acquired $8,706,029 of leasehold improvements, machinery and office equipment, and
$900,131 of intangible assets. The Company spent and additional $1,379,692 in cash ($1,281,170 spent in 2016 and $98,522 spent
in 2015) in acquiring equipment and patents.
The Company’s registered office is located at Suite
1107, 120 Eglinton Avenue East, Toronto, Ontario, Canada M4P 1E2 and its phone number is (416) 368-9411. The Company has operations
at Suite 107, 780 Montague Expressway, San Jose, CA, 95131 and 6 Changi North Street 2, Singapore, 498831.
Corporate Overview
Overview
We design, develop, manufacture and sell both discrete
and integrated opto-electronic solutions for the sensing, data communications and telecommunications markets. In addition to manufacturing
a range of Indium Phosphide (InP)-based light sources, POET has developed and is marketing its proprietary POET Optical Interposer
Ô
platform. The POET Optical Interposer utilizes a novel dielectric waveguide technology that allows the integration of electronic
and photonic devices into a single multi-chip module. The integration of devices into a single package is achieved by applying
advanced wafer-level semiconductor manufacturing techniques and novel packaging methods developed by POET. POET’s “photonics
in a package” eliminates costly components, assembly and testing methods employed in conventional photonics solutions. In
addition to lowering costs compared to conventional devices, POET’s Optical Interposer provides a flexible and scalable platform
for a variety of photonics applications ranging from data centers to consumer products.
POET’s Optical Interposer is a platform technology
upon which multiple applications can be based, including transceivers for data- and tele-communications, integrated photonics on
electronic switching devices, low-cost components for the networking and cellular markets, automotive LIDAR and a plethora of sensing
and other applications using light as a medium for data transmission. In each case, devices traditionally associated with photonics,
such as laser diodes, light emitting diodes, detectors, amplifiers and the associated waveguides and other passive devices are
designed specifically in the context of the Optical Interposer to meet the needs and functions of specific applications.
POET has targeted as the first application of the Optical
Interposer the development of Optical Engines for transceivers. Transceivers are used to convert digital electronic signals into
light signals and to transmit and receive those light signals via fiber optic cables within datacenters and between datacenters
and metropolitan centers in a vast data and tele-communications network. We expect to deliver prototypes of certain types of Optical
Engines by mid-2019. These prototypes are expected to address a small portion of the market for Optical Engines. Continued development
of the prototypes will add several commonly used communication protocols and data speeds, to increase the functionality of the
Optical Engine from receive only to transmit and receive, thus improving device capability and performance. Concurrently, we also
intend to develop additional applications for the Optical Interposer platform in the telecom, LIDAR and sensing markets.
Virtually all of POET's R&D expenditures in recent
years are in some way connected to the Optical Interposer. We expect to continue to spend the large majority of our R&D resources
for the foreseeable future on Optical Interposer-based products across a wide variety of potential applications. The only other
R&D expenditures that we have or may incur relate to conventional non-interposer-based products that we develop and manufacture
for our legacy sensing product lines that represent the majority of our current sales. However, we intend to develop and transition
these products to the Optical Interposer, because of the resulting cost and performance advantages that it provides.
POET’s Optical Interposer development program consists
of over 20 development projects in three areas: 1) Active Component Development, which includes a variety of application-specific
Indium Phosphide (InP)-based lasers, detectors and modulators; 2) Passive Component Development, which includes application-specific
filters, mux-demux devices, waveguides and spot size converters, all designed and fabricated using POET’s proprietary dielectric
materials and processes; and 3) Core Integration Process Development, which includes processes such as assembly, hermetic sealing,
flip-chip techniques, reflection management, and wafer-level test. In order to optimize our development resources, we have taken
a “building block” approach, beginning with the most fundamental functions needed for the Optical Interposer in each
of these three areas. The Optical Interposer is unique in the industry, incorporating several “first time ever” implementations
of advanced optics and semiconductor packaging techniques and completely new, novel designs for components. To minimize risk and
maximize the probability of successful outcomes, we run parallel development programs, both internal and external. Our external
programs engage development partners or subcontractors to provide devices, process expertise or equipment that we do not have internally.
As a platform technology, Optical Interposer development
does not have a specific end-point. Each application of the Optical Interposer requires development specific to the application.
POET’s product roadmap is currently focused on the development of Optical Engines for optical transceivers. Optical Engines
include all of the photonics-related components of a transceiver but does not include several of the electronic devices for a
functioning transceiver module nor does it include the external packaging and optical fibers. The electronics include such devices
as Trans Inductance Amplifiers (TIA’s), laser drivers, etc. that are produced by major semiconductor manufacturers. However,
Optical Engines represent the majority of the cost and value of most optical transceivers.
The “active” components that are included in
a POET Optical Engine include lasers, detectors and modulators fabricated on InP substrates. To exploit the unique functionality
of the Optical Interposer, each of these devices must be made to a design that integrates spot size converters (“SSCs”)
and allows the device to be compatible with a flip-chip assembly process. Our DenseLight subsidiary has been engaged for the past
two years in the development of designs and process technologies to build such devices for the Optical Interposer. To accelerate
the development process, we have either combined efforts with development partners, purchased wafers to specific designs or licensed
technology as a means to supplement our internal development efforts. One of our earliest internal developments is a QuadPIN photodetector,
which was introduced to customers for qualification in late 2018 at 25G
1
speeds. We believe the performance of this
device can be improved to allow it to be used at 50Gbps speeds, which would be used in 400G transceiver Optical Engines. As we
continue that development, we intend to place this device on an Optical Interposer with an integrated thru waveguide in Q2 of 2019,
primarily as a means to demonstrate the functionality and versatility of the Optical Interposer platform, rather than as a product
for sale. We have supplemented our active component device development with co-development partners and license agreements, including
for certain types of lasers and modulators. In particular, we have initiated the development of Optical Interposer-compatible components
at Almae, one of our laser development partners. This not only mitigates the risk to internal development and accelerates time
to market, but it also ensures a second source of Optical Interposer-compatible active components, a critical part of our strategy
going forward.
In parallel to these activities, POET has also directed
development programs in the other two areas outside of DenseLight, including Passive Component design and development and Core
Integration process development. Passive devices, as mentioned above, include filters, mux-demux devices, waveguides and spot size
converters, all designed and fabricated using POET’s proprietary dielectric materials and processes. We recently established
a waveguide development lab in Ottawa in association with Mill View Photonics. We plan to expand that effort over time in order
to design waveguides for specific applications for the Optical Interposer across several vertical markets. The actual fabrication
of the passive devices, which are built on 8-inch diameter silicon wafers is performed by our foundry partner, SilTerra Malaysia
(“SilTerra”). The devices fabricated at SilTerra represent the base foundational elements of the Optical Interposer
on which the active devices are placed. In early 2018 we transferred the basic processes for the deposition and patterning of our
proprietary dielectric material from a university lab to SilTerra. We purchased dedicated equipment in order to preserve the intrinsic
intellectual property of the processes, and since early 2018 we have continued to improve those processes in order to make them
suitable for high volume manufacturing.
1
Cisco
Visual Networking Index: Forecast and Methodology, 2017-2022, White Paper,
Executive Summary, Feb. 27, 2019
The third area, Core Integration Process Development, highlights the fundamental benefits of the Optical Interposer
platform as primarily an advanced packaging technology that allows true wafer-scale assembly and test. We do not believe that such
true wafer-scale integration has been achieved by any other technology in the photonics industry. We are able to achieve chip-level
integration and wafer-scale assembly, test and packaging because all of the active devices include SSCs and are designed to be
placed and “matched” to passive device interfaces on the foundational Optical Interposer wafer using pick-and-place
assembly techniques. We achieve high levels of coupling efficiency between each device, eliminating the high cost and cumbersome
process of testing each component following placement. Once placed and tested at wafer scale, each Optical Interposer device is
sealed, the wafer is separated into hundreds of individual die and the final Optical Engine is ready for shipment to the customer.
Each of these process steps, from flip-chipping of devices onto the dielectric, pick and place assembly, hermetic sealing and singulation
required substantial innovation and development, including several techniques that are unique in the photonics industry.
In late in 2018 we were approached by two large global
networking companies that saw promise in using all or part of our Optical Interposer technology for their 400G transceiver development
projects. These projects offered the benefits of payment for development, intersection with major companies at the early stage
of their development projects for next generation transceivers, the prestige of working with industry-leading companies, and the
potential for our Optical Engines to be included as major components of the planned shipments of transceivers by these companies.
We took a major decision to reorder our priorities in order to effectively support these companies. We believe that addressing
product-specific requirements with willing partners and committed funding is the optimal way to introduce the Optical Interposer
technology to the market. Identifying and overcoming individual technical challenges increases the likelihood of success and promotes
innovation. We expect that successful implementation of our designs into component prototypes, combined with the cost advantage
inherent in Optical Interposer-based solutions, will lead to additional funding for other products, as well as to contracts for
the delivery of production devices, once fully qualified.
The immediate consequence of our decision to work with
leading industry partners on 400G transceivers was to accelerate the development of higher performance lasers, modulators and detectors
needed for 400G, at the expense of similar programs for 100G. Another factor in our decision-making process was the market forecast
for 100G transceivers which has flattened in terms of revenue and appears to be maturing much faster than the industry anticipated.
Industry total revenue for 100G transceivers in 2019 is expected to be flat or lower than 2018. With unit volume going up, pricing
is down and therefore margins are squeezed even more heavily than before.
Our plan to deliver 400G devices is essentially unchanged
from prior plans, which targeted the release of TROE Optical Engine prototypes to customers for qualification
2
for
in the second half of 2019. Our revised plan calls for all of the required active components, waveguides for certain standards,
and core integration processes to be far enough along to allow the Company to produce both 400G prototypes and 100G prototypes
during the second half of 2019. We expect to be able to introduce the less complex standards, such as DR4 for 400G and Parallel
Single Mode 4-fiber (“PSM4”) for 100G earlier in the second half than the more complex FR4 for 400G and Coarse Wavelength
Division Multiplexing (“CWDM”) standards. In each case we have multiple parallel programs aimed at these prototype
products, utilizing both internal and external development resources.
Further, while we had forecasted the completion of a Receive
Only Engine (ROE) for 100G as our first planned prototype, we now expect that there will be little demand for a separate ROE, since
customers will be able to qualify a full TROE instead, performing one rather than two qualification cycles for a more complete
solution. However, a 100G TROE with a CWDM filter represents the second generation of transceivers being adopted and a standard
which is expected to be dominant in the 100G datacom market in China. Early adopters of 100G transceivers in the United States
utilized PSM4, a standard that does not incorporate the highly complex CWDM filter.
The inherent cost advantage of an Optical Interposer-based
100G Optical Engines should still allow entry into the 100G market, but the level of penetration will depend on how far pricing
will have fallen by year-end and into 2020. Nevertheless, because of the size of the market and the need for transceiver module
suppliers to address margin concerns, an offering of a 100G CWDM TROE could still have major impact on POET’s data-communications
revenue over the next one to two years. Due to the relatively large amount of NRE in our 2019 forecast, we do not expect to have
to revise our guidance for 2019. Overall, we believe that our revised development roadmap represents a sound foundation for growth
in 2020 and beyond.
In addition to the new products in the data communications
market noted above, POET expects a significant increase in its Sensing product revenue in 2019. Recent trends have been positive.
With some existing customers expanding order size and the addition of new customers, we have a strong pipeline of committed orders.
Expanded laser product-lines in CW, FP and DFB configurations and in high-value NLW modules which address new and complex applications
in the sensing market are in high demand. In addition, by incorporating the packaging innovations developed for the Optical Interposer,
we expect that in mid- to late 2019 the Company will be in a position to introduce a differentiated sensing product-line at lower
cost and higher performance.
2
“G” is an abbreviation for “Giga bits per second”,
the rate at which the device transmits or receives data.
In recent quarters, POET has taken major steps to advance
its development of Interposer-based new products, including through the purchase of equipment, improvement of facilities and the
strengthening of its engineering team with more highly qualified talent and larger staff, all represented in POET’s consolidated
financial statements through additions to fixed assets and increased operating expenses. Certain additional capital equipment
may be needed to enhance our development and production capabilities, but we expect only marginal increases in operating expenses
over the next 3 to 4 quarters, as we are able to address the needs of our customers with our existing engineering staff and production
facilities. The next few quarters will be devoted to the successful completion of funded development programs, the introduction
of new devices into qualification cycles with customers, and preparation for higher production volumes in subsequent quarters.
As a result of the recently announced contractual commitments for Optical Interposer sub-assembly prototypes, other anticipated
Optical Engine prototype orders in late 2019, increases in Sensing product revenue and improvement of overall gross margins described
below, we expect our DenseLight subsidiary to have a material increase in revenues in 2019. Should the Company’s structure
continue with DenseLight as a subsidiary (see “Potential Sale of DenseLight Subsidiary” below), forecasted revenue
would be in the range of approximately $8 to $10 million, though we do not expect to reach cash break-even until 2020. Gross Margins
should increase as a result of the proportion of higher margin development contracts for Non-Recurring Engineering (NRE) compared
to products sales, which utilizes POET’s existing engineering and operations staff. In addition, we plan to continue product
development with an expansion of opportunities in markets beyond data communications for our Optical Interposer technology, such
as telecommunications, Automotive LIDAR, and integration with Application Specific Integrated Circuits (ASICs), including switches
and graphics generators.
Industry Background
Since the introduction of the smartphone, people have
fundamentally changed the way they communicate, socialize, and interact among themselves and the data around them. Today, smartphones
and other such devices allow us to capture, create and communicate enormous amounts of content. The explosion in data, storage
and information distribution is driving extraordinary growth in internet traffic and cloud services. The expected growth in the
networking and data communication market is the result of many factors, among them being, the growth of wireless and mobile traffic
(which will account for 71% of total Internet Provider (IP) traffic by 2022
3
),
social media activity, the progression of video transmission, the emergence of imaging such as virtual/augmented/mixed reality
and 3D video, the continued migration to cloud storage, the propagation of sensors feeding the Internet of Things, and the evolution
of big data analytics and machine learning/artificial intelligence. These factors will continue to drive a long-term increased
demand for more capacity and higher speeds.
Photonics has traditionally been employed to
transmit and receive data over long distances because light can carry considerably more content and data at faster speeds
than other means of transmission, such as radio waves or copper wires. Optical transmission becomes more energy efficient as
compared to electronic alternatives when the transmission length and speed increase. As a natural consequence, optics are
systematically replacing copper in many of the data center communication links where speed, bandwidth and energy are at a
premium. Data center operators are increasing the size and scale of their facilities, while simultaneously looking to
component suppliers for solutions capable of providing higher data transmission rates. Within data centers, data
communications over distances 500 m to 2 km have already been transitioned from inherently lower speed copper cable to
optical fibers. Furthermore, short reach communications, either rack-to-rack or within the rack as well as those requiring
speeds of up to 100G, are now increasingly being converted from copper to optical cables.
Outside the Data Centers, future 5G build-out of mobile
communications will drive speed and capacity requirements closer to the user with significant reduction in latency. Compared to
4G, 5G technology standard offers much faster download and upload speed, minimum delay in data communication and processing, as
well as much higher density in device connections. 5G will enable advances in virtual reality, augmented reality, autonomous driving,
high-definition video, and the Internet of Things, among other applications. All of these applications require advanced photonics
devices to provide higher speeds and more bandwidth.
3
“Qualification” of new devices or components, demonstrating
adherence to both customer specifications and industry standards, is done both by POET and by our individual customers. The period
over which device testing occurs may extend from three to six months or longer, depending on the device, the qualification tests
required and the customer. We have estimated that the qualification of its “passive” devices, which do not contain
“active”, light-emitting components should average approximately three months and that active device-containing components
should average approximately six months. However, with any particular device, test or customer, the qualification period may be
shorter or longer.
Photonics Markets
The two target markets in which we currently sell or plan
to sell products near-term are Photonic Sensing and Optical Data Communications.
The Photonic Sensing market (which consists of fiber optic,
image, bio-photonic and other sensors for the oil & gas, defense, transportation, energy, healthcare consumer electronics and
other industries) is projected to grow to approximately US$20 billion by 2022, with about a 15% CAGR between 2016 and 2022.
4
Major segments include the following:
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·
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Test & Measurement - monitoring equipment for communication, components and material testing,
as well as sensing equipment such as distributed temperature and strain measurement;
|
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·
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Structural Health Monitoring - systems to monitor the power grid, and fiber optic-based sensors
in rail lines, nuclear facilities, etc.
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·
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Guidance and Navigation - navigational guidance systems, gyrocompasses, and optical-based systems
for navigating self-driving automobiles; and
|
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·
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Medical and Health Care - devices for non-invasive blood glucose monitoring, pulse-oximeter devices,
and ophthalmic examination.
|
Market segments in Photonic Sensing are typically served
by large system providers, so component sales of lasers and detectors represents approximately 10% of any given system market segment.
The Optical Communications Market (which includes optical
switching equipment, fiber optic transmission systems, transceivers, etc. for all industries) is forecasted to grow at about 9%
CAGR over the period from 2017 to 2023, to US$24 billion from a current US$15 billion.
5
System and component growth
is driven largely by global Internet Provider (IP) traffic, which is expected to nearly triple from 2017 to 2022, representing
a 26% CAGR.
6
Within the overall Data Communications market, photonic transceivers will represent a $25 billion market
opportunity in 2025, according to
Oculi, llc
.
7
The primary segments for photonic transceivers are Ethernet,
wide area network (WAN) and dense wavelength division multiplexing (DWDM), all of which are predominantly addressed by InP-based
optical technologies. Ethernet transceivers are forecasted to grow to $7.4 billion by 2025 with 100G driving a majority of the
growth. Within Ethernet, singlemode transceivers based on InP devices are forecasted to outgrow multimode transceivers based on
GaAs devices by a factor of 6:1. Segmented by distance, the majority of growth is expected in the <10km segment ($4.3 billion
by 2025)
.
8
Integrated photonic transceivers, incorporating approaches
comparable to that of POET, are expected to overtake those using discrete components by 2021, growing from a current $3.2 billion
to $20 billion in 2025
9
. Within this market, POET is focused on the highest growth segments, including Wavelength
Division Multiplexing (WDM) for medium-reach (500m – 2km) Ethernet datacom connections and Wide Area Network protocols for
long-reach or metro applications (2km – 10km). The majority of today’s discrete transceiver suppliers are shipping
100G transceivers in a 4x25G format, having developed assembly methods for placing multiple laser chips on one substrate and coupling
the output into one fiber using micro-optic filters and other elements. POET’s approach is to use the Optical Interposer
to combine multiple active and passive devices into a single package, or “Optical Engine”, which when combined with
control electronics and an outer housing, constitutes a pluggable optical transceiver. We plan to sell our Optical Engines to manufacturers
and assemblers of optical transceiver modules. We believe our Optical Engine solution will be cost competitive with conventional
modules as well as silicon photonics in the <2km data center market, and it should be scalable to 10km, and support 200G and
400G datacom speeds.
4
Market Research Future
Photonic Sensors Market Research Report – Global Forecast to 2022
, Feb. 27, 2019
5
Market Research Future
Optical Communications Market Research Report – Global Forecast to 2023
, January 2019
6
Cisco
VNI,
Forecast Overview, Feb. 27, 2019
7
Oculi, llc,
Estimates for 2025 commissioned by POET Technologies, Inc.
, March 2017
8
Ibid
9
Ibid
Our Products
We are currently engaged in the development of 100G and 400G
Transmit and Receive Optical Engines (TROE) for 100G and 400G transceiver assemblies.
We expect our InP-based solutions from our DenseLight subsidiary will add to the
Company’s current and future product portfolio, including:
|
·
|
Broadband Super-Luminescent LEDs (Light Emitting Diodes)
|
|
·
|
Narrow Linewidth Lasers
|
|
·
|
DFB (Distributed Feedback) Lasers for Data Communications
|
|
·
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High Power ELEDs (Edge Emitting Light Emitting Diodes)
|
|
·
|
Integrated CWDM Solutions
|
Competition
The photonics market is intensely competitive. Because of
the unique nature of our product offerings, we do not believe that we face a single major competitor across our various markets.
We do, however, experience intense competition in each product area from a number of manufacturers with similar or alternative
technologies and we anticipate that competition in the photonics markets will increase. Many of our competitors are larger than
we are and have significantly greater financial, marketing and other resources.
In addition, several of our competitors, especially in the datacom
markets, have large market capitalizations or cash reserves and are much better positioned to acquire other companies to gain new
technologies or products that may displace our products. Data center equipment providers, who we expect to become our customers,
and data center service providers, who are supplied by our customers, may decide to manufacture the optical subsystems that we
plan to provide. We may also encounter potential customers that, because of existing relationships, are committed to the products
offered by these competitors.
We believe the principal competitive factors in our target
markets include the following:
|
·
|
use of internally manufactured components;
|
|
·
|
product breadth and functionality;
|
|
·
|
timing and pace of new product development;
|
|
·
|
breadth of customer base;
|
|
·
|
technological expertise;
|
|
·
|
reliability of products;
|
|
·
|
manufacturing efficiency.
|
We believe that we can compete favorably with respect to the above factors
based on our GaAs and InP processes, the projected performance and anticipated inherent reliability of our products, and our technical
expertise in photonic engine design and manufacture.
Intellectual Property
We have 62 issued patents and 14 patent applications pending,
including six that have been filed since July of 2018. The patents cover device structures, underlying technology, applications
of the technology and fabrication processes. We believe these patents provide a significant barrier to entry against competition,
along with trade secrets and know-how acquired from DenseLight and BB Photonics and further developed by POET. We intend to continue
to apply for additional patents in the future. Currently, we are working on the design of integrated devices, manufacturing processes,
and products for data communication applications in the data center market, along with products for photonic sensing markets that
employ novel packaging technologies.
Fabrication and Assembly Capabilities
We provide one-stop design and manufacturing solutions, from
photonics design and simulation, epitaxial growth, wafer fabrication, chip production, in-line optical coating, sub-mounting, photonic
measurements, product testing and screening. We are operationally ready for responsive prototyping and quality production. The
50,000 sq. ft. purpose-built facility in Singapore houses our R&D, product design and manufacturing operations under one roof.
Its 15,000 sq. ft. clean room is fully equipped for enabling vertically integrated volume manufacturing, from wafer fabrication
to test and packaging. We are ISO9001 certified in Singapore processing Indium Phosphide (InP) and Gallium Arsenide (GaAs) based
opto-electronic devices and photonic integrated circuits through our in-house wafer fabrication and assembly & test facilities.
We have an experienced team with deep know-how in GaAs and
InP semiconductors wafer processing and we continue to build on this technical base. Together with our operationally ready manufacturing
and photonics design center, various ODM and design-in programs can be supported for both discrete and integrated optical components.
Potential Sale of DenseLight Subsidiary
In January 2019, the Company was approached by a third-party
interested in purchasing our DenseLight InP fabrication facility in Singapore. We took this offer seriously for several reasons,
including the party’s financial strength, its interest in investing in both R&D and high-volume manufacturing capacity
for InP-based devices, and our desire to invest more of our limited resources in Optical Interposer-based solutions. Our Board
of Directors and senior management engaged in a review of the status of our development programs and the areas in which we would
need to invest capital and human resources in the coming months and years. As a result of this review, we concluded that there
were significant benefits to the Company and its shareholders if we would adopt a “fab-light”
10
strategy, which is a common business model in the semiconductor industry. Such a strategy would allow the Company
to invest more in design and development of Optical Interposer-based solutions, expand our marketing and sales presence globally
and spend less on capital equipment and maintenance of facilities, enabling a faster path to profitability. Importantly, our review
of our development programs concluded that sufficient fundamental work in the development of “active” InP-based devices
designed specifically for the Optical Interposer had been completed. Additional development work that might be needed could continue
and be completed under contract with DenseLight or others, without the need to own the facility. On February 3 2019, we signed
a non-binding Letter of Intent (LOI) for the sale of the capital stock of our Singapore-based DenseLight subsidiary.
As of the publication of this MD&A, we are engaged with
the third-party in detailed negotiations on the specific terms of the transaction, including the terms of a supply agreement with
DenseLight for custom InP-based devices for the Optical Interposer, as well as a strategic cooperation agreement intended to keep
our mutual objectives for the growth of both companies in concert following the divestment and over the longer term. In addition,
we are conducting internal reviews of our plans, programs, personnel and budgets for the Company post-divestment. We are now committed
to pursuing our “fab-light” strategy and selling our DenseLight subsidiary, if necessary to another of several interested
parties if the current negotiations are not successful. As a direct result of this decision, our Financial Statements beginning
with Q1 of 2019 will treat DenseLight as “discontinued operations”.
Our Strategy
Our vision is to become a global leader in photonics by
deploying an Optical Interposer-based approach to the integration of photonics devices into a wide variety of vertical market applications.
Our strategy includes the following key elements:
·
Introduce the Optical Interposer concept to
suppliers of transceivers and data center operators and form commercial partnerships for product development.
Because of the
magnitude of the cost savings that may be derived from the use of POET’s Optical Engines for transceiver applications, we
expect to generate significant interest among both the suppliers of transceiver modules and their ultimate customers, the data
center operators. In addition, the POET Optical Interposer provides a straightforward and cost-effective path to higher speed transceivers,
including up to 400G and higher, providing a single platform that can span several device generations. We anticipate that several
companies will be interested in pursuing commercial partnerships with POET in order to qualify and design-in our Optical Engines.
·
Promote the POET Optical Interposer as a true
platform technology across several photonic applications and markets.
The POET Optical Interposer is designed to be a flexible
platform for the combination or integration of various photonic and electronic components. The anticipated low cost makes it suitable
for applications like automotive LIDAR. The compatibility of the Optical Interposer manufacturing process with standard silicon
CMOS processing opens up a wide variety of other applications where high-speed data communications is needed, such as integration
with ASICs, graphics generators and high-speed switches.
·
Pursue multiple potential sources of non-product
revenue and strategic partnerships.
In addition to product sales, we have been pursuing Non-Recurring Engineering (“NRE”)
revenues from end-use customers and/or from strategic partners. In particular, we believe our 100/200/400G transceiver components
represent a uniquely attractive opportunity for collaborative development with a strategic partner(s).
·
Continue to invest in our capabilities and infrastructure.
We intend to continue to invest in new products, new technology and our production infrastructure and facilities to maintain and
strengthen our competitive position. Our R&D programs in Singapore are partially reimbursed by the Singapore Economic Development
Board, whose support will help to defer the costs associated with bringing innovative new products to market.
·
Selectively pursue other opportunities that
leverage our existing expertise.
Our expertise in designing and manufacturing photonics devices, both discrete and integrated,
positions us well to pursue applications in high growth markets and our Singapore operation is ideally located to support customers
in Asia, where much of the growth in photonics is occurring.
Geographic Distribution of Revenue
Revenue and geographic markets for 2018, 2017 and 2016 were
approximately as follows:
Region
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
Asia – Pacific
|
|
$
|
1,971,000
|
|
|
$
|
1,593,000
|
|
|
$
|
1,066,000
|
|
Europe
|
|
$
|
1,191,000
|
|
|
$
|
866,000
|
|
|
$
|
657,000
|
|
North & South America
|
|
$
|
726,000
|
|
|
$
|
335,000
|
|
|
$
|
138,000
|
|
10
“Fab-light”
does not mean “fab-less”, as significant portions of our Intellectual Property are embedded in the processes that we
have developed that are themselves integral to the equipment and functioning of the Optical Interposer. By purchasing our own equipment
and placing the equipment in a foundry, for example, we are able to preserve confidentiality and ownership of such critical IP.
As a result, even with a “fab-light” strategy, we expect to continue to invest in capital equipment, but not at the
same level as owning and supporting an entire InP wafer fabrication facility.
|
C.
|
Organizational Structure
|
The following graphically displays the organizational structure
of the Company:
|
(1)
|
There are 28,374,000 Class A Common Shares of OPEL Solar, Inc. issued and outstanding, all of
which are held by the Company. There are no other outstanding securities of OPEL Solar, Inc. other than the Class A Common Shares.
|
|
(2)
|
There are 5 Common Shares of ODIS Inc. issued and outstanding, held by OPEL Solar, Inc.
|
|
(3)
|
There are 135,042 Ordinary Shares of DenseLight issued and outstanding, all of which are held by
the Company. There are no other outstanding securities of DenseLight.
|
|
(4)
|
There is 1 Ordinary Share of BB Photonics UK Ltd. issued and outstanding, held by BB Photonics
Inc.
|
|
(5)
|
There are 1,000,000 Preferred Shares and 1,050,100 Common shares of BB Photonics Inc. issued and
outstanding, all of which are held by the Company. There are no other outstanding securities of BB Photonics Inc.
|
|
D.
|
Property, Plants and Equipment
|
The Company’s head Canadian office is located in
a 400 sq. ft. leased office space in Toronto, Ontario, Canada. The US based operations are in a leased 2,730 sq. ft. space in San
Jose, California . In Singapore, we provide one-stop design and manufacturing solutions, from photonics design and simulation,
epitaxial growth, wafer fabrication, chip production, in-line optical coating, sub-mounting, photonic measurements, product tests
and screening. The 50,000 sq. ft. purpose-built facility in Singapore houses its R&D, product design and manufacturing operations
under one roof. Its 15,000 sq. ft. clean room is fully equipped for enabling vertically integrated volume manufacturing, from wafer
fabrication to test and packaging. We are ISO9001 certified in Singapore processing Indium Phosphide (InP) and Gallium Arsenide
(GaAs) based optoelectronic devices and photonic integrated circuits through our in-house wafer fabrication and assembly &
test facilities
The Company believes that its existing facilities are adequate
to meet its needs for the foreseeable future. The adoption of a “fab light” strategy would not result in the need to
procure facilities and equipment beyond what the Company currently possesses.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Required.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction
with the audited consolidated financial statements of the Company and the related notes for the years ended December 31, 2018,
2017 and 2016 and the accompanying notes thereto included elsewhere in this Annual Report. This discussion contains forward-looking
statements that involve risks and uncertainties. Actual results could differ materially from those anticipated by forward-looking
information due to factors discussed under “ITEM 3.D. Risk Factors” and “ITEM 4.B. Business Overview.”
Critical Accounting Policies and Estimates
The Company prepares its audited consolidated financial statements
in accordance with IFRS as issued by the IASB, which differs from U.S. GAAP. The preparation of financial statements in accordance
with IFRS requires the use of certain critical accounting assumptions and estimates. These assumptions are limited by the availability
of reliable comparable data and the uncertainty of predictions concerning future events. It also requires management to exercise
judgment in applying the Company’s accounting policies. The Company believes that the estimates and assumptions upon which
it relies are reasonable based upon information available at the time that these estimates and assumptions are made. Actual results
could differ from these estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and
estimates are significant to the financial statements are disclosed below.
Basis of presentation
These consolidated financial statements include the accounts of
POET Technologies Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated on consolidation.
Financial Instruments
IFRS 9 introduced new classification and measurement models
for financial assets. The investment classifications held-to-maturity and available-for-sale are no longer used and financial assets
at fair value through other comprehensive income ("FVTOCI") were introduced. Financial assets held with an objective
to hold assets in order to collect contractual cash flows which arise on specified dates that are solely principal and interest
are measured at amortized cost using the effective interest method. Debt investments held with an objective to hold both assets
in order to collect contractual cash flows which arise on specified dates that are solely principal and interest as well as selling
the asset on the basis of fair value are measured at FVTOCI. All other financial assets are classified and measured at fair value
through profit or loss ("FVTPL"). Financial liabilities are classified as either FVTPL or other financial liabilities,
and the portion of the change in fair value that relates to the Company's credit risk is presented in other comprehensive income
(loss). Instruments classified as FVTPL are measured at fair value with unrealized gains and losses recognized in net income (loss).
Other financial liabilities are subsequently measured at amortized cost using the effective interest method.
Transaction costs that are directly attributable to the
acquisition or issuance of financial assets and financial liabilities, other than financial assets and financial liabilities classified
as FVTPL, are added to or deducted from the fair value on initial recognition. Transaction costs directly attributable to the acquisition
of financial assets or financial liabilities classified as FVTPL are recognized immediately in consolidated net income (loss).
Derecognition
Financial assets
The Company derecognizes a financial asset when the contractual
rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a
transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which
the Company neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control
of the financial asset. Any interest in transferred financial assets that is created or retained by the Company is recognized as
a separate asset or liability.
Financial liabilities
A financial liability is derecognized from the balance
sheet when it is extinguished, that is, when the obligation specified in the contract is either discharged, cancelled or expires.
Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms,
or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for
an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from extinguishment
of the original financial liability is recognized in profit or loss.
The Company's financial instruments include cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities.
The following table outlines the classification of financial
instruments under IAS 39 and the revised classification on the adoption of IFRS 9:
|
|
Original classification
|
|
New classification
|
|
|
under IAS 39
|
|
under IFRS 9
|
Financial Assets
|
|
|
|
|
Cash and cash equivalents
|
|
Loans and receivables
|
|
Amortized cost
|
Short-term investments
|
|
FVTPL
|
|
Amortized cost
|
Accounts receivable
|
|
Loans and receivables
|
|
Amortized cost
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
Amortized costs
|
|
Amortized cost
|
Convertible debentures are accounted for as a compound
financial instrument with a debt component and a separate equity component. The debt component of these compound financial instruments
is measured at fair value on initial recognition by discounting the stream of future interest and principal payments at the rate
of interest prevailing at the date of issue for instruments of similar term and risk. The debt component is subsequently deducted
from the total carrying value of the compound instrument to derive the equity component. The debt component is subsequently measured
at amortized cost using the effective interest rate method. Interest expense based on the coupon rate of the debenture and the
accretion of the liability component to the amount that will be payable on redemption are recognized through profit or loss as
a finance cost.
Cash and cash equivalents
Cash and cash equivalents consist of cash in current accounts of $2,267,868 and
funds invested in US Term Deposits of $300,000 earning interest at 1.31% and maturing in less than 90 days.
Cash and cash equivalents include restricted funds of $218,888 which serves as
a bank guarantee for the purchase of certain equipment. The bank guarantee is reduced on a monthly basis by $10,424 which is amount
paid monthly in settlement of the outstanding balance on the equipment.
Short-term investments
The short-term investments of nil at December 31, 2018, nil at December 31,
2017 and $589,275 at December 31, 2016 consisted of guaranteed investment certificates ("GICs") held with one Canadian
chartered bank and earn interest at a rate of 0.50%.
Accounts receivable
Accounts receivable are amounts due from customers from the sale of products or
services in the ordinary course of business. Accounts receivables are classified as current (on the consolidated statements of
financial position) if payment is due within one year of the reporting period date, and are initially recognized at fair value
and subsequently measured at amortized cost.
In determining a default provision, the Company utilizes a
provision matrix, as permitted under the simplified approach to measure expected credit losses. In doing so we considered historical
credit losses, forward-looking factors specific to our debtors and other macro-economic factors to arrive at expected default rates.
The default rates are then applied to the Company's aging to determine expected credit losses. The carrying amount of trade receivables
is reduced by the expected credit losses. If the financial conditions of these customers were to deteriorate and the Company determines
that no recovery of a trade receivable is possible, the amount is deemed irrecoverable and subsequently written-off.
Inventory
Inventory consists of raw material inventory, work in
process, and finished goods and are recorded at the lower of cost and net realizable value. Cost is determined on a first in first
out basis and includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventory to its present
condition.
An assessment is made of the net realizable value of
inventory at each reporting period. Net realizable value is the estimated selling price less the estimated cost of completion and
the estimated costs necessary to make the sale. When circumstances that previously caused inventory to be written down no longer
exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount
of any write down previously recorded is reversed so that the new carrying amount is the lower of the cost and the revised net
realizable value. Raw materials are not written down unless the goods in which they are incorporated are expected to be sold for
less than cost, in which case, they are written down by reference to replacement cost of the raw materials, as this is the best
indicator of net realizable value.
Property and equipment
Property and equipment are recorded
at cost. Depreciation is calculated based on the estimated useful life of the asset using the following method and useful lives:
Machinery and equipment
|
|
Straight Line, 5 years
|
Leasehold improvements
|
|
Straight Line, 5 years or life of the lease, whichever is less
|
Office equipment
|
|
Straight Line, 5 years
|
Patents and licenses
Patents and licenses are recorded at cost and amortized on
a straight-line basis over 12 years. Ongoing maintenance costs are expensed as incurred.
Impairment of long-lived assets
The Company’s tangible and intangible assets are reviewed
for indications of impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may
not be recoverable. An assessment is made at each reporting date whether there is any indication that an asset may be impaired.
An impairment loss is recognized when the carrying amount
of an asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss for the year. The recoverable amount
is the greater of the asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows,
the recoverable amount is determined for the cash-generating unit ("CGU") to which the asset belongs.
An impairment loss is reversed if there is an indication that
there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent
that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortization, if no impairment loss had been recognized.
The Company reported an impairment loss of $156,717 for the
year ended December 31, 2018 (2017 - nil, 2016 - $63,522).
Goodwill
Goodwill represents the excess of the cost of an acquired
business over the fair value of the identifiable assets acquired net of liabilities assumed. Goodwill is measured at cost less
accumulated impairment losses and is not amortized. Goodwill is tested for impairment on an annual basis or whenever facts or circumstances
indicate that the carrying amount may exceed its recoverable amount.
The Company performed its annual test for goodwill impairment
at December 31, 2018. The Company utilized a five-year cash flow forecast using the annual budget approved by the Board of Directors
as a basis for such forecasts. Cash flow forecasts beyond that of the budget were prepared using a stable growth rate for future
periods. These forecasts were based on historical data and future trends expected by the Company. The Company's valuation model
also takes into account working capital and capital investments required to maintain the condition of the assets. Forecasted cash
flows were discounted using an after-tax rate of 32%.
Based on the impairment tests, the value in-use of the
CGU to which goodwill is applicable exceeds the carrying amount. As a result, no provision for impairment of goodwill was provided.
Income taxes
The Company follows the liability method of accounting
for income taxes. Under this method, deferred income taxes are provided on differences between the financial reporting and income
tax bases of assets and liabilities and on income tax losses available to be carried forward to future years for tax purposes.
Deferred income taxes are measured using the substantively enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. Deferred tax assets are only recognized if the amount is expected to be realized in the future.
Recently Enacted U.S. Federal Tax Legislation
Introduced initially as the Tax Cuts and Jobs Act, the
Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the
“Act”) was enacted on December 22, 2017. The Act applies to corporations generally beginning with taxable years starting
after December 31, 2017 and reduces the corporate tax rate from a graduated set of rates with a maximum 35% tax rate to a flat
21% tax rate. Additionally, the Act introduces other changes that impact corporations, including a net operating loss (“NOL”)
deduction annual limitation, an interest expense deduction annual limitation, elimination of the alternative minimum tax, and immediate
expensing of the full cost of qualified property. The Act also introduces an international tax reform that moves the U.S. toward
a territorial system, in which income earned in other countries will generally not be subject to U.S. taxation. However, the accumulated
foreign earnings of certain foreign corporations will be subject to a one-time transition tax, which can be elected to be paid
over an eight-year tax transition period, using specified percentages, or in one lump sum. NOL and foreign tax credit (“FTC”)
carryforwards can be used to offset the transition tax liability. As a result of this new regulation, the Company reduced its deferred
tax assets by $9,472,000 in 2017.
Revenue recognition
Revenue is measured based on the consideration specified
in a contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue when it
transfers control over a product or service to a customer.
Sale of goods
Revenue from the sale of goods is recognized, net of discounts
and customer rebates, at the point in time the transfer of control of the related products has taken place as specified in the
sales contract and collectability is reasonably assured.
Service revenue
The Company provides contract services, primarily in the
form of non-recurring revenue ("NRE") where control is passed to the customer over time. The contracts generally provide
agreed upon milestones for customer payment which include but are not limited to the delivery of sample products, design reports
and test reports. The customer makes payment when it has approved the delivery of the milestone. The Company must determine if
the contract is made up of a series of independent performance obligations or a single performance obligation. Where NRE contracts
contain multiple performance obligations for which a standalone transaction price can be assessed, revenue is recognized as each
performance obligation is satisfied. Where NRE contracts contain a single performance obligation to be settled over time, revenue
is recognized progressively based on the output method.
The Company recently adopted IFRS 15 -
Revenue from Contracts
from Customers
on January 1, 2018.
Interest income
Interest income on cash and cash equivalents classified as
fair value through profit or loss is recognized as earned using the effective interest method.
Other income
Government Grants
Grants received exclusively from governmental agencies such as the Department
of Defense of the United States of America, NASA and Productivity and Innovation Credit Scheme Singapore ("PIC Grant"),
relating to research and development or expenditure on technology, are recognized as other income.
Government grants from the United States are based on the agreed upon
milestones of the projects. PIC Grants are offered as a percentage of qualifying expenditures. PIC Grants are paid out in cash.
Other income earned on government grants in 2018 was nil (2017 - nil, 2016 - $14,027).
Research and Development Credits
The Company is eligible to receive cash credits for certain qualifying research
and development expenses based on actual spending over a three-year period, with an expectation that the credits will not exceed
a certain dollar value over the three year period. At December 31, 2018, the Company has a recoverable amount of $1,905,593 relating
to these research and development credits (2017 - $1,287,539, 2016 - nil) and is classified as prepaid and other current assets.
Qualifying recovery of $1,481,260 have been recorded for the year ended December 31, 2018 (2017 - $1,695,383, 2016 - nil) and is
included in other income.
Intangible assets
Research and development costs
Research costs are expensed in the year incurred. Development
costs are also expensed in the year incurred unless the Company believes a development project meets IFRS criteria as set out in
IAS 38, Intangible Assets, for deferral and amortization. IAS 38 requires all research costs be charged to expense while development
costs are capitalized only after technical and commercial feasibility of the asset for sale or use have been established. This
means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate
how the asset will generate future economic benefits. Development costs are tested for impairment whenever events or changes indicate
that its carrying amount may not be recoverable.
In-Process Research and Development
Under IFRS, in-process research and development ("IPR&D")
acquired in a business combination that meets the definition of an intangible asset is capitalized with amortization commencing
when the asset is ready for use (i.e., when development is complete). The Company acquired $714,000 of IPR&D when it acquired
BB Photonics Inc. in 2016. The development of this IPR&D is still incomplete, therefore no amortization has been charged against
IPR&D.
Customer relationships
Intangible assets include customer relationships acquired
with the acquisition of DenseLight. Customer relationships are an externally acquired intangible asset and are measured at cost
less accumulated amortization and any accumulated impairment losses. Customer relationships are amortized on a straight-line basis
over their estimated useful lives and is tested for impairment whenever events or changes indicate that their carrying amount may
not be recoverable. The useful life of customer relationships was determined to be 5 years.
Stock-based compensation
Stock options and warrants awarded to non-employees are accounted
for using the fair value of the instrument awarded or service provided whichever is considered more reliable. Stock options and
warrants awarded to employees are accounted for using the fair value method. The fair value of such stock options and warrants
granted is recognized as an expense on a proportionate basis consistent with the vesting features of each tranche of the grant.
The fair value is calculated using the Black-Scholes option-pricing model with assumptions applicable at the date of grant.
Loss per share
Basic loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the year. Diluted loss per share is calculated by dividing net loss
by the weighted average number of common shares outstanding during the year after giving effect to potentially dilutive financial
instruments. The dilutive effect of stock options and warrants is determined using the treasury stock method.
Recent accounting pronouncements
IFRS 15,
Revenue from Contracts with Customers
("IFRS
15"). The IASB issued IFRS 15, which is effective for annual periods beginning on or after January 1, 2018. The standard contains
a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time and over
time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is
recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue
recognized. The Company adopted the policy using the modified retrospective method.
IFRS 9,
Financial Instruments,
replaces IAS 39, Financial
Instruments: Recognition and Measurement. The new standard requires entities to classify financial assets as being measured either
at amortized cost or fair value depending on the business model and contractual cash flow characteristics of the asset. Financial
liabilities are generally classified and measured at fair value at initial recognition and subsequently measured at amortized cost.
The Company adopted IFRS 9 on January 1, 2018 using the retrospective approach. The adoption of IFRS 9 did not impact the carrying
amounts of the Company's financial assets or liabilities on the adoption date.
The following is a summary of recent accounting pronouncements
that may affect the Company:
IFRS 16, Leases (“IFRS 16”) sets out the principles
for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, the customer (lessee) and
the supplier (lessor). This will replace IAS 17, Leases (“IAS 17”) and related Interpretations. IFRS 16 provides revised
guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a single accounting
model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities for leases with terms of more
than 12 months, unless the underlying asset is of low value, and depreciation of lease assets is reported separately from interest
on lease liabilities in the income statement. Under IFRS 16, lessor accounting for operating and finance leases will remain substantially
unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for
entities that apply IFRS 15, Revenue from Contracts with Customers. The Company intends to adopt this new standard using the modified
retrospective method. The adoption of this new standard will result in a right of use asset and liability of approximately $890,000
applicable to leases that will be renewed in 2019. Due to the near term expiry of the Company's current leases, 2018 carrying values
will not be impacted. The adoption of the new standard will have no impact on the Company's cash flows.
Selected Annual Data
The selected financial data of the Company for the years
ended December 31, 2018, 2017 and 2016 was derived from the audited annual consolidated financial statements of the Company, which
have been audited by Marcum LLP, independent registered public accounting firm, as described in their report which is included
in this Annual Report.
The information contained in the selected financial data
for the 2018, 2017 and 2016 years is qualified in its entirety by reference to the Company’s consolidated financial statements
and related notes included under the heading ITEM 17. “Financial Statements” and should be read in conjunction with
such financial statements and with the information appearing under the heading ITEM 5 “Operating and Financial Review and
Prospects”. Except where otherwise indicated, all amounts are presented in accordance with IFRS as issued by IASB.
The following table relates to the operating results of the
Company.
Consolidated Statements of Operations Under International
Financial Reporting Standards
(US$)
|
|
|
Years Ended December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
Revenue
|
|
$
|
3,888,185
|
|
|
$
|
2,794,044
|
|
|
$
|
1,861,747
|
|
Cost of revenue
|
|
|
1,475,969
|
|
|
|
1,342,691
|
|
|
|
946,001
|
|
Gross profit
|
|
|
2,412,216
|
|
|
|
1,451,353
|
|
|
|
915,746
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing and administration
|
|
|
11,689,204
|
|
|
|
10,870,741
|
|
|
|
11,421,604
|
|
Research and development
|
|
|
8,692,804
|
|
|
|
5,442,873
|
|
|
|
3,165,825
|
|
Impairment loss
|
|
|
156,717
|
|
|
|
-
|
|
|
|
63,522
|
|
Loss on disposal of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
46,738
|
|
Other income, including interest
|
|
|
(1,505,790
|
)
|
|
|
(1,766,524
|
)
|
|
|
(66,872
|
)
|
Operating expenses
|
|
|
19,032,935
|
|
|
|
14,547,090
|
|
|
|
14,630,817
|
|
Net loss from operations
|
|
|
(16,620,719
|
)
|
|
|
(13,095,737
|
)
|
|
|
(13,715,071
|
)
|
Change in fair value of contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
(283,130
|
)
|
Net loss before income tax recovery
|
|
|
(16,620,719
|
)
|
|
|
(13,095,737
|
)
|
|
|
(13,431,941
|
)
|
Income tax recovery
|
|
|
(297,940
|
)
|
|
|
(297,940
|
)
|
|
|
(207,257
|
)
|
Net loss
|
|
|
(16,322,779
|
)
|
|
|
(12,797,797
|
)
|
|
|
(13,224,684
|
)
|
Deficit, beginning of year
|
|
|
(116,873,153
|
)
|
|
|
(104,075,356
|
)
|
|
|
(90,850,672
|
)
|
Net loss
|
|
|
(16,322,779
|
)
|
|
|
(12,797,797
|
)
|
|
|
(13,224,684
|
)
|
Deficit, end of year
|
|
$
|
(133,195,932
|
)
|
|
$
|
(116,873,153
|
)
|
|
$
|
(104,075,356
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
The selected annual information for 2018, 2017 and 2016 can be further analyzed
as follows:
Research and development can be analysed as follows:
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
Wages and benefits
|
|
$
|
4,641,238
|
|
|
$
|
2,839,088
|
|
|
$
|
1,572,567
|
|
Subcontract fees
|
|
|
1,288,566
|
|
|
|
1,044,936
|
|
|
|
1,013,539
|
|
Stock-based compensation
|
|
|
536,321
|
|
|
|
369,007
|
|
|
|
373,196
|
|
Supplies
|
|
|
2,226,679
|
|
|
|
1,189,842
|
|
|
|
206,523
|
|
|
|
$
|
8,692,804
|
|
|
$
|
5,442,873
|
|
|
$
|
3,165,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing and administration costs can be analysed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
3,485,796
|
|
|
$
|
2,805,917
|
|
|
$
|
3,697,068
|
|
Wages and benefits
|
|
|
2,468,001
|
|
|
|
2,574,978
|
|
|
|
2,800,878
|
|
Depreciation and amortization
|
|
|
2,562,624
|
|
|
|
2,275,160
|
|
|
|
1,521,566
|
|
General expenses
|
|
|
1,178,536
|
|
|
|
1,038,857
|
|
|
|
1,292,341
|
|
Professional fees
|
|
|
767,351
|
|
|
|
624,941
|
|
|
|
715,716
|
|
Management and consulting fees
|
|
|
155,169
|
|
|
|
229,577
|
|
|
|
611,861
|
|
Rent and facility costs
|
|
|
1,071,727
|
|
|
|
1,321,311
|
|
|
|
782,174
|
|
|
|
$
|
11,689,204
|
|
|
$
|
10,870,741
|
|
|
$
|
11,421,604
|
|
Factors Affecting Our Results of Operations
During the year ended December 31, 2018, the Company
generated gross revenue of $3,888,185 and gross profit of $2,412,216 or 62%. The Company’s revenue in 2018 was generated
from the sale of sensing products, datacom products and non-recurring engineering revenue (“NRE”) through the Company’s
subsidiary DenseLight Semiconductor Pte. Ltd. (“DenseLight”). The Company currently operates at a loss. The loss for
2018 before income taxes was $16,322,779.
During 2018, the Company spent $8,692,804 on research
and development activities directly related to the development and commercialization of the POET Optical Interposer Platform
(POIP) and the development of photonic sensing products. $11,689,204 was spent on selling, marketing and administration
expenses which included non-cash operating costs of $6,584,741, of which $2,562,624 related to depreciation and amortization,
and $4,022,117 related to the fair value stock-based compensation. The 2018 loss included other income of $1,505,790 of which
$1,481,260 related to the recovery of certain qualifying expenses from the Economic Development Board (EDB) in Singapore. The
recovery includes both collected recoveries and an amount to be received in 2019. EDB recoverable for the year ended December
31, 2018 was $1,905,593. The Company also had deferred income tax recovery of $297,940 for the year ended December 31,
2018.
The Company is not exposed to hyperinflationary risks as the Company’s
investments and operations are occur in geographic regions with stable economies.
Year Ended December 31, 2018 compared to Year Ended December
31, 2017
Net loss before taxes for the year ended December 31, 2018
was $16,620,719 as compared to net loss before taxes of $13,095,737 for the year ended December 31, 2017. The following explains
the $3,524,982 (27%) variance in net loss between December 30, 2018 and December 31, 2017.
Revenue
During 2018, the Company reported revenue of $3,888,185 through
its DenseLight subsidiary compared to $2,794,044 in 2017, a 39% increase driven primarily by an increase in product sales and non-recurring
engineering (NRE) revenue. In November 2018 the Company received its first orders for POET Optical Interposer-based solutions from
leading global networking companies targeting data communication applications, which represented entry into a new served market
for the Company’s products. The increase in sales of $1,094,141 contributed to an increase in gross margin from 52% to 62%.
R&D
Total R&D increased by $3,249,931 from $5,442,873
in 2017 to $8,692,804 in 2018. For the purposes of the following R&D analysis, non-cash stock-based compensation of $536,321
(2017 - $369,007) has been excluded and is included with the analysis of non-cash stock-based compensation below.
The largest increase for the comparative periods was R&D
which increased by $3,082,617 (61%) to $8,156,483 in 2018 from $5,073,866 in 2017. Since the acquisition of DenseLight and BB Photonics
in May and June of 2016 respectively, the Company has systematically increased its R&D activities in an effort to bring new
products to market and expand its product portfolio. The increased R&D activity has contributed to the development of the POET
Optical Interposer platform utilizing the Company’s proprietary dielectric waveguides. As a result of increased R&D spending
in the period, the Company successfully demonstrated the functionality of PIN photodetectors targeting 100G to 400G optical transceivers.
New skilled technical human resources, especially in optics and photonics device testing, represent the largest area of increase
in R&D. The increase is consistent with the Company’s budgeted R&D activity. Our expectation is that the R&D
activity conducted in 2018 will lead to sales of new products in 2019.
Professional fees
Professional fees in the year increased by $142,410 (23%)
to $767,351 from $624,941 in 2017. Professional fees increased in 2018 due to a mandatory requirement to conduct annual audits
of EDB filings, the preparation of these audits must be conducted by an independent firm, the cost of which must be borne by the
Company. No such audit was conducted in 2017. Additional professional fees, including legal fees, were required as the Company
reviewed internal policies for best practices and initiated co-development partnerships and agreements with several counterparties
as disclosed in 2018. The Company also incurred professional fees related to the filing of its final short form prospectus filed
in November 2018.
Non-cash stock-based compensation
Non-cash stock-based compensation increased by $847,193 (27%)
to $4,022,117 during 2018 from $3,174,924 in 2017. The valuation of stock options is driven by a number of factors including the
number of options granted, the strike price and the volatility of the Company’s stock. The stock option expense is dependent
on the timing of the stock option grant and the amortization of the options as they vest. The stock options vest in accordance
with the policies determined by the Board of Directors at the time of the grant consistent with the provisions of the Stock Option
Plan, as amended (the “Plan”).
Depreciation and amortization
Non-cash depreciation and amortization increased by $287,464
(13%) to $2,562,624 in 2018 from $2,275,160 in 2017. The Company has committed to improving its fabrication facilities in Singapore,
and its overall manufacturing capabilities, which includes acquiring new equipment for the Optical Interposer program. The addition
of new equipment will result in increased depreciation charges.
Management and consulting fees
Management and consulting fees decreased by $74,408 (32%)
to $155,169 in 2018 from $229,577 in 2017. The decrease was a result of the resignation of the former Executive Chairman of Board
in 2017, whose compensation was included in management and consulting fees. Management and consulting fees did not include fees
for the newly appointed Executive Chairman in 2018, which were instead charged to Wages and Benefits.
Other income
Other income in 2018 decreased by $260,734 (15%) to $1,505,790
in 2018 from $1,766,524 in 2017. The Company is entitled to a recovery of certain qualifying expenses from the EDB in Singapore.
The recoverable amount in 2017 was higher than the amount in 2018 in part due to a reduction adjustment in 2018 related to the
over accrued recovery for 2017. If the adjustment had not been done, the recovery would have been more comparable year over year.
Impairment
During the year ended December 31, 2018, management determined
that certain property and equipment would not be used to generate future cash flows and committed to a plan to dispose of the property
and equipment by December 31, 2018. Management used a market approach to determine the property and equipment's fair value less
cost to sell. Key assumptions included the cost of similar assets, the impact of customization and unique use. The fair value less
cost to sell was determined to be $3,000 which is greater than its value in use. The Company recorded an impairment loss of $156,717
on the property and equipment and reclassified $3,000 from property and equipment to non-current assets held for sale. The property
and equipment was sold in December 2018.
Credit Risk
The Company is exposed to credit risk associated with its
accounts receivable. The Company has accounts receivable from both governmental and non-governmental agencies. Credit risk is minimized
substantially by ensuring the credit worthiness of the entities with which it carries on business. Credit terms are provided on
a case by case basis. The Company has not experienced any significant instances of non-payment from its customers.
The Company's accounts receivable ageing at December 31 was
as follows:
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
Current
|
|
$
|
892,343
|
|
|
$
|
330,731
|
|
|
$
|
125,610
|
|
31 - 60 days
|
|
|
34,331
|
|
|
|
56,094
|
|
|
|
16,346
|
|
61 - 90 days
|
|
|
60,885
|
|
|
|
-
|
|
|
|
75,816
|
|
> 90 days
|
|
|
-
|
|
|
|
107,100
|
|
|
|
75,077
|
|
Expected credit losses (1)
|
|
|
(40,615
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
946,944
|
|
|
$
|
493,925
|
|
|
$
|
292,849
|
|
(1) The Company applies IFRS 9 simplified approach to measuring expected credit
losses using a lifetime expected credit loss allowance for trade receivables.
The allowance is included in selling, general and administrative expenses in the
consolidated statements of operations and deficit. Amounts charged to the loss allowance account are generally written off when
there is no reasonable expectation of recovery.
In prior years, the impairment of trade receivables was assessed based on the incurred
loss model and determined by management in accordance with its assessment of recoverability. Receivables for which an impairment
provision was recognized were written off against the provision when there was no expectation of recovering additional cash.
Exchange Rate Risk
The functional currency of each of the entities included in the accompanying consolidated
financial statements is the local currency where the entity is domiciled. Functional currencies include the US, Singapore and Canadian
dollar. Most transactions within the entities are conducted in functional currencies. As such, none of the entities included in
the consolidated financial statements engage in hedging activities. The Company is exposed to a foreign currency risk with the
Canadian and Singapore dollar. A 10% change in the Canadian and Singapore dollar would increase or decrease other comprehensive
loss by $386,391.
Liquidity Risk
The Company currently does not maintain credit facilities. The Company's existing
cash and cash resources are not considered sufficient to fund operating and investing activities beyond one year from the issuance
of these consolidated financial statements. The Company will need to seek additional financing to continue as a going concern.
Year Ended December 31, 2017 compared to Year Ended December
31, 2016
Net loss before taxes for the twelve-month period ended
December 31, 2017 was $13,095,737 compared to net loss before taxes of $13,431,941 for the twelve months ended December 31, 2016.
The loss of the year ended December 31, 2017 includes the operations of DenseLight and BB Photonics for the entire year, while
the loss for the prior-year reflected the operations of the Company with those subsidiaries for less than the full twelve months
(i.e., from May 11, 2016 for DenseLight and June 22, 2016 for BB Photonics).
Revenue
During the twelve-month period ended December 31, 2017, the
Company reported revenue of $2,794,044 through its DenseLight subsidiary compared to revenue of
$1,861,747 for the period reported in 2016. Revenue
for the period ended December 31, 2017 was for twelve months, while the revenue in 2016 was only from May 11, 2016.
R&D
Total R&D increased by $2,277,048 from $3,165,825
in 2016 to $5,442,873 in 2017. For the purposes of the following R&D analysis, non-cash stock-based compensation of $369,007
(2016 - $373,196) has been excluded and is included with the analysis of non-cash stock-based compensation below.
R&D increased by 82% or $2,281,237 to $5,073,866
in 2017 from $2,792,629 in 2016. R&D costs in 2016 included the activities of POET for the full twelve-month period and R&D
of DenseLight and BB Photonics only from May 11, 2016 and June 22, 2016, respectively. The first twelve months of 2017 include
R&D costs for the GaAs platform and the programs in InP integrated dielectrics and wafer-level packaging all associated with
the Company’s efforts to expand its product portfolio in datacom and sensing. In addition to 2016 costs only being costs
of a partial year, increased HR and related costs also contributed to the increase over the prior year.
General expenses
General expenses and rent increased by 14% or $285,653
to $2,360,168 in 2017 from $2,074,515 in 2016. This increase was also a result of shortened activity during the prior-year related
to the dates of acquisition of DenseLight and BB Photonics (i.e., May 11, 2016 and June 22, 2016, respectively).
Stock-based compensation
Non-cash stock-based compensation decreased by 22% or
$895,340 to $3,174,924 in 2017 from $4,070,264 in 2016. Departing employees and consultants who had unvested stock options contributed
to the substantial reduction in 2017, as their unvested options were returned to the Company. The valuation of stock options is
driven by a number of factors including the number of options granted, the strike price and the volatility of the Company’s
stock. The stock option expense is dependent on the timing of the stock option grant and the amortization of the options as they
vest. The stock options vest in accordance with the policies determined by the Board of Directors at the time of the grant consistent
with the provisions of the Stock Option Plan, as amended (the “Plan”).
Management and consulting fees
Management and consulting fees decreased by 62% or $382,284
from 2016. The expense in 2017 was $229,577 as compared to $611,861 in 2016. The resignation of Mr. Manocha from the position of
Executive Chairman of the Board in February 2017 contributed to the decrease. This reduction in management and consulting fees
was partially offset by an increase in wages and benefits for the compensation paid to Mr. Lazovsky who replaced Mr. Manocha as
the Executive Chairman of the Board. Mr. Lazovsky is paid $200,000 annually in his capacity as Executive Chairman as compared to
$500,000 that previously paid to Mr. Manocha.
Wages and benefits
Wages and benefits decreased by 8% or $225,900 to $2,574,978
in 2017 compared to $2,800,878 in the prior-year. Three principal factors contributed to the decrease:
(1) 2016 wages included an accrued bonus of $550,000
to the CEO and former COO, which was deferred and eventually paid in 2017; (2) 2016 wages also included wages paid to the former
Executive Co-Chairman of the Board of $136,655; and (3) 2016 wages included twelve months of wages for the former COO, Dr. Deshmukh
who resigned in Q1 2017. These decreases were offset by: (1) the inclusion of the compensation of the new Executive Chairman of
the Board; and (2) wages of DenseLight and BB Photonics for the entire 2017 as compared to only the period from May 11, 2016 and
June 22, 2016 respectively.
Depreciation and amortization
Depreciation and amortization increased by 50% or $753,594 to
$2,275,160 in 2017 from $1,521,566 in the prior-year. The increase was a result of depreciation and amortization related to the
property and equipment, patents and licenses, and intangible assets acquired during and after the acquisition of DenseLight and
BB Photonics in 2016. The Company acquired $11,118,460 of property and equipment, patents and licenses and intangible assets since
May 2016.
Other Income
Other income in 2017 was $1,766,524 as compared to $66,872 in
2016. The Company is entitled to a recovery of certain qualifying expenses from the Economic Development Board (EDB) in Singapore.
The increase is a result of both collected recoveries and an amount accrued to be received in 2018.
Exchange Rate Risk
The Company is exposed to foreign currency risk with the Canadian
dollar and Singapore dollar due to cash reserves and other current assets and liabilities that are maintained in those currencies,
all of which are exposed to currency fluctuations. Most of the Company’s operations are transacted in US dollars and Singapore
Dollars. A 10% change in the Canadian dollar and Singapore dollar would increase or decrease other comprehensive loss by $260,175.
Interest Rate Risk
Cash equivalents bear interest at fixed rates, and as such, are
subject to interest rate risk resulting from changes in fair value from market fluctuations in interest rates. The Company does
not depend on interest from its investments to fund its operations.
Credit Risk
The Company is exposed to credit risk associated with
its accounts receivable. The Company has accounts receivable from both governmental and non-governmental agencies. Credit risk
is minimized substantially by ensuring the credit worthiness of the entities with which it carries on business. Credit terms are
provided on a case- by-case basis. The Company has not experienced any significant instances of non-payment from its customers.
The Company's accounts receivable ageing at December 31 was
as follows:
|
|
|
2017
|
|
|
|
2016
|
|
Current
|
|
$
|
330,731
|
|
|
$
|
125,610
|
|
31 - 60 days
|
|
|
56,094
|
|
|
|
16,346
|
|
61 - 90 days
|
|
|
-
|
|
|
|
75,816
|
|
> 90 days
|
|
|
107,100
|
|
|
|
75,077
|
|
|
|
$
|
493,925
|
|
|
$
|
292,849
|
|
|
B.
|
Liquidity and Capital Resources
|
The Company had working capital of $3,847,842 on December
31, 2018 as compared to $7,140,119 on December 31, 2017.
The Company’s balance sheet as of December 31, 2018
reflects assets with a book value of $25,137,903 compared to $25,205,772 as of December 31, 2017. Twenty-seven percent (27%) of
the book value as of December 31, 2018, or $6,888,264, was in current assets consisting primarily of cash and other current assets,
compared to thirty-two percent (32%), or $7,950,712 as of December 31, 2017.
The Company’s working capital of $3,847,842 is not sufficient
to support its operating and investing activities over the next 12 months. The Company has several sources of financing that it
is considering in order to continue as a going concern. These sources of financing include internal cash generation from operations,
financing via public offering, assumption of debt or a combination of all three sources.
In order to provide internal financing, the Company negotiated
multiple non-recurring engineering (NRE) contracts in excess of US$3 million with large suppliers of networking and datacom equipment.
These NRE contracts extend into 2019 and will generate immediate high margin cash flow.
During 2018, the Company purchased US$3.7 million of new equipment. The payment
terms for the new equipment were negotiated both prior to placing purchase orders and re-negotiated subsequent to taking possession
of the equipment. While the Company took possession of the new equipment, it was permitted to defer a portion of purchase cost
without penalty or interest cost to 2019.
On March 21, 2018, the Company strengthened its working capital
position relative to December 31, 2017 by completing a “bought deal” public offering of 25,090,700 units at a price
of $0.425 (CAD$0.55) per unit for gross proceeds of $10,663,548 (CAD$13,799,885). Each unit consists of one common share and one-half
common share purchase warrant. Each whole warrant entitles the holder to purchase one common share of the Company at a price of
$0.58 (CAD$0.75) per share until March 21, 2020. The broker was paid a cash commission of $639,813 (6%) of the gross proceeds and
received 1,505,442 compensation options. Each compensation option is exercisable into one compensation unit of the Company at a
price of $0.425 (CAD$0.55) per compensation unit until March 21, 2020 with each compensation unit comprising one common share and
one-half compensation share purchase warrant. Each whole compensation share purchase warrant entitles the broker to purchase one
common share of the Company at a price of $0.425 (CAD$0.55) per share until March 21, 2020. The Company paid an additional $492,177
in other costs related to this financing. The Company received $9,531,558 net of share issue costs. Additionally, for the year
ended December 31, 2018, the Company raised $1,116,445 from the exercise of warrants and stock options.
On November 28, 2018, the Company filed a preliminary short
form base shelf prospectus where it advised shareholders of its intent to raise a maximum US$50 million through a public offering
of either equity securities, debt securities or a combination of both. The Company has met with multiple investment bankers in
both Canada and the United States who have expressed an interest in assisting the Company with a capital raise.
As at December 31, 2018, the Company has accumulated losses
of $(133,195,932) and working capital of $3,847,842. During the year ended December 31, 2018, the Company had negative cash flows
from operations of $(9,288,588). The Company has prepared a cash flow forecast which indicates that it does not have sufficient
cash to meet its minimum expenditure commitments and therefore needs to raise additional funds to continue as a going concern.
To address the future funding requirements, management has
undertaken the following initiatives:
|
1.
|
Entered into discussions
to secure debt financing.
|
|
2.
|
Initiated a strict
working capital monitoring program.
|
|
3.
|
Continued its
focus on maintaining an appropriate level of corporate overheads in line with the
Company's available cash resources.
|
|
4.
|
Filed a preliminary short-form prospectus to raise a maximum $50 million through a public offering
of either equity securities, debt securities or a combination of both.
|
|
5.
|
Initiated a plan for raising capital in Canada via the private placement of convertible debt.
|
In line with its needs for additional financing, on April
3, 2019, the Company closed the first tranche of a private placement of convertible debentures that raised gross proceeds of CAD$1,929,000
(the "Debentures"). The Debentures are unsecured, bear interest at 12% per annum, compounded annually with 1% payable
at the beginning of each month and mature on April 3, 2021.
Additionally, the Company arranged for a credit facility
(the “Bridge Loan”) to be provided by Espresso Capital Ltd which will grant the Company access to a maximum US$5,000,000.
The Company signed the loan documents on April 18, 2019 and was advanced US$2,000,000 on April 23, 2019. In partial consideration
of the US$5,000,000 gross credit facility available to the Company, and in connection with the initial advance of US2,000,000,
the Company issued to Espresso Capital warrants for the purchase of 3,289,500 common shares at a price of C$0.35 per share. The
Warrants expire on April 18, 2020.
The following is a summary of Company’s cash flows and
working capital:
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Net cash used in operating activities
|
|
|
(9,288,588
|
)
|
|
|
(9,163,689
|
)
|
|
|
(9,961,419
|
)
|
Net cash used in investing activities
|
|
|
(3,535,600
|
)
|
|
|
(441,065
|
)
|
|
|
(2,323,332
|
)
|
Net cash from financing activities
|
|
|
10,648,003
|
|
|
|
123,528
|
|
|
|
11,783,144
|
|
Effect of exchange rate changes on cash
|
|
|
(230,425
|
)
|
|
|
79,422
|
|
|
|
467,893
|
|
Change in cash
|
|
|
(2,406,610
|
)
|
|
|
(9,401,804
|
)
|
|
|
(33,714
|
)
|
Opening cash
|
|
|
4,974,478
|
|
|
|
14,376,282
|
|
|
|
14,409,996
|
|
Ending cash
|
|
|
2,567,868
|
|
|
|
4,974,478
|
|
|
|
14,376,282
|
|
Operating Activities
During 2018, the Company had losses from operations of
$16,322,779 (2017 - $12,797,797, 2016 - $13,224,684). Net loss from operations included non-cash depreciation and amortization
of $2,562,624 (2017 - $2,275,160, 2016 - $1,521,566) and non-cash stock-based compensation of $4,022,117 (2017 - $3,174,924, 2016
- $4,070,264).
During 2018, other operating items not affecting cash
flows included impairment loss $156,717 (2017 – nil, 2016 - $63,522), deferred income tax recovery of $297,940 (2017 - $297,940,
2016 - $207,257), deferred rent of $21,992 (2017 – nil, 2016 - $42,665) and expected credit losses of $40,615 (2017 –
nil, 2016 – nil).
As a consequence of increased revenue year over year,
accounts receivable has also increased. The increase in accounts receivable has resulted in a net cash out flow of $508,094 (2017
- $171,257, 2016 - $77,415).
Prepaid and other current assets have also increased
year over year, primarily due to the large recoverable amount due from the Economic Development Board of Singapore. This increase
is reflected as a net cash out flow of $1,025,256 (2017 - $1,116,758, 2016 - $443,590).
Due to cash management strategies initiated during 2018,
the Company negotiated with certain vendors to extend its payment terms, the extension resulted in cash in-flows of $2,026,667.
In 2017 and 2016, the Company settled large commitments, primarily to employees which resulted in net cash outflows of $894,013
and $628,292 respectively.ly
Investing Activities
During 2018, the Company either spent cash or accrued
$3,718,152 on certain critical equipment, primarily consisting of ; die pick tool, Omega etch, APM PECVD and C2L Transport. Certain
tools were required to either enhance the Company’s capabilities or meet the growing demand for its products. The Company
spent cash of $969,797 and $1,208,352 on capability enhancement tools in 2017 and 2016 respectively.
Additionally, in 2017, the $589,275 of an investment
that was made in 2016 matured. These funds were used to fund operations or equipment purchases.
In addition to the purchase of the short-term investment
in 2016, the Company also incurred a capital cost of $500,000 as part of the cost of acquiring its subsidiary DenseLight.
Financing Activities
On November 2, 2016 the Company completed a Short Form Base Shelf and Supplemental
Prospectus offering of 34,800,000 units at a price of $0.269 (CAD$0.36) per unit for gross proceeds of $9,349,254 (CAD$12,528,000).
Each unit consists of one common share and one common share purchase warrant. Each whole warrant entitles the holder to purchase
one additional common share of the Company at a price of $0.388 (CAD$0.52) per share for a period of five years. The agents received
cash commissions in the aggregate of $654,447 (CAD$876,960). Additional issue costs approximated $510,570 (CAD$666,618).
On March 21, 2018, the Company completed a brokered "bought deal"
public offering of 25,090,700 units at a price of $0.425 (CAD$0.55) per unit for gross proceeds of $10,663,548 (CAD$13,799,885).
Each unit consists of one common share and one-half common share purchase warrant. Each whole warrant entitles the holder to purchase
one common share of the Company at a price of $0.58 (CAD$0.75) per share until March 21, 2020. The broker was paid a cash commission
of $639,813 (6%) of the gross proceeds and received 1,505,442 compensation options. Each compensation option is exercisable into
one compensation unit of the Company at a price of $0.425 (CAD$0.55) per compensation unit until March 21, 2020 with each compensation
unit comprising one common share and one-half compensation share purchase warrant. Each whole compensation share purchase warrant
entitles the broker to purchase one common share of the Company at a price of $0.425 (CAD$0.55) per share until March 21, 2020.
The Company paid an additional $492,177 in other costs related to this financing.
Certain management participated in the “bought-deal” public offering,
by acquiring 281,000 units at a price of $0.425 (CAD$0.55) per unit for gross proceeds of $119,425 (CAD$154,550).
On November 28, 2018, the Company filed a preliminary short
form base shelf prospectus where it advised shareholders of its intent to raise a maximum US$50 million through a public offering
of either equity securities, debt securities or a combination of both. The Company has met with multiple investment bankers in
both Canada and the United States who have expressed an interest in assisting the Company with a capital raise.
In line with its needs for additional financing, on April
3, 2019, the Company closed the first tranche of a private placement of convertible debentures that raised gross proceeds of CAD$1,929,000
(the "Debentures"). The Debentures are unsecured, bear interest at 12% per annum, compounded annually with 1% payable
at the beginning of each month and mature on April 3, 2021.
Additionally, the Company arranged for a credit facility
(the “Bridge Loan”) to be provided by Espresso Capital Ltd which will grant the Company access to a maximum US$5,000,000.
The Company signed the loan documents on April 18, 2019 and was advanced US$2,000,000 on April 23, 2019. In partial consideration
of the US$5,000,000 gross credit facility available to the Company, and in connection with the initial advance of US2,000,000,
the Company issued to Espresso Capital warrants for the purchase of 3,289,500 common shares at a price of C$0.35 per share. The
Warrants expire on April 18, 2020.
Capital Expenditures
The Company has an approved capital budget of $2,629,000 for the
2019 fiscal year related to research and development equipment, manufacturing equipment and patent registration. In 2018, $3,785,760
(2017 - $1,030,340, 2016 - $1,281,170) was either spent in cash or accrued for acquiring development and manufacturing equipment
and new patents.
|
C.
|
Research and Development
|
Virtually all of POET's R&D expenditures in recent
years are in some way connected to the Optical Interposer. We expect to continue to spend the large majority of our R&D resources
for the foreseeable future on Optical Interposer-based products across a wide variety of potential applications. The only other
R&D expenditures that we have or may incur relate to conventional non-interposer-based products that we develop and manufacture
for our legacy sensing product lines that represent the majority of our current sales. However, we intend to develop and transition
these products to the Optical Interposer, because of the resulting cost and performance advantages that it provides.
POET’s Optical Interposer development program consists
of over 20 development projects in three areas: 1) Active Component Development, which includes a variety of application-specific
Indium Phosphide (InP)-based lasers, detectors and modulators; 2) Passive Component Development, which includes application-specific
filters, mux-demux devices, waveguides and spot size converters, all designed and fabricated using POET’s proprietary dielectric
materials and processes; and 3) Core Integration Process Development, which includes processes such as assembly, hermetic sealing,
flip-chip techniques, reflection management, and wafer-level test. In order to optimize our development resources, we have taken
a “building block” approach, beginning with the most fundamental functions needed for the Optical Interposer in each
of these three areas. The Optical Interposer is unique in the industry, incorporating several “first time ever” implementations
of advanced optics and semiconductor packaging techniques and completely new, novel designs for components. To minimize risk and
maximize the probability of successful outcomes, we run parallel development programs, both internal and external. Our external
programs engage development partners or subcontractors to provide devices, process expertise or equipment that we do not have internally.
Internally generated research costs, including the costs
of developing intellectual property and maintaining patents are expensed as incurred. Internal development costs are expensed as
incurred unless such costs meet the criteria for deferral and amortization under IFRS, which to date has not occurred.
We incurred $8,692,804, $5,442,873 and $3,165,825 of
research and development expenses in 2018, 2017 and 2016, respectively, which includes non-cash stock-based compensation of $536,321
$369,007 and $373,196 respectively. Other expenses related to research and development expenditures in the semiconductor business
include costs associated with salaries, material costs, license fees, consulting services and third-party contract manufacturing.
The expenses in all years presented can be analyzed as follows:
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
Wages and benefits
|
|
$
|
4,641,238
|
|
|
$
|
2,839,088
|
|
|
$
|
1,572,567
|
|
Subcontract fees
|
|
|
1,288,566
|
|
|
|
1,044,936
|
|
|
|
1,013,539
|
|
Stock-based compensation
|
|
|
536,321
|
|
|
|
369,007
|
|
|
|
373,196
|
|
Supplies
|
|
|
2,226,679
|
|
|
|
1,189,842
|
|
|
|
206,523
|
|
|
|
$
|
8,692,804
|
|
|
$
|
5,442,873
|
|
|
$
|
3,165,825
|
|
Other than as may be disclosed elsewhere in this annual
report and specifically in ITEM 4.B. “Business Overview,” we are not aware of any trends, uncertainties, demands, commitments
or events that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity
or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating
results or financial condition.
|
E.
|
Off-Balance Sheet Arrangements
|
The Company has no material off-balance sheet arrangements
in place at this time.
|
F.
|
Tabular Disclosures of Contractual Obligations
|
The following table sets forth our contractual obligations
and commercial commitments as of December 31, 2018:
|
|
|
Payments due by period (US$)
|
|
Contractual Obligations
|
|
|
Total
|
|
|
|
<1 year
|
|
|
|
1-3 years
|
|
|
|
3-5 years
|
|
|
|
>5 years
|
|
Operating Lease Obligations
|
|
$
|
1,225,102
|
|
|
$
|
416,348
|
|
|
$
|
808,754
|
|
|
$
|
-
|
|
|
$
|
-
|
|
See “Forward Looking Statements” on page 1 of this Annual Report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and Senior Management
|
The following table sets forth information regarding our Directors and Officers
for the most recent financial year.
Name
|
|
Positions
|
|
Age
|
|
Date First Elected or Appointed a Director or Officer
|
Jean-Louis Malinge (3)
|
|
Director
|
|
|
65
|
|
|
September 5, 2017
|
Peter Charbonneau (1)(3)
|
|
Corporate Governance and Nominating Committee Chair and Director
|
|
|
65
|
|
|
March 28, 2018
|
Dr. Suresh Venkatesan
|
|
Chief Executive Officer and Director
|
|
|
52
|
|
|
June 11, 2015
|
Kevin Barnes
|
|
Corporate Controller and Treasurer
|
|
|
47
|
|
|
December 1, 2012
|
Thomas R. Mika
|
|
Chief Financial Officer
|
|
|
67
|
|
|
November 2, 2016
|
Don Listwin (2)
|
|
Director
|
|
|
60
|
|
|
January 22, 2018
|
John F. O’Donnell (2)(3)(4)
|
|
Former Corporate Governance and Nominating Committee Chair and Director
|
|
|
72
|
|
|
February 14, 2012
|
Chris Tsiofas (1)(2)(3)
|
|
Audit and Compensation Committee Chair and Director
|
|
|
51
|
|
|
August 21, 2012
|
Todd A. DeBonis (2)(4)
|
|
Former Director
|
|
|
54
|
|
|
April 8, 2015
|
David E. Lazovsky (2)
|
|
Chairman and Director
|
|
|
47
|
|
|
April 8, 2015
|
Mohandas Warrior (1)
|
|
Director
|
|
|
58
|
|
|
June 15, 2015
|
Rajan Rajgopal
|
|
President – DenseLight Semiconductor Pte. Ltd.
|
|
|
55
|
|
|
January 23, 2017
|
Richard Zoccolillo
|
|
Senior Vice President – Strategic Marketing and Product Management
|
|
|
57
|
|
|
September 20, 2018
|
|
(1)
|
Member of Audit Committee
|
|
(2)
|
Member of Compensation Committee
|
|
(3)
|
Member of Corporate Governance and Nominating Committee
|
Dr. Suresh Venkatesan as CEO. Dr. Venkatesan was most
recently Senior Vice President, Technology Development at Global Foundries and was responsible for the Company's Technology Research
and Development. Dr. Venkatesan joined Global Foundries in 2009, where he led the development and ramp up of the 28nm node and
was instrumental in the technology transfer and qualification of 14nm. In addition, he was responsible for the qualification and
ramp up of multiple mainstream value-added technology nodes.
Mr. Thomas Mika as EVP & CFO. Prior to joining POET,
Mika served for one year as the Executive Chairman of Rennova Health, Inc., following its merger in 2016 with CollabRx, Inc., the
successor company to Tegal Corporation, a semiconductor capital equipment company (NASDAQ: TGAL). Following its spin-out from Motorola,
Mika served on the Board of Directors of Tegal from 1992 to 2002 and became Tegal’s CFO in 2002. From 2005-2012, he was Tegal’s
Chairman, President and CEO, and continued in those positions following the acquisition of CollabRx, which he later merged into
Rennova Health. In 1980, Mika co-founded IMTEC, a boutique M&A, investment and consulting firm, serving clients in the U.S.,
Europe and Japan over a period of 20 years, taking on the role of CEO in several ventures. Earlier in his career, Mika was a managing
consultant with Cresap, McCormick & Paget and a policy analyst for the National Science Foundation. He holds a Bachelor of
Science in Microbiology from the University of Illinois at Urbana-Champaign and a Master of Business Administration from the Harvard
Graduate School of Business.
Mr. Kevin Barnes has been serving as Corporate Controller
and Treasurer since 2008 and briefly as Chief Financial Officer (2016 – 2016). Mr. Barnes holds a Master of Business Administration
and is a member of the Institute of the Certified Management Accountants of Australia and an Accredited Chartered Secretary. Mr.
Barnes served as a Corporate Controller and Business Performance Manager for EC English, one of the world’s largest language
training institutes between 2006 and 2014. Mr. Barnes also serves as Chief Financial Officer of VVC Exploration Corporation, a
minerals exploration company since 2006. From 2000 to 2006, he was a reporting manager with Duguay and Ringler Corporate Services,
which specializes in financial reporting for publicly traded companies.
Mr. John F. O’Donnell has a BA (Economics) and an
LLB, has practiced law in the City of Toronto since 1973 and has been on the Board of Directors of the Company since February of
2012. He is currently counsel to Stikeman Keeley Spiegel LLP. His practice is primarily in the field of corporate and securities
law and, as such, he is and has been counsel to several publicly traded companies. Mr. O’Donnell is currently also Chairman
of the Board of Peloton Mining Corporation. (PM: CSE). Mr. O’Donnell resigned from the board of directors on December 31,
2018.
Mr. Chris Tsiofas, CA, CPA, earned a Bachelor’s
of Commerce Degree from the University of Toronto and is a member of the Chartered Professional Accountants of Canada and the Canadian
Tax Foundation. He has been on the Board of Directors since August of 2012. He is a partner with the Toronto Chartered Professional
Accountancy firm of Myers Tsiofas Norheim LLP.
Todd A. DeBonis is a veteran semiconductor executive
with over 27 years of expertise in sales, marketing and corporate development. For the last decade Mr. DeBonis was the Vice President
of Global Sales and Strategic Development at TriQuint Semiconductor. Mr. DeBonis played an integral part in the recent merger of
TriQuint with RFMD and subsequent creation of Qorvo, Inc. Mr. DeBonis previously held the position of Vice President, Worldwide
Sales and Marketing at Centillium Communications. Mr. DeBonis also served as the Vice President, Worldwide Sales for Ishoni Networks
and Vice President, Sales & Marketing for the Communications Division of Infineon Technologies North America. Mr. DeBonis has
a B.S. degree in Electrical Engineering from the University of Nevada. Mr. DeBonis resigned from the board of directors on January
22, 2018.
David E. Lazovsky is the founder of Intermolecular and served
as that company’s President and Chief Executive Officer and as a member of the board of directors from September 2004 to
October 2014. Mr. Lazovsky has an in-depth knowledge of the semiconductor industry, technology and markets. Prior to founding Intermolecular,
Mr. Lazovsky held several senior management positions at Applied Materials (NASDAQ: AMAT). From 1996 through August 2004, Mr. Lazovsky
held management positions in the Metal Deposition and Thin Films Product Business Group where he was responsible for managing more
than $1 billion in Applied Materials’ semiconductor manufacturing equipment business. Mr. Lazovsky holds a B.S. in mechanical
engineering from Ohio University and, as of March 31, 2014, held 41 pending or issued U.S. patents. Mr. Lazovsky was appointed
as the Chairman of the Board on February 1, 2017.
Mr. Mohan Warrior was president and chief executive officer
(CEO) of Alfalight Inc. (“Alfalight”) from February 2004 to Sep 2016. Alfalight is a GaAs based high power diode laser
manufacturing company with headquarters in Madison, Wisconsin. Alfalight serves military, telecom and industrial customers. Mr.
Warrior established Alfalight as a leading provider of high-powered laser diode solutions in both commercial and defense segments.
Alfalight was sold to Gooch and Housego in 2016. Prior to joining Alfalight, Mr. Warrior's career included 15 years at Motorola
Semiconductors (now Freescale) where he led the test and assembly operations, a group of 3500 employees, in the US, Scotland and
Korea. Mr Warrior earned his Bachelor’s degree in Chemical Engineering from Indian Institute of Technology, Delhi, a Master’s
degree in Chemical Engineering from Syracuse University, New York and an MBA from the Kellogg School of Management at Northwestern
University.
Mr. Jean-Louis Malinge serves as partner with ARCH Venture
Partners, an early-stage venture capital firm with nearly $2 billion under management. Additionally, he also serves as a managing
director for YADAIS, a leading consulting firm in the photonics and telecommunications industries, and is a board member of EGIDE
SA and CAILabs. EGIDE SA designs, manufactures and sells hermetic packages for the protection and interconnection of several types
of electronic and photonic chips and CAIlabs is a venture-backed French innovative start-up founded in 2013 which has developed
a unique spatial multiplexing platform. From 2004 to 2013 Jean- Louis was President and CEO of Kotura, a Silicon Photonics pioneer
which was acquired in 2013 by Mellanox Technologies. Prior to Kotura Mr. Malinge was an executive with Corning Inc for 15 years.
Jean-Louis hold an Executive M.B.A. from MIT Sloan School in Boston, Massachusetts. He also holds an engineering degree from the
Institut National des Sciences Appliquées in Rennes, France.
Mr. Don Listwin has over 30 years of technology investing and
management experience, highlighted by a decade at Cisco Systems, where he served as executive vice president. During his tenure
at Cisco, he built several multi-billion-dollar lines of business, including the company's Service Provider line of business that
underpins much of today's global Internet infrastructure. More recently, Listwin served as chief executive officer of both Sana
Security and Openwave Systems. In addition, Listwin founded and holds the role of chief executive officer of the Canary Foundation,
a non-profit research organization focused on the early detection of cancer. He also serves as a director on the boards of AwareX,
Calix, D-wave, iSchemaView, Robin Systems and Teradici. Previously, he also served on the boards or was an advisor to JDS Uniphase,
PLUMgrid, Redback Networks, E-TEK Dynamics, the Cellular Telecommunications & Internet Association (CTIA) and the Business
Development Bank of Canada (BDC).
Mr. Rajan Rajgopal is a seasoned semiconductor executive
with senior previous roles at top multi-national leaders such as Micron, Global Foundries and Texas Instruments. He holds an MSEE
degree from the University of Maine and a BSEE degree from the University of Texas at Austin.
Mr. Charbonneau was a general partner at Skypoint Capital
Corporation for almost 15 years, where he was jointly responsible for the placement of $100 million of capital in early-stage telecommunications
and data communication companies. Charbonneau currently serves on the board of directors of Teradici Corporation, a collaboration
solutions Company and the creator of PCoIP protocol technology and Cloud Access Software. He recently served on the Board of Mitel
Networks Corporation, a leading global provider of cloud and on-site business communications until November 2018 when it was sold
to a private equity firm. He served as Lead Director, Chair of the Nominating and Governance Committee and Chair of the Audit Committee.
He previously served as Chairman of the Board of Trustees for the CBC Pension Board and a director on the board of the Canadian
Broadcasting Corporation as well as many technology and networking companies, including March Networks Corporation, TELUS Corporation,
Breconridge Corporation and Dragonwave Incorporated.
Mr. Zoccolillo joined the Company with extensive experience in the photonics
industry, including senior management roles at Infinera, Opnext and Lucent Technology’s optical networking business.
He has held senior management roles in Operations as well as General Management roles executing on growth-oriented business strategies.
Mr. Zoccolillo has served on the Advisory Board for Kaiam Corporation and the School of Science and Technology of Monmouth University.
The Directors, unless otherwise noted above, have served in their
respective capacities since their election and/or appointment, and will serve until the next Company’s annual general meeting
or until a successor is duly elected, unless the office is vacated in accordance with the Articles of Continuance.
The Board has adopted a written Code of Business
Conduct and Ethics to promote a culture of ethical business conduct and relies upon the selection of persons as directors, senior
management and employees who they consider to meet the highest ethical standards. The Company’s Code of Business Ethics can
be found on the Company’s web site at: www.poet-technologies.com.
There are no family relationships between any of our
Directors or senior management. There are no arrangements or understandings with major shareholders, customers, suppliers or others,
pursuant to which any person referred to above was selected as a Director or member of senior management.
Fixed Stock Option Plan
On September 21, 2007, the Directors approved a fixed
20% vesting Stock Option Plan (the “Plan”) to replace the Rolling Stock Option Plan that had been in effect since May
4, 2005. The Plan was approved by the disinterested shareholders of the Company at the Shareholders’ Meeting of June 19,
2008 and accepted for filing by the TSXV. Under the Plan, the maximum number of shares (the “Maximum Number”) which
may be issued pursuant to options granted under the Plan or otherwise granted cannot exceed 20% of the issued and outstanding shares.
The shareholders fixed the Maximum Number at 11,930,000. Thereafter, the Plan has been amended by the Directors, and such amendments
have been approved by the shareholders in 2009, 2011, 2013, 2014, 2015, 2016 and 2018. The Maximum Number is currently 57,611,360
shares.
The purpose of the Plan is to assist the Company in attracting,
retaining and motivating directors, employees and consultants of the Company and any of its subsidiaries and to closely align the
personal interests of such directors, employees and consultants with those of the shareholders by providing them with the opportunity,
through options, to acquire common shares in the capital of the Company.
The Plan provides that the number of common shares issuable
pursuant to options granted under the Plan and pursuant to other previously granted options is limited to the Maximum Number, currently
fixed at 57,611,360. Any subsequent increase in the Maximum Number must be approved by shareholders of the Company and cannot exceed
20% of the issued and outstanding shares of the Company at the time of the shareholders’ approval. There is no other limit
to the number of options granted to any individual, except for:
(i)
2%
on a yearly basis to any one consultant and (ii) 2% on a yearly basis to any employee providing “Investor Relations Activities.”
The following paragraphs summarize some of the terms of the Plan:
Eligibility. Options may be granted under the Plan
to directors, employees, consultants and consultant companies of the Company and any of its subsidiaries. Options may also be granted
to individuals referred to as “Management Company Employees” which are employed by a company providing management services
to the Company, except for services involving “Investor Relations Activities.”
Plan Administration. The Board of Directors is the plan administrator,
subject to the advice and recommendations of our Compensation Committee. The plan administrator will determine the provisions and
terms and conditions of each grant.
Exercise Price. The exercise price subject to an option
shall be determined by the Board and set forth in the option agreement, but shall be either (i) not less than the last closing
price of the Company’s common shares as traded on the TSXV, unless discounted by the Board or (ii) such other price agreed
by the Board and accepted by the TSXV. Except in certain circumstance, the Company can amend the other terms of a stock option
only where prior TSXV acceptance is obtained and where the following requirements are met:
|
(i)
|
if the amendment is in respect of an option held by an insider of the Company, but excluding
amendments to extend the length of the stock option term, the Company obtains disinterested shareholder approval;
|
|
(ii)
|
if the option exercise price is amended, at least six months have elapsed since the later of
the date of commencement of the term, the date the Company’s shares commenced trading, or the date the option exercise price
was last amended;
|
|
(iii)
|
if the option price is amended to the discounted market price, the exchange hold period is applied
from the date of the amendment (and for more certainty where the option price is amended to the market price, the exchange hold
period will not apply); and
|
|
(iv)
|
if the length of the stock option term is amended, any extension of the
length of the term of the stock option is treated as a grant of a new option, and therefore the amended option must comply with
the pricing and other requirements of the policy as if it were a newly granted option. The term of an option cannot be extended
so that the effective term of the option exceeds 10 years in total. An option must be outstanding for at least one year before
the Company can extend its term.
|
The TSXV must accept a proposed amendment before the option
may be exercised as amended. If the Company cancels a stock option and within one year grants new options to the same individual,
the new options will be subject to the requirements in sections (i) to (iv) above.
Option Agreement. Options granted under the plan are
evidenced by an option agreement that sets forth the terms, conditions and limitations for each grant.
Term of the Awards. At the meeting of the Board of Directors
held on February 25, 2016, based on the report of Compensia, it was determined that stock options should generally have a term
of 10 years.
Vesting Schedule. In general, options granted under the
Plan vest 25% immediately and 25% every six months from the date of issue, until fully vested. The directors may, at their discretion,
specify a different vesting period, provided that options granted to consultants performing “Investor Relations Activities”
must vest in stages over 12 months with no more than 25% of the options vesting in any three-month period. At the meeting of the
Board of Directors held on February 25, 2016, based on the report of Compensia, it was determined that stock options should vest
25% at the end of one year from the date of issue with the remaining 75% vesting equally on a quarterly basis over the remaining
3 years for a total vesting period of 4 years. At a meeting of the Board of Directors held on March 30, 2017, the board approved
a revised one-year vesting schedule for options granted for service on the board to conform to the term for which a director is
elected. Such options will vest 25% at the end of each quarter served in office.
Transfer Restrictions. Options granted under the Plan may not
be transferred in any manner by the option holder other than by will or the laws of succession and may be exercised during the
lifetime of the option holder only by the option holder. Securities that are subject to restrictions may not be transferred during
the period of restriction.
Change of Control and Alteration of Capital. The Plan provides
that if a Change of Control, as defined herein, occurs, the shares subject to option shall immediately become vested and may thereupon
be exercised in whole or in part by the option holder. The Plan also provides for automatic adjustments in the number of optioned
shares and/or the exercised price, in the event of an alteration in the share capital of the Company.
Termination of Options. In the event that the award recipient
ceases employment with us or ceases to provide services to us, the options will terminate after a period of time following the
termination of employment. Our Board of Directors has the authority to amend or terminate the plan subject to shareholder approval
with respect to certain amendments. However, no such action may adversely affect in any material way any awards previously granted
unless agreed upon by the recipient.
Officer Compensation
Total cash compensation accrued and/or paid (directly
and/or indirectly) to all of our Officers during fiscal year 2018 was $1,333,919 (refer to ITEM 7. “Major Shareholders and
Related Party Transactions” for information regarding indirect payments)
In order to assist the Board of Directors in fulfilling
its oversight responsibilities with respect to human resources matters, the Board established a Compensation Committee. The Compensation
Committee reviews and makes determinations with respect to senior officer compensation on a regular basis with any discretionary
compensation used only for extraordinary projects or significant milestone results that advance the Company’s growth potential.
When determining Executive Officers’ compensation, the Compensation Committee receives input and guidance from the Executive
Chairman of the Board and the Chief Executive Officer of the Company. In the past, the Compensation Committee has engaged an outside
consultant to conduct a peer group review to provide guidance to the Compensation Committee with respect to appropriate comparative
terms for executive compensation and stock option grants. The Company also utilizes peer group comparisons from subsidiary locations
to assist in its salary review of various positions in those locations. The Compensation Committee utilizes such comparative reviews
to assist it in making appropriate recommendations to the Board.
In addition to his or her fixed base salary, each officer
may be eligible to receive variable pay compensation or bonus meant to motivate him or her to achieve short- term goals. Currently,
the Company does not have in place established procedures for determining variable pay compensation. Stock options are an important
element of the variable pay compensation and do not require cash disbursement from the Company. Stock options are also generally
awarded to officers, qualifying employees and consultants at the time of hire and are used as a recruitment tool to attract highly
qualified and experienced executives, employees and consultants to the Company. Stock options are also granted at other times during
the year. As the Company is continuing to develop its Optical Interposer technology, it must conserve its limited financial resources
and control costs to ensure that funds are available when needed to complete its scheduled developments. As a result, the Compensation
Committee generally considers not only the financial situation of the Company at the time of the determination of the compensation,
but also the estimated financial situation in the mid- and long-term. The use of stock options encourages and rewards performance
by aligning an increase in each officer’s compensation with increases in the Company’s performance and in shareholder
value.
The following table sets forth all annual and long-term compensation for services
in all capacities to the Company for fiscal year 2018 of the Company.
|
|
|
|
|
|
|
|
Options-Based Awards(1)(2)
|
|
Non-Equity Incentive Plan
Compensation
|
|
|
|
|
Name and Principal Position
|
|
Fiscal
Year
|
|
Salary (2)
(US$)
|
|
Share-
Based
Awards (1) (2)
(US$)
|
|
No. of
Options
|
|
(US$)(1)
(2)
|
|
Annual
Incentive
Plans
|
|
Long-term
Incentive
Plans
|
|
Pension
Value
(US$)
|
|
All
Other
Comp.
(US$)
|
|
Total
Comp.
(US$)
|
David Lazovsky, Executive Chairman
|
|
2018
|
|
200,000
|
|
—
|
|
950,000
|
|
347,856
|
|
—
|
|
—
|
|
—
|
|
—
|
|
547,856
|
Dr. Suresh Venkatesan Chief Executive Officer
|
|
2018
|
|
440,000
|
|
—
|
|
3,900,000
|
|
1,845,488
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,285,488
|
Richard Zoccolillo, SVP Strategic Marketing
|
|
2018
|
|
72,917
|
|
—
|
|
1,750,000
|
|
477,796
|
|
—
|
|
—
|
|
—
|
|
—
|
|
550,713
|
Kevin Barnes Treasurer and Controller
|
|
2018
|
|
117,669
|
|
—
|
|
150,000
|
|
54,925
|
|
—
|
|
—
|
|
—
|
|
—
|
|
172,594
|
Thomas Mika Chief Financial Officer
|
|
2018
|
|
283,333
|
|
—
|
|
950,000
|
|
347,856
|
|
—
|
|
—
|
|
—
|
|
—
|
|
631,189
|
Rajan Rajgopal President of DenseLight
|
|
2018
|
|
220,000
|
|
—
|
|
250,000
|
|
91,541
|
|
—
|
|
—
|
|
—
|
|
—
|
|
311,541
|
|
(1)
|
The Company used the Black-Scholes model as the methodology to calculate the grant date fair
value. The fair value will be recorded as an operating expense as the options vest based on the stock options vesting schedule
from the date of grant.
|
|
(2)
|
The exchange rate used in these calculations to convert CAD to USD is based on the exchange rate applicable at the date of
grant.
|
The following table sets forth information concerning all awards outstanding
under a stock option plan to each of the current officers, as of December 31, 2018:
|
|
Option-Based Awards
|
|
|
|
Share-Based Awards
|
Name
|
|
No. of Shares Underlying Unexercised Options (#)
|
|
Option Exercise Price (CA$/share)
|
|
Option Expiration Date
|
|
Value of Unexercised
In-The Money Options (1) (US$)
|
|
Number of Shares
or Units of Shares That Have Not Vested (#)
|
|
Market or Payout Value of Share- Based Awards That Have Not Vested (US$)
|
David Lazovsky
|
|
|
25,000
|
|
|
|
1.54
|
|
|
Jun 12, 2020
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
250,000
|
|
|
|
1.99
|
|
|
April 08, 2020
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
150,000
|
|
|
|
0.86
|
|
|
July 07, 2026
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
3,000,000
|
|
|
|
0.39
|
|
|
Feb 1, 2027
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
950,000
|
|
|
|
0.52
|
|
|
Mar 28, 2028
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
Richard Zoccolillo Manocha
|
|
|
1,750,000
|
|
|
|
0.39
|
|
|
Sep 24, 2028
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
Kevin Barnes
|
|
|
25,000
|
|
|
|
0.23
|
|
|
Feb. 16, 2022
|
|
|
733
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
25,000
|
|
|
|
0.51
|
|
|
Sep. 28, 2021
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
50,000
|
|
|
|
0.76
|
|
|
Feb. 28, 2021
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
50,000
|
|
|
|
1.24
|
|
|
Aug. 12, 2019
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
50,000
|
|
|
|
1.54
|
|
|
June 12, 2020
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
25,000
|
|
|
|
1.08
|
|
|
Aug. 13, 2020
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
100,000
|
|
|
|
0.86
|
|
|
July 7, 2026
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
250,000
|
|
|
|
0.28
|
|
|
July 31, 2027
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
150,000
|
|
|
|
0.52
|
|
|
Mar 28, 2028
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
Thomas Mika
|
|
|
1,000,000
|
|
|
|
0.62
|
|
|
Nov 2, 2026
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
500,000
|
|
|
|
0.385
|
|
|
Jan 16, 2027
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
1,000,000
|
|
|
|
0.28
|
|
|
July 13, 2027
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
950,000
|
|
|
|
0.52
|
|
|
Mar 28, 2028
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
Dr. Suresh Venkatesan
|
|
|
6,357,000
|
|
|
|
1.40
|
|
|
June 15, 2020
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
300,000
|
|
|
|
0.86
|
|
|
July 7,2026
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
3,000,000
|
|
|
|
0.28
|
|
|
July 13, 2027
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
3,900,000
|
|
|
|
0.52
|
|
|
Mar 28, 2028
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
Rajan Rajgopal
|
|
|
500,000
|
|
|
|
0.36
|
|
|
Jan 23,2027
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
250,000
|
|
|
|
0.52
|
|
|
Mar 28,2028
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
500,000
|
|
|
|
0.28
|
|
|
Jul 13, 2027
|
|
|
-
|
|
|
|
N/A
|
|
|
N/A
|
(1) This amount is calculated
based on the difference between the market value of the shares underlying the options as of December 31, 2018, being CAD $0.27
(US$0.20), and the exercise or base price of the option. The exchange rate used in these calculations to convert CAD to USD was
0.7333, being the closing exchange rate at December 31, 2018.
The value vested or earned during fiscal year 2018 of incentive plan awards granted
to NEOs are as follows:
|
|
Option-Based Awards – Value
|
|
Share-Based Awards – Value Vested
|
|
Non-Equity Incentive Plan Compensation – Value Earned
|
|
|
|
|
|
|
|
|
|
NEO Name
|
|
Vested During the Year (1) (US$)
|
|
During the Year (US$)
|
|
During the Year (US$)
|
|
Richard Zoccolillo
|
|
-
|
|
N/A
|
|
N/A
|
|
Kevin Barnes
|
|
-
|
|
N/A
|
|
N/A
|
|
Suresh Venkatesan
|
|
-
|
|
N/A
|
|
N/A
|
|
Thomas Mika
|
|
-
|
|
N/A
|
|
N/A
|
|
Rajan Rajgopal
|
|
-
|
|
N/A
|
|
N/A
|
|
David Lazovsky
|
|
-
|
|
N/A
|
|
N/A
|
|
(1) This amount is the dollar
value that would have been realized and is computed by obtaining the difference between the market price of the underlying securities
on the vesting date and the exercise or base price of the options under the option-based award. For the named executive officers
to realize this value, they would have had to exercise their options and sell the shares on the day of vesting. The exchange rates
used in these calculations to convert CAD to USD were the rates applicable on the vesting dates.
Director Compensation
The following table details compensation paid/accrued for fiscal year 2018 for
each director who is not also an officer.
|
|
|
|
|
|
|
Options-Based
|
|
Non-Equity
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards(1)(2)
|
|
Compensation
|
|
|
|
All
|
|
|
Name and Principal Position
|
|
Fiscal
Year
|
|
Salary (cash)
(2)
(US$)
|
|
Share-Based Awards (1)(US$)
|
No. of Shares
|
|
(US$)
|
|
Annual
Incentive
|
|
Long-term
|
|
Pension
|
|
Other
|
|
Total
|
John F. O’Donnell (3)(4)
|
|
2018
|
|
40,000
|
|
—
|
433,333
|
|
100,968
|
|
—
|
|
—
|
|
—
|
|
—
|
|
140,968
|
|
Todd. A. DeBonis (4)
|
|
2018
|
|
2,500
|
|
—
|
—
|
|
——
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,500
|
|
Don Listwin
|
|
2018
|
|
27,500
|
|
—
|
867,750
|
|
165,696
|
|
—
|
|
—
|
|
—
|
|
—
|
|
193,196
|
|
Chris Tsiofas
|
|
2018
|
|
50,000
|
|
—
|
487,666
|
|
111,064
|
|
—
|
|
—
|
|
—
|
|
—
|
|
161,064
|
|
Mohan Warrior
|
|
2018
|
|
30,000
|
|
—
|
399,000
|
|
90,871
|
|
—
|
|
—
|
|
—
|
|
—
|
|
120,871
|
|
Peter Charbonneau
|
|
2018
|
|
22,500
|
|
—
|
553,730
|
|
90,871
|
|
—
|
|
—
|
|
—
|
|
—
|
|
113,371
|
|
Jean-Louie Malinge
|
|
2018
|
|
30,000
|
|
—
|
399,000
|
|
90,871
|
|
—
|
|
—
|
|
—
|
|
—
|
|
120,871
|
|
|
(1)
|
The Company used the Black-Scholes model as the methodology to calculate the grant date fair value.
The fair value will be recorded as an operating expense as the stock options vest from the date of grant.
|
|
(2)
|
The exchange rate used in these calculations to convert CAD to USD was the rate of exchange applicable on the date of grant.
|
|
(3)
|
The firm of Stikeman Keeley Spiegel LLP, of which Mr. O’Donnell is counsel, billed the sum of $115,740 for legal fees
and disbursements incurred in 2018.
|
|
(4)
|
Resigned from the board in 2018
|
The following table sets forth information concerning all awards outstanding
under the stock option plans to each of the current Directors who are not also named executive officers as of December 31, 2018:
|
|
|
|
Option-Based Awards
|
|
|
|
S
hare-Based Awards
|
Name
|
|
|
No. of Shares Underlying Unexercised Options (#)
|
|
|
|
Option Exercise Price (CA$/share)
|
|
|
Option Expiration Date
|
|
|
Value of Unexercised In- The Money Options (1) (US$)
|
|
|
Number of Shares or Units of Shares That Have Not Vested (#)
|
|
Market or Payout Value
of Share- Based Awards That Have Not Vested (US$)
|
John F. O’Donnell
|
|
|
150,000
|
|
|
|
0.23
|
|
|
16-Feb-22
|
|
|
4,400
|
|
|
N/A
|
|
N/A
|
|
|
|
12,500
|
|
|
|
0.345
|
|
|
19-Aug-20
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
625,000
|
|
|
|
0.28
|
|
|
13-Jul-27
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
300,000
|
|
|
|
1.24
|
|
|
12-Aug-19
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
443,333
|
|
|
|
0.33
|
|
|
21-Jun-28
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
100,000
|
|
|
|
1.54
|
|
|
12-Jun-20
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
150,000
|
|
|
|
0.86
|
|
|
07-Jul-26
|
|
|
-
|
|
|
N/A
|
|
N/A
|
Chris Tsiofas
|
|
|
687,500
|
|
|
|
0.28
|
|
|
13-Jul-27
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
300,000
|
|
|
|
1.24
|
|
|
12-Aug-19
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
300,000
|
|
|
|
1.54
|
|
|
12-Jun-20
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
150,000
|
|
|
|
0.86
|
|
|
07-Jul-26
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
487,666
|
|
|
|
0.33
|
|
|
21-Jun-28
|
|
|
-
|
|
|
N/A
|
|
N/A
|
Peter Charbonneau DeBonis
|
|
|
399,000
|
|
|
|
0.33
|
|
|
21-Jun-28
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
154,730
|
|
|
|
0.52
|
|
|
28-Mar-28
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
562,500
|
|
|
|
0.28
|
|
|
13-Jul-27
|
|
|
-
|
|
|
N/A
|
|
N/A
|
Don Listwin
|
|
|
399,000
|
|
|
|
0.33
|
|
|
21-Jun-28
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
468,750
|
|
|
|
0.22
|
|
|
22-Jan-28
|
|
|
17,187
|
|
|
N/A
|
|
N/A
|
Jean-Louis Malinge
|
|
|
525,000
|
|
|
|
0.30
|
|
|
05-Sep-27
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
399,000
|
|
|
|
0.33
|
|
|
21-Jun-28
|
|
|
-
|
|
|
N/A
|
|
N/A
|
Mohan Warrior
|
|
|
562,500
|
|
|
|
0.28
|
|
|
13-Jul-27
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
250,000
|
|
|
|
1.54
|
|
|
12-Jun-20
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
399,000
|
|
|
|
0.33
|
|
|
21-Jun-28
|
|
|
-
|
|
|
N/A
|
|
N/A
|
|
|
|
150,000
|
|
|
|
0.86
|
|
|
07-Jul-26
|
|
|
-
|
|
|
N/A
|
|
N/A
|
(1) This amount is calculated
based on the difference between the market value of the shares underlying the options as of December 31, 2018, being CAD $0.27
(US$0.20), and the exercise or base price of the option. The exchange rate used in these calculations to convert CAD to USD was
0.7333, being the closing price at December 31, 2018.
The value vested or earned during fiscal year 2018 of incentive plan awards granted
to Directors who are not also named executive officers are as follows:
|
|
|
Option-Based Awards – Value
|
|
|
|
Share-Based Awards – Value Vested
|
|
|
|
Non-Equity Incentive Plan Compensation – Value Earned
|
|
Director Name
|
|
|
Vested During the Year (1) (US$)
|
|
|
|
During the Year (US$)
|
|
|
|
During the Year (US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Charbonneau
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
John F. O’Donnell
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Jean-Louis Malinge
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Chris Tsiofas
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Don Listwin
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Mohan Warrior
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(1) This amount is the dollar value that would
have been realized and is computed by obtaining the difference between the market price of the underlying securities on the vesting
date and the exercise or base price of the options under the option- based award.
Termination and Change of Control Benefits
Other than disclosed below in “Written Management Agreements,”
the Company has no plans or arrangements in respect of remuneration received or that may be received by the Officers the Company
to compensate such Officers, in the event of termination of employment (as a result of resignation, retirement, change of control)
or a change of responsibilities following a change of control.
Pension Plan Benefits
The Company does not provide a defined benefit plan to the
Officers or any of its employees.
The Company offers a defined contribution plan that is
a 401k Plan but does not contribute toward such plan. The Company does not have any deferred compensation plans other than that
described above.
Written Management Agreements
The Company and/or its subsidiaries have employment contracts
with the following current and former Officers as follows:
Dr. Venkatesan entered into an Executive Employment Agreement
with an effective date of June 10, 2015 wherein (i) he will be paid US$550,000 per year under at- will terms of employment; (ii)
he will be eligible for annual and special bonuses as determined by the Board of Directors; (iii) he was granted 6,357,000 stock
options vesting over 4 years; (iv) he became eligible for a signing bonus of US $450,000 payable on the first anniversary of the
effective date; (v) he will receive a severance of twelve months on termination of employment by the Company, other than for cause.
Mr. Venkatesan agreed to a permanent reduction of his cash compensation by 20% effective October 2016, reducing his compensation
from US$550,000 to US$440,000 per year.
Mr. Mika entered into an Executive Employment Agreement
with an effective date of November 2, 2016 wherein (i) he will be paid US$250,000 per year under at- will terms of employment (ii)
he will be eligible for annual and special bonuses as determined by the Board of Directors; (iii) he was granted 1,000,000 stock
options vesting over 4 years; (iv) he will receive an additional 500,000 stock options vesting over 4 years in Q1 2017 (v) he will
be entitled to compensation of three months’ salary on termination of employment by the Company, if termination is other
than for cause. Mr. Mika’s compensation was adjusted to US$300,000 on May 1, 2018.
On July 1, 2016, Mr. Lazovsky entered into a Consulting Agreement
with the Company to provide strategic, technological, integration and other general consulting services. For his services, Mr.
Lazovsky was paid $150,000 for the term from July 1, 2016 to December 31, 2016.
Mr. Lazovsky entered into an Executive Employment Agreement
to provide services as the Executive Chairman of the Board, with an effective date of February 1, 2017. He will (i) be paid US$200,000
per year under at-will terms of employment (ii) be eligible for annual and special bonuses as determined by the Board of Directors;
(iii) granted 3,000,000 stock options vesting over 4 years; (iv) be entitled to compensation of six months’ salary on termination
prior to 2 years of employment by the Company, if termination is other than for cause.
Mr. Barnes has an arrangement with the Company to provide
consulting services starting January 1, 2013 for a period of one year with an automatic one-year renewal at a monthly rate of CA$13,750.
The Company may terminate the arrangement without cause on six months’ notice or equivalent compensation.
Effective December 30, 2016, Mr. Rajan Rajgopal entered into an
employment agreement with DenseLight to provide services as the President and General Manager of DenseLight. As per the agreement,
Mr. Rajgopal will (i) be paid be paid US$220,000 per year (ii) be eligible for annual and special bonuses as determined by the
Board of Directors; (iii) be granted 500,000 stock options vesting over 4 years; (iv) be granted an additional 500,000 stock options
no later than June 30, 2017 (v) be entitled to compensation of one month salary on termination of employment by the Company, if
termination is other than for cause.
Effective September 10, 2018, Mr. Zoccolillo entered into an employment
agreement to provide services as the Senior Vice President Strategic Marketing and Product Management. As per the agreement, Mr.
Zoccolillo will (i) be paid be paid US$250,000 per year (ii) be eligible for annual and special bonuses as determined by the Board
of Directors; and (iii) be granted 1,750,000 stock options vesting over 4 years.
Our Board of Directors currently consists of seven (7)
directors, including five (5) independent directors. Each director holds office until the next annual general meeting of the Company
or until his successor is elected or appointed, unless his office is earlier vacated in accordance with the Articles of Amalgamation
and all amendments thereto (the “Articles”), or with the provisions of the OBCA. The Company’s Officers are appointed
to serve at the discretion of the Board, subject to the terms of the employment agreements described above.
The Board and committees of the Board schedule regular meetings
over the course of the year.
During fiscal 2018, the Board held 12 regularly scheduled
meetings, including committee meetings. If for various reasons, Board members may not be able to attend a Board meeting, all Board
members are provided information related to each of the agenda items before each meeting, and, therefore, can provide counsel outside
the confines of regularly scheduled meetings.
The Board has adopted standards for determining whether a director
is independent from management. The Board reviews, consistent with the Company’s corporate governance guidelines, whether
a director has any material relationship with the Company that would impair the director’s independent judgment. The Board
has affirmatively determined, based on its standards, that Messrs. Tsiofas, Malinge, Charbonneau, Listwin and Warrior are independent.
Directors’ Service Contracts
Messrs.Venkatesan and Lazovsky entered into employment contracts
as explained above in “Written Management Agreements.”
Audit and Compensation Committees of the Board of Directors
We currently have three board committees; (1) an Audit
Committee; (2) a Compensation Committee, and (3) a Corporate Governance and Nominating Committee. Committee charters can be found
on the Company’s website (poet-technologies.com). The names of the members and a summary of the terms of the charter for
each the Audit Committee and the Compensation Committee is provided below.
Audit Committee
The Audit Committee is currently comprised of three members:
Chris Tsiofas (Chair), Peter Charbonneau and Mohandas Warrior. All three members are independent directors of the Company. Mr.
Tsiofas was appointed chair of the Audit Committee on August 21, 2012. The Board has determined that Mr. Tsiofas satisfies the
criteria of “audit committee financial expert” within the meaning of Item 401(h) of Regulation S-K and is independent
in accordance with Rule 4200 of the NASDAQ Marketplace Rules. All members of the audit committee are financially literate, meaning
they have the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting
issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by
the Company’s financial statements.
The Audit Committee is responsible for reviewing the
Company’s financial reporting procedures, internal controls and the performance of the Company’s external auditors.
The Audit Committee is also responsible for reviewing the annual and quarterly financial statements and accompanying Management’s
Discussion and Analysis prior to their approval by the full Board. The Audit Committee also reviews the Company’s financial
controls with the auditors of the Company on an annual basis.
The Company’s independent auditor is accountable
to the Board and to the Audit Committee. The Board, through the Audit Committee, has the ultimate responsibility to evaluate the
performance of the independent auditor, and through the shareholders, to appoint, replace and compensate the independent auditor.
Any non-audit services must be pre- approved by the Audit Committee.
Compensation Committee
The Compensation Committee is currently comprised of three members:
Chris Tsiofas (Chair), David Lazovsky and Don Listwin. Mr. Tsiofas was appointed chair of the Compensation Committee on November
14, 2014. Both Mr. Tsiofas and Mr. Listwin are independent directors. David Lazovsky currently serves as the Executive Chairman
of the Board and is not independent. However, the Board of Directors determined that Mr.Lazovsky’s extensive knowledge of
local employment conditions, practices and salary level made him a valuable addition to the Committee. The Board has determined
that all members of the Compensation Committee are qualified as members based on the following:
Mr. Chris Tsiofas, CA, CPA, Chairman of the Compensation Committee, earned a Bachelor’s
of Commerce Degree from the University of Toronto in 1991 and has been a member of the Institute of Chartered Accountants of Ontario
since 1993. He has been on the Board of Directors of the Company since August of 2012. Mr. Tsiofas is a partner with the Toronto
Chartered Professional Accountancy firm of Myers Tsiofas Norheim LLP, a position he has held since 1994. Mr. Tsiofas has served
as Chairman of the Company’s Compensation Committee since 2014 and has directed past engagements with the Company’s
outside executive compensation consultants. Mr. Tsiofas is also the Chairman of the Audit Committee of the Board of Directors.
He brings to the Compensation Committee specialized knowledge regarding the tax impact of certain compensation policies and practices
on individuals and on the Company.
Mr. Don Listwin has over 30 years of technology investing and management experience,
highlighted by a decade at Cisco Systems, where he served as its Executive Vice President. Mr. Listwin currently serves as chief
executive officer of iSchema View and in the recent past served as chief executive officer of both Sana Security and Openwave Systems.
Mr. Listwin also currently serves as a director on the boards of AwareX, Calix, D-wave, Robin Systems and Teradici. Previously,
he also served on the boards or was an advisor to JDS Uniphase, PLUMgrid, Redback Networks, E-TEK Dynamics, the Cellular Telecommunications
& Internet Association (CTIA) and the Business Development Bank of Canada (BDC). In these capacities, Mr. Listwin had extensive
direct experience with executive compensation matters as both a chief executive and board member of an assortment of companies,
large and small, including companies within industries directly relevant to the Company.
Mr. David E. Lazovsky is the founder of Intermolecular and served as
that company’s President and Chief Executive Officer and as a member of the board of directors from September 2004 to October
2014. Mr. Lazovsky has an in-depth knowledge of the semiconductor industry, technology and markets. Prior to founding Intermolecular,
Mr. Lazovsky held several senior management positions at Applied Materials (NASDAQ: AMAT). From 1996 through August 2004, Mr. Lazovsky
held management positions in the Metal Deposition and Thin Films Product Business Group where he was responsible for managing more
than $1 billion in Applied Materials’ semiconductor manufacturing equipment business. Mr. Lazovsky holds a B.S. in mechanical
engineering from Ohio University and, as of March 31, 2014, held 41 pending or issued U.S. patents. Mr. Lazovsky was appointed
as the Chairman of the Board on February 1, 2017 and was recently appointed to the Compensation Committee.
The Compensation Committee has extensive direct
relevant experience in determining executive compensation policies and practices on behalf of the Company. In addition to being
supported by outside compensation consultants on a periodic basis for peer group review, the members of the Committee are professional
executives familiar with best practices associated with executive compensation, are knowledgeable about the tax implications to
the Company and its executive officers of changes in the tax laws pertaining to executive compensation and have direct relevant
experience with the incentives used throughout the Company’s industry to align the interests of executive management with
company and shareholder interests. This gives these individuals strong insight as to the incentive structures and programs appropriate
for companies of a comparable size. The seniority, experience and level of achievement of the three current members of the Compensation
Committee speak to the independent judgement exercised in making decisions about the suitability of the Company’s compensation
policies and practices.
The Compensation Committee discusses and makes recommendations
to the Board for approval of compensation issues that pertain to the senior executives of the Company, and on issues involving
employment company-wide compensation policies and practices. In general, the compensation programs of the Company are designed
to reward performance and to be competitive with the compensation agreements of other comparable semiconductor companies. The Compensation
Committee is responsible for evaluating the compensation of the senior management of the Company and assuring that they are compensated
effectively in a manner consistent with the Company’s business, stage of development, financial condition and prospects,
and the competitive environment. Specifically, the Compensation Committee is responsible for: (i) reviewing the compensation practices
and policies of the Company to ensure that they are competitive and that they provide appropriate motivation for corporate performance
and increased shareholder value; (ii) overseeing the administration of the Company’s compensation programs, and reviewing
and approving the employees who receive compensation and the nature of the compensation provided under such programs, and ensuring
that all management compensation programs are linked to meaningful and measurable performance targets; (iii) making recommendations
to the Board regarding the adoption, amendment or termination of compensation programs and the approval of the adoption, amendment
and termination of compensation programs of the Company, including for greater certainty, ensuring that if any equity- based compensation
plan is subject to shareholder approval, and that such approval is sought; (iv) periodically surveying the executive compensation
practices of other comparable companies; (v) establishing and ensuring the satisfaction of performance goals for performance-based
compensation; (vi) annually reviewing and approving the annual base salary and bonus targets for the senior executives of the Company,
other than the Chief Executive Officer (the “CEO”); (vii) reviewing and approving annual corporate goals and objectives
for the CEO and evaluating the CEO’s performance against such goals and objectives; (viii) annually reviewing and approving,
based on the Compensation Committee’s evaluation of the CEO, the CEO’s annual base salary, the CEO’s bonus, and
any stock option grants and other awards to the CEO under the Company’s compensation programs (in determining the CEO’s
compensation, the Compensation Committee will consider the Company’s performance and relative shareholder return, the compensation
of CEOs at other companies, and the CEO’s compensation in past years); and (ix) reviewing the annual report on executive
compensation required to be prepared under applicable corporate and securities legislation and regulation including the disclosure
concerning members of the Compensation Committee and settling the reports required to be made by the Compensation Committee in
any document required to be filed with a regulatory authority and/or distributed to shareholders.
In 2016, the Compensation Committee contracted with
Compensia to perform an executive compensation review (the “Review”) of certain senior positions within the then-current
executive management team. Base salaries and annual and long-term incentives were benchmarked against a group of public companies
in the communications equipment, semiconductor, and electronic component industries. The data provided was one of the elements
considered by the Compensation Committee, with adjustments made for the differences in stage of development, revenues, profitability
and other characteristics that distinguished the Company from the benchmarks.
The benchmarks comprised the following companies:
Alliance Fiber Optic Product, Amtech Systems, Applied Optoelectronics, Clearfield, CyberOptics, Dynasil, EMCORE, Exar, GigPeak,
GSI Technology, Intermolecular, LightPath Technologies, Micropac Industries, Nanometrics, PDF Solutions, QuickLogic and Ultratech.
The data came from each company’s public filings available as of April 2016. The positions benchmarked were CEO, COO, CTO,
VP-Product Development and VP-Design Enablement. Due to cost and relevance, the Company elected not to repeat the Review with Compensia
for its consideration of executive compensation for fiscal years subsequent to December 31, 2016.
Code of Ethics
The Board has adopted a written code of business conduct and ethics.
All transgressions of the code of business conduct and ethics are required to be promptly reported to the Chair of the Board or
of any committee, who in turn, reports them to the Corporate Governance and Nominating Committee. The Corporate Governance and
Nominating Committee is charged with investigating alleged violations of the code of business conduct and ethics. Any findings
of the Corporate Governance and Nominating Committee are then reported to the full Board, which will take such action as it deems
appropriate. The Company’s Code of Ethics may be inspected on the Company’s website (poet-technologies.com) and is
filed as an Exhibit to this Annual Report.
As of December 31, 2018, the Company had ninety-nine
(99) full-time employees and four (4) consultants, including one (1) in a senior management position. Seven (7) employees and one
(1) consultant work at our lab facility either as support staff or are engaged in research and development initiatives; one (1)
employee and three (3) consultants are employed at the Canadian office; ninety-one (91) employees are employed at our fabrication
facility in Singapore. None of the Company’s employees are covered by collective bargaining agreements.
As
of December 31, 2017, the Company had sixty-eight
(68) full-time employees and five
(5) consultants, including senior management. Five
(5) employees and one (1) consultant worked at our lab facility either as
support staff
or were engaged in research and development initiatives; One
(1) employee and
three (3) consultants were employed at the Canadian office; sixty-three
(63) employees were employed at our fabrication facility in Singapore. None of the Company’s employees were
covered by collective bargaining agreements.
As of December 31, 2016, the Company had seventy-one
(71) full-time employees and two (2) consultants, including senior management. Eight (8) employees and one (1) consultant worked
at our lab facility either as support staff or are engaged in research and development initiatives; 1 employee and 1 consultant
are employed at the Canadian office; 62 employees are employed at our fabrication facility in Singapore. None of the Company’s
employees are covered by collective bargaining agreements.
The following table sets forth certain information regarding
the beneficial ownership of our outstanding common shares for: (i) each of our Directors and Officers individually; (ii) all of
our Directors and Officers as a group; and (iii) each other person known to us to own beneficially more than 5% of our common shares
as of April 22, 2019. Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over
which a person exercises sole or shared voting or investment power. The table also includes the number of shares underlying options
that are exercisable within sixty (60) days of April 22, 2019. Ordinary shares subject to these options are deemed to be outstanding
for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding
for the purpose of computing the ownership percentage of any other person.
The shareholders listed below do not have any different voting rights from our other shareholders.
|
|
|
Number of Shares
|
|
|
|
|
|
|
Beneficially Owned (1)
|
|
|
|
Percent of Class
|
|
Directors and Officers:
|
|
|
|
|
|
|
|
|
Chris Tsiofas
|
|
|
25,000
|
|
|
|
0.01
|
%
|
John F. O’Donnell
|
|
|
30,000 (2)
|
|
|
|
0.01
|
%
|
Thomas Mika
|
|
|
100,000
|
|
|
|
0.03
|
%
|
Kevin Barnes
|
|
|
17,463
|
|
|
|
0.01
|
%
|
David Lazovsky
|
|
|
181,000
|
|
|
|
0.06
|
%
|
Suresh Venkatesan
|
|
|
115,000
|
|
|
|
0.04
|
%
|
Don Listwin
|
|
|
632,250
|
|
|
|
0.22
|
%
|
Rajan Rajgopal
|
|
|
25,000
|
|
|
|
0.01
|
%
|
Directors and Officers Subtotal
|
|
|
1,095,713
|
|
|
|
0.38
|
%
|
Major Shareholders:
|
|
|
|
|
|
|
|
|
None that we are aware of.
|
|
|
|
|
|
|
|
|
|
(1)
|
The number of shares set forth for each Director, Officer and Major Shareholder is determined
in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act.
|
|
(2)
|
Resigned from the Board on December 31, 2018
|
See “ITEM 6.B. Compensation” for the exercise prices of options.
|
|
|
Number of Options exercisable within 60 days
|
|
|
|
Percent of class
|
|
Kevin Barnes
|
|
|
381,250
|
|
|
|
0.86
|
%
|
Peter Charbonneau
|
|
|
315,548
|
|
|
|
0.71
|
%
|
David Lazovsky
|
|
|
1,868,750
|
|
|
|
4.20
|
%
|
Don Listwin
|
|
|
668,250
|
|
|
|
1.50
|
%
|
Jean- Louis Malinge
|
|
|
724,500
|
|
|
|
1.63
|
%
|
Thomas Mika
|
|
|
1,187,500
|
|
|
|
2.67
|
%
|
John O'Donnell
|
|
|
1,502,917
|
|
|
|
3.38
|
%
|
Rajan Rajgopal
|
|
|
437,500
|
|
|
|
0.98
|
%
|
Chris Tsiofas
|
|
|
1,625,083
|
|
|
|
3.65
|
%
|
Suresh Venkatesan
|
|
|
6,647,839
|
|
|
|
14.95
|
%
|
Mohandas Warrior
|
|
|
1,105,750
|
|
|
|
2.49
|
%
|
Richard Zoccolillo
|
|
|
-
|
|
|
|
-
|
|
|
|
|
16,464,887
|
|
|
|
37.03
|
%
|
|
|
Number of Warrants exercisable within 60 days
|
|
Exercise price CA$
|
|
Percent of class
|
Suresh Venkatesan
|
|
|
37,500
|
|
|
|
0.52
|
|
|
|
0
|
%
|
Rajan Rajgopal
|
|
|
12,500
|
|
|
|
0.52
|
|
|
|
0
|
%
|
David Lazovsky
|
|
|
90,500
|
|
|
|
0.52
|
|
|
|
0
|
%
|
|
|
|
140,500
|
|
|
|
|
|
|
|
0.003
|
%
|
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Holdings by Major Shareholders
Please refer to ITEM 6.E. “Share Ownership” for details regarding
securities held by Directors, Officers and Major Shareholders. The Company’s major shareholders do not have any different
or special voting rights.
U.S. Share Ownership
As of April 22, 2019, there were a total of 448 holders of record of our common
shares with addresses in the U.S. We believe that the number of U.S beneficial owners is substantially greater than the number
of U.S record holders, because a large portion of our common shares are held in broker “street names.” As of April
22, 2019, U.S. holders of record held approximately 1.25% of our outstanding common shares.
Control of Company
The Company is a publicly owned Ontario corporation,
the shares of which are owned by Canadian residents, U.S. residents and other foreign residents. The Company is not controlled
by any foreign government or other person(s) except as described in ITEM 4.A. “History and Progress of the Company”
and ITEM 6.E. “Share Ownership.”
Change of Control of Company Arrangements
None
|
B.
|
Major Shareholders and Related Party Transactions
|
No shareholder beneficially owns 5% or more of the Company’s
common shares.
Compensation to key management personnel (Executive Chairman,
CEO, CFO, President and General Manager of Denselight) was as follows:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
1,216,250
|
|
|
$
|
932,133
|
|
|
$
|
2,047,634
|
|
Share-based payments (1)
|
|
|
2,449,683
|
|
|
|
2,110,773
|
|
|
|
3,061,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,665,933
|
|
|
$
|
3,042,906
|
|
|
$
|
5,109,320
|
|
(1) Share-based payments are the fair value of options granted
to key management personnel and expensed during the various years as calculated using the Black-Scholes model.
In 2016, the Company paid or accrued $150,000 in consulting
fees to David Lazovsky, a director, for strategic, technology, integration and general business consulting services.
The Company paid or accrued $115,740 in fees for the year ended
December 31, 2018 (2017 - $115,660, 2016 - $113,250) to a law firm, (Stikeman Keeley Spiegel LLP), of which a former director (John
O’Donnell), is counsel, for legal services rendered to the Company. Mr. O’Donnell resigned from the Board of Directors
effective December 31, 2018 and will continue as a consultant to the Company on an unpaid basis until the next Annual General Meeting.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
|
A.
|
Consolidated Statements and Other Financial Information
|
The Company’s financial statements are stated in U.S.
dollars and are prepared in accordance with IFRS as issued by the IASB.
The financial statements as required under “ITEM 17. Financial Statements”
are attached hereto and found immediately following the text of this Annual Report. The audit report of Marcum LLP, independent
registered public accounting firm, is included herein immediately preceding the consolidated financial statements.
Legal Proceedings
The directors and the senior management of the Company do not know of any material,
either active or pending, legal proceedings against them, nor is the Company involved as a plaintiff in any material proceeding
or pending litigation.
The directors and the senior management of the Company know of no active or
pending proceedings against anyone that might materially adversely affect an interest in the Company.
Dividend Policy
The Company has not paid, and has no current plans to pay, dividends
on its common shares. We currently intend to retain future earnings, if any, to finance the development of our business. Any future
dividend policy will be determined by the Board, and will depend upon, among other factors, our earnings, if any, financial condition,
capital requirements, any contractual restrictions with respect to the payment of dividends, the impact of the distribution of
dividends on our financial condition, tax liabilities, and such economic and other conditions as the Board may deem relevant.
On April 1, 2019 the Company announced that it arranged for
certain financing required to bridge the Company to the previously announced anticipated sale of its DenseLight subsidiary. That
sale is scheduled to be completed in September 2019, subject to certain conditions including shareholder and other approvals. The
Company expects to generate cash proceeds of approximately CAD$34.5 million to CAD$40 million upon completion of the DenseLight
sale.
The first component of the financing consists of the issuance
of up to CAD$14 million principal amount of 12% convertible unsecured debentures (the “Convertible Debentures”) of
the Company. The Convertible Debentures will be sold in multiple tranches over several months, as needed, on a brokered private
placement basis through the Company’s financial advisors, IBK Capital. The Company closed the first tranche of Convertible
Debentures, for gross proceeds of CAD$1,929,000 on April 3, 2019.Further indications of interest amounting to approximately CAD$1.6
million from parties who could not participate in the first tranche are expected to be included in subsequent tranches.
The Debentures are unsecured, bearing interest at 12% per
annum, compounded annually with 1% payable at the beginning of each month and mature on April 3, 2021. The Debentures are convertible
at the option of the holders thereof into units at any time after October 31, 2019 at a conversion price of CAD$0.40 per unit for
a total 4,822,500 units of the Company. Each unit will consist of one common share and one common share purchase warrant. Each
common share purchase warrant will entitle the holder to purchase one common share of the Company at a price of CAD$0.50 per share
for a period of two years from the date upon which the convertible debenture is converted into units. In the event that the sale
of the Company’s DenseLight subsidiary is completed, holders of Debentures have the right to cause the Company to repurchase
the Debentures at face value, subject to certain restrictions. The Debentures are governed by a trust indenture dated April 3,
2019 between the Company and TSX Trust Company as trustee.
Insiders of the Company subscribed for 37% or $710,000 of
the first tranche of Convertible Debentures, including the Company’s board of directors and senior management team. Insiders
of IBK Capital subscribed for 10% or $200,000 of this first tranche. Successive tranche closings in the coming months are each
subject to approval by the TSX Venture Exchange.
Additionally, the Company arranged for a credit facility
(the “Bridge Loan”) to be provided by Espresso Capital Ltd which will grant the Company access to a maximum US$5,000,000.
The Company signed the loan documents on April 18, 2019 and was advanced US$2,000,000 on April 23, 2019. In partial consideration
of the US$5,000,000 gross credit facility available to the Company, and in connection with the initial advance of US2,000,000,
the Company issued to Espresso Capital warrants for the purchase of 3,289,500 common shares at a price of C$0.35 per share. The
Warrants expire on April 18, 2020.
ITEM 9. THE OFFER AND LISTING
A.
Offer and Listing Details
The Company’s common shares began trading on the TSXV in Toronto, Ontario,
Canada, on June 25, 2007. The current Stock symbol is “PTK”. The CUSIP/ISN numbers are 73044W104 / 73044W1041.
The following table lists the high and low sales price on the TSXV for the
Company’s common shares for: the last six months; the last ten fiscal quarters; and the last five fiscal years.
Period Ended
|
|
|
High (CA$)
|
|
|
|
Low (CA$)
|
|
MONTHLY
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
0.40
|
|
|
|
0.315
|
|
February 28, 2019
|
|
|
0.46
|
|
|
|
0.305
|
|
January 31, 2019
|
|
|
0.34
|
|
|
|
0.27
|
|
December 31, 2018
|
|
|
0.285
|
|
|
|
0.25
|
|
November 30, 2018
|
|
|
0.34
|
|
|
|
0.245
|
|
October 31, 2018
|
|
|
0.40
|
|
|
|
0.255
|
|
QUARTERLY
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
0.46
|
|
|
|
0.27
|
|
December 31, 2018
|
|
|
0.40
|
|
|
|
0.245
|
|
September 30, 2018
|
|
|
0.44
|
|
|
|
0.23
|
|
June 30, 2018
|
|
|
0.44
|
|
|
|
0.27
|
|
March 31, 2018
|
|
|
0.79
|
|
|
|
0.19
|
|
December 31, 2017
|
|
|
0.36
|
|
|
|
0.28
|
|
September 30, 2017
|
|
|
0.42
|
|
|
|
0.17
|
|
June 30, 2017
|
|
|
0.43
|
|
|
|
0.27
|
|
March 31, 2017
|
|
|
0.51
|
|
|
|
0.31
|
|
YEARLY
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
0.79
|
|
|
|
0.19
|
|
December 31, 2017
|
|
|
0.51
|
|
|
|
0.17
|
|
December 31, 2016
|
|
|
1.44
|
|
|
|
0.27
|
|
December 31, 2015
|
|
|
2.00
|
|
|
|
0.62
|
|
December 31, 2014
|
|
|
2.87
|
|
|
|
0.49
|
|
Not Required.
The Company’s common shares trade on the TSXV in Canada under the
symbol “PTK”. The Company’s common shares also trade on the OTCQX International Marketplace under the symbol
“POETF”.
Not Required.
Not Required.
Not Required.
ITEM 10. ADDITIONAL INFORMATION
Not Required.
|
B.
|
Articles of the Corporation
|
The Company was originally formed under the British Columbia
Company Act on February 9, 1972 as Tandem Resources Ltd. (“Tandem”). The Company took its current form after Tandem
amalgamated with Stanmar Resources Ltd. and Keezic Resources Ltd. pursuant to Articles of Amalgamation on November 14, 1985. Tandem
moved to Ontario by Articles of Continuance on January 3, 1997. Tandem changed its name to OPEL International Inc. by Articles
of Amendment on September 26, 2006. OPEL International Inc. was continued under the New Brunswick Business Corporations Act on
January 30, 2007, then back to Ontario by Articles of Continuance on November 30, 2010, changing its name to OPEL Solar International
Inc. By Articles of Amendment on August 25, 2011, OPEL Solar International Inc. changed its name to OPEL Technologies, Inc. By
Articles of Amendment on July 23, 2013, OPEL Technologies Inc. changed its name to POET Technologies Inc. Today, the Company is
an Ontario corporation governed by the OBCA. The following are summaries of material provisions of our Articles of Continuance,
as amended from time to time (the “Articles”), in effect as of the date of this Annual Report insofar as they relate
to the material terms of our ordinary shares.
Register, Entry Number and Purposes
Our Articles of Continuance became effective on November
30, 2010. Our corporation number in Ontario is 641402. The Articles of Continuance do not contain a statement of the Company’s
objects and purposes. However, the Articles of Continuance provide that there are no restrictions on business that the Company
may carry on or the powers the Company may exercise as permitted under the OBCA.
Board of Directors
Pursuant to our By-laws and the OBCA, a director or officer
who is a party to, or who is a director or officer of, or has a material interest in, any person who is a party to, a material
contract or proposed material contract with the Company, shall disclose the nature and extent of his interest at the time and in
the manner provided by the OBCA. Any such contract or proposed contract shall be referred to the Board or shareholders for approval
even if such contract is one that in the ordinary course of the Company’s business would not require approval by the Board
or shareholders, and a director interested in a contract so referred to the Board shall not vote on any resolution to approve the
same unless the contract or transaction: (i) relates primarily to his or her remuneration as a director of the Company or an affiliate;
(ii) is for indemnity or insurance of or for the director or officer as permitted by the OBCA; or (iii) is with an affiliate.
Directors shall be paid such remuneration for their services
as the Board may determine by resolution from time to time, and will be entitled to reimbursement for traveling and other expenses
properly incurred by them in attending meetings of the Board or any committee thereof. Neither the Company’s Articles nor
By-laws require an independent quorum for voting on director compensation. Directors are not precluded from serving the Company
in any other capacity and receiving remuneration therefor. A director is not required to hold shares of the Company. There is no
age limit requirement respecting the retirement or non-retirement of directors.
The directors may sign the name and on behalf of the
Company, or appoint any officer or officers or any other person or persons on behalf of the Corporation either to sign on behalf
of the Company, all instruments in writing and any instruments in writing so signed shall be binding upon the Company without further
authorization or formality. The term “instruments in writing” includes contracts, documents, powers of attorney, deeds,
mortgages, hypothecs, charges, conveyances, transfers and assignments of property (real or personal, immovable or movable), agreements,
tenders, releases, receipts and discharges for the payment of money or other obligations, conveyances, transfers and assignments
of shares, stocks, bonds, debentures or other securities, instruments of proxy and all paper writing.
Nothing in the Company’s By-laws limits or restricts
the borrowing of money by the Company on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf
of the Company.
Rights, Preferences and Restrictions Attaching to Common
Shares
The holders of common shares are entitled to vote at all meetings
of the shareholders, except meetings at which only holders of a specified class of shares are entitled to vote. Each common share
carries with it the right to one vote. Subject to the rights, privileges, restrictions and conditions attaching to any other class
or series of shares of the Company, the holders of the common shares are entitled to receive any dividends declared and payable
by the Company on the common shares. Dividends may be paid in money or property or by issuing fully paid shares of the Company.
Subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the Company,
the holders of the common shares are entitled to receive the remaining property of the Company upon dissolution.
No shares have been issued subject to call or assessment. There
are no preemptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or
purchase funds. The common shares must be issued as fully-paid and non-assessable, and are not subject to further capital calls
by the Company. The common shares are without par value. All of the common shares rank equally as to voting rights, participation
in a distribution of the assets of the Company on a liquidation, dissolution or winding-up of the Company and the entitlement to
dividends.
The Company does not currently have any preferred shares outstanding.
Ordinary and Special Shareholders’ Meetings
The OBCA provides that the directors of a corporation shall call
an annual meeting of shareholders not later than 15 months after holding the last preceding annual meeting. The OBCA also provides
that, in the case of an offering corporation, the directors shall place before each annual meeting of shareholders, the financial
statements required to be filed under the Ontario Securities Act and the regulation thereunder relating to the period that began
immediately after the end of the last completed financial year and ended not more than six months before the annual meeting and
the immediately preceding financial year, if any.
The Board has the power to call a special meeting of shareholders
at any time.
Notice of the date, time and location of each meeting
of shareholders must be given not less than 21 days or more than 50 days before the date of each meeting to each director, to the
auditor of the Company and to each shareholder who at the close of business on the record date for notice is entered in the securities
register as the holder of one or more shares carrying the right to vote at the meeting.
Notice of a meeting of shareholders called for any other
purpose other than consideration of the minutes of an earlier meeting, financial statements, reports of the directors or auditor,
setting or changing the number of directors, the election of directors and reappointment of the incumbent auditor, must state the
general nature of the special business in sufficient detail to permit the shareholder to form a reasoned judgment on such business,
must state the text of any special resolution to be submitted to the meeting, and must, if the special business includes considering,
approving, ratifying, adopting or authorizing any document or the signing of or giving of effect to any document, have attached
to it, a copy of the document or state that a copy of the document will be available for inspection by shareholders at the Company’s
records office or another accessible location.
The only persons entitled to be present at a meeting of shareholders
are those entitled to vote, the directors of the Company and the auditor of the Company. Any other person may be admitted only
on the invitation of the chairman of the meeting or with the consent of the meeting. In circumstances where a court orders a meeting
of shareholders, the court may direct how the meeting may be held, including who may attend the meeting.
Limitations on Rights to Own Securities
No share may be issued until it is fully paid.
Neither Canadian law nor our Articles or By-laws limit
the right of a non-resident to hold or vote common shares of the Company, other than as provided in the Investment Canada Act (the
“Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”).
The Investment Act generally prohibits implementation of a direct reviewable investment by an individual, government or agency
thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act
(a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment
is likely to be of net benefit to Canada. An investment in the common shares of the Company by a non-Canadian (other than a “WTO
Investor,” as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control
of the Company, and the value of the assets of the Company were CA$5.0 million or more (provided that immediately prior to the
implementation of the investment the Company was not controlled by WTO Investors). An investment in common shares of the Company
by a WTO Investor (or by a non- Canadian other than a WTO Investor if, immediately prior to the implementation of the investment
the Company was controlled by WTO Investors) would be reviewable under the Investment Act if it were an investment to acquire direct
control of the Company and the value of the assets of the Company equaled or exceeded certain threshold amounts determined on an
annual basis.
The threshold for a pre-closing net benefit review
depends on whether the purchaser is: (a) controlled by a person or entity from a member of the WTO; (b) a state- owned enterprise
(SOE); or (c) from a country considered a “Trade Agreement Investor” under the Investment Act. A different threshold
also applies if the Canadian business carries on a cultural business. The 2019 threshold for WTO investors that are SOEs will be
$416 million based on the book value of the Canadian business' assets, up from $398 million in 2018. The 2019 thresholds for review
for direct acquisitions of control of Canadian businesses by private sector investor WTO investors ($1 billion) and private sector
trade- agreement investors ($1.5 billion) remain the same and are both based on the "enterprise value" of the Canadian
business being acquired.
A non-Canadian, whether a WTO Investor or otherwise,
would be deemed to acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of the common
shares of the Company. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an
acquisition of control of the Company, unless it could be established that the Company is not controlled in fact by the acquirer
through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a “national” of a
country (other than Canada) that is a member of the WTO (“WTO Member”) or has a right of permanent residence in a WTO
Member. A corporation or other entity will be a “WTO Investor” if it is a “WTO Investor-controlled entity,”
pursuant to detailed rules set out in the Investment Act. The U.S. is a WTO Member. Certain transactions involving our common shares
would be exempt from the Investment Act, including:
• an acquisition of the shares if the acquisition were made in the
ordinary course of that person’s business as a trader or dealer in securities;
• an acquisition of control of the Company
in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose
related to the provisions of the Investment Act; and
• an acquisition of control of the Company
by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect
control in fact of the Company, through the ownership of voting interests, remains unchanged.
Procedures to Change the Rights of Shareholders
In order to change the rights of our shareholders with
respect to certain fundamental changes as described in Section 168 of the OBCA, the Company would need to amend our Articles to
effect the change. Such an amendment would require the approval of holders of two-thirds of the votes of the Company’s common
shares, and any other shares carrying the right to vote at any general meeting of the shareholders of the Company, cast at a duly
called special meeting. The OBCA also provides that a sale, lease or exchange of all or substantially all of the property of a
corporation other than in the ordinary course of business of the corporation likewise requires the approval of the shareholders
at a duly called special meeting. For such fundamental changes and sale, lease and exchange, a shareholder is entitled under the
OBCA to dissent in respect of such a resolution amending the Articles and, if the resolution is adopted and the Company implements
such changes, demand payment of the fair value of the shareholder’s common shares.
Impediments to Change of Control
In 2016, the Canadian Securities Administrators (the
“CSA”) enacted amendments (the “Bid Amendments”) to the Take-Over Bid Regime. The Bid Amendments, which
are very significant, are contained in National Instrument (NI) 62-104.
The Bid Amendments were intended to enhance the quality and integrity
of the take-over bid regime and rebalance the current dynamics among offerors, offeree issuer boards of directors (“Offeree
Boards”), and offeree issuer security holders by (i) facilitating the ability of offeree issuer security holders to make
voluntary, informed and coordinated tender decisions, and (ii) providing the Offeree Board with additional time and discretion
when responding to a take-over bid.
Specifically, the Bid Amendments require that all non-exempt
take-over bids
(1)
receive tenders of more than 50% of the outstanding securities of the class that are subject to the bid, excluding securities
beneficially owned, or over which control or direction is exercised, by the offeror or by any person acting jointly or in concert
with the offeror (the Minimum Tender Requirement);
(2)
be
extended by the offeror for an additional 10 days after the Minimum Tender Requirement has been achieved and all other terms and
conditions of the bid have been complied with or waived (the 10 Day Extension Requirement); and
|
(3)
|
remain open for a minimum deposit period of 105 days (the Minimum 105 Day Bid Period) unless
|
(a)
the offeree board states in a news release a shorter deposit period for the bid of not less than 35 days, in which case
all contemporaneous take-over bids must remain open for at least the stated shorter deposit period, or
(b)
the issuer issues a news release that it intends to effect, pursuant to an agreement or otherwise, a specified alternative
transaction, in which case all contemporaneous take-over bids must remain open for a deposit period of at least 35 days.
The Bid Amendments involved fundamental changes to the bid regime
to establish a majority acceptance standard for all non-exempt take-over bids, a mandatory extension period to alleviate offeree
security holder coercion concerns, and a 105 day minimum deposit period to address concerns that offeree boards did not have enough
time to respond to an unsolicited take-over bid. The CSA determined not to amend National Policy 62-202 Defensive Tactics (NP 62-202)
in connection with these amendments. They reminded participants in the capital markets of the continued applicability of NP 62-202,
which means that securities regulators will be prepared to examine the actions of offeree boards in specific cases, and in light
of the amended bid regime, to determine whether they are abusive of security holder rights.
After canvassing several commentaries concerning the new regime,
we have concluded that:
|
•
|
It will be much more difficult for hostile bidders as a result of target issuers having a much
longer period of time to respond, concurrent with the added risk and cost to such bidders.
|
|
•
|
There is good reason to expect that, except in unusual circumstances, regulators will not permit
SRPs to remain in effect after a 105 day bidding period.
|
|
•
|
A significant number of reporting issuers have not sought re-approval of their SRPs since the
amendments were introduced and those that have sought to renew their SRPs have been required to amend the plans to comply with
the new rules.
|
|
•
|
A large part of the traditional rationale for adopting SRPs has now been eliminated.
|
We believe that the amended take-over bid rules provide adequate protection
against hostile bids. Having said that, it has been suggested that the new rules do not protect against creeping take-over bids
for control which are exempt from the rules (such as the accumulation of 20% or more of the issuer’s shares through market
transactions or the acquisition of a control block through private agreements with a few large shareholders). These activities
would however be identifiable through the early warning filing requirements. If, prior to making a determination that the Company
ought to adopt a “strategic” SRP at an annual or special meeting of shareholders, the Company were faced with a hostile
bid that we believed was not in the best interests of the Company and its shareholders, the directors could adopt a “tactical”
plan which we could take to the shareholders for approval. Nevertheless, at this point in time, we are of the opinion that such
action is not necessary and the shareholders should be the best arbiters of when “the pill must go”.
Stockholder Ownership Disclosure Threshold in Bylaws
Neither our Articles nor By-laws contain a provision governing
the ownership threshold above which shareholder ownership must be disclosed. Pursuant to securities legislation, an Early Warning
Report and an Insider Report must be filed if a shareholder obtains ownership on a partially diluted basis of 10% or greater of
the Company.
Special Conditions for Changes in Capital
The conditions imposed by the Company’s Articles are
not more stringent than required under the OBCA.
In addition to any contracts described in “ITEM 7.B. Related
Party Transactions” or “ITEM 4. Business Overview”, below is a summary of material contracts, other than those
entered into by the Company in the ordinary course of business, to which we are or have been a party during the two years immediately
preceding the date of this document. Other than contracts entered into in the ordinary course of business, we have not been a party
to any other material contract within such two-year period.
|
1.
|
On May 11, 2016 the Company acquired all the issued and outstanding shares of DenseLight Semiconductor Pte. Ltd. in an all-stock
acquisition for $10,500,000 satisfied through the issuance of 13,611,150 common shares.
|
|
2.
|
On June 22, 2016, the Company acquired all the issued and outstanding shares
of BB Photonics, a New Jersey company and its subsidiary BB Photonics UK Ltd, collectively BB Photonics, a designer of integrated
photonic solutions for the data communications market for consideration of $1,550,000. The all-stock purchase was accomplished
with the issuance of 1,996,090 common share of the Company at a price of $0.777 per share.
|
|
3.
|
On October 19, 2016, the Company announced that it had entered into an
agreement with Singapore’s Economic Development Board (EDB) to expand the Company’s research and development operations
in Singapore. Under this agreement, the Company is eligible to receive support up to a maximum of S$10.7 million (US$7.7 million)
over five years subject to certain expenditure, capital acquisition and head count thresholds.
|
|
4.
|
On April 18, 2019, the Company signed loan and security agreements for
a senior secured credit facility (the “Bridge Loan”) to be provided by Espresso Capital Ltd which grants the Company
access to a maximum US$5,000,000. On April 23, 2019 the Company received the initial advance against the credit facility in the
amount of US$2,000,000. In partial consideration of the US$5,000,000 gross credit facility available to the Company, and in connection
with the initial advance, the Company issued to Espresso Capital warrants for the purchase of 3,289,500 common shares at a price
of C$0.35 per share. The Warrants expire on April 18, 2020.
|
Canada has no system of exchange controls. There are
no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors. There
are no laws in Canada or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments
to non-resident holders of the Company’s securities, except as discussed in “ITEM 10.E. Taxation” below.
Canadian Federal Income Tax Considerations
The Company believes the following is a brief summary of the material
principal Canadian federal income tax consequences to a U.S. Holder (as defined below) of common shares of the Company who deals
at arm’s length with the Company, holds the shares as capital property and who, for the purposes of the Income Tax Act (Canada)
(the “Tax Act”) and the Canada — U.S. Income Tax Convention (1980) (the “Treaty”), is at all relevant
times resident in the U.S., is not and is not deemed to be resident in Canada and does not use or hold and is not deemed to use
or hold the shares in carrying on a business in Canada. Special rules, which are not discussed below, may apply to a U.S. Holder
that is an insurer that carries on business in Canada and elsewhere. U.S. Holders are urged to consult their own tax advisors with
respect to their particular circumstances.
This summary is based upon the current provisions of
the Tax Act, the regulations thereunder in force at the date hereof, all specific proposals to amend such regulations and the Tax
Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof and the current provisions
of the Convention and the current administrative practices of the Canada Revenue Agency published in writing prior to the date
hereof. This summary does not otherwise take into account or anticipate any changes in law or administrative practices whether
by legislative, governmental or judicial decision or action, nor does it take into account tax laws of any province or territory
of Canada or of the U.S. or of any other jurisdiction outside Canada.
For the purposes of the Tax Act, all amounts relating
to the acquisition, holding or disposition of the common shares must be converted into Canadian dollars based on the relevant exchange
rate applicable thereto.
This summary does not address all aspects of Canadian federal
income taxation that may be relevant to any particular U.S. Holder in light of such holder’s individual circumstances. Accordingly,
U.S. Holders should consult with their own tax advisors for advice with respect to their own particular circumstances.
Under the Tax Act and the Treaty, a U.S. Holder of common
shares will generally be subject to a 15% withholding tax on dividends paid or credited or deemed by the Tax Act to have been paid
or credited on such shares. The withholding tax rate is 5% where the U.S. Holder is a corporation that beneficially owns at least
10% of the voting shares of the Company and the dividends may be exempt from such withholding in the case of some U.S. Holders
such as qualifying pension funds and charities.
A U.S. Holder will generally not be subject to tax under
the Tax Act on any capital gain realized on a disposition of common shares, provided that the shares do not constitute “taxable
Canadian property” to the U.S. Holder at the time of disposition. Generally, common shares will not constitute taxable Canadian
property to a U.S. Holder provided that such shares are listed on a designated stock exchange (which currently includes the TSXV)
at the time of the disposition and, during the 60- month period immediately preceding the disposition, the U.S. Holder, persons
with whom the U.S. Holder does not deal at arm’s length, or the U.S. Holder together with all such persons has not owned
25% or more of the issued shares of any series or class of the Company’s capital stock. If the common shares constitute taxable
Canadian property to a particular U.S. Holder, any capital gain arising on their disposition may be exempt from Canadian tax under
the Convention if at the time of disposition the common shares do not derive their value principally from real property situated
in Canada.
U.S. Federal Income Tax Considerations
Subject to the limitations described herein, the following
discussion summarizes certain U.S. federal income tax consequences to a U.S. Holder of our common shares. A “U.S. Holder”
means a holder of our common shares who is:
• an individual who is a citizen or resident of the U.S. for U.S. federal
income tax purposes;
• a corporation (or other entity taxable as a corporation for
U.S. federal income tax purposes) created or organized in the U.S. or under the laws of the U.S. or any political subdivision
thereof, or the District of Columbia;
• an estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
• a trust (i) if, in general, a court within the U.S. is able to
exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its
substantial decisions, or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated
as a U.S. person.
Unless otherwise specifically indicated, this discussion does
not consider the U.S. tax consequences to a person that is not a U.S. Holder (a “Non-U.S. Holder”). This discussion
considers only U.S. Holders that will own our common shares as capital assets (generally, for investment) and does not purport
to be a comprehensive description of all of the tax considerations that may be relevant to each U.S. Holder’s decision to
purchase our common shares.
This discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury Regulations promulgated
thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on
a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any
particular U.S. Holder in light of such holder’s individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to U.S. Holders
that are subject to special treatment, including U.S. Holders that:
• are broker-dealers or insurance companies;
• have elected market-to-market accounting;
• are tax-exempt organizations or retirement plans;
• are financial institutions or “financial services entities”;
• hold our common shares as part of a straddle, “hedge”
or “conversion transaction” with other investments;
• acquired our common shares upon the exercise of employee stock options
or otherwise as compensation;
• own directly, indirectly or by attribution at least 10% of our voting
power;
• have a functional currency that is not the U.S. Dollar;
• are grantor trusts;
• are certain former citizens or long-term residents of the U.S.; or
• are real estate trusts or regulated investment companies.
If a partnership (or any other entity treated as a partnership
for U.S. federal income tax purposes) holds our common shares, the tax treatment of the partnership and a partner in such partnership
will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should
consult its own tax advisor as to its tax consequences.
In addition, this discussion does not address any aspect of
state, local or non-U.S. laws or the possible application of U.S. federal gift or estate taxes.
Each potential U.S Holder of our common shares is advised
to consult its own tax advisor with respect to the specific tax consequences to it of purchasing, holding or disposing of our common
shares, including the applicability and effect of federal, state, local and foreign income tax and other laws to its particular
circumstances.
Distributions
Subject to the discussion below under “Passive Foreign
Investment Company Status,” a U.S. Holder will be required to include in gross income as ordinary dividend income the amount
of any distribution paid on our common shares, including any non-U.S. taxes withheld from the amount paid, to the extent the distribution
is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions
in excess of such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in our common shares
and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of our common shares. The dividend
portion of such distributions generally will not qualify for the dividends received deduction available to corporations.
Subject to the discussion below under “Passive
Foreign Investment Company Status,” dividends that are received by U.S. Holders that are individuals, estates or trusts may
qualify for taxation at the rate applicable to long-term capital gains (a maximum marginal federal income tax rate of 20%), provided
that such U.S. Holders satisfy certain holding period requirements and such dividends meet the requirements of “qualified
dividend income.” For this purpose, dividends paid by a non-U.S. corporation may qualify if the non-U.S. corporation is eligible
for benefits of a comprehensive income tax treaty with the U.S., which benefits include an information exchange program and is
determined to be satisfactory by the U.S. Secretary of the Treasury. The IRS has determined that the U.S.- Canada Tax Treaty is
satisfactory for this purpose. Dividends that fail to meet such requirements, and dividends received by corporate U.S. Holders,
are taxed at ordinary income rates.
Distributions of current or accumulated earnings and
profits paid in foreign currency to a U.S. Holder (including any non-U.S. taxes withheld therefrom) will be includible in the income
of a U.S. Holder in a U.S. Dollar amount calculated by reference to the exchange rate on the day the distribution is received.
A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt
may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the
U.S. dollar, which will generally be U.S. source ordinary income or loss. A loss might not be deductible due to certain limitation.
U.S. Holders will have the option of claiming the amount of any
non-U.S. income taxes withheld at source either as a deduction from gross income or as a dollar-for- dollar credit against their
U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction,
may not claim a deduction for the amount of the non-U.S. income taxes withheld, but such amount may be claimed as a credit against
the individual’s U.S. federal income tax liability. The amount of non-U.S. income taxes which may be claimed as a credit
in any taxable year is subject to complex limitations and restrictions, which must be determined on an individual basis by each
shareholder. These limitations include, among others, rules that limit foreign tax credits allowable with respect to specific classes
of income to the U.S. federal income taxes otherwise payable with respect to each such class of income. A U.S. Holder will be denied
a foreign tax credit with respect to non-U.S. income tax withheld from a dividend received on the common shares if such U.S. Holder
does not satisfy certain holding period requirements.
Distributions of current or accumulated earnings and profits generally
will be foreign source income for U.S. foreign tax credit purposes.
Disposition of Common Shares
Subject to the discussion below under “Passive
Foreign Investment Company Status,” upon the sale, exchange or other taxable disposition of our common shares, a U.S. Holder
will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in such common
shares, which is usually the cost of such shares, and the amount realized on the disposition. Capital gain from the sale, exchange
or other disposition of common shares held more than one year is long-term capital gain, and is eligible for a reduced rate of
taxation for individuals (currently a maximum marginal federal income tax rate of 20%). Gains recognized by a U.S. Holder on a
sale, exchange or other disposition of common shares generally will be treated as U.S. source income for U.S. foreign tax credit
purposes. A loss recognized by a U.S. Holder on the sale, exchange or other taxable disposition of common shares generally is allocated
to U.S. source income. The deductibility of capital losses recognized on the sale, exchange or other taxable disposition of common
shares is subject to limitations. A U.S. Holder that receives foreign currency upon disposition of common shares and converts the
foreign currency into U.S. dollars subsequent to the settlement date or trade date (whichever date the taxpayer was required to
use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation or depreciation
in the value of the foreign currency against the U.S. Dollar, which will generally be U.S. source ordinary income or loss. Such
loss may not be deductible due to certain limitations.
Passive Foreign Investment Company Status
We would be a passive foreign investment company (a “PFIC”)
if (taking into account certain “look-through” rules with respect to the income and assets of our corporate subsidiaries
in which we own 25 percent (by value) of the stock) either (i) 75 percent or more of our gross income for the taxable year was
passive income or (ii) the average percentage (by value) of our total assets that are passive assets during the taxable year was
at least 50 percent.
If we were a PFIC, each U.S. Holder would (unless it
made one of the elections discussed below on a timely basis) be taxable on gain recognized from the disposition of our common shares
(including gain deemed recognized if the common shares are used as security for a loan) and upon receipt of certain “excess
distributions” (generally, distributions that exceed 125% of the average amount of distributions in respect to such common
shares received during the preceding three taxable years or, if shorter, during the U.S. Holder’s holding period prior to
the distribution year) with respect to our common shares as if such income had been recognized ratably over the U.S. Holder’s
holding period for the common shares. The U.S. Holder’s income for the current taxable year would include (as ordinary income)
amounts allocated to the current taxable year and to any taxable year period prior to the first day of the first taxable year for
which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other taxable year
period to which income is allocated, and an interest charge on the tax as so computed would also apply. Additionally, if we were
a PFIC, U.S. Holders who acquire our common shares from decedents (other than nonresident aliens) would be denied the normally
available step-up in basis for such shares to fair market value at the date of death and, instead, would have a tax basis in such
shares equal to the decedent’s basis, if lower.
As an alternative to the tax treatment described above,
a U.S. Holder could elect to treat us as a “qualified electing fund” (a “QEF”), in which case the U.S.
Holder would be taxed currently, for each taxable year that we are a PFIC, on its pro rata share of our ordinary earnings and net
capital gain (subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge). Special
rules apply if a U.S. Holder makes a QEF election after the first taxable year in its holding period in which we are a PFIC. In
the event that we conclude that we will be classified as a PFIC, we will make a determination at such time as to whether we will
be able to provide U.S. Holders with the information that is necessary to make a QEF election. Amounts includable in income as
a result of a QEF election will be determined without regard to our prior year losses or the amount of cash distributions, if any,
received from us. A U.S. Holder’s basis in its common shares will increase by any amount included in income and decrease
by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long
as a U.S. Holder’s QEF election is in effect with respect to the entire holding period for its common shares, any gain or
loss realized by such holder on the disposition of its common shares held as a capital asset ordinarily will be capital gain or
loss.
As an alternative to making the QEF election, a U.S.
Holder of PFIC stock which is regularly traded on a qualified exchange may avoid the negative effects of the PFIC rules by electing
to mark the stock to market and recognizing as ordinary income or loss, each taxable year that we are a PFIC, an amount equal to
the difference as of the close of the taxable year between the fair market value of the PFIC stock and the U.S. Holder’s
adjusted tax basis in the PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included
by the U.S. Holder under the election for prior taxable years. This election is available for so long as the Company’s common
shares constitute “marketable stock,” which includes stock of a PFIC that is “regularly traded” on a “qualified
exchange or other market.” Generally, a “qualified exchange or other market” includes a national market system
established pursuant to Section 11A of the Exchange Act, or a foreign securities exchange that is regulated or supervised by a
governmental authority of the country in which the market is located and that has certain characteristics. A class of stock that
is traded on one or more qualified exchanges or other markets is “regularly traded” on an exchange or market for any
calendar year during which that class of stock is traded, other than in de minimis quantities, on at least 15 days during each
calendar quarter, subject to special rules relating to an initial public offering. It is not entirely clear whether either the
OTCBB or TSXV are qualified exchanges or other markets, or whether there will be sufficient trading volume with respect to the
Company’s common shares, and accordingly, whether the common shares will be “marketable stock” for these purposes.
Furthermore, there can be no assurances that the Company’s common shares will continue to trade on any of the exchanges listed
above.
We believe we were not a PFIC for the year ending December
31, 2018 and do not expect to be classified as a PFIC for the year ending December 31, 2019. However, PFIC status is determined
as of the end of each taxable year and is dependent on a number of factors, including the value of our passive assets, the amount
and type of our gross income, and our market capitalization. Therefore, there can be no assurance that we will not become a PFIC
for the current taxable year ending December 31, 2019 or in a future taxable year. U.S. Holders which are individuals, estates
and trusts and whose income exceeds certain thresholds will be required to pay a 38% surtax on “net investment income”
including, among other things, dividends (if any) and net gain realized from our common shares. U.S. Holders should consult with
their own tax advisors regarding the application of this tax. We will notify U.S. Holders in the event we conclude that we will
be treated as a PFIC for any taxable year.
Information Reporting and Backup Withholding
U.S. Holders (other than exempt recipients, such as corporations)
generally are subject to information reporting requirements with respect to dividends paid on, or proceeds from the disposition
of, our common shares. U.S. Holders are also generally subject to backup withholding (currently at a rate of 28%) on dividends
paid on, or proceeds from the disposition of, our common shares unless the U.S. Holder provides IRS Form W-9 or otherwise establishes
an exemption.
The amount of any backup withholding will be allowed
as a credit against a U.S. or Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund,
provided that certain required information is furnished to the IRS.
|
F.
|
Dividends and Paying Agents
|
Not Required.
The consolidated financial statements of POET Technologies Inc. as of December 31, 2018, 2017 and 2016 included
herein, have been audited by Marcum LLP, our independent registered accounting firm for that period, 555 Long Wharf Drive, 8
th
Floor, New Haven, CT 06511, USA, as stated in their report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The Company’s documents can be viewed at its Canadian
office, located at: Suite 1107, 120 Eglinton Avenue East, Toronto, Ontario M4P 1E2, Canada. Further, we file reports under Canadian
regulatory requirements on SEDAR; you may access our reports filed on SEDAR by accessing their website at www.sedar.com. The Company
is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), and files reports,
Annual Reports and other information with the SEC. The SEC maintains a website that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company’s reports, Annual
Reports and other information can be inspected on the SEC’s website.
As a foreign private issuer, we are exempt from
the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
In addition, we are not required under the Exchange Act to file annual, and other reports and financial statements with the SEC
as frequently or as promptly as United States domestic companies whose securities are registered under the Exchange Act.
We maintain a corporate website at www.poet-technologies.com.
Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report on Form
20-F. We have included our website address in this Annual Report on Form 20-F solely as an inactive textual reference.
|
I.
|
Subsidiary information
|
Not Required.
ITEM 11. Quantitative and Qualitative Disclosures About Market
Risk
Interest Rate Risk
Short-term investments bear interest at fixed rates,
and as such, are subject to interest rate risk resulting from changes in fair value from market fluctuations in interest rates.
The Company does not depend on interest from its investments to fund its operations.
Exchange Rate Risk
The Company is exposed to foreign currency risk with the
Canadian and Singapore dollar. The Company maintains bank accounts and cash reserves in US, Canadian and Singapore dollars with
the majority of reserves currently split between Canadian and US dollars. The Canadian dollar reserves are exposed to currency
fluctuations. Most of the company’s operations are transacted in US and Singapore dollars. A 10% change in the Canadian and
Singapore dollar would have increased or decreased other comprehensive loss by $386,391.
The following table shows exchange rates, from CAD to USD, for the past six months:
Period
|
|
High (1)
|
|
Low (1)
|
|
Average (2)
|
March 2019
|
|
|
0.7623
|
|
|
|
0.7425
|
|
|
|
0.7481
|
|
February 2019
|
|
|
0.7652
|
|
|
|
0.7493
|
|
|
|
0.7575
|
|
January 2019
|
|
|
0.7623
|
|
|
|
0.7318
|
|
|
|
0.7519
|
|
December 2018
|
|
|
0.7597
|
|
|
|
0.7318
|
|
|
|
0.7435
|
|
November 2018
|
|
|
0.7660
|
|
|
|
0.7485
|
|
|
|
0.7579
|
|
October 2018
|
|
|
0.7824
|
|
|
|
0.7592
|
|
|
|
0.7677
|
|
October 2018 — March 31, 2019
|
|
|
0.8163
|
|
|
|
0.7629
|
|
|
|
0.7544
|
|
(1) Bank of Canada monthly average
rates
(2) Bank of Canada daily closing
average rates
|
|
|
|
The following table shows exchange rates, from SGD to USD, for the past six months:
|
|
|
|
Period
|
|
High (1)
|
|
Low (1)
|
|
Average (2)
|
March 2019
|
|
|
0.7427
|
|
|
|
0.7342
|
|
|
|
0.7384
|
|
February 2019
|
|
|
0.7432
|
|
|
|
0.7345
|
|
|
|
0.7388
|
|
January 2019
|
|
|
0.7432
|
|
|
|
0.7315
|
|
|
|
0.7372
|
|
December 2018
|
|
|
0.7336
|
|
|
|
0.7261
|
|
|
|
0.7291
|
|
November 2018
|
|
|
0.7299
|
|
|
|
0.7213
|
|
|
|
0.7269
|
|
October 2018
|
|
|
0.7290
|
|
|
|
0.7213
|
|
|
|
0.7246
|
|
October 2018 — March 31, 2019
|
|
|
0.7432
|
|
|
|
0.7213
|
|
|
|
0.7325
|
|
(1) Bank of Singapore monthly average
rates
(2) Bank of Singapore daily closing
average rates
|
|
|
|
Market Risk
Market risk arises from the possibility that changes in market
prices will affect the value of the financial instruments of the Company. The Company is exposed to fair value fluctuations on
its cash equivalents. The Company’s other financial instruments (cash and accounts payable and accrued liabilities) are not
subject to market risk, due to the short- term nature of these instruments.
ITEM 12. Description of Securities Other than Equity Securities
Not Required.
Not Required.
Not Required.
|
D.
|
American Depositary Shares
|
Not Required.