20FR12G 1 a13-25081_120fr12g.htm 20-FR12G

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

x

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

o

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended                 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

Commission file number:          

 

POET TECHNOLOGIES INC.

(Exact name of Registrant as specified in its charter)

 

Ontario, Canada

(Jurisdiction of incorporation or organization)

 

121 Richmond Street West, Suite 501

Toronto, Ontario, M5H 2K1, Canada

(Address of principal executive offices)

 

Leon M. Pierhal, President and CEO

P.O. Box 555

Storrs-Mansfield, Connecticut 06268

Tel: 401-338-1212 – Email: lp@poet-technologies.inc

(Name, Telephone, E-mail and Address of Company Contact Person)

 

With a copy to:

 

Timothy C. Maguire, Esq.

Pierce Atwood LLP

100 Summer Street, Suite 2250

Boston, MA 02110

617-488-8140, tmaguire@pierceatwood.com

 

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.

 



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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Not Applicable.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

 

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.

o Yes   x No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Not Applicable.

o Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
x

 

Other o

 

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.

o Item 17   o Item 18

 

Pursuant to The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we are classified as an “Emerging Growth Company.”  Under the JOBS Act, Emerging Growth Companies are exempt from certain reporting requirements, including the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.  Under this exemption, our auditor will not be required to attest to and report on management’s assessment of our internal controls over financial reporting during a five-year transition period.  We are also exempt from certain other requirements, including the requirement to adopt certain new or revised accounting standards until such time as those standards would apply to private companies.

 

Pursuant to the JOBS Act, we will remain an Emerging Growth Company until the earliest of:

 

·      the last day of our fiscal year following the fifth anniversary of the date of our initial public offering of common equity securities;

 

·      the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more;

 

·      the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

 

·      the date on which we are deemed to be a “large accelerated filer,” which will occur at such time as we (a) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (b) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months, and (c) have filed at least one annual report pursuant to the Exchange Act.

 



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POET TECHNOLOGIES INC.

FORM 20-F REGISTRATION STATEMENT

TABLE OF CONTENTS

 

 

 

Page

Introduction

1

 

PART I

 

 

 

ITEM 1.

Identity of Directors, Senior Management and Advisors

2

ITEM 2.

Offer Statistics and Expected Timetable

3

ITEM 3.

Key Information

3

ITEM 4.

Information on the Company

17

ITEM 4a.

Unresolved Staff Comments

26

ITEM 5.

Operating and Financial Review and Prospects

27

ITEM 6.

Directors, Senior Management, and Employees

39

ITEM 7.

Major Shareholders and Related Party Transactions

53

ITEM 8.

Financial Information

54

ITEM 9.

The Offer and Listing

55

ITEM 10.

Additional Information

56

ITEM 11.

Quantitative and Qualitative Disclosures About Market Risk

67

ITEM 12.

Description of Securities Other Than Equity Securities

68

 

 

 

PART II

 

ITEM 13.

Defaults, Dividend Arrearages and Delinquencies

68

ITEM 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

68

ITEM 15.

Controls and Procedures

68

ITEM 16.

Reserved

68

ITEM 16a.

Audit Committee Financial Expert

68

ITEM 16b.

Code Of Ethics

69

ITEM 16c.

Principal Accounting Fees and Services

69

ITEM 16d.

Exemptions from the Listing Standards for Audit Committees

69

ITEM 16e.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

69

 

PART III

 

ITEM 17.

Financial Statements

69

ITEM 18.

Financial Statements

69

ITEM 19.

Exhibits

70

 



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INTRODUCTION

 

POET Technologies Inc. is organized under the Business Corporations Act (Ontario).  In this Registration Statement, the “Company”, “we”, “our” 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 Registration Statement.  Our principal Canadian corporate offices are located at Suite 501, 121 Richmond Street West, Toronto, Ontario M5H 2K1, Canada.  Our principal operations office is located in the U.S. on the campus of the University of Connecticut, P.O. Box 555, Storrs-Mansfield, CT 06268.  Our telephone number is (203) 612-2366.

 

Upon effectiveness, we will 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.

 

Business of POET Technologies Inc.

 

We are a fabless semiconductor company specializing in the design and development of semiconductor devices for military, industrial and commercial applications, including infrared sensor arrays and ultra-low-power random access memory.  In the past, the Company focused on the development of solar panel and solar tracking technology for application in solar energy generation.  Today, we are focusing on our proprietary Planar Opto-Electronic Technology (“POET”), a semiconductor technology platform that enables multiple single-chip applications requiring optical and electrical functions, thereby addressing the needs of speed, size, energy and cost efficiency associated with current silicon-based semiconductor technology.

 

The Company generated $238,806 in revenue from its continuing operations during its fiscal year ended December 31, 2012 and incurred expenses of $1,029,254 in research and development.  To date, proceeds from the issuance of its common shares and the receipt of grants from governmental agencies have financed the Company’s continuing operations and research and development initiatives.

 

Financial and Other Information

 

In this Registration Statement, unless otherwise specified, all dollar amounts are expressed in United States Dollars (“US$” or “$”).

 

Forward-Looking Statements

 

This Registration Statement on Form 20-F contains 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.

 

The forward-looking statements and information in this Registration Statement are subject to various risks and uncertainties, including those described in “ITEM 3.D.  Risk Factors”, many of which are difficult to predict and generally beyond the control of the Company, including without limitation:

 

·                  we have a limited operating history;

·                  our need for additional financing, which may not be available on acceptable terms or at all;

·                  the possibility that we will not be able to compete in the highly competitive semiconductor market;

·                  the risk that our objectives will not be met within the time lines we expect or at all;

·                  research and development risks;

·                  the risks associated with successfully protecting patents and trademarks and other intellectual property;

·                  the need to control costs and the possibility of unanticipated expenses;

·                  manufacturing and development risks;

·                  the risk that the price of our common stock will be volatile; and

·                  the risk that shareholders’ interests will be diluted through future stock offerings or options exercises.

 

1



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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, the Company undertakes no obligation to revise or update any forward-looking statements after the date hereof.

 

Data relevant to estimated market sizes for the Company’s technologies under development are presented in this Registration Statement. 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. Although the Company believes the foregoing data is reliable, the Company has not independently verified the accuracy and completeness of this data.

 

PART I

 

ITEM 1.                                                                                                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

ADirectors and Senior Management

 

The following are the names, business addresses and positions of the members of the board of directors (collectively, the “Board of Directors” or the “Board” and, individual, each a “Director”) and the named executive officers (the “NEOs” or “Officers” and, individually, each an “NEO” or an “Officer”) of POET Technologies Inc. (the “Company”), as of December 31, 2013.

 

Name and Business Address

 

Position(s)

 

 

 

Leon M. Pierhal

PO Box 555

Storrs-Mansfield, CT 06268, USA

 

President, Chief Executive Officer and Director

 

 

 

Kevin Barnes

Suite 501, 121 Richmond Street West

Toronto, Ontario M5H 2K1, Canada

 

Chief Financial Officer and Treasurer

 

 

 

Christopher Lee Shepherd

Suite 501, 121 Richmond Street West

Toronto, Ontario M5H 2K1, Canada

 

Vice President of Technology

 

 

 

Stephane Gagnon

Suite 501, 121 Richmond Street West

Toronto, Ontario M5H 2K1, Canada

 

Senior Vice President of Operations

 

 

 

Mark Benadiba

Suite 501, 121 Richmond Street West

Toronto, Ontario M5H 2K1, Canada

 

Executive Chairman and Director

 

 

 

Peter Copetti

Suite 501, 121 Richmond Street West

Toronto, Ontario M5H 2K1, Canada

 

Executive Director and Chairman, Special Strategic Committee

 

 

 

Samuel Peralta

Suite 501, 121 Richmond Street West

Toronto, Ontario M5H 2K1, Canada

 

Director

 

 

 

John O’Donnell

Suite 2300, 200 Front Street West

Toronto, Ontario M5V 3K2, Canada

 

Director

 

 

 

Chris Tsiofas

812 — 330 Bay Street

Toronto, Ontario M5H 2S8, Canada

 

Audit Committee Chair and Director

 

2



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Adam Chowaniec

Suite 501, 121 Richmond Street West

Toronto, Ontario M5H 2K1, Canada

 

Director

 

 

 

Geoffrey Taylor

PO Box 555

Storrs-Mansfield, CT 06268, USA

 

Director and Chief Scientist

 

BAdvisers

 

The Company’s bankers are the Royal Bank of Canada, 20 King Street West, Lower Level, Toronto, ON M5H 1C4, Canada; Bank of America, 157 Church Street, New Haven, CT 06510, USA; and the Savings Institute Bank and Trust, 803 Main Street, Willimantic, CT 06226, USA.

 

The Company’s legal advisors in Canada are Stikeman Keeley Spiegel Pasternack LLP, 200 Front Street West, Suite 2300, Toronto, ON M5V 3K2, Canada.

 

The Company’s legal advisors in the United States are Pierce Atwood LLP, 100 Summer St. Suite 2250, Boston, MA 02110, USA.

 

C.  Auditors

 

The Company’s auditor is Marcum LLP, independent registered public accounting firm, 185 Asylum Street, 17th Floor, Hartford, CT 06103, USA.  Marcum LLP is a registered member of the Canadian Public Accountability Board (“CPAB”) permitting them to practice public accounting in Canada and a registered member of the United States Public Company Accounting Oversight Board (“PCAOB”).  Marcum LLP has confirmed that it is independent with respect to the Company within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario and under the guidelines of the SEC, the Independence Standards Board and PCAOB Rule 3526.

 

ITEM 2.                                                                                                OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

ITEM 3.                                                                                                KEY INFORMATION

 

A.  Selected Financial Data

 

The selected financial data of the Company for the years ended December 31, 2012, 2011 and 2010 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 elsewhere in this registration statement.

 

The information contained in the selected financial data for the 2012, 2011 and 2010 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 International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”).

 

The selected financial data of the Company for the three and nine months ended September 30, 2013 and 2012 was derived from the condensed unaudited interim financial statements of the Company.

 

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 government agencies 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.  The Company believes that it will continue to rely on the sale of its equity securities to provide funds for its activities; however, at this time the Company is not planning to seek additional equity financing because it is well capitalized for the next 12 months.  The Company may pursue a financing next year if an opportunity presents itself.  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.

 

The following consolidated financial information is separated between continuing and discontinued operations.

 

3



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Consolidated Statements of Operations

Under International Financial Reporting Standards

(US$)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Years Ended December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

84,628

 

$

112,070

 

$

261,984

 

$

112,070

 

$

238,806

 

$

755,422

 

$

1,107,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administration

 

2,013,975

 

698,005

 

5,280,254

 

2,002,694

 

3,092,504

 

2,713,781

 

1,373,691

 

Research and Development

 

352,486

 

240,494

 

921,951

 

764,108

 

1,029,254

 

1,327,057

 

1,021,256

 

Investment Income, including interest

 

 

 

 

 

 

(21,915

)

(36,689

)

Total Expenses

 

2,366,461

 

938,499

 

6,202,205

 

2,766,802

 

4,121,758

 

4,018,923

 

2,358,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss for the Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(2,281,833

)

(826,429

)

(5,940,221

)

(2,654,732

)

(3,882,952

)

(3,263,501

)

(1,250,404

)

Loss from discontinued operations, net of taxes

 

 

382,666

 

 

(4,474,695

)

(4,685,449

)

(11,898,225

)

(6,741,943

)

Net Loss

 

(2,281,833

)

(443,763

)

(5,940,221

)

(7,129,427

)

(8,568,401

)

(15,161,726

)

(7,992,347

)

Deficit, beginning of period

 

(62,836,640

)

(57,156,399

)

(59,178,252

)

(50,470,735

)

(50,470,735

)

(35,309,009

)

(27,316,662

)

Divestiture of non-controlling interest

 

 

 

 

 

(139,116

)

 

 

Deficit, end of period

 

$

(65,118,473

)

$

(57,600,162

)

$

(65,118,473

)

$

(57,600,162

)

$

(59,178,252

)

$

(50,470,735

)

$

(35,309,009

)

Basic and Diluted Loss Per Share:

 

$

(0.02

)

$

 

$

(0.05

)

$

(0.08

)

$

(0.08

)

$

(0.17

)

$

(0.11

)

Continuing Operations

 

$

(0.02

)

$

(0.01

)

$

(0.05

)

$

(0.03

)

$

(0.04

)

$

(0.04

)

$

(0.02

)

Discontinued Operations

 

$

 

$

0.01

 

$

 

$

(0.05

)

$

(0.04

)

$

(0.13

)

$

(0.09

)

 

Consolidated Statements of Discontinued Operations

Under International Financial Reporting Standards

(US$)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Years Ended December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

2012

 

2011

 

2010

 

Revenue

 

$

 

$

398,016

 

$

 

$

610,895

 

$

617,728

 

$

5,122,507

 

$

539,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

(258,156

)

 

1,117,282

 

1,117,282

 

8,916,603

 

434,627

 

General and Administration

 

 

319,307

 

 

3,024,857

 

3,380,117

 

5,551,286

 

4,026,491

 

Research and Development

 

 

(45,801

)

 

609,948

 

611,644

 

2,561,217

 

2,769,806

 

Foreign currency translation loss

 

 

 

 

 

 

 

10,231

 

Loss on divestiture of ASM

 

 

 

 

 

 

 

40,572

 

Investment Income, including interest

 

 

 

 

(2,791

)

(3,044

)

(8,374

)

 

Total Expenses

 

 

15,350

 

 

4,749,296

 

5,105,999

 

17,020,732

 

7,281,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Operating Income (Loss) from Discontinued Operations

 

 

382,666

 

 

(4,138,401

)

(4,488,271

)

(11,898,225

)

(6,741,943

)

Loss on divestiture of subsidiaries

 

 

 

 

(336,294

)

(197,178

)

 

 

Net Income (Loss) from Discontinued Operations

 

 

382,666

 

 

(4,474,695

)

(4,685,449

)

(11,898,225

)

(6,741,943

)

Attributable to non-controlling interest

 

 

 

 

 

 

107,662

 

29,825

 

Attributable to equity shareholders

 

 

382,666

 

 

(4,474,695

)

(4,685,449

)

(11,790,563

)

(6,712,118

)

 

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Consolidated Balance Sheets

Under International Financial Reporting Standards

(US$)

 

 

 

(Unaudited)
September 30,

 

December 31,

 

 

 

2013

 

2012

 

2011

 

2010

 

Assets

 

 

 

 

 

 

 

 

 

Cash

 

$

4,439,906

 

$

1,435,762

 

$

1,330,141

 

$

6,629,958

 

Short-term Investments

 

 

 

 

304,149

 

Accounts and Other Receivable

 

277,511

 

96,749

 

526,229

 

312,043

 

Prepaids and Other Current Assets

 

 

158,257

 

152,162

 

507,635

 

Inventories

 

 

 

1,426,003

 

5,608,647

 

Marketable Securities

 

410

 

426

 

415

 

423

 

Assets Available for Sale

 

 

606,413

 

 

 

Investment in Opel Solar Asia Company Limited

 

 

 

197,178

 

 

Property and Equipment

 

409,739

 

26,670

 

1,798,779

 

3,315,081

 

Construction in Progress

 

481,010

 

 

 

 

Patents and Licenses

 

39,838

 

42,983

 

169,971

 

192,968

 

Total Assets

 

$

5,648,414

 

$

2,367,260

 

$

5,600,878

 

$

16,870,904

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Accounts Payable and accrued liabilities

 

$

249,814

 

$

231,903

 

$

1,705,876

 

$

771,938

 

Product Warranty

 

100,000

 

25,899

 

25,899

 

 

Customer Deposits

 

 

 

 

1,347,825

 

Loan Payable

 

 

 

 

 

 

 

 

 

Disposal Group Liabilities

 

 

606,413

 

 

 

Deferred Energy Credit

 

 

 

614,363

 

649,642

 

Asset Retirement Obligation

 

 

 

74,277

 

69,062

 

Total Liabilities

 

349,814

 

864,215

 

2,420,415

 

2,838,467

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Share Capital

 

42,904,177

 

40,225,401

 

38,507,720

 

34,330,441

 

Special Voting Share

 

 

100

 

100

 

100

 

Special Warrants and Shares to be Issued

 

 

 

27,521

 

276,833

 

Warrants

 

8,135,590

 

3,850,685

 

1,813,729

 

6,025,715

 

Contributed Surplus

 

19,303,172

 

16,361,282

 

13,162,981

 

8,497,812

 

Accumulated Other Comprehensive Income

 

74,134

 

243,829

 

278,263

 

(233,495

)

Deficit

 

(65,118,473

)

(59,178,252

)

(50,470,735

)

(35,309,009

)

Non-Controlling Interest

 

 

 

(139,116

)

(22,950

)

Total Shareholders’ Equity

 

5,298,600

 

1,503,045

 

3,180,463

 

14,032,437

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

5,648,414

 

$

2,367,260

 

$

5,600,878

 

$

16,870,904

 

 

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Statements of Changes in Share Capital

Under International Financial Reporting Standards

(US$, except share data)

 

 

 

Number of Shares

 

Amount

 

Balance, January 1, 2010

 

58,302,862

 

$

29,939,171

 

Opel Solar Inc. Exchangeable Shares, exchanged into common shares

 

1,824,987

 

372,029

 

Shares issued on private placements

 

25,164,665

 

7,178,965

 

Share issue costs

 

 

(794,593

)

Fair value of warrants and compensation warrants issued

 

 

(2,365,131

)

 

 

 

 

 

 

Balance, December 31, 2010

 

85,292,514

 

34,330,441

 

OPEL Solar Inc. Exchangeable Shares, exchanged into common shares

 

1,223,000

 

249,312

 

Shares issued on the exercise of warrants and compensation warrants

 

3,218,907

 

1,411,780

 

Fair value of warrants and compensation warrants exercised

 

 

551,401

 

Shares issued on the exercise of stock options

 

3,291,000

 

1,166,358

 

Fair value of stock options exercised

 

 

798,428

 

 

 

 

 

 

 

Balance, December 31, 2011

 

93,025,421

 

38,507,720

 

OPEL Solar Inc. Exchangeable Shares, exchanged into common shares

 

135,000

 

27,521

 

Shares issued on the exercise of stock options

 

185,000

 

52,700

 

Fair value of stock options exercised

 

 

39,794

 

Shares issued on private placement

 

23,412,479

 

5,428,644

 

Fair value of warrants and compensation warrants issued

 

 

(3,608,483

)

Share issue costs

 

 

(502,965

)

Shares issued as finance costs

 

500,000

 

150,000

 

Shares issued on the exercise of warrants

 

270,715

 

93,012

 

Fair value of warrants exercised

 

 

37,458

 

 

 

 

 

 

 

Balance, December 31, 2012

 

117,528,615

 

40,225,401

 

Shares issued on the exercise of warrants and compensation warrants

 

140,000

 

37,111

 

Fair value of warrants and compensation warrants exercised

 

 

23,387

 

Shares issued on the exercise of stock options

 

582,500

 

148,034

 

Fair value of stock options exercised

 

 

118,558

 

Shares issued on private placement

 

14,400,000

 

7,189,200

 

Fair value of warrants and compensation warrants issued

 

 

(4,308,292

)

Share issue costs

 

 

(529,222

)

 

 

 

 

 

 

Balance, September 30, 2013

 

132,651,115

 

$

42,904,177

 

 

Exchange Rate

 

Because the presentation currency of the Company is U.S. dollars, there are no exchange rate considerations in interpreting these tables, unless otherwise noted.

 

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B.  Capitalization and Indebtedness

 

The following table sets forth the capitalization and indebtedness of the Company as of December 15, 2013.  This information should be read in conjunction with the Company’s consolidated financial statements and the notes relating to such statements appearing elsewhere in this registration statement.

 

 

 

December 15, 2013

 

Shareholders’ Equity

 

 

 

Share Capital

 

$

42,912,063

 

Warrants

 

 

8,135,590

 

Contributed Surplus

 

 

20,052,050

 

Accumulated other comprehensive loss

 

 

(17,358

)

Deficit

 

 

(66,713,269

)

Total Shareholders’ Equity

 

 

4,369,076

 

 

 

 

 

 

Total Capitalization

 

$

4,369,076

 

 

C.  Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D.  Risk Factors

 

In addition to the other information presented in this Registration Statement, the following should be considered carefully in evaluating the Company and its business.  This Registration Statement contains 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 below and elsewhere in this Registration Statement.

 

Risks Related to Our Business

 

We have a limited operating history, and we do not expect to become profitable in the near future.

 

We are a fabless semiconductor technology company with a limited operating history.  We are not profitable and have incurred losses.  We continue to incur research and development and general and administrative expenses related to our operations.  We expect to continue to incur losses for the foreseeable future, and these losses may increase as we move toward the commercialization of our technology in development.  If our POET platform does not achieve market acceptance, we may never become profitable.  Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.  Accordingly, it is difficult to evaluate our business prospects.  Moreover, our prospects must be considered in light of the risks and uncertainties encountered by an early-stage company and competitive markets, such as the semiconductor market, where market acceptance of our technology is uncertain.

 

We depend on the implementation of our business plan, including our ability to make future progress in the development or our POET technology.  There can be no assurance that our efforts will ultimately result in profits.

 

We have not yet commercialized the POET technology, and we may never become profitable.

 

We have not yet commercialized our POET technology, and we may never be able to do so.  We do not know when or if we will complete our development efforts or successfully license our technology or commercialize any products.  Even if we are successful in developing a commercially useful POET platform, we will not be successful unless POET gains market acceptance.  The degree of market acceptance of these products will depend on a number of factors, including:

 

·                  the competitive environment;

·                  the establishment and demonstration in the technology community of the efficacy of our technology and its potential advantages over existing technology; and

·                  the adequacy and success of distribution, sales and marketing efforts.

 

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The Company has a history of losses and expects to continue to incur additional losses for the foreseeable future.

 

The Company’s primary focus is on the research and development of a specific semiconductor technology, which requires the expenditure of significant amounts of cash over a relatively long time period.  The Company’s cash flows from its operations do not, and are not expected to, provide sufficient income to fund the Company’s research and development expenditures.  As at December 31, 2012, the Company’s total deficit was $59,178,252, with net losses in fiscal year 2012, 2011 and 2010 equaling $8,568,401, $15,161,726 and $7,992,347 respectively.  There can be no assurance that the Company will ever record any earnings.

 

The Company may need to obtain additional investment capital and there can be no assurance that the Company will be successful in generating sufficient cash flow to continue its development.

 

As stated above, the Company expects to incur losses for the foreseeable future. As of December 31, 2012, the Company’s working capital was $1,433,392.  Subsequent to December 31, 2012, the Company successfully completed an equity financing of CA$7,200,000, less financing fees.  After taking into consideration the Company’s anticipated revenue, planned research and development expenditures and assuming no material unanticipated expenses, the Company expects that its working capital will be sufficient to fund operations for the next nine to 12 months, which are planned to include further development of the POET semiconductor process and increasing the POET intellectual property portfolio to enable the Company to exploit the POET technology, through licenses and collaborative arrangements.  If development were delayed, or in the event that the Company was unable to execute licenses of the POET technology or otherwise exploit the technology, additional financing would be necessary.  There can be no assurance that the Company would be able to obtain such financing or that the objectives will be achieved at all.

 

The Company has no external sources of liquidity such as bank lines of credit. The Company will likely require future additional financing to carry out its business plan. The current market for both debt and equity financings for companies such as the Company is challenging, and there can be no assurance that a financing, whether debt or equity, will be available on acceptable terms or at all. The failure to obtain financing on a timely basis may result in the Company’s having to reduce or delay one or more of its planned research, development and marketing programs and to reduce related overhead, any of which could impair the Company’s current and future value.  Any additional equity financing, if obtained, may result in significant dilution to the existing shareholders at the time of such financing. The Company may also seek additional funding from other sources, including government grants, technology licensing, co-development collaborations and other strategic alliances, which, if obtained, may reduce the Company’s interest in its projects or products. There can be no assurance, however, that any such alternative sources of funding will be available.

 

Our solar product revenue declined, leading to our strategic decision to abandon solar technology production, which has represented most of our revenue in the last three years.

 

As a result of the discontinuance of the solar operations, we incurred larger losses from operations as well as from write-downs of solar related property, equipment, intangibles and other assets.  Consequently, we have changed our strategic direction. All product development programs related to our solar product lines were cancelled and we divested all our solar product assets.  We have redeployed all of our remaining research and development resources to our POET program.

 

As our business model changes there can be no assurances that the focus solely on the POET program will produce acceptable results. Moreover, any other future changes to our business may not prove successful in the short or long term due to a variety of factors, including competition, customer acceptance, demand for our products and other factors. This may cause a material negative impact on our financial results.

 

Rapid technological change could render the Company’s technology non-competitive and obsolete.

 

The semiconductor industry is subject to rapid and substantial technological change. Developments by others may render the Company’s POET technology non-competitive, and the Company may not be able to keep pace with technological developments.  Competitors have developed technologies that could be the basis for competitive products.  Some of these products have an entirely different approach or means of accomplishing the desired process and function than products being developed by the Company and may be more effective and less costly than the products developed by the Company.

 

Our research and development efforts are focused on the POET platform, and any delay in the development, or abandonment, of POET, or POET’s failure to achieve market acceptance, would compromise our competitive position.

 

We have devoted and expect to continue to devote a large amount of resources to develop new and emerging technologies and standards that can be commercially introduced in the future.  Our POET platform is a new technology which as yet does not have an established base and may not be embraced for use by the semiconductor industry.  Should technology companies fail to develop commercially available products based on our POET platform, our research and development efforts with respect to these technologies and standards likely would have no appreciable value.  In addition, if we do not correctly anticipate new technologies and standards,

 

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or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would.  Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate.

 

We are a relatively small company with limited resources compared to some of our current and potential competitors and we may not be able to compete effectively and increase market share.

 

Some of our potential competitors have longer operating histories, significantly greater resources and name recognition and a larger base of customers. As a result, these competitors may have greater credibility with our potential customers.  They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we would be able to.  In addition, some of our potential competitors have likely already established supplier or joint development relationships with the decision makers at our potential customers. These competitors may be able to leverage their existing relationships to discourage their customers from licensing or otherwise utilizing our technology.  These competitors may elect not to support our technology which could complicate our sales efforts.  These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business.

 

We are party to an intellectual property license agreement granting a portion of all future revenues.

 

In 2003, the Company entered into a License Agreement with the University of Connecticut (“UConn”) whereby UConn granted the Company an exclusive license to the intellectual property developed by a consultant and director of the Company, Dr. Geoffrey Taylor, who is also a member of the faculty at UConn.  Such a license may reduce the profitability of the Company if and when our products reach market.  The Company is obligated to pay up to $1,000,000 per year when revenues reach certain milestones as well as pay an additional 30% of any sublicense revenue received for commercial, royalty bearing sublicenses of the licensed intellectual property to third parties.  The Company and UConn are currently renegotiating the terms of this license.

 

We will be dependent on both semiconductor partners and major intellectual property licensees.

 

We will rely on semiconductor partners to manufacture and market microprocessors based on our architecture in order to receive royalties in the future. We also depend on them to add value to our licensed technology by providing complete POET-based solutions to meet the specific application needs of systems companies. However, the semiconductor partners, if any, will not be contractually obliged to manufacture, distribute or sell devices based on our technology or to market our POET technology on an exclusive basis. Some potential semiconductor partners design, develop and/or manufacture and market devices based on different competing architectures, including their own, and others may do so in the future.

 

We anticipate that our revenue will depend on these major customers, although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period depending on the addition of new contracts, the timing of work performed by us and the number of designs utilizing our products. In addition, we cannot be certain that any of the integrated circuit manufacturers will produce products incorporating our intellectual property components or that, if production occurs, they will generate significant royalty revenue for us.

 

We cannot assure you that semiconductor device manufacturers will dedicate the resources necessary to promote and develop products based on our POET technology, that they will manufacture products based on our POET technology in quantities sufficient to meet demand, that we will be successful in maintaining our relationships with semiconductor manufacturers or that we will be able to develop relationships with new semiconductor manufacturers.

 

Our revenues will depend in large part on royalties that may be received on POET-based devices, which will likely be generated on the volumes and price of devices manufactured and sold by our semiconductor manufacturer customers, if any. Our royalties will be therefore influenced by many of the risks faced by the semiconductor market in general. These risks include reductions in demand and reduced average selling prices. The semiconductor market is intensely competitive. It is also generally characterized by declining average selling prices over the life of a generation of devices. The effect of these price decreases is compounded by the fact that royalty rates decrease as a function of volume. We cannot assure you that delays in licensing, poor demand for services or decreases in prices or in our royalty rates will not materially adversely affect our business, results of operations and financial condition.

 

The enforceability of the Company’s patents and the Company’s ability to maintain trade secrets cannot be predicted and such patents or trade secrets may not provide the Company with a competitive advantage against competitors with similar products or technologies.

 

We rely on a combination of patent and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot be certain that the steps we have taken will prevent unauthorized use of our intellectual property. Any failure to protect our

 

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intellectual property rights would diminish or eliminate the competitive advantages that we derive from our proprietary technology.  We cannot assure you that we will be able to adequately protect our technology or other intellectual property from third-party infringement or from misappropriation in the U.S. and abroad. Any patent licensed by us or issued to us could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S. and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected.

 

We may occasionally become involved in administrative proceedings, lawsuits or other proceedings if others allege that we infringe on their intellectual property rights. Some of these claims could subject us to significant liability for damages and invalidate our property rights. If successful, such claims could impair our ability to collect royalties or license fees or could force us or our customers to:

 

·                  stop using or exploiting the challenged intellectual property;

·                  obtain from the owner of the infringed intellectual property, at our expense, a license to sell the relevant technology at an additional cost, which license may not be available on reasonable terms, or at all; or

·                  redesign our technology to make it non-infringing.

 

Our failure to protect our proprietary rights, or the costs of protecting these rights, may harm our ability to compete.

 

Our success depends in part on our ability to obtain patents and licenses and to preserve other intellectual property rights covering our products and development and testing tools.  To that end, we have obtained certain domestic and foreign patents and intend to continue to seek patents on our inventions when appropriate.  The process of seeking patent protection can be time consuming and expensive. We cannot ensure the following:

 

·                  that patents will be issued from currently pending or future applications;

·                  that our existing patents or any new patents will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us;

·                  that foreign intellectual property laws will protect our foreign intellectual property rights; and

·                  that others will not independently develop similar products, duplicate our products or design around any patents issued to us.

 

Intellectual property rights are uncertain and adjudication of such rights involves complex legal and factual questions.  We may be unknowingly infringing on the proprietary rights of others and may be liable for that infringement, which could result in significant liability for us.  We may receive correspondence from third parties alleging infringement of their intellectual property rights.  If we are found to infringe the proprietary rights of others, we could be forced to either seek a license to the intellectual property rights of others or alter our technologies so that they no longer infringe the proprietary rights of others.  A license could be very expensive to obtain or may not be available at all.  Similarly, changing our processes to avoid infringing the rights of others may be costly or impractical.

 

We would be responsible for any patent litigation costs.  If we were to become involved in a dispute regarding intellectual property, whether ours or that of another company, we may have to participate in legal proceedings in the United States Patent and Trademark Office or in the United States or Canadian courts to determine any or all of the following issues: patent validity, patent infringement, patent ownership or inventorship.  These types of proceedings may be costly and time consuming for us, even if we eventually prevail.  If we do not prevail, we might be forced to pay significant damages, obtain a license, if available, or stop making a certain product.  From time to time, we may prosecute patent litigation against others and as part of such litigation, other parties may allege that our patents are not infringed, are invalid and are unenforceable.  We also rely on trade secrets, proprietary know-how and confidentiality provisions in agreements with employees and consultants to protect our intellectual property.  Such parties may not comply with the terms of their agreements with us, and we may not be able to adequately enforce our rights against these parties.

 

Our results may fluctuate significantly and be unpredictable.

 

Assuming that we are able to finish development of the POET platform technology and commence its exploitation, we will likely experience in the future significant quarterly fluctuations in our results of operations. Our results may fluctuate because of a variety of factors. Such factors include:

 

·                  the timing of entering into agreements with licensees;

·                  the financial terms and delivery schedules of our agreements with licensees;

 

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·                  the demand for products that incorporate our technology;

·                  the mixture of license fees, royalties, revenues from the sale of development systems and fees from services;

·                  the introduction of new technology by us, our licensees or our competition;

·                  the timing of orders from and shipments to systems companies of ARM-based microprocessors from our semiconductor partners;

·                  the sudden technological or other changes in the microprocessor industry; and

·                  new litigation or developments in current litigation.

 

In future periods, our operating results may not meet the expectations of public market analysts or investors. In such an event the market price of our shares could be materially adversely affected.

 

We anticipate that licenses of our POET platform to a relatively limited number of customers will account for a significant portion of our total net revenues.

 

Once our POET technology is fully developed, we expect that a relatively small number of customers will account for a significant portion of our future net revenues in any particular period.  Due to this, some of the following may reduce our future revenues or adversely affect our business:

 

·                  reduction, delay or cancellation of licenses from one or more potentially significant customers;

·                  development by one or more of our potentially significant customers of other technologies for current or future products;

·                  loss of one or more of our potentially significant customers or a disruption in our licensing activities;

·                  failure of one or more of our potentially significant customers to make timely payment of our invoices; and

·                  failure of one or more of our customers to implement our technology in products successfully, thus limiting any potential royalty income.

 

We cannot be certain that any potential customer will license technology from us, or, once established as a customer, that they will generate further income to us by means of further licenses or royalties.

 

Our success will depend substantially on systems companies.

 

Our future success will depend substantially on the acceptance of our technology by systems companies, particularly those which develop and market electronic products in the defense, wireless, consumer electronics and networking markets where demand may be highly cyclical. The reason for this dependence is that sales of POET-based devices by semiconductor manufacturers to systems companies directly affect the amount of royalties we might receive. We are subject to many risks beyond our control that may influence the success or failure of a particular systems company. These risks include:

 

·                  competition faced by the systems company in its particular industry:

·                  the engineering and marketing capabilities of the systems company;

·                  market acceptance of the systems company’s products;

·                  technical challenges unrelated to our technology faced by the systems company in developing its products; and

·                  the financial and other resources of the systems company.

 

It will likely take a long time to persuade systems companies to accept our POET technology and, even if accepted, we cannot assure you that our technology will be used in a product that is ultimately brought to market. Furthermore, even if our technology is used in a product brought to market, we cannot assure you that such product will be commercially accepted or result in significant royalties to us. Demand for our intellectual property may also be affected by consolidation in the integrated circuit and related industries, which may reduce the aggregate level of purchases of our intellectual property components and services by the combined companies.

 

Competition — we may not be able to compete successfully in the future.

 

Our target markets are intensely competitive and characterized by rapid technological change. We cannot assure you that we will have the financial resources, technical expertise or marketing or support capabilities to compete successfully in the future. Competition is based on a variety of factors including price, performance, features, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given our contemplated reliance on semiconductor manufacturers, our competitive position is dependent on their competitive position. In addition, semiconductor manufacturers are not expected to license our architecture exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-POET technologies.

 

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Our future capital needs may require us to seek debt financing or additional equity funding which, if not available, could cause our business to suffer.

 

From time to time, we may be required to raise additional funds for our future capital needs through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business.

 

We are dependent on key personnel and the loss of any of these individuals could adversely affect the Company.

 

The Company’s ability to continue its development of potential products, and to develop a competitive edge in the marketplace, depends, in large part, on its ability to attract and maintain qualified key management and technical personnel.  Competition for such personnel is intense and the Company may not be able to attract and retain such personnel.  The Company’s growth will depend on the efforts of its senior management, particularly its President and Chief Executive Officer, Leon Pierhal; Executive Director Peter Copetti; Chief Scientist, Dr. Geoffrey Taylor; and other members of Dr. Taylor’s team.  The Company has entered into a consulting agreement with Dr. Taylor, who is on the faculty of the University of Connecticut, an employment agreement with Mr. Pierhal and a Consulting Agreement with Mr. Copetti.  If the Company loses the services of key personnel through loss of life, impairment or resignation, it may be unable to replace them, and its business could be negatively affected.

 

We will be highly dependent upon collaborative partners to develop and commercialize products using our POET Technology.

 

A key part of our strategy is to form collaborations with semiconductor, defense and electronics companies that will assist us in developing, testing, and commercializing the POET platform. We currently have a collaborative agreement for process development with BAE Systems, Nashua, New Hampshire (“BAE”).

 

We will negotiate specific ownership rights with respect to the intellectual property developed as a result of the collaboration with each partner. While ownership rights will likely vary from program to program, in general we will seek to retain ownership rights to developments directly relating to POET and our partner will retain rights specific to the application under development.

 

Despite our existing development and manufacturing agreement with BAE, we cannot make any assurances that:

 

·                  we will be able to enter into additional collaborative arrangements to develop products utilizing our POET technology;

·                  any existing or future collaborative arrangements will be sustainable or successful;

·                  the applications contemplated in collaborative arrangements will be further developed by partners in a timely fashion;

·                  any collaborative partner will not infringe upon our intellectual property position in violation of the terms of the collaboration contract; or

·                  milestones in collaborative agreements will be met and milestone payments, if any, will be received.

 

If we are unable to obtain development assistance and funds from other companies to fund a portion of our product development costs and to commercialize our technology, we may be required to delay, curtail, or stop development of our projects.

 

We face risks from failures in the device manufacturing processes of our customers.

 

The fabrication of integrated circuits, particularly those made of gallium arsenide (“GaAs”), is a highly complex and precise process. Integrated circuits incorporating the POET platform are primarily manufactured on wafers made of GaAs. Compared to the manufacturing of silicon integrated circuits, GaAs technology is less mature and more difficult to design and manufacture within specifications in large volume. In addition, the more brittle nature of GaAs wafers can result in lower manufacturing yields than with silicon wafers. Further, during manufacturing, each wafer is processed to contain numerous integrated circuits or which may also result in lower manufacturing yields. As a result, our customers utilizing POET GaAs wafers may reject or be unable to sell a substantial percentage of wafers or the die on a given wafer because of, among other factors:

 

·                  minute impurities;

·                  difficulties in the fabrication process, such as failure of special equipment, operator error or power outages;

·                  defects in the masks used to print circuits on a wafer;

·                  electrical and/or optical performance; or

·                  wafer breakage.

 

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Our future customers may experience similar difficulty in maintaining acceptable manufacturing yields, which in turn may hinder adoption of our POET platform for cost or yield reasons.

 

Our POET platform incorporates technology licensed from third parties.

 

We incorporate technology (including software) licensed from a limited number of third parties in the deployment of our POET platform, including from the University of Connecticut.  We could be subjected to claims of infringement regardless of our lack of involvement in the development of the licensed technology.  Although a third-party licensor may, in some cases, indemnify us if the licensed technology infringes on another party’s intellectual property rights, such indemnification is typically limited in amount and may be worthless if the licensor becomes insolvent.  Furthermore, any failure of third-party technology to perform properly would adversely affect the development or exploitation of POET.

 

Our intellectual property indemnification practices may adversely impact our business.

 

We expect to be required to indemnify our customers for certain costs and damages of intellectual property rights in circumstances where one of our products is the factor creating the customer’s infringement exposure.  This practice may subject us to significant indemnification claims by our customers.  In some instances, our products are designed for use in devices manufactured by our customers that comply with international standards.  These international standards are often covered by patent rights held by third parties, which may include our competitors.  The costs of obtaining licenses from holders of patent rights essential to such international standards could be high.  The cost of not obtaining such licenses could also be high if a holder of such patent rights brings a claim for patent infringement.  We are not aware of any claimed violations on our part. However, we cannot assure you that claims for indemnification will not be made or that if made, such claims would not have a material adverse effect on our business, results of operations or financial condition.

 

We may be subject to information technology failures that could damage our reputation, business operations and financial condition.

 

We rely on information technology for the effective operation of our business.  Our systems are subject to damage or interruption from a number of potential sources, including natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, cyber attacks, sabotage, vandalism, or similar events or disruptions.  Our security measures may not detect or prevent such security breaches.  Any such compromise of our information security could result in the unauthorized publication of our confidential business or proprietary information, result in the unauthorized release of customer, supplier or employee data, result in a violation of privacy or other laws, expose us to a risk of litigation or damage our reputation.

 

Although safeguards exist, third parties with which we currently conduct business may have access to certain portions of our sensitive data.  In the event that these third parties do not properly safeguard our data that they hold, security breaches could result and negatively impact our business.  In addition, our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business, which could negatively affect our business and operating results, operations and financial results.

 

The high cost of building advanced semiconductor manufacturing facilities may limit the number of foundries as potential customers for our POET platform.

 

The cost of developing leading-edge manufacturing facilities and processes needed for building advanced chips is rising. Some of our potential foundry customers may delay or cancel plans for expanding current processes or developing new manufacturing processes, which, if done, may reduce our licensing opportunities.  In addition, the bargaining power of the remaining foundries with advanced manufacturing facilities would be increased. This could make it harder for us to win profitable licensing deals with these foundries, further reducing both licensing and royalty revenue.

 

There are foreign exchange risks associated with our Company.

 

Because we have historically raised funds in both the Canadian and U.S. markets, a portion of our costs are denominated in Canadian dollars and our funding is subject to foreign exchange risks.  A decrease in the value of the U.S. dollar relative to the Canadian dollar could affect our costs and potential future profitability.  We do not currently hold forward exchange contracts or other hedging instruments to exchange foreign currencies for U.S. dollars to offset potential currency rate fluctuations.

 

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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 are registering our stock with the U.S. Securities Exchange Commission (“SEC”), no significant U.S. market may develop, and if 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;

·                  announcements of partnerships or technological collaborations and announcements of the results or further actions in respect of any 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 December 15, 2013, our 52-week high and low closing market price for our common stock on the TSXV was CA$0.69 (US$0.6512) and CA$0.315 (US$0.2973), respectively, based on the closing exchange rate of $0.9438 on December 15, 2013.

 

The Company has historically obtained, and expects to continue to obtain, its requisite additional financing primarily by way of sales of its equity, which may result in significant dilution to existing shareholders.

 

The Company has not earned profits, so its ability to finance operations is chiefly dependent on equity financings. Since the change in the board of directors and decision to discontinue the solar operations in June 2012, the Company has raised over CA$12,584,870 (US$12,617,844) in equity financing in support of the POET initiative, 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 December 15, 2013, there were outstanding options to purchase up to 18,325,250 shares of our common stock that are currently exercisable and additional outstanding options to purchase up to 5,407,500 shares of common stock that are exercisable over the next several years.  As of December 15, 2013, there were outstanding warrants to purchase 42,478,568 shares of our stock. The holders of these options and warrants 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 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 CA$0.397 and the weighted average exercise price of warrants is CA$0.48, which compares to the CA$0.54 (US$0.51) market price at closing on December 15, 2013.

 

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 December 15, 2013, there were 23,732,750 share purchase options outstanding with a weighted average exercise price of CA$0.40 and 42,478,568 share purchase warrants outstanding with a weighted average exercise price of CA$0.48. If all of these securities were exercised, an additional 66,211,318 common shares would become issued and outstanding. This represents an increase of 33.3% in the number of shares issued and outstanding and would result in significant dilution to current shareholders.

 

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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 1934 Securities and 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 registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).

 

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. Under certain circumstances the Board of Directors may also have the ability to change the number of directors under U.S. state law.

 

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

 

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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.  Corporations that are listed on a U.S. securities exchange or are quoted on NASDAQ may also be required to have transactions with officers and directors and other related party transactions reviewed by an audit committee comprised of independent directors.

 

There is no limitation imposed by our Articles or other charter documents on the right of a non-resident to hold or vote our common shares.  However, the Investment Canada Act (the “Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”), generally prohibits implementation of a 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, unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be a net benefit to Canada. An investment in our common shares by a non-Canadian would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of our assets were CA$5.0 million or more.  However, an investment in our shares by a national of a country (other than Canada) that is a member of the World Trade Organization or has a right of permanent residence in such a country (or by a corporation or other entity that is a “WTO Investor-controlled entity” pursuant to detailed rules set out in the Investment Act) would be reviewable at a higher threshold of CA$223 million in assets, except for certain economic sectors with respect to which the lower threshold would apply.  A non-Canadian, whether a national of a WTO member or otherwise, would acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of our common shares.  The acquisition of less than a majority, but at least one-third of our common shares, would also be presumed to be an acquisition of control of the Company, unless it could be established that the Company was not controlled in fact by the acquirer through the ownership of voting shares.  The United States is a WTO Member for purposes of the Investment Act.  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 which 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. Therefore, these officers, directors and principal shareholders are exempt from short-swing profits which apply to insiders of U.S. issuers. 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.

 

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ITEM 4.                                                INFORMATION ON THE COMPANY

 

A.  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.

 

The Company has two U.S. subsidiaries, OPEL Solar Inc. (“OPEL Solar”) and ODIS Inc. (“ODIS”).  ODIS is wholly-owned subsidiary of OPEL Solar, which in turn is wholly owned by the Company.

 

Until recently, the Company was engaged principally in two distinct businesses: (1) the development and marketing of concentrating solar panels as well as single and dual axis solar tracking systems for commercial solar applications and (2) the development of a GaAs microchip technology with potential for use in numerous applications.  Through our subsidiary OPEL Solar, we focused on the solar business, which included designing, manufacturing and marketing high concentration photovoltaic (“HCPV”) panels as well as manufacturing and marketing single and dual axis solar trackers used to mount solar panels.  Through our subsidiary ODIS, we focused on the design of a platform technology capable of addressing multiple technology markets, the first market application being an infrared sensor type product for the military with industrial applications to follow, achieved through the development of GaAs-based processes and semiconductor microchip products with several potential market applications.

 

During the fiscal years 2011 and 2012, however, the Company experienced decreasing margins within the solar industry due to (i) the trimming of the subsidies for new energy technologies that had sustained OPEL Solar and (ii) the development of a large solar product inventory in the marketplace.  During this time, the Company enacted aggressive cost cutting measures in its solar division and redirected the business of OPEL Solar from being a concentrated solar photovoltaic (“CPV”) panel provider into a solar tracker provider.  In June 2012, a special committee of the Board of Directors was established to explore the divestiture of the solar division.  This led to the sale of a significant portion of the assets of the solar tracker business in December 2012.  The Company has since sold the remaining solar assets.

 

On December 14, 2012, the Company and its subsidiary OPEL Solar agreed to sell the non-cash assets used in connection with the operation of OPEL Solar’s single axis solar power tracker business to Northern State Metals, through its subsidiary Tracker Acquisition, Inc., for the aggregate purchase price of $1,000,000, subject to adjustment.  In April 2013, the Company disposed of the remaining sold solar assets in consideration of the assumption of the associate disposal group liabilities.

 

During our divestiture of OPEL Solar assets, the Board of Directors made a strategic decision to focus all efforts on the POET process.  POET is a proprietary process that is intended to address the needs of speed, size, energy and cost efficiency associated with the current silicon-based technology with a view to surmounting the hurdles of expanding silicon-based chip technology to fit the needs of product developers.  Going forward, developing and monetizing the POET program, which has already received several grants from governmental bodies, will be the main focus of the Company.

 

Our capital expenditures on continuing operations, which principally consist of purchases of research and development equipment and instrumentation, from the beginning of the Company’s last three financial years as follows:

 

Period

 

Capital Expenditure

 

Purpose

January 1, 2013 to December 15, 2013

 

$

900,236

 

Instruments and Equipment

Fiscal 2012

 

$

28,352

 

Office Equipment

Fiscal 2011

 

$

1,647

 

Manufacturing Equipment

Fiscal 2010

 

$

0

 

 

 

The Company’s registered office is located at Suite 501, 121 Richmond Street West, Toronto, Ontario, Canada M5H 2K1 and its phone number is (416) 368-9411.  The Company’s operations office is located on the campus of the University of Connecticut, PO Box 555, Storrs-Mansfield, CT 06268 and its phone number is (203) 612-2366.

 

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B.  Business Overview

 

Corporate Overview

 

The Company is a fabless semiconductor company developing a novel semiconductor technology called POET (Planar Opto Electronic Technology) which is anticipated to allow the monolithic fabrication of digital, analog and optical components on a single integrated circuit (“IC” or “die”).  Formerly, the Company had been focused on concentrating solar panels and solar tracking technology.  In 2012, however, the Company made the strategic decision to divest itself of the solar division, sell all solar-related assets and focus on semiconductor research.  The Company is incorporated under the laws of the Province of Ontario and is currently traded on the TSXV.  We conduct our research activities primarily through ODIS, our subsidiary.  Descriptions of the Company include the operations of both ODIS and OPEL Solar unless otherwise indicated.

 

As a result of our strategic divestiture of the solar division and our focus on our POET platform, our continuing operations are focused on a market in which we have a limited operating history.  We are not currently profitable and have incurred losses since our concentration on developing our POET platform.  We anticipate incurring losses for the foreseeable future until we are able to commercialize our technology, which may not occur, and may sustain losses after commercialization.  If we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

 

Key benefits of the integrated POET platform are anticipated to include: (i) faster semiconductor operating frequencies; (ii) decreased need for device cooling; (iii) greater reliability; and (iv) total system cost reductions.  With POET’s materials system incorporating periodic table element groups III, IV and V (“Group III-V”), we expect that active optical elements and high-performance electronic elements can be packed in a single IC built around a GaAs wafer at a density similar to that of silicon, the traditional IC material.  POET is being developed to be differentiated from competing semiconductor processes such as silicon, GaAs, or indium phosphide, however, by its more comprehensive set of functional capabilities and its ability to integrate them.  Unlike existing processes which require the use of multiple chips, circuit boards or sub-systems being linked together by either physical snap connections or multiple cable connections that (i) produce the potential for multiple points of failure, (ii) require more space, increasing the physical end product size and (iii) require greater amounts of power with the attendant production of excess heat, thus demanding additional space for cooling and ventilation, we anticipate that POET will be able to integrate lasers, modulators, photoreceivers and passive optics as well as high-speed, low-power electronics on one monolithically-fabricated die.  This would allow POET ICs, when fully developed, to demonstrate a lower cost structure, increased power savings and increased reliability.

 

The Company has 30 patents issued and 99 patents pending for its semiconductor POET platform, which is currently being developed through ODIS.  The Company has licensed the intellectual property portfolio developed by our Chief Scientist and Director, Dr. Geoff Taylor, at the University of Connecticut.  We believe that our patent and trade secret protection on POET, together with ODIS’s specific design knowledge using POET elements, will provided us with a large, defensible barrier to outside competition.

 

We expect to incur additional losses and require additional financial resources to complete development.  The continuation of the Company’s research and development activities and the commercialization of its products are dependent upon the Company’s ability to successfully complete its research programs, protect its intellectual property and finance its cash requirements on an ongoing basis.  It is not possible to predict the outcome of future research and development activities or the financing thereof.

 

Research and Development Activities

 

The Company is currently conducting research and development for its POET platform, which allows for the construction of semiconductors with the potential to service a wide array of devices.  The Company has been awarded more than a dozen U.S. Department of Defense and National Aeronautical and Space Administration’s (“NASA”) Small Business Innovation Research (“SBIR”) grants since 2000, which have supported the initial development of the POET process, infrared sensing technology, sensor/laser development and the combination of electronic circuits and lasers on the same microchip.  The Company has made the strategic decision to reduce its dependency on SBIR grants.  We remain active, however, in the military sector, with projects underway with the U.S. Government, namely NASA and a major U.S. defense contractor, BAE Systems, Inc. (“BAE”).

 

The Company conducts most of its own research and development activities through its facilities on the campus of the University of Connecticut in Storrs-Mansfield, Connecticut.  The Storrs-Mansfield facility is dedicated to semiconductor development.  In addition, the Company contracts specific projects with third-party research and development organizations.

 

We have produced working device prototypes in our development laboratories at the University of Connecticut to prove the functionality of the POET process.  We are now transitioning the device technology into production of a completely integrated platform, utilizing funds provided by NASA as well as from the Company’s general funds and facilities provided by our development partner, BAE.  Throughout the transition process, the Company will continue to use its University of Connecticut research and development facility, or other such laboratory facilities, in our effort to produce scalable commercial product prototypes.  We

 

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currently expect to produce a functional prototype by June 2014, although no assurances can be given that such project will be completed on a timely basis, if at all.  These commercial market prototypes are targeted to demonstrate the Company’s position as a sole source provider meeting specific product application needs and are anticipated to be used to enter the market and obtain initial design wins.

 

In 2011, all U.S. government contractors, including ODIS, were notified that funding to continue ongoing projects would see dramatic cuts throughout 2011 and possible termination in 2012.  ODIS began experiencing such cutbacks in financial support to projects throughout 2011, including our project with BAE, which by the end of 2011 was no longer funded.  Recognizing the importance this development effort has to the overall future of the POET project, funds were redirected to continue this project while alternative sources of funding were being sought.  In April 2012, we received a Phase II award of $750,000 from NASA to continue developing radiofrequency and optical phased arrays using the POET platform, and work began under this award during the third quarter of 2012.

 

In June 2011, BAE independently produced operational transistors on gallium arsenide wafers, further validating critical components of the POET process.  By June 2011, ODIS, under the supervision of Dr. Geoffrey Taylor, had completed several wafers containing multiple devices produced with POET Technology.  In August 2011, BAE Systems ran a fabrication lot of five wafers using POET.  Chips were produced from these wafers and tested to further validate the varied capabilities and devices developed utilizing the POET platform.  ODIS has made significant progress regarding POET as it pertains to its advancements in optical interconnection of high speed circuits, making it possible to implement an optical interface as a single chip to connect existing complementary metal oxide semiconductor (“CMOS”) processors.

 

In December 2012, ODIS successfully produced an integrated laser device, the first Vertical Cavity Laser (“VCL”) utilizing POET, the basis for chip-to-chip interconnection, and complementing other optoelectronic devices already demonstrated by ODIS — including heterostructure field effect transistors (“HFETs”), optical thyristors, pulsed lasers, and super-radiant light emitting devices.

 

In March 2013, the Company achieved radio frequency and microwave operation of both n-channel and p-channel transistors. With this achievement, POET extends the capability of its unique monolithic platform to cover integration of a complete range of wavelength-division multiplexed (“WDM”) capable optoelectronic devices and functions. This is in addition to complementary electronics based on n-channel and p-channel transistors as either field effect transistors (“FETs”) or bipolar devices. Specifically for this milestone, 3-inch POET wafers fabricated at BAE yielded submicron n-channel and micron-sized p-channel transistors operating at frequencies of 42 GHz and 3 GHz respectively. These operating frequencies are expected to be improved even further with subsequent development.

 

In June 2013, the Company achieved integration of the complementary inverter, the basis for all on-chip logic. Specifically, we successfully demonstrated complementary heterostructure field effect transistor (“HFET”) based inverter operation using the POET process.

 

In October 2013, the Company reported progress on demonstrating a fast-signal switchable laser transmitter for standard optical fibre telecommunications applications. The Company also reported significant progress on fabrication of its optical thyristor-based infrared detector array with its third-party fab partner. Both milestones are in the latter stages of testing, and are expected to be completed in the first few weeks of fiscal 2014.

 

At the same time, the Company reported success in realizing submicron device operation at the 200-nm scale, introducing, in parallel, specific milestones associated with reducing feature size further to the 100-nm range in scale.

 

Each subsequent device demonstrated by POET increases the range of procedures in its design kits, increasing the probability of adoption in semiconductor foundry process libraries. Currently the Company is focused on developmental work leading to device fabrication at the 100-nm scale.  The 100-nm goal is matched to the state-of-the-art commercial III-V foundry capabilities and is expected to demonstrate the >50x speed improvement together with lower power consumption by a factor ranging from four to 10 depending on the application as compared to silicon at smaller nodes.

 

POET Technology

 

POET is based on a novel Group III-V materials structure that is anticipated to provide an optoelectronic mixed-signal process that can integrate high-performance analog and digital electronics with high-performance active optical elements.  We believe that POET ICs will enable integration of a dense mix of active optical elements and optical waveguides together with logic and mixed-signal elements on a single chip, in one serial fabrication process.

 

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Current Market Technology

 

Currently, suppliers of optoelectronic subsystems use hybrid integration manufacturing technology.  With hybrid technology, a number of components are individually manufactured and tested, then assembled together to form the desired subsystem.  An example of such a component is the physical interface for a 10 gigabit/sec Ethernet connection.  The subsystem requires several component elements, as illustrated below.  The result is intrinsically high in cost when compared with an integrated solution.

 

 

“PIN”

-

PIN diode photodetector

“TIA”

-

Trans-Impedance Amplifier

“LA”

-

Limiting Amplifier

“CMOS”

-

Complementary Metal Oxide Semiconductor

“Serdes”

-

Serializer and Deserializer

“CDR”

-

Clock and Data Recovery

“LD”

-

Laser Diode

“LDD”

-

Laser Diode Driver

 

 

 

Since each individual component in a hybrid semiconductor has to be individually manufactured and tested, the price of each component represents a fully-loaded manufacturing process, including the manufacturer’s margin.  Typically, module assemblers purchase components from other manufacturers that make their only profit on the component sale.  The module assembly process itself is a complex, labor-intensive process, resulting in a significant rate of faulty assemblies.  As a result of this cascade of cost elements, optoelectronic subsystems built using hybrid technology are relatively costly and limited in volume.  While hybrid technology has advantages for small market applications where relatively high costs are offset by the functional flexibility of being able to use multiple different technologies, hybrid technology is unable to address higher volume, cost-sensitive applications.

 

The POET Integrated Solution

 

We are developing POET to integrate all of the optoelectronic subsystem elements of a semiconductor onto a single, mixed-signal chip.  The POET process’s anticipated ability to integrate high-performance analog and digital electronics with high-performance active optical elements permits one serial manufacturing process, as diagramed below.

 

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The elements of the receive side of the hybrid solution are replaced in the planned POET implementation by a photoreceiver formed from a single Optical Thyristor (“OT”) device.  The CDR is also formed using an OT—based device.  In the transmit direction, the clock multiplication block will be formed using an OT-based device, while the optical transmitter will be based on an OT laser.  All of these elements are expected to be formed in one single semiconductor fabrication process.  Within the same POET process, arbitrary numbers of high-performance transistors may be formed to implement the Serdes and any other required electronic functions.

 

POET’s goal of implementing complex, multi-functional optoelectronic subsystems in one serial manufacturing process is expected to be achieved at less cost than competing products built using hybrid technology.  POET device yield is targeted to approximate silicon. This would give the Company a technology basis that is powerful, economical to produce and extensible in generations.  Capitalizing on POET capabilities, the Company plans to develop and offer products into the communications, optoelectronic, radiofrequency/wireless, sensor and imaging markets.

 

The key elements to be integrated in the POET process, all targeted to be simultaneously available for design, are:

 

·                  The Optical Thyristor

·                  Complementary High Electron Mobility Transistors and Heterojunction Bipolar Transistors

·                  Dielectric Isolation.

 

Optical Thyristor

 

The OT is the backbone of the development of the POET platform.  The OT is a multiple-use, four-terminal device having both optical and electrical inputs and optical and electrical outputs.  Depending on application and design, an OT could be a (i) laser, (ii) an optical amplifier, (iii) a photoreceiver, or (iv) have multiple electrical operations, as detailed below.  An additional anticipated aspect of the POET OT in development is a process step that allows for emission and reception of light in-plane, parallel to the chip surface.  Lasers and photoreceivers may either be designed with vertical emission, or use this step to have in-plane emission. This step would allow on-chip optical interconnections and would also support a low-cost multiple-fiber attachment system that the Company has designed.

 

Various modifications of the basic POET epitaxial structure are being designed to support emission or reception at wavelengths of 980, 1310 or 1550 nanometeres.  ODIS’s structure and fabrication also is being developed to provide detection and emission from the 3 to 20 micrometer band via the attributes of its quantum well structure.

 

OT Lasers

 

POET lasers are being developed to be a third-generation fabrication that uses an implant confinement technique and improve efficiency and reliability over the proton-confined and oxide-confined devices currently available.  Either vertical emission or in-plane emission are anticipated to be employed, depending on design needs.  When the in-plane feature is employed, vertical cavity lasers are formed in stripe geometries and have end emission.  Such vertical cavity traveling wave lasers have ratios of peripheral length to active area higher than conventional circular vertical-cavity surface-emitting lasers, thus dissipating power more readily and resulting in higher reliability components having longer life.  All POET lasers are being developed to be driven by a logic voltage signal, further lowering power requirements and increasing efficiency.

 

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OT Photoreceivers

 

As photoreceivers, OTs have high sensitivity, are self-contained and do not require trans impedence amplifiers, which convert current to voltage to produce usable outputs.  Incident light of adequate intensity will produce a direct electrical logic signal.  Semiconductor optical amplification provides signal gain and the OT provides the thresholding function.  All optical OT structures can be made selectively as transmitters or photoreceivers, further adding to POET IC flexibility.  The in-plane emission feature of POET allows easy connection to on-chip passive waveguides.  This waveguide technology design features enlarged waveguide apertures to facilitate ease of coupling to single mode fibers with low device insertion loss.  This feature is also part of POET’s low-cost multiple fiber attachment technology via waveguides.  We are developing a packaging technology that we anticipate will match this horizontal input/output coupling in order to further maintain the cost-effective approach.

 

OT Electrical Applications

 

The POET OT is being developed to also act as an electronic device in memory, digital logic and millimeter-wave oscillator applications.  OTs can form single-device static random-access memory cells and can be designed for bistable logic uses.  An OT with an optical cavity forms a low-noise voltage controlled oscillator.  The ability for OTs to act as comparators is important for high speed analog-to-digital converter designs.  The POET platform is targeted to enable manufacturers to develop the internal components required within their product offerings (e.g., handhelds and laptops) to be more reliable, operate faster, and operate for longer periods of time.

 

Transistors

 

POET transistors are designed to suit a wide range of high-performance needs.  Electronic designs are expected to be performed using an arbitrary mix of complementary Heterojunction Bipolar Transistors (“HBT”) or complementary High Electron Mobility Transistors (“HEMT”).

 

Complementary HEMT Transistors

 

The POET process is being designed to offer both p-channel and n-channel HEMT devices with complementary threshold voltages.  These devices are expected to be usable in both low-noise radiofrequency applications and in high-speed, low power logic applications.  Complementary HEMT logic has a potential speed-power ratio above that of silicon CMOS, owing to the higher mobility of the HEMT structure, and can form very low power logic running at speeds to over 100 GHz.  This flexibility facilitates the integration of dense logic circuitry with low power, high speed and small size, which allows the combined inclusion of analog circuits and logic circuits in an IC design, which can improve system performance.

 

Complementary HBT Transistors

 

Complementary HBT devices can amplify high-power, high-frequency signals.  HBTs find use in high-frequency power amplifiers such as the ones found in cellular phones.  Unlike current GaAs processes, the POET process is being developed to allow fabrication of complimentary HBTs.  Once implemented, POET platform technology could benefit the consumer by extending battery life and reducing the number of internal components required in a product, thereby reducing its manufacturing cost and increasing product reliability.

 

Dielectric Isolation

 

One of the POET design elements anticipated to support effective optoelectronic integration is high-quality dielectric isolation (“DI”).  DI “islands” are formed by a deep trench etch through the entire epitaxial structure into the substrate.  Under each active “island” is a layer of oxide produced in the process step in which the lower mirrors are formed.  The electrical coupling path between such dielectric “islands” is through the oxide of one region, through a semi-insulating substrate, then through the oxide of another island.  This DI produces a much higher isolation than the reverse-junction and deep trench isolations of silicon.

 

High-quality isolation is a principal factor in our being able to produce mixed-signal designs such as optoelectronic transceivers.  Without this isolation, resulting crosstalk between the more sensitive receive section and the higher-powered transmit section can cause implementation problems.  POET DI is being designed to greatly reduce such problems.

 

Markets and Products

 

The overall semiconductor market has been projected to grow to $550 billion by 2015 and remains a rapidly growing segment of our economy.  Current research and development spending by semiconductor companies has grown to a record-high $53.0 billion, or an equiovalent of 16.7% of total semiconductor sales, its highest level in 4-5 years (IC Insights 2013).  Electronics, with sales topping

 

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$1,200 billion, generally require semiconductors to achieve success and competitive performance.  Progress in the electronics industry over the past four decades has both driven and been driven by the industry’s ability to create and serve markets with faster, cheaper and smaller monolithic ICs.  Each product advance in turn becomes the driver for the next wave of IC technology.  Many new generations of IC technology have increased IC capabilities and thus those of the products in which they serve.  Advances in personal computers, communications and many consumer devices have been powered by this continual development in semiconductor technology.  Through 2017, the convergence of internet-capable and mobile technologies will drive the strength of the semiconductor device market.

 

Today however, the traditional semiconductor paradigms may be falling short.  Silicon ICs are not well suited to serve in the arenas of optoelectronics and very high-speed mixed-signal circuits, and currently no adequate monolithic (single-chip) technology exists.  Today’s implementations in these markets are not fully benefiting from the cost savings of integrated technologies, but rather are based in part on hybrid or multi-component approaches.  In the hybrid approach, multiple individual semiconductor components incorporating multiple technologies are interconnected to form circuits satisfying the needs of a particular application.  This approach is used successfully to bring solutions to limited-size markets, particularly those in which performance is at a premium, despite a higher price.  As the need for high-speed services spreads and higher-volume markets continue to emerge, however, this hybrid approach to implementation adds expense.  Hybrid technology may be able to serve the limited-size markets that are able to tolerate higher price tags, but such technology cannot serve truly large, competitive markets.

 

Today’s semiconductor industry is typically seen as dominated by silicon products, with the silicon IC industry then being divided into (i) the personal computer and memory segment and (ii) the fabless IC segment. The fabless segment is then split into a triad of separate industries providing (i) design tools, (ii) IC designs and (iii) IC fabrication, all operating independently but synergistically.  While this is a good description of the silicon portion of the semiconductor industry, it is not a model of the whole semiconductor industry.  Left unaddressed are markets for analog, mixed-signal, radio frequency and optical products that are currently served by a combination of non-silicon technologies, including silicon-germanium, GaAs, indium phosphide and gallium nitride, which collectively cover a variety of applications, some of which are described below.  Compared to existing technologies, POET is expected to be more versatile, meaning that POET can potentially be utilized to manufacture many more device types that could require the implementation of on-board optics or radio frequency electronics.

 

The Company’s POET platform is being developed to apply in a large portion of this budding semiconductor market as it represents a potential solution to increasing semiconductor performance in an economical and functional manner.  Once developed, the Company’s GaAs-based chip design processes could have several potential major market applications, including: (i) infrared sensor arrays for military as well as Homeland Security monitoring and imaging and (ii) microchips combining optical lasers and electronic control circuits for potential use in various military programs and telecom applications, including within fiber to the home technology.  In the short term, POET’s current development efforts may allow future licensees to address opportunities in the following markets (IC Insights 2013, Gartner 2013)):

 

·                  Pad, Tablet and Cloud OS-type PC devices—Demand continues to surge for tablet-class and phablet-class devices, and the market for PCs built on cloud-based services, such as Chromebooks, is beginning to heat up. One example of device key to this market, DRAM, is projected at a $35.0 billion market in 2015; logic at $115 billion;

 

·                  Smartphones—Semiconductor content of this fast-growing segment represents approximately 31% of the average selling price, compared to 23% for ordinary cellphones. 3G/4G smartphones are set to impact on the future analog, DSP, logic, and NAND flash memory IC markets. The mobile phone semiconductor market alone is projected $64.1 billion for 2015.

 

·                  Digital and Smart TVs—Streaming capability via the Internet will be the must-have technology in 2014; this points to increased revenues for LED drivers, power management ICs, and MCUs/MPUs. MPUs/CPUs are forecast at $92.6 billion for 2015.

 

·                  Smart Grids and Advanced Metering Infrastructure (AMI)— Residential appliances and related electrical systems are now being designed for interaction with power utilities via the Internet and local networks. Smart grid technology investment is forecast to grow 19% annually through 2016.

 

·                  “Internet of Things”— The identification, monitoring, and control of objects with an addressable Internet protocol has been gaining momentum for over a decade with no abatement. The sensor and actuator semiconductor market, one of the areas impacted by this sector, is projected at $14.1 billion.

 

The Company’s strategy is to continue aggressive research and development efforts directed toward the completion of the POET platform.  Upon completion of development, the Company anticipates that POET could compete in the following broad markets.

 

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Military

 

POET’s technology platform for optoelectronic integration is designed to exploit the optoelectronic and electronic behaviors of GaAs semiconductor material.  One of the benefits of this material, from a space electronics perspective, is that GaAs is significantly less susceptible to x-ray and gamma-ray total integrated dose radiation.  GaAs has been a long-standing choice for high-frequency devices and circuits, though GaAs digital devices do not provide the performance that metal oxide semiconductor field effect transistor devices provide.  Currently, the POET platform is being utilized within a NASA deep space probe initiative.

 

Important to military applications are the electronic devices that can be integrated into the POET design architecture, including both complementary heterostructure field effect transistors and complementary HBTs.  These transistors will enable both analog and digital functions in POET hybrid optoelectronic devices.  The technology also provides a number of key, integrable opto-electronic devices:  resonant vertical cavity lasers, detectors, amplifiers and modulators for out-of-plane operation.  In addition, a novel innovation enables in-plane waveguide and traveling wave operation for lasers, detectors, modulators, amplifiers and directional coupler switches.  Important to the military is POET’s potential to integrate digital, radio frequency and optical technologies in a single device, which is designed to satisfy the documented high-performance capability needs for multiple space systems of all military departments and agency technology areas.

 

POET’s architecture, which incorporates a dense mix of active optical elements and optical waveguides together with logic and mixed signal elements, is designed to enable a wide variety of space-system components including 40GB/s polarization diversity receivers, radiation hardened digital signal processor chips, 1THz transmitters and receivers, 40 GB/s optical transponders and ultraviolet, visible and infrared imaging.  These components, when developed, could be combined to enable a number of applications including high speed transceivers for laser communications, radio frequency transceivers, radiofrequency and optical phased arrays, opto-electronic interconnects, analog-to-digital and digital-to-analog converters, uncooled visible, mid-wavelength infrared and long-wave infrared imagers, optical memory, opto-electronic and radio frequency apertures, ultra-wide-band sources and receivers, low-light-level sensors, single photon counters and optical correlators.

 

Using inter-sub-band absorption for the ultraviolet, infrared and visible light detector, POET could have the ability to offer a low-cost monolithic solution to multi-spectral imaging.  The compact array could provide: (i) detection, readout and analog-to-digital conversion on a single chip; (ii) a common axis for ultraviolet, visible and infrared imaging; (iii) wavelength scanning; and (iv) 300K operation with no cooling required.  The Space Situational Awareness Tech Area (“SSA”) has indicated that this technology addresses SSA sensor requirements by providing required capability with significantly reduced size, weight and power.  In addition, the Air Force Communications Command and Control Division (“C3”) Tech Area Plan identifies mid- and long-term space communication and C3 technology challenges that require the photonic applications that POET is designed to provide.

 

After testing, the Air Force Commercialization Pilot Program (“CPP”) selected POET’s ultraviolet/infrared/visible imaging technology project as their candidate for an AFRL grant to fund the POET transition program and Phase III effort.  Utilizing AFRL funding, the Company and BAE have entered into a transition program to jointly produce the POET platform and take it to production.  Furthermore, BAE and other military prime contractors have expressed interest in using the POET platform in systems/subsystems for their Department of Defense customers.  Additionally, a qualifier for receiving CPP funding is the acknowledgement of the firm’s willingness to commercialize a portion of the funded technology, thus providing commercial customers access to packaged parts, enabling the technology to be adopted for commercial and military systems.

 

Commercial

 

The proliferation of consumer electronics has created a vast and growing market demand for semiconductor technology.  Each new advance in this market requires smaller, denser and more efficient computing power, while maintaining efficient costs.  To satisfy these demands, the capabilities of traditional semiconductors must be enhanced.  The Company believes that POET has the potential to be a breakthrough technology.

 

According to a report published by industry researcher IC Insights in 2013, the optoelectronics market is forecast to surpass the discrete semiconductor market and become the second largest segment in the semiconductor industry behind ICs.  Another market researcher, BBC Research of Wellesley, Massachusetts recently published a report, “The Electronics and Components in Global Imaging Markets”, which stated that the global market for opto-electronic imaging sensors and components is expected to increase sharply over the coming years, including in applications such as automobile internal compartment monitoring, external accident sensors and camera applications.

 

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Marketing Plan

 

Military Segment

 

Our initial fundamental business strategy is to continue our directed focus on the military market through licensing arrangements with BAE and others and by pursuing projects which meet the POET platform product design goals of the transition process, which may lead to the subsequent volume production and license revenue generation.  Our intent is also to foster prime contractor involvement that will lead to either a licensing or other form of partnership relationship based on long term demand for the POET platform, and to develop that demand into a potential partner’s strategic plans for meeting government requirements.  Training, supporting and energizing the prime contractor sales teams will be a key ingredient to POET’s success in generating military and agency revenue.

 

Commercial Segment

 

Our commercial sales and marketing activity will be based on direct contact with target corporations by senior management or industry consultants hired by the Company.  Such contact will focus on developing successful relationships within the product areas.  We know from our past experience in the solar industry that relationship leveraging is required to first gain entrance and then acceptance of a new company with new technology.  Marketing and product development activity is expected to continue throughout the POET development and transition process in order to anticipate and adapt commercially directed devices, as well as commercial applications discovered going forward, during the development phase, thus offering well-designed, well-supported, market-focused products capitalizing on the potential advantages of POET.

 

The release of test or prototype devices to both market segments for testing and acceptance of the POET process is important to the Company’s marketing plan.  The availability of prototypes will be necessary to solicit early design wins with the potential to lead to volume production at such time as the Company can commence the POET transition.  Currently, a prototype infrared sensor is in development for the AFRL which the Company believes, when completed, can be adapted for commercial prototype use.

 

The Company believes that the most expedient way to scale its sales efforts in both the military and commercial market segments will be to work with and through the marketing, sales and engineering teams of those firms who are respected, proven product and solution providers, already holding a significant market share within their industry.

 

Commercialization

 

The Company will focus first on the simplest products that can make its POET process stand out.  To achieve this, the Company anticipates teaming with partners to produce and deliver POET driven devices into the military market segment in order to obtain high visibility quickly and to achieve the fast sales ramp-up in the commercial segment.

 

First Phase: Initial Prototypes and Initial Production

 

Initial prototype devices meeting commercial requirements are anticipated to be produced in sufficient quantities during the POET transition program utilizing the BAE fabrication facility.  Prototypes such as the infrared sensor now in development with BAE for military testing and use are targeted to be used to introduce the POET platform process to the marketplace and to enable the Company to gain access to potential customers and seek early commercial design wins.  Having a third party manufacture infrared sensors will help serve to validate POET and should provide momentum to seek design wins.

 

Second Phase: Production

 

The Company’s manufacturing model is to be fabless, meaning that we will partner with third party semiconductor fabrication facilities to produce the POET IC devices.  As vertical market partnerships may be established, we anticipate those partnerships would seek to either utilize the BAE facility or another facility of their choosing to meet their volume fabrication needs, leveraging off of the prototypes expected to be manufactured at the BAE facility.  To the extent that POET is successfully introduced and demand dictates, the Company intends to continue to improve on its ability to provide cost effective product by utilizing well known, commercial market-focused fabrication facilities worldwide.

 

The manufactured cost of a POET component will include the cost of manufacturing the die, plus the cost of packaging the die. Depending upon the type of component manufactured, the physical dimensions of the die will vary, as will the packaging cost.

 

Manufacturing

 

The Company has contracted with BAE for the transition phase of its POET platform development from the POET laboratory on the campus of the University of Connecticut.  If successfully completed, the Company expects to partner with BAE for the continued and

 

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on-going manufacture of wafers to meet the Company’s initial production requirements.  The Company does not currently have a manufacturing agreement in place with BAE, but would seek to establish such agreements upon a successful transition of the POET process to production capability

 

BAE’s III-V GaAs fabrication facility is ISO 9001/14001 certified, military specification certified and can produce radiation hard devices.  BAE’s state of the art facility houses two 3” wafer diameter production lines and two 6” wafer diameter production lines within 14,000 sq. ft. and a wafer test area covering 16,000 sq. ft.  The facility is vibration isolated and environmentally controlled for sub-micron device development and manufacture.  We believe that there is substantial capacity available to us for implementation of our development and to-market plans, and that BAE would be receptive to making such capacity available to us.  Currently, a staff of over 150 engineers is devoted to design and development with another 70 devoted to foundry operations and testing.

 

Packaging

 

We do not expect to package the devices, but expect to subcontract the service, as is conventional in the industry.  BAE does offer a packaging group and can serve as the Company’s initial provider of this service, although no such arrangement currently exists.  Packaging of early components will use vertical optical fiber attachment, as do vertical-cavity surface-emitting laser components.  POET expects to introduce a lower-cost packaging technology capitalizing on the in-plane emission and reception capability of POET that will be developed later.

 

Packaging of a POET component will involve attaching one die to a package, and attaching the fibers.  Since all elements of the design are incorporated on one die, there will be no electrical or optical connections to be made between die in the package.  Thus the packaging cost of POET components should be less than the costs of competing multiple-component products.

 

C.  Organizational Structure

 

The Company currently has two subsidiaries with the following corporate structure:

 

 


(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.

 

D.  Property, Plants and Equipment

 

The Company’s head Canadian office is located in a 1,400-sq. ft. rented office space in Toronto, Ontario, Canada.  The Company has its operational office in a 5,371-sq. ft. leased office space in Storrs-Mansfield, Connecticut, on the campus of the University of Connecticut.

 

The Company believes that its existing facilities are adequate to meet its needs for the foreseeable future.

 

ITEM 4A.                                       UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

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ITEM 5.                OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion should be read in conjunction with (i) the condensed unaudited financial statements of the Company for the three month periods ended September 30, 2013 and 2012, (ii) the condensed unaudited financial statements of the Company for the nine month periods ended September 30, 2013 and 2012, and (iii) the audited consolidated financial statements of the Company for the years ended December 31, 2012, 2011 and 2010 and the accompanying notes thereto included elsewhere in this registration statement.  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.”

 

A.  Operating Results

 

Overview

 

The Company is incorporated in the Province of Ontario. The Company is engaged in the development of its patented POET opto-electronic semiconductor technology.  Prior to June 2012, the Company also engaged in the design, development, marketing and sales of solar energy systems and equipment.

 

On June 11, 2012, Management committed to a plan to discontinue its solar related operations and to dispose of its solar related assets and liabilities. The decision was taken in line with the Company’s strategic focus on its key competencies, namely the development of the POET platform, which enables the monolithic fabrication of integrated circuits containing both electronic and optical elements.  Consequently, all saleable assets and liabilities relating to the solar operations were classified as “assets available for sale” or “disposal group liabilities.”

 

On December 12, 2012, the Company sold a portion of its assets available for sale to an arm’s length party for the purchase price of $1,000,000, subject to adjustment.  No gain or loss was recorded on the sale of the assets because current accounting standards mandate that assets be evaluated for impairment prior to discontinued operations treatment.

 

The remaining carrying amount of assets and liabilities allocated as “assets available for sale” and “disposal group liabilities” as of December 31, 2012 were as follows:

 

Solar installations

 

$

606,413

 

Assets available for sale

 

$

606,413

 

 

 

 

 

Deferred energy credit

 

$

526,518

 

Asset retirement obligation

 

$

79,895

 

Disposal group liabilities

 

$

606,413

 

 

The assets were sold in consideration of the assumption of the associated disposal group liabilities in April of 2013.  Ongoing revenue in the semiconductor segment, at this time, consists exclusively of grant funding.

 

Factors Affecting Our Results of Operations

 

Our net sales, revenues and expenses have changed dramatically over the past three years, due largely to our strategic decision to divest of our solar division and focus predominantly on our semiconductor division.  The decision to divest our solar division eliminated all of our traditional sources of revenue from product sales and licensing.  The divestiture also eliminated many of our traditional expenses in designing, manufacturing, installing and servicing solar panels and trackers.

 

Taxation

 

See “ITEM 10.E. Taxation.”

 

Critical Accounting Policies and Estimates

 

The Company prepares its audited consolidated financial statements in accordance with IFRS as issued by the IASB.  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

 

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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

 

The consolidated financial statements include the accounts of POET Technologies Inc. and its subsidiaries.  All intercompany balances and transactions are eliminated on consolidation.

 

Foreign Currency Translation

 

The consolidated financial statements are presented in U.S. dollars, which is the Company’s functional currency.

 

Items included in the financial statements of each of the Company’s subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”).  Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transaction.  Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities not denominated in the functional currency of an entity are recognized in the statement of operations and deficit.

 

Assets and liabilities of entities with functional currencies other than U.S. dollars are translated into the presentation currency at the year-end rates of exchange, and the results of their operations are translated at average rates of exchange for the year. The resulting translation adjustments are included in accumulated other comprehensive income in shareholders’ equity. Additionally, foreign exchange gains and losses related to certain intercompany loans that are permanent in nature are included in accumulated other comprehensive income.

 

Financial Instruments

 

Financial instruments are required to be classified as one of the following: held-to-maturity; loans and receivables; fair value through profit or loss; available-for-sale; or other financial liabilities.

 

The Company’s financial instruments include cash, accounts and other receivable, accounts payable and accrued liabilities.  The Company designated its cash as fair value through profit or loss, its accounts and other receivable as loans and receivables, and its accounts payable and accrued liabilities as other financial liabilities.

 

Fair value through profit or loss financial assets are measured at fair value with gains and losses recognized in operations.  Financial assets, loans and receivables and other financial liabilities are measured at amortized cost. Available-for-sale financial assets are measured at fair value with unrealized gains and losses recognized in other comprehensive income.

 

Fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.  The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received.  Subsequent to initial recognition, the fair value of a financial instrument that is quoted in active markets is based on the bid price for a financial asset held and the offer price for a financial liability.  When an independent price is not available, fair value is determined by using a valuation methodology which refers to observable market data. Such a valuation technique includes comparisons with a similar financial instrument where an observable market price exists, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.  If no reliable estimate can be made, the Company measures the financial instrument at cost less impairment as a last resort.

 

Marketable Securities

 

Marketable securities are classified as available for sale and are carried at fair value.  Unrealized holding gains and losses are recognized in other comprehensive income.

 

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 rates:

 

New

 

 

Machinery and equipment

 

Straight Line, 5 years

Office equipment

 

Straight Line, 5 years

 

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Patents and Licenses

 

Patents and licenses are recorded at cost and amortized on a straight line basis over their estimated useful lives.  Ongoing maintenance and patent registration costs are expensed as incurred.  The expiry of the patents and licenses range from six to 12 years.

 

Product Warranty

 

A product warranty is recognized when present obligations as a result of a sale of products will probably lead to an outflow of economic resources from the Company and the amounts can be estimated reliably.  The timing or the amount of the outflow may still be uncertain.

 

Product warranty is measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Product warranties are reviewed at each reporting date and adjusted to reflect the current best estimate. After a review, the Company increased its estimate to $100,000 during the second quarter of 2013.

 

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 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.  In 2013 the Company did not record an impairment loss on long-lived assets (for the years-ended December 31, 2012 - $414,570, December 31, 2011 - $1,501,692 and December 31, 2010 - $0).

 

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 which are expected to be in effect when the differences are expected to reverse.  Valuation allowances are provided to reduce deferred income tax assets to the amount expected to be realized.

 

Revenue Recognition

 

Revenue is comprised of research and development service revenue.  Revenue under research and development contracts is recognized as services are provided.  Research and development costs are recognized as incurred; any unbilled revenue is recognized as services are provided under the terms of the contract.  The Company, through ODIS, also provides services under “fixed price” and “cost plus” research and development contracts exclusively with the U.S. Department of Defense and NASA.

 

Interest Income

 

Interest income on cash and short-term investments classified as fair value through profit or loss is recognized as earned using the effective interest method.

 

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.

 

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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.

 

Selected Annual and Interim Data

 

The selected financial data of the Company for the years ended December 31, 2012, 2011 and 2010 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 registration statement.

 

The information contained in the selected financial data for the 2012, 2011 and 2010 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 selected financial data of the Company for the three and nine months ended September 30, 2013 was derived from the condensed unaudited interim financial statements of the Company.

 

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The following table relates to the operating results of the continuing semiconductor operations of the Company.  The subsequent table relates to the operating results of the discontinued solar sector.

 

Consolidated Statements of Operations

Under International Financial Reporting Standards

(US$)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Years Ended December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

84,628

 

$

112,070

 

$

261,984

 

$

112,070

 

$

238,806

 

$

755,422

 

$

1,107,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administration

 

2,013,975

 

698,005

 

5,280,254

 

2,002,694

 

3,092,504

 

2,713,781

 

1,373,691

 

Research and Development

 

352,486

 

240,494

 

921,951

 

764,108

 

1,029,254

 

1,327,057

 

1,021,256

 

Investment Income, including interest

 

 

 

 

 

 

(21,915

)

(36,689

)

Total Expenses

 

2,366,461

 

938,499

 

6,202,205

 

2,766,802

 

4,121,758

 

4,018,923

 

2,358,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss for the Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(2,281,833

)

(826,429

)

(5,940,221

)

(2,654,732

)

(3,882,952

)

(3,263,501

)

(1,250,404

)

Loss from discontinued operations, net of taxes

 

 

382,666

 

 

(4,474,695

)

(4,685,449

)

(11,898,225

)

(6,741,943

)

Net Loss

 

(2,281,833

)

(443,763

)

(5,940,221

)

(7,129,427

)

(8,568,401

)

(15,161,726

)

(7,992,347

)

Deficit, beginning of period

 

(62,836,640

)

(57,156,399

)

(59,178,252

)

(50,470,735

)

(50,470,735

)

(35,309,009

)

(27,316,662

)

Divestiture of non-controlling interest

 

 

 

 

 

(139,116

)

 

 

Deficit, end of period

 

$

(65,118,473

)

$

(57,600,162

)

$

(65,118,473

)

$

(57,600,162

)

$

(59,178,252

)

$

(50,470,735

)

$

(35,309,009

)

Basic and Diluted Loss Per Share:

 

$

(0.02

)

$

 

$

(0.05

)

$

(0.08

)

$

(0.08

)

$

(0.17

)

$

(0.11

)

Continuing Operations

 

$

(0.02

)

$

(0.01

)

$

(0.05

)

$

(0.03

)

$

(0.04

)

$

(0.04

)

$

(0.02

)

Discontinued Operations

 

$

 

$

0.01

 

$

 

$

(0.05

)

$

(0.04

)

$

(0.13

)

$

(0.09

)

 

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The following table relates exclusively to the operating results of the discontinued operations attributable to the divestiture of the Company’s solar sector.

 

Consolidated Statements of Discontinued Operations

Under International Financial Reporting Standards

(US$)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Years Ended December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

398,016

 

$

 

$

610,895

 

$

617,728

 

$

5,122,507

 

$

539,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

(258,156

)

 

1,117,282

 

1,117,282

 

8,916,603

 

434,627

 

General and Administration

 

 

319,307

 

 

3,024,857

 

3,380,117

 

5,551,286

 

4,026,491

 

Research and Development

 

 

(45,801

)

 

609,948

 

611,644

 

2,561,217

 

2,769,806

 

Foreign currency translation loss

 

 

 

 

 

 

 

10,231

 

Loss on divestiture of ASM

 

 

 

 

 

 

 

40,572

 

Investment Income, including interest

 

 

 

 

(2,791

)

(3,044

)

(8,374

)

 

Total Expenses

 

 

15,350

 

 

4,749,296

 

5,105,999

 

17,020,732

 

7,281,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Operating Income (Loss) from Discontinued Operations

 

 

382,666

 

 

(4,138,401

)

(4,488,271

)

(11,898,225

)

(6,741,943

)

Loss on divestiture of subsidiaries

 

 

 

 

(336,294

)

(197,178

)

 

 

Net Income (Loss) from Discontinued Operations

 

 

382,666

 

 

(4,474,695

)

(4,685,449

)

(11,898,225

)

(6,741,943

)

Attributable to non-controlling interest

 

 

 

 

 

 

107,662

 

29,825

 

Attributable to equity shareholders

 

$

 

$

382,666

 

$

 

$

(4,474,695

)

$

(4,685,449

)

$

(11,790,563

)

$

(6,712,118

)

 

Description of Certain Line Items

 

Revenue consisted of an SBIR contract from NASA which began in July 2012, continued through 2013 and extends into 2014.  The Company does not expect any new sources of revenue through the SBIR program.

 

Costs and expenses consist of general and administrative expenses as well as research and development costs.  General and administrative costs and expenses include salaries and wages, stock based compensation, professional fees, rent, transfer agent and listing fees, impairment of long lived assets, uncollectable accounts receivable and prepaid expenses.  Included in research and development expenditures are costs associated with developing and monetizing our POET platform.  Investment income consists of interest earned from funds deposited with financial institutions as well as gains (or losses) from the sale of investments.

 

Three Months Ended September 30, 2013 compared to Three Months Ended September 30, 2012

 

Revenue

 

In Q3 2013, the Company continued to earn SBIR revenues relating to a $750,000 SBIR contract granted to the Company in 2012.  This award was granted to the Company while the government was scaling back on SBIR contracts due to government cutbacks, and amounted to $84,628 in revenues for the three months ended September 2013, compared to $112,070 during the same period in 2012.  The Company continues to earn revenues on this award and expects the contract to be completed in early 2014.  The Company’s strategy, however, is to reduce its dependency on SBIR revenues by developing POET to the stage of monetizing it outside of its current uses by the government.

 

Costs and Expenses

 

During the quarter ended September 30, 2013, the Company reported a loss of $2,281,833 compared to a loss of $443,763 for the same period in 2012.

 

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The loss in Q3 2013 was driven primarily by the non-cash expense of stock options granted in Q3 2013 and the latter half of 2012 (as measured by Black-Scholes option calculator).  In Q3 2012, the Company reported a non-cash stock option expense of $1,332,554 relating to granted stock options.  This value compares to $379,243 in stock option valuation expense for the same period in 2012.  During the period, the Company granted 3,380,000 new stock options to officers, directors and consultants of the Company at an average price of $0.45.  Due to the timing of the stock option grants and the price at which the stock options are granted, the valuation may have a substantial impact on the Company’s profitability.  This non-cash expense is considered an integral part of the Company employing and maintaining highly qualified and competent personnel to reach its goals.

 

The Company had increases in all major categories of corporate expenditure during Q3 2013 as compared to Q3 2012.  Research and development costs increased by $111,992, increasing from $240,494 in Q3 2012 to $352,486 in Q3 2013.  The increase is consistent with the Company’s goal to reach milestones which will in-turn drive monetization of POET.  The increased research and development costs and the reprioritization of the Company’s milestones contributed to the Company achieving a certain milestone.  The new milestone is the integration of the complementary inverter, the basis of all on-chip logic.  The Company successfully demonstrated complementary heterostructure field effect transistor (“HFET”) based inverter operation using the POET process.  The Company is now focused on two other milestones (Switching Laser Demonstration at POET’s R&D Labs and Optical Thyristor-Based Infrared Detector Array Fabrication and Validation), both of which are progressing without technical issues.

 

Depreciation and amortization increased by $21,220, increasing from $3,258 in Q3 2012 to $24,478 in Q3 2013.  This expense will continue to increase as the Company had committed to add approximately $900,000 of new equipment to the lab beginning in February of 2013.  The new equipment provides the Company with a unique opportunity to advance the POET process within the confines of its own lab and advance its timelines toward monetization.  The equipment was delivered and installed over a 5 month period commencing in late Q2 2013 and installation and certification was completed in Q4 2013.

 

Professional fees continue to increase over 2012.  In Q3 2013, professional fees were $92,176 compared to the Q3 2012 amount of $17,650, an increase of $74,526.  The Company made numerous changes to its corporate structure and is continuing to make changes in order to better position the Company to quickly execute on the best opportunities for monetization.  These structural changes include: changing its name, managing its patent registrations, expanding its shareholder base and examining other non-Canadian listing opportunities.

 

General and administrative expenses in Q3 2013, although higher than Q3 2012 by $266,913, remain consistent from quarter to quarter in 2013.  The increase over Q3 2012 was driven primarily by increases in management fees and investor relations of $121,750.  Other increases grouped with general and administrative expenses included travel ($13,500), payroll costs ($51,000) and product warranty ($45,000). As previously disclosed, the increase management fees have yielded immediate effects on the Company’s overall operations and direction.

 

Discontinued Operations

 

The divestiture of the Company’s solar division was completed prior to the three month period ended September 30, 2013.  For a discussion of the solar division divestiture, see the yearly comparison between 2012 and 2011 below.

 

Nine Months Ended September 30, 2013 compared to Nine Months Ended September 30, 2012

 

Revenue

 

The Company earned $261,984 during the nine months ended September 30, 2013 in SBIR revenue relating to a $750,000 SBIR contract granted to the Company in 2012.  The Government’s interest the Company’s technology and its historical success helped to secure the $750,000 award while it was scaling back on SBIR contracts due to government cutbacks.  During the same period in 2012, the Company earned $112,070 representing the beginning of the $750,000 SBIR.  The Company’s strategy, however, is to reduce its dependency on SBIR by developing POET to the stage of monetizing it outside of its current uses by the government.

 

Costs and Expenses

 

General and administrative expenses in 2013 increased by $962,000 over the same period in 2012.  The increase was primarily driven by increases in: management fees and investor relations of $358,000; maintenance and insurance costs of $125,000; travel of $35,000; director fees, salaries and benefits of $330,000; listing and regulatory fees of $15,000 and product warranty expense of $119,000.

 

The increases in the above expenses are consistent with the Company’s strategy to continue to drive POET to monetization.  The new management team was successful in attracting high profile members to the Board of Directors and renewing investor confidence which allowed the Company to raise over CA$12.58 million (US$12.62 million) dollars in new capital since June 2012.  Additionally, the leadership of the new management team contributed to divesting the Company of its under-performing solar division which had

 

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Table of Contents

 

contributed $4,685,449 to the net loss in 2012.  The current level of management fees and investor relation expenditure is expected to remain for the foreseeable future as the team continues to drive the POET monetization.  Other expenses such as regulatory fees, listing fees, office expenses, travel expenses and other ancillary expenses naturally increased as these costs are considered integral to raising capital.

 

The Company continues to invest in highly technical staff to expedite the development and monetization of POET.  As a result, the Company had an additional $247,000 of salaries and benefits for the nine month period when compared to the same period in 2012.  This investment has already contributed to the Company reaching important POET milestones in the Company’s path to monetization.  The Company is also close to completing certain other POET milestones which are proceeding without technical difficulties.

 

Non-cash stock option expense was $3,060,448 in the nine months ended September 30, 2013 compared to $1,052,709 in 2012, an increase of $2,007,739.  The Company granted 5,630,000 stock options in 2013 compared to 8,280,000 stock options in 2012.  The expensing of vested stock options granted in 2012 had a significant impact on the expense in the current period.  The periodic granting of stock options to key personnel is considered to be invaluable to maintaining such key employees and consultants.

 

Professional fees were $417,577 in the nine months ended September 30, 2013 compared to $143,331 during the same period in 2012.  Professional fees had increased by $274,246 due to the professional services required by both accountants and lawyers in dealing with the divestiture of the solar division which included the sale of assets, termination of leases and orderly termination of redundant employees.  Additionally, the Company made numerous changes to its corporate structure and is continuing to make changes in order to better position the Company to quickly execute on the best opportunities for monetization.  These structural changes include: changing its name, managing its patent registrations, expanding its shareholder base and examining other non-Canadian listing opportunities.  Additional legal and other professional costs were incurred to execute on these necessary changes.

 

Discontinued Operations

 

The divestiture of the Company’s solar division was completed prior to the nine month period ended September 30, 2013.  For a discussion of the solar division divestiture, see the yearly comparison between 2012 and 2011 below.

 

Year Ended December 31, 2012 compared to Year Ended December 31, 2011

 

Revenue

 

Year over year, revenue within the semiconductor segment contracted by 68% from $755,422 in 2011 to $238,806 in 2012.  The significant downturn is a result of cutbacks in the SBIR grants funding POET’s development activities.  The only billings in 2012 are associated with a new grant from NASA that began in July 2012 and is continuing into 2013.

 

Costs and Expenses

 

The Company decreased its research and development expenses by 22%, or $297,803, from $1,327,057 in 2011 to $1,029,254 in 2012.  The reduction was a result of reduced subcontracting activities, leaner operations and research and development activities focused only on the goal of monetizing the POET platform in the near term.

 

The Company’s salaries and wages increased from $437,334 in 2011 to $725,192 in 2012.  Additional corporate level management was the big driver of this increased expense.  The addition of this expense had an immediate impact as the Company was able to use this new expertise to raise needed capital, remove redundant and expensive human resources and discontinue the solar division which was adding negative pressure on the Company’s ultimate goal of developing the POET platform.

 

General and administrative expenses increased by $378,723 from $2,713,781 in 2011 to $3,092,504 in 2012.  This increase is due to additional corporate level management, as discussed above, and some one-time corporate listing and regulatory fees from the TSXV and our transfer agent associated with multiple financings closed in the year, disclosure obligations resulting from our change in business focus and fees associated with securing a revolving line of credit.  Additionally, the Company was obligated to pay severance packages to employees who were considered redundant as the Company discontinued its solar operations.

 

Discontinued Operations

 

During the year ended December 31, 2012, the Company made a strategic decision to discontinue the solar division.  The solar division had experienced ongoing losses and required substantial investment with unlikely prospects for recovery.  After careful review and analysis, the Board directed management to restructure the Company, including identifying and discontinuing redundant positions, selling solar related assets, divesting solar related minority interests and shutting down the solar division.  The Company had a loss from discontinued operations of $4,685,449 in 2012 compared to $11,898,225 in 2011.  The loss from discontinued

 

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Table of Contents

 

operations included: (i) an inventory write down of $1,143,011 in 2012 compared to $3,570,406 in 2011; (ii) impairment of long lived assets of $414,570 in 2012 compared to $1,501,692 in 2011; (iii) uncollectible accounts receivable of $195,774 in 2012 compared to $0 in 2011; and (iv) a write down of prepaid expenses of $127,602 in 2012 compared to $0 in 2011.  As mentioned above, included in the loss from discontinued operations is a loss incurred in divesting its investment in Opel Solar Asia Company Limited of $197,178.

 

Year Ended December 31, 2011 compared to Year Ended December 31, 2010

 

Revenue

 

In 2010, the Company was awarded $1,750,000 in new SBIR contracts.  The Company recognized $1,107,854 as revenue in 2010.  The remainder of this award carried over into 2011 where, along with other minor research and development revenue, the Company earned the remaining $642,146.

 

Costs and Expenses

 

Research and development costs increased by approximately $306,000 over 2010, increasing from approximately $1,021,000 in 2010 to approximately $1,327,000 in 2011.  The Company was awarded a $1,750,000 SBIR contract in 2010 which continued into 2011.  In order to service this new SBIR contract through 2011, the Company increased its research and development costs.  The increased cost was anticipated due to the new and increased SBIR revenue.

 

The twelve months ended December 31, 2011 included the non-cash expense of $1,803,012 related to stock options, some of which were granted in a prior year.  This was higher by $1,211,153 than the 2010 expense as more options were granted at higher market prices.  The Company believes it is necessary to grant incentive stock options to attract and hold highly skilled employees and directors.

 

Professional fees were higher in 2011 than 2010 by approximately $102,000.  The expense was approximately $98,000 in 2010 and increased to approximately $200,000 in 2011.  The increase was attributable to legal fees associated with contract review and investment banking activities.  In addition, the Company was reviewing and preparing for its IFRS conversion.  As a result, the Company contracted with third parties to assist and consult on the conversion process.

 

The Company’s stock option compensation increased from $591,859 in 2010 to $1,803,012 in 2011.  The increase of $1,211,153 was a result of the expense associated with stock options granted and/or vested in 2011.

 

Discontinued Operations

 

For the twelve months ended December 31, 2011, revenue increased by $4,582,723 over the full year 2010, reflecting an increase in U.S. sales of solar products subcontracted installation of the Company’s products.  The solar product revenues were associated with seven different installations in 2011.  Gross margin for the year of 2011 was approximately 19%, excluding inventory write-offs.

 

In the twelve months ended December 31, 2011, cost of goods sold was higher due to one time inventory adjustments for old and slow moving solar materials of $3,570,406.  The rapidly falling pricing of silicon solar panels from China made it extremely difficult to compete in the solar panel market.  While the U.S. government stepped in to review claims of unfair trade practices, the Company’s product pricing was above market and thus not competitive.  The Company decided during this period not to market its HCPV solar panels while the marketplace remained in turmoil.

 

In 2011, the Company decreased its research and development expenses by $208,589 from $2,769,806 in 2010 to $2,561,217 in 2011.

 

Recent IFRS Accounting Pronouncements

 

Financial Instruments

 

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.  For financial liabilities, IFRS 9 requires an entity choosing to measure a liability at fair value to present the portion of the change in its fair value due to change in the entity’s own credit risk in the other comprehensive income rather than in the statement of profit or loss.  The new standard applies to annual years beginning on or after January 1, 2015.  There is no impact to the financial statements as a result of adopting IFRS 9.

 

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Presentation of Items of Other Comprehensive Income (“OCI”)

 

IAS 1, Presentation of Financial Statements, is amended to change the disclosure of items presented in OCI, including a requirement to separate items presented in OCI into two groups based on whether or not they may be recycled to profit or loss in the future.  This amendment is effective for years beginning on or after July 1, 2012.  There was no impact to the financial statements as a result of adopting IAS 1.

 

Disclosure of Interests in Other Entities

 

IFRS 12, Disclosure of Interests in Other Entities, requires disclosures relating to an entity’s interests in subsidiaries.  The Company will start the application of IFRS 12 in the financial statements effective from January 1, 2013.  There was no impact to the financial statements as a result of adopting IFRS 12.

 

Fair Value Measurement

 

IFRS 13, Fair Value Measurements, provides a single source of guidance on how to measure fair value where its use is already required or permitted by other IFRS and enhances disclosure requirements for information about fair value measurements.  The new standard is effective for years beginning on or after January 1, 2013.  There was no impact to the financial statements as a result of adopting IFRS 13.

 

Consolidated Financial Statements

 

IFRS 10, Consolidated Financial Statements, replaces SIC 12, Consolidation — Special Purpose Entities, and the guidance on control and consolidation in IAS 27, Consolidated and Separate Financial Statements.  IFRS 10 includes a new definition of control that determines which entities are consolidated, and requires control of an investee to be reassessed when the facts and circumstances indicate that there have been changes to one or more of the criteria for determining control.  This standard is effective for annual years beginning on or after January 1, 2013.  There is no impact to the financial statements as a result of adopting IFRS 10.

 

The Company has considered all other recently issued accounting pronouncements and does not believe the adopting of any other such pronouncements will have a material impact on its consolidated financial statements.

 

B.  Liquidity and Capital Resources

 

The Company had working capital of $4,368,013 on September 30, 2013 compared to $1,433,392 on December 31, 2012.  The increase and maintenance of the high working capital was due to the CA$7.2 million of financing completed on February 14, 2013 in addition to the CA$5.4 million raised in the second half of 2012.  The Company used a portion of the funds raised in 2012 to settle the high accounts payable balances and the credit facility that were carried for most of 2012.  Additionally, $900,236 has been spent in procuring vital machinery and equipment.

 

The Company’s balance sheet as of September 30, 2013 has assets with a book value of $5,648,414 (December 31, 2012 - $2,367,260) of which 84% (December 31, 2012 - 97%) or $4,717,827 (December 31, 2012 - $2,297,607) is current and primarily cash and accounts receivable of $4,717,417 (December 31, 2012 - $1,532,511).  This highly liquid and unencumbered balance sheet has permitted corporate activity already undertaken and further expected in 2013, including but not limited to achieving technical and operational milestones, acquiring new and more modern semi-conductor fabrication equipment and engaging critical commercial and technical staff.

 

The Company is positioned with sufficient liquidity to support its operations, technological programs and fixed asset purchases over the next nine to 12 months.  Although the Company has been successful in obtaining such financing in the past, there is no assurance that it will be able to do so in the future.

 

The Company is executing its plan of monetizing POET while simultaneously improving shareholder value.  The focus therefore is to remain sufficiently capitalized through lean operations.

 

In April, 2012, the Company entered into a credit agreement for a revolving credit facility of up to $5,000,000 with TCA Global Credit Master Fund, LP.  This credit facility was amended to be an $850,000 term loan in July of 2012 and in September 2012, the outstanding loan balance and all accrued interest was paid in full and the facility was terminated.

 

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Table of Contents

 

Operating Activities

 

The Company has experienced net operating losses in 2012, 2011 and 2010 of $8,568,401, $15,161,726 and $7,992,347, respectively, driven primarily from discontinued operations as well as general administration and research and development costs.  While losses due to general costs and expenses were similar between the two years, $4,121,758 in 2012 and $4,018,923 in 2011, losses due to discontinued operations were much lower in 2012 than in 2011, at $4,685,449 and $11,898,225, respectively.  The losses due to discontinued operations reflect our shift in focus from our solar division to the semiconductor division.  The losses in 2010 were significantly less than 2011.  The general costs and expenses in 2010 were $2,358,258 and the losses from discontinued operations being $6,741,943.  Losses from continued operations and discontinued operations in 2010 totaled $7,992,347 as compared to $15,161,726 in 2011.  The SBIR contract revenue of $1,107,854 contributed to the more favorable performance in 2010 as compared to 2011. General and administrative expenses in 2010 were also lower than 2011, primarily driven by non-cash stock based compensation which was $591,859 in 2010 as compared to $1,803,012 in 2011.

 

The Company had a net negative cash flow of $2,021,568 from its operating activities in 2012 versus $1,456,132 in 2011 and $654,352 in 2010.  One cause of the increase in the use of cash was in salaries and wages which saw a significant increase of $173,390.  Salaries and wages totaled $437,334 in 2012 as compared to $263,944 in 2011.  The increase was a result of the Company adding personnel in an effort to capitalize on the interest shown in POET.  Monetizing POET is the Company’s goal and adding sales and marketing staff to drive the monetizing process is an inevitable part of the Company achieving this goal.  The $1,107,854 in SBIR revenue in 2010 contributed to the more favorable cash flow position in 2010 as compared to 2011.  Additionally, the Company’s operations specific to POET was leaner in 2010 as the Company was focused on finalizing the development of POET.  The advanced development of the POET platform caused the Company to increase its general and administrative costs in 2011 and 2012 which was necessary to execute its strategy to monetize POET.

 

Revenue from SBIR grants decreased each year starting at 31% from $1,107,854 in 2010 to $755,422 in 2011, and further by 68% from $755,422 in 2011 to $238,806 in 2012.  The significant steady downturn was a result of cutbacks in the SBIR grants funding the Company’s development activities for the U.S. government.  The only billings in 2012 were associated with a new grant from NASA that began in July 2012 and continued into 2013, in contrast to 2010 and 2011 where multiple grants were ongoing.

 

Investing Activities

 

The Company is currently not involved in any investing activity other than the purchase of property and equipment for use in the development of its POET technology.  When investing, the Company has a strict investment policy which includes investing any surplus capital only in highly liquid, highly rated financial instruments.

 

The Company had a loss from discontinued operations of $4,685,449 in 2012, $11,898,225 in 2011 and $6,741,943 in 2010.  The net negative cash flow from the loss from discontinued operations in 2012 was $3,728,678 versus $6,519,756 in 2011 and $5,423,273 in 2010.  By divesting of the solar division, the Company reduced its (i) research and development expenses by approximately $2,500,000 per year, (ii) professional fees by $300,000, (iii) wages and salaries by $1,400,000 per year, (iv) rent by $200,000 per year, (v) sales, marketing and advertising by $300,000 per year and (vi) general and administrative expenses by $300,000 per year.

 

While divesting of the solar division resulted in lost revenue of up to $5,000,000 per year, the inconsistency and uncertainty of the revenue along with poor market conditions pressured the financial resources of the Company.  The Company had either low or negative gross margins which were a result of either obsolete inventory that was written off ($35,035 in 2010, $4,125,134 in 2011 and $1,143,011 in 2012) or expense product that was sold at a substantial discount.

 

During 2012, the Company made capital divestitures amounting to $1,000,000.  This divestiture represents the sale of substantially all solar division assets in an asset sale in December of 2012.  There were no capital divestitures in 2011 or 2010.

 

Financing Activities

 

During 2012, the Company completed private placement financing rounds for gross proceeds aggregating to CA$5,384,870 (US$5,428,644).  IBK Capital Corp. acted as agent in respect of the issuance and sale of 23,412,479 units, at a price of CA$0.23 (US$0.225) per unit.  Each unit consisted 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 CA$0.35 (US$0.34) per share for a period of three years.  The agent received cash commissions in the aggregate of CA$368,941 (US$371,862) and 2,341,247 compensation warrants in connection with these private placements.  Each compensation warrant entitles the holder to purchase one common share of the Company at CA$0.23 (US$0.225) per share for a period of four years.  Additional issue costs amounted to CA$132,144 (US$131,103).  The proceeds from this offering were used to repay all debt and continue research and development efforts.

 

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On February 14, 2013, the Company completed another private placement financing round for gross proceeds of CA$7,200,000 (US$7,189,200).  The Company issued 14,400,000 units, at a price of CA$0.50 (US$0.499) per unit.  Each unit consisted 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 CA$0.75 (US$0.748) per share for a period of two years.  The agent, IBK Capital Corp., received cash commissions in the aggregate of CA$504,000 (US$503,224) and 1,440,000 compensation warrants in connection with the private placement.  Each compensation warrant entitles the holder to purchase one common share of the Company at CA$0.50 (US$0.499) per share for a period of three years.  Additional issue costs amounted to CA$26,017 (US$25,998).

 

The Company will continue to seek additional funding, primarily by way of equity offerings, to carry out its business plan and to minimize risks of its operations.  The market for equity financing for companies such as us is challenging, however, and there can be no assurance that additional funding by way of equity financing will be available, or if available, on terms acceptable to the Company.  The failure of the Company to obtain additional funding on a timely basis may result in the Company reducing or delaying one or more of its planned research, development and marketing programs and reducing related personnel, any of which could impair the current and future value of the business. Any additional equity financing, if secured, may result in dilution to the existing shareholders at the time of such financing.  The Company may also seek additional funding from other sources, such as government grants, technology licensing, and strategic alliances, which, if obtained, may reduce the Company’s interest in its projects or products.  There can be no assurance, however, that any alternative sources of funding will be available.

 

Capital Expenditures

 

The Company is currently planning to spend a total of approximately $2,000,000 during the 2014 fiscal year primarily on research and development equipment and technology in connection with the development of our POET platform.  The money will go towards general costs as well as research and development and will be drawn from internal cash resources.  In the first nine months of fiscal year 2013, the Company spent approximately $900,000 on capital equipment in order to complete and increase the efficiency of the POET process.

 

Our capital expenditures amounted to $28,352, $1,647 and $0 in 2012, 2011 and 2010, respectively.  In 2011 and 2010, capital expenditures primarily related to discontinued operations.  Our capital expenditures in 2012 included lab equipment.  In the past, our capital expenditures consisted principally of purchases of various pieces of equipment.

 

C.  Research and Development

 

We are developing our proprietary POET platform to address the emerging needs of enhanced speed, size, energy and cost efficiency for semiconductor devices as compared to the current silicon-based technology.  We are developing GaAs-based semiconductor technologies that have several potential market applications including: infrared sensor arrays for Homeland Security monitoring and imaging applications; higher efficiency computing systems; and telecom for fiber to the home.

 

Internally generated research costs, including the costs of developing intellectual property and registering 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 $1,640,898, $3,888,274 and $3,791,062 of research and development expenses across all sectors in 2012, 2011 and 2010, respectively.  Of these totals, however, $611,644, $2,561,217 and $2,769,806 of the 2012, 2011 and 2010 totals, respectively, were incurred by the Company’s discontinued solar business, while $1,029,254, $1,327,057 and $1,021,256 were incurred in 2012, 2011 and 2010, respectively, by continuing operations in the semiconductor business.  In the three and nine months ended September 30, 2013, we incurred research and development expenses of $352,486 and $921,951, respectively, as compared to $240,494 and $764,108 in the three and nine months ended September 30, 2012, respectively.

 

Research and development expenditures in the semiconductor business include costs associate with salaries, material costs, license fees, patents, consulting services and third-party contract manufacturing.

 

D.  Trend Information

 

Other than as 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.

 

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F.  Tabular Disclosures of Contractual Obligations

 

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2013:

 

POET Technologies Inc.

 

 

 

Payments due by period (US$)

 

 

 

Total

 

< 1 year

 

1-3 years

 

3-5 years

 

> 5 years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Obligations(1)

 

$

161,801

 

$

128,904

 

$

32,897

 

$

 

$

 

Operating Support Obligations(2)

 

50,000

 

50,000

 

 

 

 

Total

 

$

211,801

 

$

178,904

 

$

32,897

 

$

 

$

 

 


(1)         Office and research facilities on the campus of the University of Connecticut.

(2)         Support services from the University of Connecticut.

 

G.  Safe Harbor

 

See “Forward Looking Statements” on page 2 of this Registration Statement.

 

ITEM 6.                                                DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.  Directors and Senior Management

 

The following table sets forth information regarding our Directors and Officers as of the date of this Registration Statement.

 

Name

 

Positions

 

Age

 

Date First Elected or
Appointed a Director or
Officer

 

 

 

 

 

 

 

Leon M. Pierhal

 

President, Chief Executive Officer and Director

 

67

 

September 26, 2006(5)

Kevin Barnes

 

Treasurer and Chief Financial Officer

 

42

 

December 1, 2012

Stephane Gagnon(4)

 

Senior Vice President of Operations

 

43

 

November 14, 2013

Christopher Lee Shepherd

 

Vice President of Technology

 

45

 

November 1, 2012

Mark Benadiba

 

Executive Chairman and Director

 

59

 

June 8, 2012

Peter Copetti (1)(2)(3)(4)

 

Executive Director

 

49

 

June 8, 2012

Dr. Samuel Peralta (1)(2)(3)

 

Director

 

51

 

September 26, 2006(5)(6)

John F. O’Donnell (2)(3)

 

Director

 

67

 

February 14, 2012

Chris Tsiofas (1)

 

Audit Committee Chair and Director

 

46

 

August 21, 2012

Dr. Adam Chowaniec(4)

 

Director

 

63

 

April 2, 2013

Dr. Geoff Taylor(4)

 

Director and Chief Scientist

 

69

 

April 2, 2013

 


(1)         Member of Audit Committee

(2)         Member of Compensation Committee

(3)         Member of Corporate Governance and Nominating Committee

(4)         Member of Special Strategic Committee or Special Strategic Committee Advisory Board

(5)         Notwithstanding the date of election, the elected Director took office on January 30, 2007 following the Continuance of the Company into New Brunswick as was contemplated at the time of election

(6)         Dr. Peralta resigned as a director on February 8, 2012 and rejoined the Board on June 8, 2012

 

Mr. Leon M. Pierhal has been the President and Chief Executive Officer of the Company since 2010.  He has also been President of ODIS Inc. since April of 2008 and was President and Chief Executive Officer of OPEL Solar, Inc. from June of 2003 to April of 2008.  Including his time with the Company, Mr. Pierhal has over forty years of management experience in semiconductor, telecommunications and computing technology development companies, including Amdahl Corporation, Intel Corporation, Masstor Systems Corporation and Jupiter Technology.  Mr. Pierhal has assisted a significant number of companies with capital formation and re-capitalization from private and public sources.  He contributed exceptional strategic and tactical vision, strong team development and leadership skills.  In addition, Mr. Pierhal has impressive experience in the area of technology startup company development and previously served as an outside board member to several such firms.

 

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Mr. Kevin Barnes has been serving as Chief Financial Officer since December of 2012 and previously served as Controller beginning in 2008.  Mr. Barnes is a member of the Institute of the Certified Management Accountants of Australia and an Accredited Chartered Secretary.  Mr. Barnes has served as a Corporate Controller and Business Performance Manager for EC English, one of the world’s largest language training institutes, since 2006.  Mr. Barnes has also served 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, a Company specializing in financial reporting for publicly traded Companies.

 

Mr. Stephane Gagnon has been the Senior Vice-President of Operations of the Company since November 14, 2013.  He has a Bachelor of Science in Computer Engineering from Laval University. He has over 20 years of experience in the semiconductor, telecommunication and processor industry. His last role was with IDT (Integrated Device Technology) that had acquired Tundra Semiconductor in 2000, where he spent 13 years. His role at IDT was Senior Director of Product Management where he drove business strategy for the RapidIO® switching product line with primary responsibilities that included strategy and product marketing, business development, and management of international customer and partner relationships. Mr. Gagnon became involved with the RapidIO Trade Association (“RTA”) Technical Working Group 13 years ago and held the position of Chairman of the RTA Steering Committee for over 3 years ending in October 2013.  Prior to his role at IDT and Tundra, Mr. Gagnon held positions at Motorola and Nortel Networks.

 

Mr. Christopher Lee Shepherd has been the Vice President of Technology of the Company since November of 2012.  He has a Bachelor of Science (Honours) in Applied Physics from Carleton University.  He has 27 years of experience in business, technical, and military leadership roles.  He has spent the last 18 years in the Telecommunications/Information Technology industry serving in technical, management, architecture and entrepreneurial roles of ever-increasing scope and responsibility.  Mr. Shepherd previously founded Niterion Corporation and served as Chief Technology Officer at Niterion Corporation from 2001 to 2009.  In 2009, he founded IT Millwrights Corporation and has served as its Chief Executive Officer since.  He has also served as Designer, Team Leader & Architect with Bell-Northern Research and Nortel.

 

Mr. Mark Benadiba currently serves on the board of directors of Cott Corp. (NYSE: COT) (TSX: BCB), where he also served as Vice President of Sales from 1996 through June of 2006. Mr. Benadiba was involved in helping Cott Corp. shift its strategy to refocus on its core business activities in late 2008.  He has extensive experience in mergers, acquisitions, divestitures, strategic alliances and negotiating licensing agreements.

 

Mr. Peter Copetti has over 25 years of capital markets and management experience in key leadership roles.  He has been the chief architect and strategist of the Company’s transformation since joining the Company in June 2012.  Mr. Copetti was personally responsible for the restructuring of both secured and unsecured debt, negotiated new equity infusion into the company, and re-focused the company on its original technical vision of monolithic optoelectronic integration, leading to the Company’s resurgence as a leading platform innovator in the semiconductor industry.  Prior to joining the Company, Mr. Copetti was COO of Cache Metal Inc., a Toronto based precious metals company and President, from 2011 to 2012, and Chief Executive Officer of Larrge Global Capital Inc., a Canadian private company involved in trading securities, commodities, real estate and construction, from 2008 to 2011.

 

Dr. Samuel Peralta has a Ph.D. in physics from the University of Wales with business certificates from Rotman School of Management and the Schulich School of Business.  He has been on the Board of Directors since September of 2006 with the exception of the period from February to June of 2012, when he resigned and then was reelected.  Dr. Peralta was the President of Envergence Inc. from 2004 to 2007.  He brings technical continuity to the Company’s Board, with industry-recognized expertise in communications, inspection and robotics, mobile software and hardware, and business transformation.  Dr. Peralta is also currently business director for Kinectrics Inc. and sits on the board of directors of Windrift Bay Limited.

 

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 Pasternack 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 a director of Nerium Biotechnology Inc.

 

Mr. Chris Tsiofas 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 since August of 2012.  He is a partner with the Toronto Chartered Accountancy firm of Myers Tsiofas Norheim LLP, a position he has held since 1994.  Mr. Tsiofas has extensive experience as a founder, owner and manager of various private enterprises over the years.

 

Dr. Adam Chowaniec was previously the founding Chief Executive Officer and Chairman of Tundra Semiconductor (acquired by Integrated Device Technology) from 1995 to 2009, Chairman of Zarlink (acquired by Microsemi) from 2007 to 2011, and Chairman of Bel Air Networks (acquired by Ericsson) from 2002 to 2012.  Previously, he was President and Chief Executive Officer of Calmos

 

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Systems, acquired by Newbridge Networks and renamed Newbridge Microsystems, where he served as President and as a Vice President of Newbridge Networks.  He has also served on the boards of SiberCore Technologies, Liquid Computing, Microbridge, GEAC and Amiga.  He has served on the boards of Solantro Semiconductor since 2010.  Dr. Chowaniec holds an M.Sc. in Electrical Engineering from Queen’s University, as well as both a B.Sc. and a Ph.D. from the University of Sheffield.  In 2010, he was recognized by the California Computer Museum as one of the founding fathers of the personal computer.

 

Dr. Geoff Taylor is Chief Scientist at the Company and has led development of the POET platform since 2000, directing a focused team at the ODIS subsidiary of the Company.  Dr. Taylor possesses an extraordinary technical background made-up of 30 years of design and development experience in electronic and optical device physics, circuit design, opto-electronic technology, materials and applications.  He is concurrently a Professor of Electrical Engineering and Photonics at the University of Connecticut, a position he has held since 1994, and is responsible for ODIS’ development efforts at the GaAs growth and fabrication facility.  With over 150 papers in the world’s most respected journals, and dozens of patents, Dr. Taylor is widely regarded as the world’s leading authority on GaAs solid-state physics, III-V opto-technology, as well as the pioneer in the development of monolithic integrated opto-electronic circuits.  Dr. Taylor has a B.Sc from Queen’s University and an M.A.Sc. and Ph.D. from the University of Toronto.

 

The Directors have served in their respective capacities since their election and/or appointment, unless otherwise noted above, 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 Amalgamation.

 

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, except that in connection with the entry into of a financing arrangement between the Company and IBK Capital Corporation in 2012, Messrs. Benadiba, Copetti and Peralta were appointed Directors of the Company on June 8, 2012.

 

B.  Compensation

 

Fixed Stock Option Plan

 

On September 21, 2007, the Directors approved a new fixed 20% vesting Stock Option Plan (the “Plan”) to replace the Rolling Stock Option Plan which 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.

 

In December 2008, the TSXV changed its policy relating to stock option plans.  Among the changes implemented by the TSXV were the following: (i) extending the maximum term of options from 5 years to 10 years; (ii) eliminating the hold period for options granted at or above market price; (iii) allowing, with disinterested shareholders’ approval, the granting to any one optionee, within a 12 month period, of options to purchase an aggregate number of shares exceeding 5% of the issued shares of the Company, calculated at the date the option(s) is(are) granted; and (iv) removing the mandated vesting provisions, except for options granted to consultants performing “Investor Relations Activities.”

 

On May 21, 2009, the Directors amended the Plan in order to conform with changes to the TSXV policy described above and to clarify the wording of some sections of the Plan.  At the same time, the Maximum Number was increased from 11,930,000 to 12,115,000, being a net increase of 185,000.  The amended Plan was approved by the disinterested shareholders of the Company at the Shareholders’ Meeting of June 17, 2009 and accepted for filing by the TSXV.

 

On May 11, 2011, the Directors amended the Plan to increase the Maximum Number to 18,472,000.  No other change other than the increase in the Maximum Number was made to the Plan, except for inserting the new proposed name of the Company.  The amended Plan was approved by the disinterested shareholders of the Company at the Shareholders’ meeting of June 21, 2011 and accepted for filing by the TSXV.

 

On February 20, 2013, the Directors amended the Plan to increase the Maximum Number to 26,475,000, a net increase of 8,003,000.  No other change was made to the Plan other than the increase in the Maximum Number, a change in the form of option agreement and some minor housekeeping corrections.  The amended Plan was approved by the disinterested shareholders of the Company at the Shareholders’ Meeting of July 21, 2013 and accepted for filing by the TSXV.

 

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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 26,475,000.  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.  The term of each option grant shall be stated in the option agreement, provided that the term shall not exceed 10 years from the date of the grant.  Prior to May 21, 2009, the term was limited to 5 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; provided, however, that 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.  Prior to May 21, 2009, vesting was mandatory for all option grants.

 

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

 

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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) (refer to “ITEM 7. Major Shareholders and Related Party Transactions” for information regarding indirect payments) to all of our Officers during fiscal year 2012 was $452,615.

 

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 NEOs’ compensation, the Compensation Committee receives input and guidance from the Executive Chairman of the Board, the Executive Director and the Chief Executive Officer of the Company.

 

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.  Additionally, the variable pay compensation plan is a retention tool, used to help maintain a low executive attrition.  Previously, the pre-established, company-wide quantitative target(s) used to determine variable pay compensation plans are generally set at the beginning of each fiscal year, and awards under this plan, if any, were made annually by way of cash payments and/or stock options grants in the first quarter of the next fiscal year.  With the financial difficulties encountered in 2011-12, the many changes in management during 2012 and the divesture of the solar business, the Company set aside the previously established procedures for determining variable pay compensation and has not yet put in place new procedures.  Stock options are a very important element of the variable pay compensation and do not require cash disbursement from the Company.  Stock options are also generally awarded to officers and consultants at the time of hire and are used as a recruitment tool to attract highly qualified and experienced executives and consultants to the Company.  Stock options are also granted at other times during the year.  As the Company is still continuing to develop its POET 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 Board of Directors has to consider 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.  Also the granting of stock options aligns officers’ rewards with an increase in shareholder value over the 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 the value of the shareholders’ investments.

 

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The following table sets forth all annual and long term compensation for services in all capacities to the Company for fiscal year 2012 of the Company.

 

 

 

 

 

 

 

 

 

 

 

Non-Equity Incentive

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-

 

 

 

 

 

Plan Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

Based

 

Options-Based
Awards(1)(2)

 

 

 

Long-

 

 

 

All

 

 

 

 

 

 

 

Salary

 

Awards

 

 

Annual

 

term

 

Pension

 

Other

 

Total

 

NEO Name and
Principal Position

 

Fiscal
Year

 

(2)
(US$)

 

(1)(2)
(US$)

 

No. of
Shares

 

(US$)

 

Incentive
Plans

 

Incentive
Plans

 

Value
(US$)

 

Comp.
(US$)

 

Comp.
(US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leon M. Pierhal(3)

President, CEO

 

2012

 

233,786

 

N/A

 

1,125,000

 

317,411

 

 

 

 

 

551,197