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OmniVision Technologies Inc.UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
□ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
181 ANNUAL REPORT PURSUANT TO SECTION 13 OR IS(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fi scal yenr ended December 31, 2018
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR IS(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
□ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR IS(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
OR
Date of event requiring this shell company report
Commission file number: 000-55135
POET TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Ontario, Canada
(Jurisdiction of incorporation or organization)
1107 - 120 Eglinton Avenue East
Toronto, Ontario, M4P I E2. Canada
(Address of principal executive offices)
Surcsh Vcnkatesan, CEO
780 Montague Expressway
Ste 107
San Jose, California 95 I 3 I
Email: svv@poet-technologies.com
(Name. Telephone. Email and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act: None.
Securities registered or 10 be registered pursunnl to Section I 2(g) or the Act: Common Stock, no par va lue.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Not Required.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Ruic 405 of the Securities Act.
□ Yes
181 No
Ir this report is on annual or transition report, indi cate by check mark irthe registrant is not required to file reports pursuant to Section 13 or 15(d) or the Securities Exchange Act or 1934.
Yes D No 181
Note - Checking the box above will not relieve any registrunl required to file reports pursuant to Section 13 or 15(d) or the Securities Exchange Ac l or 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant ( I) has filed all reports required to be filed by Section 13 or l 5(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.
181Yes O No
Indicate by check mark whether the registrant hus submitted electronically e,·ery Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files) .. t8I
Indicate by check mark whether the regi strant is n large accelerated filer, nn accelerated filer, a non-acce lerated filer, or nn emerging growth company. See de finition of " large accelerated filer,"
"accelerated filer,'' and ·'emerging growth company" in the Exchange Act.
Large accelerated filer D
Accelerated filer 181
Emerging Growth Company !XI
Non-accelerated filer □
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP. indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting Slnndnrds provided pursuant to Section 13(a} of lhe Exchange Act. □
Indicate by check mark which basis of accounting the registrant has used to prepare the financial state ments included in this filing:
U.SGAAP □
International Financial Reporting Standards as issued
by the Internati onal Accounting Standards Board IZl
Other □
lf "Ot her" has been checked in response lo the previous question. indicate by check mark which finan c ial stulement item the registrant has elected to follow.
□ Item 17 D Item 18
ff this is an unnuul report, indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act}. □ Yes No 181
POET TECl·INOLOGIES INC.
FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS
!11t rnduc1ion
ITEM I.
ITEM 2.
ITEM 3.
ITEM4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM9.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
ITEM I6A.
ITEM 168.
ITEM I6C .
ITEM 16D.
ITEM I6E.
ITEM I 6F.
ITEM 160.
ITEM I6H.
ITEM 17.
ITEM I S.
ITEM 19.
ldcntitv of Directors. Sen io r Mana!!cmcm and Adv isors
Offer S1atistics and Ex pected Timetable
Kev lnfomrnt ion
ln fonnat ion 0 11 the Com pan v
Unresolved Staff Comments
Opera1in2 ond fin anc ial Review und Prospecls
Dircc1ors. Sen ior Management. and Emp lovccs
Major Shareholders and Rcla1cd Partv Transactions
Financial ln fom1al ion
The O ffer und Lisli m!
Additional lnfom1ation
Quamitativc and Qualitrnivc Disclosures Abo111 Market Ri sk
Description of Sccuri1ics O ther Than Equi rv Securiti es
l'.All.I.l
PART JI
Dcfo u ll s. Div ide nd A rrca ra "CS and Delinquenc ies
M:11e riol Modilica ti ons to the Ri ght s o f Security Ho lders ri nd Use o f Proceeds
Controls nnd Procedures
Reserved
Audit Commi tt ee Financial Expcn
Code O f Et hics
Principal Accountinu Fees nnd Service:.
Exe mpt ions fro m the Listing Sta nda rds for A udit Commillccs
PLLTchascs of Equity Secu rities bv the Issuer and Affiliated Purc hase rs
Chnnl!es in Registran t's Certifvin" Accoun111n1s
Comorntc Governance
Mine Snfetv Disclosure
PART 111
Fimmcial S1n1ements
Fimmcin l Slal l.':mcnt s
Exhibit s
l
:I.
±
±
12
ll
ll
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if
ll
n
11
fil
21
ill!
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fil
INTRODUCTION
POET Tcch.nologics Inc. is organized under the Business Corporations Act (Ontario). 1n thi s Annual Report, the "Company'', ··we", "our", " POET' and "us•· refer to POET Technologies lac. and its
subsidiaries (unless the context otherwise requires). We refer you to the documents attached as exhibits hereto for more complete infonnation than may be contained in this Annua l Rcpon. Our principal
Canad ian corporat e offices are loc ated at Suite 1107, 120 Eglinlon Avenue East. Toronto, Onlario M4P IE2, Canada. Our U.S office is located in the U.S. at Suite 107, 780 Montague Expre ssway, San
Jose. CA, 95131. Our telephone number in Toronto is (416) 368•9411.
We file reports and othe r infonnution with the Securities and Exchange Commiss ion ("SEC") located ut 100 F Street NE . Wushinglon, D.C. 20549. You may obtuin copies of our filings with th e SEC by
accessin g their website located at www.sec.gov. We al so file reports under Canadian regu latory requirements on SEDAR; you may access our reports filed on SEDAR by accessing the website
\Vww.sedar.com.
This Annual Report ( including !he consolidated audited financial statements for lhe years ended Dece mber 3 1. 2018. 2017 and 20 16 attached thereto. logether wit h the auditors' report thereon). and the
exhibits thereto shall be deemed to be incorporated by reference as exhibits to the Regi stra ti on Statement o f the Company on Form F- 10. as amended (File No. 333-227873), and to be a part thereo f from
the date on which this report was fil ed, to the exlent not superseded by documents or reports subsequently filed or furnished.
Business of POET Technologies Inc .
POET Technologies is a developer and manufacturer of oplica l light source products for the sensing and data communications markets . Integration of optics and electronics is fundamental to increasing
functional scaling and lowering the cost of current pbotonic solutions. POET believes that its approach to hybrid integration of devices, utilizing a novel dielectric platform and proven advanced wafer
level packaging techniques enables substantial improvements in device cost, efficiency and pcrfommnce. Optical engines based on this intet,•-ruted approach have applications ranging from data centers lo
telecommunication networks to consumer products.
During the year ended December 31. 2018, the Company generated revenues of $3.888. 185 nnd gross profit of S2A 12 ,216. The Company currently operates at a loss.
The loss fo r 20 I 8 was SI 6,322,779. I 00% of the Company's revenue in 20 18 was generated from the sale of sensing products and non-recurring engineering ('·NRE")
revenue through the Company's subsidiary DcnseLight Semiconductor Pie. Ltd. ("'DcnseLight").
During 2018, the Company spent SB,692,804 on research and development activities directly related lo the development and commercial ization of the POET Optical Interposer Platfonn ("POIP'') and the
development ofphotonic sensing products, $ 11.689,204 was spent on selling, marketing and administration expenses which included non-cash operating costs of$6.584.741. of which $2.562,624 related
to depreciation and amortization, nnd $4.022, 11 7 related to the foir value stock-based compensation. The 20 18 loss included other income of$1 ,505,790 of which $1.48 1.260 related to the recovery of
certain qualifying expe nses from the Econom ic Development Board ("EDB") in Singapore. The recovery includes both collected recoveries and an amount to be received in 2019. EDS recoverable fo r
the year ended December 3 1,20 18 was $1,905,593. The Company also had deferred income tax recovery of S297,940 for the year ended December 31, 2018.
On February I, 2019, the Company signed a non-binding Letter of Intent (LOT) for the sale of all the outstanding shares of Den:;eLighl. Key tenns of the LOI include proposed cash consideration in the
range of $26 - $30 million, including a S4 million cam-out provision, no-shop and confident iali ty clauses, and an undertaking to enter into key operating agreemenls, including a preferred supply
agreement and a long-term strategic cooperation agreement among the parties. The parties expect to complete the signing of 1hc definitive transaction agreements on or before September 15, 2019. The
broad tem1s of the LOI and the consummation of any transaction are subjec t to further due diligence, !be negotiation of definit ive agreements and obraining required approvals by all parties, incl uding bur
not limited to the TSX Venture Exchange and a majority of the Company's shareholders.
Oa February 1, 20 19, management committed to a plan to sell its subsid iary, Densclight. The dec ision was taken in line with a strategy to focus on the Company's opportunities related to its Optical
Interposer. The divestiture of DcnscLight will immediately reduce the Company's operating losses and cash bum, while allowing the Company to pursue a "fob-light" strategy with a less capital-intensive
business model that is focused on growing lhe Optica l Interposer business through lurgeted investments in the design, development and sa le of vertical market solutions
The Company's balance sheet as of December 31, 2018 reflects assets with a book value of $25 , 137,903 compared lo $25 ,205 ,772 as of December 31, 20 17. Twenty-seven percent (27%) of the book
value as of December 3 1, 20 18, or $6,888,264, was in current asse1s consisting primari ly of cash and other current assets, compared lo thirty-two percent (32%), or S7,950,712 as of December 31,2017.
The Company's working capital of S3,847 ,842 is not sufficient to support its operating and investing activiti es over the next 12 months. The Company has severa l sources of financing that it is
considering in order to continue as a going concern. These sources of financing include internal cash generation from operations, financing via public offering, assumption of debt or a combinat ion of all
three sources.
In order to provide internal financing, the Company negotia1ed multiple NRE contracts in excess of USS3 million with large suppl iers of networking and datacom equipment. These NRE contracts extend
into 2019 and will generate immediate high margin cash flow.
During 20 18, the Company purchased US$3.7 million of new equipment. The payment tenns for the new equipment were negotiated both prior to placing purchase orders and re-negotiated subsequenr to
raking possession of the equipment. While the Company took possession of the new equ ipment, ii was pennincd to defer a portion of purchase cost without penalty or interesr cost to 20 19.
On March 21, 2018, the Company strengthened its working capital position relative to December 3 1, 20 17 by comp leting a "bought deal" public offering of 25,090,700 units at a price of S0.425
(CADS0.55) per unit for gross proceeds of $10,663 ,548 (CADS 13,799,885). Each unit consists of one common shore and one-half common share purchase warrant. Each whole warrant entitles the holder
to purchase one common share of the Company at a price of $0.58 (CADS0. 75) per share until March 2 1, 2020. The broker was paid a cash commission of $639,813 (6%) of the gross proceeds and
received 1.505,442 compensation options. Euch compen:;ation option is exerc isable into one compensation unit of the Company al a price or S0.425 (CADS0.55) per compensation unit until March 2 1,
2020 wilh each compensation unit comprising one common share and one-half compensation share purchase warrant. Each whole compensation share purchase warrant entitles the broker to purchase one
common share of the Company at a price of S0.425 (CAD$0.55) per share until Marcb 21 , 2020. The Company paid an additional $492,177 in other costs related to this financing. The Company received
$9,53 I ,558 nel of share issue costs. Additionally, the Company raised S I, 11 6,445 from the exercise of warrants and stock options.
On November 28. 20 18. the Company filed a preliminary short form base shelf prospectus where it advised shareholders of its intent to rnise a maximum USS50 million through a public offering of either
equity securities, debt securities or a combination of both. The Company has met with multiple investment bankers in both Canada and the United States who have expressed an interest in assisting the
Company with a capital raise.
As at December 31. 2018. the Company has accumulated losses ofS{ 133.195,932) and working capital of $3,847,842. During the year ended December 3 I. 2018, the Company had negative cash nows
from operations ofS9,288,588. The Company has prepared a cash flow forecast which indicates that it docs not have sufficient cash to meet its minimum expenditu re commitments and therefore needs to
raise additional funds to continue as a going concern for the next hvclve months from the issuance of this Annua l Report on Form 20-F. As a result, there is suhslantial dollbl about the Company's ability
10 cont inue as a going concern for the nexl twelve months from the issuance of this Annual Report on Form 20-F.
To address the future funding requirements, management has undertaken the fo llowing initiati ves:
Initi ated u strict working cupilul monitoring program.
l. Entered into discussions lo secure debt financing .
2.
3. Continued its focus on maintaining an appropriate level ofcorpornte overheads in line with the Company's available cash resources.
4. Filed a preliminary short-form prospectus to raise a maximum $50 million through a public offering of either equity securi ties, debt securities or a combination of both.
5.
Initiated a plan for raising cupita l in Canada viu the private placement of convertible debt.
In line with its needs for additional financing, on April 3, 2019, the Company closed the first tranche ofa private placement of convertible debentures that rai sed gross proceeds ofCAD$J,929,000 (the
"Debentures"). The Debcntun:s arc unsecured, bear interest at 12% per annum, compounded annually with I% payable al the beginning of each month and mature on April 3, 202 1. Insiders of the
Company subscribed for over 47% of tl.ie first tranche of Convertible Debentu res, including the Company's board or directors. senior nmnagemen1 team and financial advisors. IBK Capital. Successive
tranche closings in the coming months ore each subject to approval by the TSX Venture Exchange.
Additionally, the Company arranged for a credit faci lity (the "Bridge Loan") lo be provided by Espresso Capital Ltd which will grant the Company access to a maximum USSS,000,000. The Company
signed the loon documents on Apri l 18, 2019 and was advanced USS2,000,000 on April 23. 2019. In partia l consideration of the US$5,000,000 gross credit facility available to the Company, and in
connection with the initial advance of US2,000.000. the Company issued to Espresso Capita l warrants for the purchase of 3.289,500 common shares at n price of CS0.35 per share. The Warrants expire
on April 18, 2020.
In Lhis Annual Report. unless otherwise specified, all dollar amounts arc expressed in United States Doll ars ("USS'', "USO" or "S").
Cautionary Statements Regarding Forward~Looking Statements
Financial and Other Infonnation
This Annual Report on Form 20-F and olher publicly available documents, including the documents incorporated herein and therein by reference contain forward - looking statements and information
within the meaning of U.S. and Canadian securities laws. Forward-looking statements and information can generally be identified by the use of forward- looking tem1inology or words, such as,
"con1inues", "wi th a view to" , " is designed to", "pending", "predict", "potential", "plans", "expects", "anticipates", "believes", "intends", "eslimates", "proj ects'', and simi lar express ions or variations
thereon, or statements that events. conditions or results ''can'', "might", ''will", "sha ll", "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 infonnation are bused on management's current expectations and
assumptions, which arc inherently subject to uncertainties , risks and changes in circumstances that are difficult to predict.
Our actual result s, perfom,ancc and achievements may differ material from those expressed in, or implied by, the forward- looking statemen ts and information in thi s Annual Report as a result of various
risks, uncertainties and other factors , many of which arc difficult to predict and generally beyond the control of the Company, including without limitation:
our need for additional financing. which may not be avai lable on acceptable terms or al oil;
the possibility that we will not be able to compete in the highly competitive semiconductor market;
tin: ri sk that our objectives will not be met within the timelines we expect or at all ;
resea rch and development risks ;
the risks associated with successfu lly protecting patents and trademarks and other intellectual property;
the need to control costs and the possibility of unanticipated expenses;
o we have u limited operating history ;
o
o
o
o
o
o
o manufacturing and development risks;
o
o
o
the risk that the price of our common stock will be \'Olatile;
1he risk that shareholders' interests wil l be diluted through fu ture stock offerings. oplion and wnrranl exe rcises; and
other risks and uncertainties described in ITEM 3. D. "Risk Factors".
For all of the reasons set forth above, investors should not place undue reli ance on forward- looking statements. Other than any obligation to disclose material infonnation under applicable securit ies laws
or 01herwise as maybe required by lnw, we undenake no obligation lo revise or update any fo rward- looking sta lemen ls a0er the date hereor.
Data relevant to estimated market sizes for our lechnologies under de\"elopmenl are presented in this Annual Report These data have been obtained from a variety of published resources including
published scientific literature, websi tes and infonnation generally avai lable through publicized means. The Company attempts to source reference data from multiple sources whenever possible for
confinnatory purposes. However, the Company has nol independently verified the accuracy and completeness of this data.
ITEM I. IDENTITY OF DIRECTORS. SEN IOR MANAGEMENT AND ADVISORS
A. Not Required.
ITEM 2. OFFER STA TIS TICS AND EXPECTED TIMETABLE
PART!
Not Required.
ITEM 3. KEY INFORMATION
A.Selected Financial Data
The selected financial data of the Company fo r rhe years ended December 31. 20 18, 20 17 and 2016 was derived from the audited annual consolida1ed financial statements oflhe Company, which have
been audited by Marcum LLP, independent registered public accoun ting firm. Selected financial data of the Company for the yea rs ended December 3 1, 20 15 and 2014 was derived from the consolidated
financial stalements of the Company, which arc not included in this Annual Report.
The infonnati on con tained in the se lected financial data for the 20 18, 2017 and 2016 years is qualified in its entirety by reference to the Company's audited consolidated financial statements and related
notes included under lhe heading "ITEM I 7''. Financial Statements•· and should be read in conjunction with such financial statements and related notes and wilh the information appearing under the
heading "ITEM 5".
Operating and Financial Review and Prospects." Except where otherwise indicated, all amounts arc presented in accordance with International Financial Reporting Standards ("IFRS") as issued by the
Intemaliona l Accounting Standards Board (''IASB").
Since its fonnation, the Company has financed its operations from public and private sales of equity securiti es, proceeds received upon the exercise of warrants and stock options, research and
development contracts from U.S. government agencies, sales of the Company 's photonic products and, prior to 2012, by sa les of so lar energy eq uipment products. The Company has never been
profitable, so its ability to finance operations has been dependent on equity financings. While the Company has been generating cash flow from the sa le of its photonic sensing products and NRE, wc
believe that it wi ll also need to rely on lhe sa le of our equity securities, debt securities or a combination of both lo provide funds for its activities. See ITEM 3.0. "Risk Factors."
The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeab le future.
Revenue
Cost of revenue
Gross profit
Opcrnting expenses
Selling. marketing and administnition
Research and development
Impairment loss
Loss on di sposal of property and equipment
Other income_. including interest
Operating expenses
Net loss from operations
Change in fair value contingent consideration
Nel loss before income tax recovery
Income tax recovery
Net loss for lhe year
Deficit, beginning of year
Deficit, end of year
Basic and diluted loss per share:
s
Consolidated Statements of Operations Under
International Financial Reporting Standards
( US$)
2018
2017
3,888, 185
1,475,969
2,4 12,216
11.689, 204
8,692,804
156,717
(1,505 ,790)
19,032,935
2,794,044
1,342,691
1,45 1,353
10,870, 741
5,442,873
(1 ,766,524)
14,547,090
(16,620,719)
(13, 095,737)
(16,620,7 19)
(297,940)
( 16,322,779)
( 11 6,873,153)
( 133, 195,932)
(0.06)
(13 ,095,737)
(297,940)
( 12,797,797)
(104,075,356)
( 116,873 , 153)
(0.05)
2016
1,861 ,747
946 ,001
915 ,746
11 ,42 1,604
3, 165,825
63 ,522
46,738
(66,872)
14,630,817
(13,7 15,07 1)
(283,130)
(13,43 1,94 1)
(207,25 7)
(13 ,224,684)
(90,850,672)
( I 04,075 ,356)
(0.06)
20 15
2014
8,6 14, 109
3,532,492
9,677, 705
2,277.927
(76,431 )
12,070,170
( 169,832)
11,785,800
(12,070. 170)
(1 1,785,800)
(12,070,170)
( 11 ,785,800)
( 12,070, 170)
(78,780,502)
(90, 850,672)
(0.07)
(11 , 785.800)
(66,994,702)
(78,780,502)
(0.08)
Certa in prior period figures ha ve been reclassi.li ed lo confom1 with the current period's presentation
Assets
Cash nnd cnsh equivalents
Short-tenn investments
Accounts rece ivable
Prepaids and other current assets
Inventory
Property and equipment
Patents and licenses
Intangible assets
Goodwill
Total Assets
Liabilities
Current Liabi lities
Accounts payable and accrued liabilities
Deferred lax liabili ty
Deferred rent
Total Liabilities
Shareholders' Equity
Share capital
Warrants
Contributed surp lus
Accumulated other comprehensive loss
Deficit
Total Equity
Total Liabilities and Equity
Consolidated Stateme nts of Financi al Position
Under International Financia l Reporting Standards
(US$)
2018
2.567,868
946,944
2,936,6 19
436, 833
9,299,5 13
466,7 14
802,409
7,68 1,003
25,137,903
3,040,422
1,000,427
1,814
4,042,663
11 2,028,194
8,303, 738
36,042,754
(2,083,514)
(133 , 195 ,932)
21 ,095,240
25, 137,903
20 17
4,974,478
493 ,925
1,957,727
.524.582
8,21s: 110
456,250
839,63 7
7,68 1,003
25 ,205,772
810,593
1,298 ,367
24,03 1
2,132,99 1
I 03 ,616,221
t 985, 378
32, 102,967
( 1,758,632)
( I 16,873, 153)
23 ,072, 781
25,205,772
$
$
s
December 3 1,
2016
14,376,282
589.275
292 ,849
758,9 17
1, 11 6,880
9,364,210
449,676
876,865
7,68 1,003
35,505,957
1,624,344
1,596,307
42,665
3,263 ,3 16
103,357,862
5,985, 378
29,062,874
(2,088, 11 7)
( 104,075,356)
32 ,242,641
35,505,957
s
s
2015
14,409,996
2014
11 ,287,864
150,923
947,1 07
426,813
243 ,50 1
1,05 8,860
260,72 1
15,934,839
12,850,946
5 15,42 1
451 ,724
5 15,42 1
45 1,724
8 1,027, 17 1
2,01 3,747
25 ,61 8, 159
(2 ,388,987)
(90,850,672)
15,419,418
15,934,839
s
6 1,688 ,953
6.4 58,659
23,6 16,664
(584,552)
(78 ,780,502)
12,399,222
12,850,946
B. Capita lization and Indebtedness
Not Required.
C. Reasons for rite Offer and Use or Proceeds
Not Required.
D.Risk Factors
We are subject to various risks, including those described below, wh ich cou ld materially adversely aITect our business. financial cond il ion and resuhs of operations and, in tum. the value of our securities.
ln addition, other ri sks nol present ly known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition and resu lls of opera tions, perhaps materially.
The risks discussed below also include for.vard- looking statements and information with in the meaning of U.S. and Canadian securities laws that involve risks and uncenainties. The Company's actua l
results may differ materially from the results discussed in the forwa rd- looking statements and infonnation Factors that might cause such differences include those discussed. Before making an investment
decision with respect to any of our secu rities, you shou ld carefu lly consider the follow ing risks and uncertainties described below and elsewhere in this Annual Report. See also "Cautionary Statement
Regarding Forward-Looking Statements.•·
Risks Related to Our Business
We 1,aw! agreed in principle tu dh•esl mtr m aj or operating flS.'i el, lwve adopter/ a new ''fab-ligltt'' strategy, anti plt,11 to focu.-. 011 the Upticul Interp(l.'ier as our mui11 bmi11eu, UllY vr all of wl,ich may
!,a,•e a muteriul (l{l\terse effect 011 lhe results of our operatiom, jimmciul position mu/ cu.,;h flows, aml pose furth er risks to the mcce.-.sful operatio11 of our busiues.-. over the slw rl mu/ /011g-term, 11s
well t1s to the i11terpretatio11 of our fi11a11 cifll results by sl1t1reh oltler.\· uml our .-.lwre prh-e.
There are substantial risks associated wi th our proposed sale of our Dense light business located in Singapore and adoplion or a "fab-light" slrategy. including the immediate loss or all or a substantial part
of our revcm1e, the loss of contro l over an internal development asset. and the loss of key tec hnica l know ledge avai lab le from personnel who wi ll no longer be emp loyed by the Company. whom we may
have to rep lace.
Al the presenl time we have executed u non-b inding Lener orintent (LOI) for the DenseLight sale and are in the process of negotiating definiti ve agreements. We cannot guanrntee that we will reach a fina l
agreement and any material renegotiation o f the terms represented in the LOI may result in significant write-offs, including those related lo goodwi ll and other intangible assets, which may have a material
adverse effect on our results of operations and financial position. The negotiation process itself is a diversion of management's attention from other business concerns, which also may have a material
adverse effect on the business. If we do not reach agreement with the current potential buyer, we have committed to seek other buyers as part of our .. fob -light" strategy, which would be a time- consuming
process that may con linue to divert management's altention from other business concerns and which we cannot guarantee would be successful. Ir we ore not successfu l in selling Denselight or ir there is
material delay in the sa le or a subs tantial reduction in the price at which it can be so ld , then ou r financial position and cash flows wi ll be adversely affected, we may hove to repay any borrowings on the
secured credit faci li ty (sec next risk factor) or absorb a substantia l increase in interest cost, and may not be able to sustain operations at their current levels or at all .
We have some previous experience wit h managing development without an internal deve lopme nt reso urce under a similar "fob-light" stralegy which was not successful, and there is no guarantee that our
new approach to operati ng a company with our chosen strategy will be successfu l. Further. our strategy wi ll be sole ly dependent on the ful\lre market acceptance and sale of Optica l Interpose r-based
solutions, which arc not yet fully developed and which no customer bas yet adopted in a production product.
We cannot guarantee that the meusures we ha ve taken to protect POET's intellectual property in the Optical Interposer whi le perfom1ing development activities at ou r DenseLight faci lity have been
effective or that some or all of the proprietary information and know-how on which the Optical Interposer is based has not been learned by the engineers working on Optical Interposer related projects.
Fo llowing divestment, we wi ll have little or no control over any leakage of such proprietary information or know-how either within or outside the Dense Light operation. In addition, we anticipate engaging
with Dcnselighl to complete certain development projects, which wi ll furt her expose our intellectua l property lo parties that we cannot contro l. Further, we cannot guarantee that Dcnsclight or any othe r
third-puny that we rely on to perfonn development, manufacturing . packaging or testing services will perform as expected and produce the devices we will need to grow our Optica l Interposer bu siness.
As "discontinued operations" our reported financia l slatements wi ll immediate ly reflect the fact that all of ouri-sales have been produced from ou r DenseLight operating unit. We may elect not to allocate
any revenue 10 POET based on our current interprclalion of 1hc LOI and shareholders and analysts may form a poor opinion about the future prospects of the Company based on having little no revenue. If
our developme nt projects and discussions with customers for the adoption of all or portions of our Optical Interposer solutions are not successful , we may report little or no revenue for some period of time
follow ing the divestment of DcnscLight. These and other factors may have a materia l adverse effect on the results of our operations and our share price.
There can be no ossurancc that we wil l be successful in addressing these or any other significant risks we may encounter in the divestment or DcnseLight, the adoption of a "fob- light" strategy or the focus
of our business sole ly on the Optica l Interposer.
We m ay 1101 be able to ge11erate s11Jfide11t ens!, '" sen-ice our reccut~\' ttcqttired tlebl oblig1tlio11s.
We recently sold unsecured conve niblc debentures and secu red financing with a bridge lender in the form oFa sec ured cred it faci li ty . Our ab ility to make payments on our debt wi ll depend on ou r financia l
and operating performance, which may fluctuate significantly from quarter to quarter, and is subject to prevai ling economic condition s and fina ncial, business and other facto rs, many of which arc beyond
our contro l. In addi tion. we have certain covenants in the secured credit facility that irnol met would result in an significant increase in our in1eres1 cost and there are conditions which ifnol met wou ld
prevent us from accessing any additional fund s from this faci lity. We cunnol assure you tha t we will be able to generate sum cient cash now or 1ha1 we will be able to borrow funds from another source in
amounts sufficient to enable us to service our debt or to meet our working capital requirements. lfwe arc not able to generate sufficient cash fl ow From operations or to borrow sufficient funds to service
our debt, we may be required to se ll equity or assets, reduce expe nditures, refinance all or a portion of our ex isting debt or obtain additiona l fi nanci ng. We cannot assure you that we will be able to
refinance our debt, se ll assets or equity or borrow more fund s on ten11s acceprable to us, ifat all.
Tlte procen ,if developi11g n ew, tedmologicully culvauceti product.-. i11 semicomlw:lor mauufitcluriug aml plwlouics product.-. is high~v complex mul m1cerlui11, and we camwl guarantee a positive
result.
The development of new, techno logically advanced products is a complex and uncertain process requiring frequent innovation, highly-skilled engineering and development personne l and significant
capital, ns well as the accurate anticipation of technological and market trends. We cannot assure you that we will be ab le to identi fy, develop, manufacture, marke t or support new or enhanced products
successfu lly or on a timely basis. Funher. we cannot assure you that our new producls will guin market acceptunce or that we wi ll be able to respond efTectively lo product inlroduct ions by competitors,
technological changes or emerging industry standards. We also may not be able to deve lop the underlying core technologies necessary to create new products and enhancements. licen se these
technologies from third parties, or remain competi tive in our markets.
Customer tlema,u/ is tlifficu/1 lo foreL·asl accurale/y at1d, as a re.m/1, we may be mwble to mate/, prmltu:tio11 with customer tlemmuf.
We make planning and spending decisions , including dcLcnnining the levels or business that we will seek and accept, production schedu les, componen t procuremenl commi tment~, personnel needs and
other resource requirements, based on our estimates or product demand and customer requirements. Our products arc typically sold pursuant to individual purchase orders. While our customers may
provide us with their demand forecasts, they are typically not contractually com milled to buy any quantity or products beyond fim1 purchase orders. Furthcnnorc, many of our customers may increase,
decrease, cancel or delay purchase orders already in place without significant penalty. The short-term nature of commitments by our customers and the possibility of unexpected changes in demund for
their products reduce our ability to accurately estimate future customer requirements. If any of our customers decrease, stop or delay purchasing our products for any reason, we will likely have excess
manufacturing capacity or inventory and our business and results of operations would be harmed.
If our cwilm11ers do t1ot qualify our products for use 011 a timely basis, our results of oper11tious may suffer.
Prior to the sale of new products, our customers typicall y require us to "qual ify" our products for use in their applications. At the successfu l comp letion of this qualification process, we refer to the
resulting sales opportunity as a "design win." Additionally, new customers often audit our manufacturing facilities and perform other evaluations during this qualification process. The qualification
process involves product sampling and reliability testing and collaboration with our product management and engineering reams in the design and manufacturing stages. If we are unable to accurately
predict the amount of lime required to quulify ou r products wilh customers, or are unable to qualify our products with certain cus tomers at all, then our ab ility to generute revenue could be delayed or our
reven ue would be lower than expected and we may not be ab le to recover the costs associated with the qualification process or with our product development efforts, which wou ld have an adverse effect
on our results of operat ions.
The markets i11 which we operate t1re J,igh~v competitive, w/,ic/, coulil result iu lo.ft :rn/eJ am/ /tJwer revenues.
The market for optica l components and modules is highly compctiti\'c and this competition cou ld result in our existing customers moving their orders to our competitors. We arc aware of a number of
companies that huvc developed or arc developing optical component products, including LEDs, lasers, pluggable components, modules and subsystems, among others, that compete (or may in the future
compete) directly with our current and proposed product offerings.
Some of our current competitors, as well as some of our potential competitors, have longe r operating histories, greater name recognition, broader customer relationships and industry alliances and
substantia lly greater financial , technical and marketing resources than we do. We may not be able to compete successfully with our compet itors and aggressive competition in the market may result in
lower prices for our products and/or decreased gross margins. Any such development cou ld have a material adverse effect on our business, financial condition and resulrs or operations.
Our prodttcls, im:lttdiug t/wJe sold by pretlece.uor compa11y1 OPEL Solar, L'o11/d couluiu tlefecl.'i tl,a/ may cause tl.'i lo illL'1tr sig11ijh-a11t rnsls or result i11 11 loss of cmltmrers or .rnbjeL'I us tu cl<1ilmftJr
which we may 1101 be fully insured.
Our predecessor company, Opel Solar, sold solar systems and products between 2007 and 20 12, and some of those products may still be under warranty. We have not undertaken 10 quantify the size of
that warranty obligation and it is not recorded on our balance sheet because it is not detenninable. Although we carry product liability insurance. thi s insurance may not adequate ly cover our costs arising
from defects or warranty claims related lo those producls.
Our current products sold by DcnseLight arc complex and undergo quality testing as well as fonnal qualification by our customers. Our customers' testing procedures arc limited to evaluating our
products under likely and foreseeable failu re scenurios and over varying amounts of time. For various reusons, such as the occurrence of perfonnance problems thaL are unforeseeable in testing or that are
detected only when products age or arc operated under peak stress cond iLions, our products may fail Lo perfom1 as expected long after customer acceptance. Failures could result from faulty components
or design, problems in manufacturing or other unforeseen reasons. As a result, we cou ld incur significant costs to repair or replace defective products under warranty, particu larly when such failures
occur in installed systems. Our products arc typically embedded in, or deployed in conjunction with, our customers' products, which incorporate a vuriety of components, modules and subsystems and
may be expecled to interoperate with modules produced by third parties. As a result, nol all defects are immediutely detectuble and when problems occur, it may be difficult to identify the source of the
problem. We will continue to face this risk going forward because our products arc widely deployed in many demanding environmen ts and applications worldwide. In addition, we may in certain
ci rcumstances honor warranty claims after the warranty has expired or for problems not covered by warranty to maintain customer relationships. Any significant product fai lure cou ld result in liti gation,
damages, repair costs and lost future sa les of the affected product und other products, divcn the attention of our engineering personnel from our product development efforts and cause significant
customer relalions problems, all of which would ham1 our business. Although we carry product liability insurunce, this insurance may not adequately cover our costs arising from defects in our products
or otherwise.
The bmi11ess that we acquired tlitl 11nt l,m•e a history of prnfitt1ble opertttirms. Our ability to successful(v ma11age our mmmfi1L'lttri1tg operalious is essential la our m •ernll success, mu/ if wefuil ta till
so, our fiuaucial results will suffer.
At the time of the acquisition of Dense Light Semiconductors, Ptc. Ltd. in May of 2016, the company had been operating at a loss for several years and was at a minimum staffing level. Since the
acquisition we have committed substantial capital and management attention to improving the operation, increasing sales and driving to profitability. Even though substantia l changes in lhe management
and personnel huve been made, the results to date have been less than anticipated and more improvement will be required in order to make the DcnseLight operation profitable. We cannot guarantee that
our efforts to improve the DenseLight opera tion wi ll be successful. und if they are not, the operation will continue to need capital and al1ention from the senior management of the Company und our
fimmcial resu lts may suffer as a result.
If we eucmmler ma111ifacl11ri11g problem.\' or if mauufacturiug t1I our Singapore tJpemtitm i.'i tliscu11li1111etl for any reason, illchuli11g t111 imlttslrit1l ur workplm:e uccitle11t, we may lose sales mu/
damage our ctl.'iltJmer relllliot1ships, or be mbjecl lo claitmfor wl,icl, we may ,wt befulfr it1.rnretl.
We may experience delays, disruptions or quality control problems in our manufacturing operations. These and other foctors may cause less than acceplable yields al our wafer fabrication facility.
Munufocturing yie lds depend on a number of factors, including the quality of available raw materials, the degradation or change in equipmenl ca libration and the rate and timing of the introduction of
new products. Changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new products may significantly reduce our
manufacturing yields, resulting in low or negative margins on those products. In addition, because of our wafer size, we use equipment that is not readily available on the open market and for which spare
parts and quulificd service people muy not be available. If any of our key equipment were to he damaged or destroyed for any reason, our manufacturing process would be severely disrupted. Any such
manufacturing prob lems wou ld likely delay producl shipments to our customers, which wou ld negatively aITect our sa les, compeLitive position und reputation.
Our operations in Singapore are subject to government regulations that protect lhe workplace safety or employees. We ·s,rive to maintain on occidenl•free workplace, bur we cannot guarantee that
industria l accidents w ill nol take place, or that we will not be subject lo linbi lily for these ond other workplace related claims. We have obtained insurance policies to protect the Company againsl claims
for workplace related claims, but we cannot guarantee thal these and other insurance policies carried by the Company wi ll be sufficient to cover the full costs of such claims , which could have a material
adverse effect on the Company.
We l,al'e limited operating history in the tlutacom market, uud our husi,,e,fs could be /wrm ed if this market do es ,wt 1/evelop us we expect.
The initial target market fo r our O ptica l Interposer-based optical engine is I.he datacom market and we have no experi ence ia selling products in th is market. We may aot be successful in deve loping a
product for this market and even if we do, it may never gain widespread acceptance by large data center operators. If our expectations fo r the growth o r the datacom market arc not realized , our fi nancial
condition or results of operations may be adversely affected.
We tlepeutl ,m II limiter/ number of :mppliers mu/ key c,mtract u1111uifac/11rer:f who could disrupt our business nm/ tec:/11wlo[:Y tle,1elopm eut flctivities if t!,ey stopped, decreased, rleh~vetl or ll'ere
tmable lo meet <>llr dem,mdf<>r .fhipmet1l.f of their products or 11111111~fucturiug of our protl11ct.f.
We depend on a limited number of suppliers of epi taxial wafers and contract manufacturers for our Indium Phosphide ("InP" ) development and production activities. Some of these suppliers arc sole
source suppliers. We typically have not entered into long-term agreemenls wilh our suppliers. As a result. these suppliers generally may stop supplying us materia ls and 01her components al any lime.
Our re liance on a sole supplier or limited number of suppliers could rcsull in deli very problems, reduced control over technology development, product development, pricing and quality, and an inability
to identiry and qualify another supplier in a timely manner. Some of our supp liers lhat muy be small or under~capita lized may experience financial dimcuhies !bat could prevent them from supp lying us
materia ls and other components. In addition, our suppliers, including our so le source suppli ers, may experience manufacturing delays or shut downs due to circumslanccs beyond their con trol such as
cartbquakcs, fl oods, fire s, labor unres1, polit ica l unrest or other natural disasters. A Change in supp lier could require technology transfe r that could require multiple iterations of test wafers. Thi s could
result in significant delays in resumption of production.
Any supply deficiencies relating to tbc quality or quantiti es of materia ls or equipment we use to manufactwe our products could maleri ally and adversely affect our ab ili ty to fu lfill customer orders and
our results of operations. Lead rimes fo r the purchase of certai n materials and equ ipment from suppliers have increased, and in some cases have lim ited our ability to rap idly respond to increased demand
and may conti nue lo do so in the future. To the exten t we introduce additional contrac t manufacturing partners, in troduce new producls wi lh new partners and/or move existing in ternal or ex ternal
production lines to new partners, we could experience supply dismpt ions during th e transition process. In add ition, due to our customers' requirements relating to the qua lificat ion of our suppli ers and
contract manufacturing faci lities and operation s, we cannot quickly enter into alternative supp lier relationships, which prcvenls us from being able to respond immediatel y to adverse events affecting our
suppliers.
Our i11/er1wtio11nl h11si11e.f.f um/ opert1thms expose 11.f lo addilio,,nl risk.f.
Products shipped to customers located outside Ca nada and the United States account fo r a majority of our revenues. In addition, we have significant tangible assets located outside Canada and the Uni ted
Stales. Our manufacturing facili ties are localed in Singapore. Conducting bus iness outside Canada and the United Stu tes subj ects us to a number of additional risks and challenges, including:
period ic changes in a speci fi c country's or region's econom ic conditions. such as recession;
licenses and olher trade barriers;
the provision of services may require export licenses;
enviro nmenta l regulations;
cen ifi cation requirements;
fluctuations in forei gn currency exchange rates;
inadequate protection orintellectmil property rights in some countries;
preferences of ccn ain customers fo r locally produced products;
poten tial polit ical, legal and economic instability, fore ign con nicts, and the impact of regional and globa l in fec tious illnesses in the countries in which we and our customers. supp liers and contract
manufacturers are located;
Canadian and U.S. and fo reign anticom.1ption laws ;
seasonal reductions in business act ivities in certain countries or regions ; and
fluctuations in fre ight rates and transportation disruptions.
These factors, individually or in combination, could impair our abi lity to effec ti vely operate one or more or our fo reign fac ilities or deliver ou r products, result in unexpected and material expenses, or
cause an unexpec ted decline in the demand for our products in ccnuin countries or regions. Our fa ilure to manage the risks and challenges associated with our international business and operat ions cou ld
have a material adverse effect on our business.
Jf wefl1il tt, tlltrad ,mrl retain key p er:wu11e/1 our busiuess could stiffer.
Ou r future success depends, in part, on our ability to attract and rc1ain key personnel, including executi ve management. Competit ion for highly skill ed technical personnel is extreme ly intense and we
may face difficulty id en tifyin g and hiring qual ified engineers in many areas of our business. We may not be able to hire ond retain such personnel at compensa1ion levels consis1ent with our existing
compensation and sa lary stmcture. Our future success also depends on the continued contributions o r our executive mana gement learn and other key management and technical personnel. each of whom
woul d be difficult to replace. The loss or services of these or other executive officers or key personnel or the inability to continue to attract qualifi ed personne l cou ld have a material adverse effect on our
business.
Our prior {IC(JUisilfons created II large am o1111/ of gootlwill, whi1.•I, may he impaired in /1, e fi,ture a11d as a result m ay atfrersefy affect our fi11m1cial rernlls. In 111ltlilio11, past aud any fi,ture
r,cquisititms inmfre mm1ero11s risks wul may ,ufrersely affect our fi11a11cinl comlitim, 11111I results of operations.
As parl of our business slrategy, we huve in 1he past and may in the futu re pursue acquisitions of companies lhat we be lieve could enhance or complement our current producl portfolio, augment our
technology roadmap or diversify our revenue base. Acquisitions invo lve numerous ri sks, any of which could hann ou r business, including:
diniculties integrating the acquired business;
un anti cipated costs, capital expenditures, liabiliti es or changes to product development efforts;
difticulties integrat ing the business relationships with supp liers and customers o f the acquired business with our existing operat ions;
acts or omissions by the acquired company prior to the acquisil ion that may subject us to unknown risks or liab il ities;
risks assoc iated wi th enlcring markets in which we have little or no prior experience;
poten tial loss of key employees, panicularly those of lhe acq ui red organizat ions: and
diversion of financia l and management resources from our existing business;
Our prior acquisit ions have resulted, and future acquisitions may result in the recording of goodwill and other intangible assets subject to potentia l impairment in the future, adversely affecting our
operat ing resuhs. We may not achieve the anticipated benefits ofan acqu isition ifwc foil to evaluate it properly, and we may incur costs in excess of what we anticipate. A failure to evaluate and exccule
an acquisilion appro priately or otherwise udequalely address these risks may adversely affect our fimrnciul condi tion and results o f operat ions.
Our pretle,·es.wr 1.·ompnuy recefretl n,ul our currenl c:ompn11ics recefre mu/ expect to receive i11 I/re future subsidies nml other types of fim diug fr om gm·emmerrt agencies in tire locations;,, 11"/rit:!1 we
op erate. Thefwuli11g t1greeme11ts stipulate that if we do uni comp~v witlr rnriims ctwe11a11ts, incl,u/i,,g eligibility requirements, 111ulltJr tin n ot achieve certain pre-defi11etl ohjectfres, those gol'emme11t
agen cies m ay reclaim all or a portion oftlre fimtling provitled. lftl,is were to occur, we would either uot he in 11 p osition to repay tire claimetl am ormts or woultl ha1ie lo ho"ou, large sums iu ortler lo
do so or refi1111111.·e wit/, tlilutive jinnm:iug, which coultl udverse(11 affect our fimm ci11I comlitiurr.
Our predecessor company, Opel Solar and its wholly-owned subs idiary ODIS, received research and development gran1s from the United States Air Force and from NASA; our recently acquired
subsidiary company, DenseLight Semiconductor, Pte, Ltd. is expected to receive fundin g for new product development activi ties conducted in Singapore from the Economi c Development Board; and we
expect that ou r recently acquired subs idiary company BB Photonics U.K .• may also app ly for certnin grants to defer the cost of development in th e U .K. The ni les for eli gibility vary widely across
government agencies, arc comp lex and may be subject to different interpretations. Furthermore, some of the grants set pre-defined development or spending objecti ves, which we may not achieve. We
cannot guarantee that one or more agencies will not seek repayment of all or a portion of the funds provided, and if this were to occur, we could have to borrow large sums or refinance with diluti ve
financing in order to make the repayments, which would adversely affect our financial condition.
U11cer1u;111ies ;,, tire ;11terpret11tiu11 nm/ 11pplict1titm oft!,e ZOJ 71'tL\. Cuts mul J obs Act coultl m uterial(v affect our lax obligutio11s aud effective t11x rule.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017, or the "20 I 7 Tax Act,'" was signed into Jaw and includes severa l key tax provisions that affected us. inc luding a reduction of the statutory
corporate lax ro te from 35% to 2 1% effecti ve fo r tax years beginning a0er December 3 1, 20 17, elimination of certu in ded uctions, and changes to how the Un ited States imposes income tax on multinational
corporat ions, among others. T he 2017 Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgmen ts to be made in interpretation of the
provisions of the 20 17 Tax Act, significant estimates in calculations, and the preparation and ana lysis of infonnation not previously relevant or regularly produced. The U.S. Treasury Depanmcnt , the IRS ,
and other standard-sen ing bodies wi ll continue to interpret or issue guidance on how provi sions of the U.S. Tax Act will be applied or otherwise admin istered. As future gu idance is issued, we may make
adjusunents to amoun ts that we have previously recorded thul muy mate rially impact ou r fin anc ial statements in the period in which the adj uslmenls are made
A sig11ifit.-a11t disruption i11, or bre11ch iu set.:urity of, our i11formutio11 teclm ology systenu or ,,iol11tio11s of tlatu protection laws t.:ould m 11terinl(v utfversely uff el.'I uur husiueu a,ul reputation.
ln the ordinary course of business, we collect and store confidential infomrntion , includi ng proprietary business in formation belonging to us, our customers, suppliers, business partners and other third
parties und persona lly idenliliabl e informulion of our employees. We rely on information technology systems to protect this infonnation and to keep financial records, process orders, manage inventory,
coord inate shipme nts to cuslomers. and operate other cri tical functions. Our in fonna ti on tec hnology sys tems may be susceptible to damage. di sruptions or shutdow ns due lo power outages, hardware
failure s, telecommunication fai lures and user errors. Jfwe experience a disruption in our information tcclmology systems, it cou ld result in the loss of sa les and custome rs and significant incrementa l costs,
which could materia lly adversely affect our business. We may also be subject to security breaches caused by computer viruses , illega l break-ins or hacking, sabotage, or acts of vandali sm by disgruntled
employees or 1hird parties. T he risk of a security breach or disruption, particularly through cyberaltack or cyber intrusion, including by computer hackers, fore ign govcmmcnts and cyber lerrorists. has
increased ns the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our information techno logy nel work and systems have been and, we
believe, continue to be under constant auack. Accordingly, despite our security measures or those of our third-party service providers, a security breach may occu r, including breaches that we may not be
able to detect. Security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential.
IO
We /,a ve a history of /urge operating /ones. JVe may ,wt be able to ocl,ieve or smtai11 profitability iu the future mu/ as a result we may ,wt be t1ble lo moi11lai11 sufficienl le"eb• of liquidity.
The Company's balance sheet as of December 31, 20 18 reficcts assets with a book value of$25, 137,903 compared to $25,205,772 as of December 3 1, 20 17. Twenty-seven percent (27%) of the book
value as of December 3 I, 20 18, or $6 ,888,264 , was in current assets consisting primarily of cash and other current assets, compared to thirty-two percent (32%), or $7,950 ,712 us of December 31, 20 17.
The Co mpany's working cap ital of $3,847,842 is nol sufficient lo support its operating and investing activities over the next 12 months. The Company hus several sources of financing that it is
considering in order to continue as a going concern for the next twel ve months from the issuance of this Annual Report on Form 20-F. These sources of financing include internal cash generation from
operations, financing via public offering, assumption of debt or a combination of all three sources.
In orde r to prov ide internal financing . the Company negotiated multiple non-recurring eng inee ring (NRE) contracts in excess ofUSS3 million with large suppliers of networking and datacom equipment.
These NRE contracts extend into 2019 and will generate immed iate high margin cash fi ow.
During 20 18, the Company purchased US$3.7 million of new equipment. l11e paymenl tenns for the new equipment were ncgotia1cd botb prior to placing purchase orders and re-negotiated subsequent to
taking possession of the equipment. While the Company took possess ion of the new equipmen t, it was permitted to defer a portion of purchase cost wi thout penalty or interest cos t to 2019.
On March 21 , 201 8, the Company strengthened its working capital position relative to December 3 1, 2017 by completing a "'bought deal" public offering of 25,090,700 units at a price ofS0.425
(CADS0. 55) per unit for gross proceeds of$ I 0,663,548 (CADS 13,799,885). Each unit consists of one common share and one-half common share purchase warrant. Each whole warrant entitl es the holder
to purchase one common share of the Company at a price of $0.58 (CADS0. 75) per share until March 2 1, 2020. The broker was paid a cash commission of $639,8 I 3 (6%) of the gross proceeds and
received 1,505,442 compensation options. Each compensation option is exercisable into one compensation unit of the Company at a price of S0.425 (CADS0.55) per compensation unit until March 2 1,
2020 with each compensation unit comprising one common share and one-half compensation share purchase warrant. Each whole compensation share purchase warrant entitles the broker to purchase one
common share of the Company at a price of S0.425 (CADS0.55) per share until March 21 , 2020. The Company paid an additi onal $492, 177 in other costs related to this finan cing. 111e Com pany received
$9.531 ,558 nel of share issue costs. Additionally, the Company ra ised S I, 11 6,445 from the exercise of warranLs and stock options.
On November 28, 201 8, the Company filed a preliminary short fonn base shelf prospectus where it advised shareholders of its intent to raise a maximum US$50 milli on through a public offering of either
equity securities, debl securities or a combination of both. The Company has met with multiple investment bankers in both Canada and the United States who have expressed an interest in assisti ng the
Company with a capital raise .
As at December 31. 20 18. the Compuny has accumulated losses o r S( \3 3, 195,932) and working ca pital of $3,847.842. During the year ended Dece mber 3 I, 20 18, the Company had nega1ive cash fl ows
from operations ofS9,288,588. The Comp,my has prepared a cash fl ow forecast which indicates lhat it docs nol have sufficient cash to meet its minimum expenditure commi tments and therefore needs to
raise additional funds to continue as a going concern for the next tweh'c months from the issuance of this Annual Report on Fann 20-F. As a resuh, there is substantial doubt about the Company's ability lo
continue as a going concern fo r the next 1,vclve months from the issuance of this Annua l Report on Fann 20-F.
To address the future funding requi rements, management has undertaken the fo ll owing initiatives:
Initi ated a strict working capita l monit oring program.
I. Entered into discussions to secure debt financing.
2.
3. Continued its foc us on maintaining an appropriate level of corporate overheads in line wi th the Co mpany's avai lab le cash resources .
4. Filed a preliminary short-form prospectus to raise a maximum $50 million through a public offering of either equity securities, debt securities or a combination of both.
5.
Initialed a plan for raising capital in Canada via the private placement of convertible debt.
II
In line with its needs for add iliona l finuncing . on Apri l J. 2019, the Company closed the first tronche or a privale plncement o r convertible debentures that raised gross proceeds o r CADSl.929.000 (the
"Debentures"). The Debentures are unsecured, bear interest al 12% per annum , compounded annually with I% payable at the begin ning of each month and mature on April J, 202 1. Insiders of the
Company subscribed for over 47% of the first tranche of Convertible Debentures, including lhe Company's board of directors , senior management learn and financia l advisors, IBK Capital. Successive
tranche closings in the coming months are each subject to approval by the TSX Venture Exchange.
Additiona ll y, the Company arranged fo r a cred it facility (the "Bridge Loan .. ) to be provided by Espresso Capita l Ltd which will grant the Company access to a maxi mum USSS,000,000. The Company
signed the loan documents on Apri l 18, 20 19 and was advanced USS2,000,000 on April 23 , 20 19. In pa rtia l consideration of the US$5 ,000 ,000 gross credit facility avai lable to the Company, and in
connection with the initial advance of US2.000,000. the Company issued to Espresso Cap ital wa rrants for the purchase of 3,289,500 common sha res at a price of C$0.35 per share. The Warrants expire
on April 18, 2020.
The opt ica l commun ications industry is subjec t lo significant operat iona l fluctuat ions. In order to remain competi ti ve, we incur substantial costs assoc iated with research and development, qual ification,
production capacity and sales and marketing activities in connection with products that may be purchased , if at all , long after we have incurred such costs. ln addition, the ra pidly changing industry in
which we opern te, the length of time belween developing and introducing u product to market, freque nt changing customer spec ifications for products, customer cuncella1ions o r products and general
down cycles in the ind ustry, among other things, make our prospects difficult to evaluate. As a result of these factors, it is possible tha t we may not (i) generate sufficie nt positive cash now from
operations; (ii) raise funds through the issuance of equi ty, equity-linked or convertible debt securit ies; or (iii) otherwise have suffic ient capita l resources to meet our fun1rc capital or liquidity needs. There
arc no guarantees we wi ll be abl e to ge nerate add itiona l finan cial resources beyond our ex ist ing balances.
We may u ot be able to obtaiu athlitioiwl ct1pital when desired, tm favorable /emu or at all.
We operate in a market that makes our prospects difficult to eva lu ate and, to remain competitive, we will be required to make continued investments in capital equipment , fac ilities and technolo1,,ry. We
expect that subs1antial capita l wi ll be required to contin ue 1echno logy and product development, to expand our manufacturing capacity if we need to do so and to fund working capital for anticipated
growth . Ir we do no1 genernte sufficient cash now from operations or otherwise bave the capilal resources to meet our future capi tal needs, we may need addi tional financing to implemen t our business
strategy.
If we raise additional fund s through the issuance of our common stock or convertib le sec urities, the ownership interests of our stoc kholders cou ld be significantly diluted. These newly issued securit ies
may have rights , preferences or privileges se nior to those of existing stockboldcrs. Additional financing may not, however, be avai lable on terms favora ble to us, or at all , if and when needed, and our
abi lity to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. lf we cannot raise
required capital when needed. including under our Short Form Prospectus filed with the Canadian Securit ies Exchange and the SEC in October 2016 and refiled in November 2018, we may be unuble to
conlinuc technology nnd product deve lopment, meet the demands or ex isting and prospective customers. adversely aITccting our sales and market opportuni ties and consequently our business, financial
condition and results of operations.
We m ay be subject to disruptious or failures in iuformatior, teclnwlagy systenis and 11eh11t1rk fofrustrm.:lures that coultl lwve a m aterial adverse effect 0 11 our business 011dfi11a11ciul comlitim,.
We re ly on the effic ient and unintem1pted operation of complex information technolo1,,ry systems and network in frastmctures to operate our business. A disruption, infiltrati on or fa ilure of our in fonnut ion
technology systems as u result or so flwure or hardware malfunctions, syste m implemen tations or upgrades, computer vim ses, third-party securit y breaches. employee error, the n or misuse, mulfeusnnce,
power disrnptions. natural disasters or acc idents could cause a breach of data security, loss of inre llectual property and cri tical data and the release and misappropriation of sensitive competiti ve
infonrnition and partner, custome r. and emp loyee personal data . Any of these events could hann our competit ive posit ion. resu lt in a loss or customer confidence, cause us to incur significant costs to
remedy any damages and ulti mate ly materially adverse ly affect our business and fin anci al condition.
If we fail Ill pr11tect, or iucur sig11ijica11I costs iu defe111/i11g, our i11tel/ectuul property am/ other proprietary rights, our busiue.'is am/ results of operntimrs coultl be muterifl/~)1 harmetl
Our success depends on our ability to protect our inte llectua l property and 01her proprietary rights. We rely on a combination or patent, trademark, copyright, trnde secret and unfair competiti on laws, as
well as license agreements and other contracnial provisions, to establish and protect our intellectua l property and other proprietary rights. We have applied for patent registrations in Canada, th e U.S. and
other countries, some of which have bee n issued. We cannot guarantee that our pending applications will be approved by the appli cab le govcmmcntal authoriti es. Moreover, our existing and future
patents and trademarks may not be sufficiently broad to protect our proprietary rights or may be held invulid or unenforceab le in cou11. A fui lure lo obtain parents or trademark registrat ions or a
successfol challenge lo our registrations in Canada, the U.S. or other countries may limit our ability to protecl the intell ectual property rights that these appl ications and registrations intended to cover.
12
Policing unauthorized use or our technology is difficult and we cannot be certain thut the steps we have taken will prevent the misappropriation, unauthori zed use or other infringement or our in1ellectual
property rights. Further, we may not be able to effec tively protect our intellectual property rights from misappropriation or other infringement in fo reign countries where we have not applied for patent
protections, and where effective patent, trademark, trade secret and other intellectual property laws may be unavailable, or may not protect our proprietary rights as fully as Canadian or U.S. law. We may
seek to secure comparable intellectual property protections in other countries. However, the level of protection afforded by potent and other laws in other counuies may nol be comparable to that afforded
in Canada and the U.S.
We also attempt to protect our intellectual property, including our trade secrets and know-how. through the use of trude secret and other intellechrnl property la ws, and contractual provisions. We enter
into confidentiali ty and invention assignment agreements with our emp loyees and independent consu ltants. We also use non- disclosure agrcemenls with other thi rd parties who may have access to our
proprietary technologies and information. Such measures, however, provide only limited protection, and there can be no assurance that our confidentiality and non-disc losure agreements will not be
breached, especially after our employees end their employment, and that our trade secrets will not otherwise become known by competitors or that we will have adequate remedies in the event of
unaulhorized use or disclosure of proprielary information. Unaut horized third parties moy try to copy or reverse engineer our prod ucts or portions or our products. otherwise obtain and use our
intellectual property, or may independently deve lop similar or equivalent trade sccrels or know•how. If we fa il to protect our intellectual property and other proprietary rights, or if such intellectual
property and proprietary rights arc infringed or misappropriated, our business, results of operations or financial condi tion could be materially banned.
In the future, we may need to take legal actions to prevent third parties from infringing upon or misappropriating our intellectual property or from otherwise gaining access to our tec hnology. Protecting
and enforcing our intellectual property rights and detcnnining their va lidity and scope cou ld result in significant litigation costs and require sign ificant time and attention from our technical and
management personnel, which could significantly hann our business. We may not prevail in such proceedings, and an adverse outcome muy adversely in1pact our competitive advantage or otherwise
hann our financial condit ion and our business.
We may he involved i11 i11tel/ec1tml property disputes i11 tltefuture, wlticl, could dfrert m111,ageme11t's attentim,, cause us to incur sig11ific"11t costs and prel'e11t us /ram selling or usiug the c/1alle11getl
tec/11,0/ug:y.
Participants in the markets in which we sell our products have experienced frcquenl litigation regarding patent and other intellectual property rights. There can be no assurance that third parties w ill not
assert infringement claims against us and we cannot be certain that our products would not be found infringing on the intellectuul property rights of others. Regardless of their merit, responding to such
claims can be time consuming, divert munagement's allention and resources and may cause us 10 incur significant expenses. Intellectual property claims against us could result in a requirement to license
technology from others, di scontinue manufacturing or se lling the infringing products , or pay substantial monetary dam.:igcs, each of could result in a substantial reduction in our revenue and could result
in losses over an extended period or time .
If we fail to obtain th e right to use the iutel/ectual property rig /,ts uf other.v t/wt t1re ,reL·enur.v tu operate our husiues.v, 111111 to protect th eir i11tellect11ul property, our b11si11eH amt results of aper(ltifms
will be adver.ve(v 1,Jfected.
From time to time we may choose to or be required to license technology or intellectual property from third parties in conn ection with the development of our products. We ca1mot assure you that third
party licenses will be available to us on commercially reusonuble tem1s, if al all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both . These payments or
other terms could have a sign ificant udverse impact on our results or opera tion s. Our inability lo obtain a necessary third-pnrty license required for our product offerings or 10 develop new products and
product enhnnccmcnts could require us to substitute tec hnology of lower quality or pcrfom1ancc standards, or of greater cost, either of which cou ld adversely affect our business. If we arc not able to
obta in licenses from third parties, if necessary, then we may also be subject to liti gation to defend against infringement claims from these third parties. Our competitors may be able to obtain licenses or
cross-license their technology on better terms than we can, which could put us at a competirive di sadvuntuge.
lf wefitil to maiutaiu effedfre i11ter111rl L'tmtrol over ji11am:i11/ reporting i11 thefillure, t!,e m:wrttL'.V tmd timing of 011r fi11n11c:it,/ reporting may be mlver.rn(v affected
Preparing our consolidated financial statements involves a number of complex manual and automated processes, which arc dependent upon individual data input or review and require significant
management judgment. One or more of these elements may result in errors that nmy not be delected and could result inn material misstatement of our consolidated financial sta tements. The Sarbanes
Oxley Act in the U.S. requires, among other things, that as a publicly traded company we disclose whether our internal control over financial reporting and disclosure controls and procedures are
effective. As long as we qualify as an "emerging growt h company" under the JO BS Act, we wi ll not have to provide an auditor's attestation report on our internal controls. During the course of nny
evaluation, documentation or a\lestntion, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify in a timely manner or at all
as a result of the deferred implementation of this additional leve l of review.
13
Our internal contro ls cannot guarantee that no accounting errors ex ist or that all accounting errors, no matter how immaterial, wi ll be detected because a control system , no matter how wel l designed and
operated, can prO\·ide only reasonable. bu l not absolute assurance thut the conlrol system's objeclives wi ll be met. Irwe ore unable to implement and maintain effec tive internal control over financia l
reporting, our abi lity to accurate ly and timely report our fi nancial re sults could be adversely impacted. This cou ld resu lt in late filin gs of our annual and quarterl y reports under the Canadian Securities
Act and the Securities Exchange Act of 1934, or the Exchange Act , rcslalemcnls of our consolidated financia l stal'emcnts, a decline in our stock price , suspension or deli sting of our common stock by the
TSX Venture Exchange, or other material adverse effects on our business, reputation, resu lts of operations or financial condi tion.
Our uhility It> use our 11el operutiug losseJ am/ artai11 oJ/wr /tu,: lllfrih11tes mll_v he limited.
As or December 31. 2018, we had accumulated net operating losses (NOLs). or approx imate ly S I 33 mrn ion. Varying jurisdic tional tax codes have restrictions on the use or NO Ls. if a corporn1ion
undergoes an "ownership change," the corporation 's ability to use its pre-change NOLs, R&D credits and other pre-change tax attributes to offset its post-change income may be limi ted. An ownership
change is genera lly defined as a greater than 50% change in eq uity ownership. Based upon an analysis of our eq uity ownersh ip, we do not believe that we have experienced such ownership changes and
therefore the ann ual utilization of our NOLs may not be subject to such limitation at this time. However. should we experience additional ownership changes, our NOL carry fo rwards may be limited.
We trre subjed to gmierume,i/fll export am/ import co11trols tlwl could :mbjt!cl us to linbility or impair our ability to compete iu internatimw l m arkets.
We arc subject to export and import contro l laws, trade regu lati ons and other trade requirements that limit which raw materials and tec hnology we can import or export and whi ch products we sell and
where and to whom we se ll our products. Spec ifica lly, the Bureau ofln dustry and Security or the U.S . Deportment or Commerce is respons ible fo r regulating the export or most comme rci al items that ure
so ca lled dual-use goods that may have bOlh commercial and mi litary app lications. A limited number or our products arc exported by license under certain classifications. Export Control Classification
requi rements arc dependent upon an item's techn ical characteristics, the destination, the end-use, and the end-user, and other activities of the end•uscr. Should the regulations applicable to our products
change, or the restrictions appl icable to countries to which we ship our products change, then the export of our products to such countries could be restricted. As a result, our ability to export or sell our
produc ls to certain countries could be restricted, wh ich could adversely affect our business, financial condition and results of operations. Changes in our producls or any chnnge in export or import
regulations or related legislation, shifi in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regu lations. could result in
delayed or decreased sales of our products to existing or potential customers. In such event, our business and results of operations could be adversely affected.
Our m nmifac.:turi,,g opemtious nre .rnhject to e11 viromue11Jal regulntitm J/,a/ could limiJ our grow//, or impou .''itlbJlt111tinl co.'il.'i, adversely 1iffec.:ti11g our jiumu:inl comlitim, t111d results af oper11Jhms.
Ou r properties, operations and products arc subject to the environmental laws and regulations of 1hc jurisdictions in wh ich we operate and sell products. These laws and regulations govern, among other
things, air emissions. wastewater discharges, the management ond disposa l of hazardous materials. the contamination or so il and groundwater. employee health and surety und the content, performance.
packaging and disposa l of products. Our failure to comply wilh current and future environmental laws and regu lations, or the identification or contaminat ion for whic h we are liable, could subject us to
substantial costs, including fines , clean-up costs, third•party propeny damages or personal injury claims, and make significant investments to upgrade our facilities or curtail our operations. Identification
of presently unidentifi ed environmental condi tions, more vigorous enforcement by a governmental authority, cnachuent of more stringent legal requi rements or other unant icipated events could give rise
to adverse publici ty, restrict our operations, affect the des ign or marketabil ity of our products or otherwise cause us to incur materi al env ironmenlal costs. adversely aITecling our financial condi tion and
results of operati ons.
We arc exposed to risks nm/ i11cr et1setl eJ.:p enses anti business risk as a rentlt of RestricJitm 011 Hazartlom Suhstn11ces, or RoHS tlirt!clivcs.
Follow ing the leud or the European Union ("EU"), various governmenta l agencies have either already put into pluce or ure planni ng to introduce regulat ions that regulate the permissible levels or
haza rdous substances in produc ts so ld in various regions of the world. For example, the RoHS dircclivc for EU took effect on July I, 2006. The labeling provisions of similar legislation in China went
into effect on March I, 2007. Consequently, many suppliers of products sold into the EU have required their suppliers to be compl iant with the new directive. We anticipate that our customers may adopt
th is approach and will require our fu ll compliance, which will require a sign ificant amount of resources and effort in planning and execut ing our RoHS program, ii is poss ible that some of our products
might be incompa tible with such regulat ions. In such events, we cou ld experience the following consequences: loss or revenue, damages reputa tion, diversion of resources, monetary pena!lies, and lega l
action.
14
Failure to comply with the U.S. Foreign Corrupt Practices At'I could subject us to pe,wllies aml oth er at/verse co11seque11ces.
We arc subjccl lo the U.S. Foreign Com1pt Practices Act, which generally prohibits companies operating in the U.S. from engaging in bribery or olhcr prohibited payments LO fo reign officials for the
purpose of obtaining or retaining business. In addition, we arc required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting
controls. Non•U.S. companies, including so me that may compete wit h us, may not be subject to these proh ibi tions, and therefor!! may have a competitive advantage over us. If we arc not successful in
implementing und muintaining adequate preventative measures, we may be responsible for acts of our employees or other agents engaging in such cond uct. We could suffe r se\'ere penalties and other
consequences that may have a material adverse effect on our financia l condit ion and resu hs of operntions.
Nulurnl ,Us,,sters or other cnlttstrophic el'euts coultl lwrm m,r operotimts.
Our operations in the U.S. , Canada and Singapore could be subject to significant risk of natural disasters, including earthquakes , hurricanes, typhoons, nooding und tornadoes. as well as 01her
catastrophic events, such as epidemics, terrorist attacks or wars. For example, our wafer fabrication facility in Singapore is in an area that is suscept ible to hurricanes. Any disrnption in our manufacturing
facilities arising from these and other natural disasters or other catastrophic events could cause signi ficant delays in the production or shipment of our products until we arc able to arrange for third parti es
to manufacture our producls. We may not be able to obtain alternate capacity on favorable tenns or at all. Our property insurance coverage with respect to nan1ral disaster is limited and is subj ect to
deductible and coverage limits. Such coverage may not be adequate or continue to be available al commercially reasonable rates and lenm. The occ urrence of any of these circumstances may adversely
affect our financia l condition and resu lts of operation.
Gootlll'ill lmp,1irme11I Risk
POET' s Board and management are required to analyze on nn annual basis whether any inlangibles should be impaired. based on a calculation of the likely future cash nows from those assets. The
annua l impaim1cnt test was done by management in the fisca l fourth quarter. Both Densclight and BB Photonics arc regarded by POET's Board and management as a single unit contributing to the
Corporation·s development of an Oplical Interposer platform. At the time of their acqui sition in mid•20 16, the combined purchase price exceeded their combined asset values, resulting in the creation of
Goodwill. va lued as of December 31 , 2018 at $7,68 1,003. At the time of the initial va luation, no value was attributed to DenseLight 's Intellectua l Property, which POET's Board and management now
expect to be a major contributor to the Corporation's anticipated future cash 0ows. POET's Board and management annually ussesses the ant icipated foture cash nows of the Corporat ion related to this
Goodwill and determi nes ifan impairment is necessary. No provision for impairment was required as of the most recent ly completed financial year.
Risks Related lo Our Common Stock
Our stock price lws been am/ may crmtimte lo he volatile.
The trading price for our common stock on the TSX Venture Exchange ('TS.XV") has been and is likely to continue to be highly volatile. Although we have registered our stock with the SEC, the U.S.
market for our shares has been slow to develop, and if and as such a market develops, prices on thal market are al so likely to be highly volati le. The market prices for securities of early stage tec hnology
companies have historically been highly vo latile.
Factors that could adverse ly affect our stock price include:
• nuctuations in our operating results and our financial condition;
• announcements of new producls, part nerships or [echnologicn l collaborations and announcements of the results or further actions in respec t of any products, partnerships or collabora tions,
including termination of same;
• innovations by us or our compclitors;
• 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 (noat); and
• inc lusion in or dropping from stock indexes.
As of Apri l 22, 20 19, our 52•weck high and low closing market prices for our common stock on the TS XV were CAS0.56 and CAS0.23.
15
We l,m·e hiflorh:ally ublai11ed1 am/ expect to co11ti1111e lo ohlaiu, 01f1/i1io11afjiua11d11g primarily by way ofsules of equity, whid, may resull i11 sig11ijicu11t tfitutio11 lo e.x.istiug shareholtlers.
We I.Jave not earned profits , so the Company's ability to finance operations is chicny dependent on equity financings. Si nce 2012 we raised approximately USS60.5 million (net of share issue costs) in
equity finuncing lhrough private plucements or the exercise of stock opt ions and warran ls in support o f the Company's business, which hus resulted in significant dilution to ex ist ing shareholders. Further
equity financings will also resu lt in dilution to ex isting shareholders, and such dilution could be signi ficant.
Future sales 11/ comnum stack or w11rra11ts, or the prospect af future sttles, may depress our stock price.
Sales of a substantial number of shares of common stock or warrants, or the perception that sales could occur, could adversely affect the market price of our common stock. Additionally, as of April 22,
2019, there were outstanding options to purchase up to 26,969,384 shares of our common stock that arc currently exercisable and additiona l outstanding options to purchase up 10 17,834,345 shares of
common stock that are exercisable over the next several years. As of April 22. 2019, there were outstanding warrants to purchase 48,034.350 shares or our stock and broker compensation unils to
purchase 1,505,442 unils. Each compensation unit is convertible into one common share and one-hair common share purchase warrant. The holders or these options. warrants and compensation units
have an opponunily to profit from a rise in I.he markel pri ce or our common stock with a resulting dilution in the interests of the other shareholders. The exislence of these options, warrants and
compensation units may adversely affect the terms on wh ich we may be able to obtain ridditional financing. The weighted average exercise price of issued and outstanding options is CADS0.70, the
weighted average exercise price of warrants is CADS0.56 and the weighted average exercise price of the compensation units is CADS0.55, which compares to the CAD$0.32 market price at closing on
April 22, 20 19.
Dilutitm t/mmglt exercise ofs/,are "Pti,m.\· coultl mfi,ersely «J/ecl the Compauy'.'i sharelwltler.'i.
Because the success of the Company is highly dependent upon ils employees, the Company has grnnled 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 s10ckholders of the Company may be diluted. As of April 22, 20 19,
there were 44 ,803 ,729 share purchase options outstanding with a weighted average exercise price of CAD$0.70, 48 ,034 ,350 share purchase warrants outstanding with a weighted average exercise price of
CADS0.56 and 1,505,442 compensation units outstanding with a weighted average price of CADS0.55. If all of these securities were exercised, an additional 94, 143 ,52 1 common shares would become
issued and outstanding. This represents an increase of 32. 7% in the number of shares issued and outstanding and wou ld result in significant dilution to current shareholders.
The d~kf ussudutetl ll'itl, pe1111y .flock cl"ssijicutitm crmltl 11/Ject the m"rketability of the Compt111y's co11u11011 shure.,· mrtl shurelwltlers c,mltljiml it tlifjic11/t to sell their .'ilwres.
The Company's common shares are subject to "'penny stock'" rules as defined in Exchange Act Ruic 3a5 I-I. 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 arc likely to be higher than those for other securities. Penny stocks generally arc equity securities with a price of less
than SS.00 (other than securities listed on certain U.S. national securities exchanges, provided that current price and volume information with respect to transactions in such securities is provided by the
exchange).
The penny stock rules require a broke r-<.lealer. prior to a transaction in u penny stock not otherwi se exempt from the rnles, to deliver a standardized risk disclosure document that provides infonnation
about penny stocks and the natme and leve l or risk s in the penny stock market. The broker-denier also must provide the customer with curre nt bid and offer quotations for t.he penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and monthly account st:l.lemcnts showing the market value of each penny stoc k held in the customer' s account. The bid and offer
quotation s, and the broker-dealer and salesperson compensation infom1ation, 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 confim1ation.
In addition, the penny stock rules require that prior to a transaction in a penny stock nol otherwise exempt from suc h rules, the broker-dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and recei ve lhe purchaser's written agreement 10 the lnmsaction. These di sc losure requiremenls may ha,·e the effect of reducing the level of trading oclivily
in the secondary market for the Company's common shares in the United States and shareholders may find it more difficult to se ll their shares .
16
Tlte rigltts of our shareltolders may differ from the rig/tis typically affortletl lo slwrelwltler.f of a U.S. corporation.
We arc incorporated under the Business Corporations Act (On1ario) (the "OBCA "}. The rights of holders of our common sha res are governed by the laws of the Province of Ontario, including 1he OBCA,
by 1he applicable laws of Canada, nnd by our Articles of Contimmnce and all amendments 1here10 (collectively. the "Articles"). and our by-laws (the "By-laws"). These right s difTer in certain respects
from the rights of shareholders in typica l U.S. corporations. The principa l 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 arc 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 meeti ng of sha reho lders du ly ca lled for suc h purpose being cast in favor of the
proposed mailer. Such matters include without limitation: (a) the sale, lease or exchange of all or substantia lly 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 capiia l stmcture suc h 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, us well as amendments cha nging 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 lhe assets of a corporation generally requires approval by a majority of the outstanding shares. although in some cases approval by a higher
percentage of lhe outstanding shares mny be required. In addition, under U.S. state law the vote of a majority of lite shares is general ly sufficient to amend a compuny's certilicate of incorporation,
including amendments affecting capital strncturc or the number of directors.
Pursuant to our By•laws, two persons present in person or represented by proxy and each entitled lo vote thereat shall constitute a quornm for lhc transaction of business at any meeting of shareho lders.
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 aol less than
one-third of the number of shares entitled to vote.
Under rules of the Ontario Securities Commiss ion, a meeting of shareholders must be ca lled for consideration and approval of certain transaclions between a corporation and any "related party" (as
defined in such mies). A "related party" is defined to include, among other parties, directors and senior officers of a corporation. holders of more than I 0% of the voting securities of a corporation.
persons owning u block of securities that is otherwise sufficient to uffect muteriully the control of the corporation, and other persons thnt manage or direct, to a substantial degree, the affa irs or operations
of the corporation. At such shareholders' meeting, votes cast by any related party who holds common shares and ha s an interest in the transaction may not be counted for the purposes of detennining
whether the minimum number of required votes have been cast in favor of the transaction. Under U.S. state law, a transaction between a corporation and one or more of its officers or directors can
generally be approved either by the shareholders or a by majority of the directors who do not have an interest in the transaction.
Neither Canadian law nor our Articles or By-laws limil the right of a non•resident to hold or vote common shares of the Company, other than as provided in the lnvcstmcnl Canada Act (the ·· investment
Act"), as amended by lhe World Trade Organization Agreement Implementation Act (the .. WTOA Act"). The In vestment Act generally prohibi ts implemenlation of a direct reviewable investment by an
individua l, government or agency thereof. corporation, partnership, trust or joint venture that is not a "Canadian,'' as defined in the Investment Act (a "non-Canadian"), unless. nfier review. the mini ster
responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investme nt in the common shares of the Company by a non-Canadian (other than a ''WTO
Investor," as defined below) would be rcviewablc under the In vestment Act ifit were an investment to acquire direct control of the Company, and the va lue of the assets of the Company were CASS.0
million or more (provided that immediately prior to the implementation of the investment the Company was not controlled by WTO Investors}. An investment in common shares of the Company by a
WTO Investor (or by a non- Canadian other than a WTO Investor if, immediately prior to the implementation of the investment the Company was controlled by WTO In vestors) wou ld be rcviewablc
under the Investment Act if it were an investment to acquire direcl con trol of the Company and the value of the assets of lite Company equaled or exceeded certain threshold amounts determined on an
annual basis. The threshold for a pre•closing net benefit review depends on whether the purchaser is: (a) controlled by n person or entity from a member of the WTO; (b) a state- owned enterprise \SOE):
or (c) from a country considered a "Trade Agreement Investor" under the Investment Act. A different threshold also applies if the Canadian business carries on a cultural business. The 2019 threshold for
WTO investors that arc SOEs will be S4\6 million based on the book value of the Canad ian business' assets, up from $398 milli on in 20 18. The 2019 thresholds for review for direct acquisitions of
conlrol of Canadian businesses by private sector inwstor WTO investors (S I billion) and private sector trade- agreement investors (S 1.5 billion} remain the same and are bolh based on the "enterprise
value" of the Cam1dian business being acquired.
17
A non-Canadian , whether a WTO Investor or otherwise, would be deemed to acquire control of the Company for purposes of the lnveshnent Act if hc or she acquired a majority of the common shares of
the Company. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an acquisition of control of the Company, unle ss it could be establ ished that the
Company is not controlled in fact by the acquirer through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a "national" of a country (other than Canada) that is a
member or the WTO ("WTO Member") or has a right or pennanent residence iu a WTO Member. A corporation or other ent ity will be a "WTO Investor·· if it is a "WTO Investor-controlled entity,''
pursuant to detailed rules set out in the Investment Act. The U.S. is a WTO Member. Certain transactions invo lving our common shares would be exempt from the In vestment Act, including:
• an acquisition of our common shares if the acquisition were macle in connection with the person 's business as a truder or dealer in securit ies;
• an acquisition of control of the Company in connection with the reali zation of a security interest granted for a loan or other fimrncial assistance and not for any purpose related to the
provisions or Lhe lnvesLment Act; and
• an acquisition of control of the Company by reason of an amalgamation, merger, conso lidation or corporate reorganization , following which the ultimate direct or indirect control of the
Company, through the ownership of voling interests. remains unchanged. Under U.S. law, except in limited circumstances, restrict ions generally are not imposed on the ability of non
rcsidenls to hold a controlling interest in a U.S. corporation.
A.f a "ffJreigu private i.f.mer 11
dm11eJtic U.S. is.mer.
, the CfJmptmy i.f exempt /mm certaiu ... ectio11.'f of the £xc:lw11ge Act wlticl, result.'i i11 slwrelwlders l,miing /e,'iS complete um/ timely tlutt1 t/um if tl,e Comp1111y were a
As a "foreign private issuer," as defined under the U.S. securi ties laws, we arc exempt from certain sections of the Exchange Act. In particular, we are exempt from Section 14 proxy rules that arc
applicable to domest ic U.S. issuers. The submission of proxy und annual meeting of shareholde r infonuation (prepared to Canadian standards) on Fonn 6-K has typicu \ly been more li mited than the
submissions required of U.S. issuers and resu lts in shareholders having less complete and timely data, including. among others, with respect to di sc losure of: (i) persona l and corporate relationsh ips and
age of directors and officers; (ii) material legal proceedings involving the Company, affiliates of the Company, and direc tors, officers promoters and control persons; (iii) the identity of principa l
shareho lders and certain significant employees; (iv) related party transac tions; (v) audit fees and change of auditors; (vi) rnting policies and procedures; (vii) executive compensation; and
(viii) composition oflhe Compensation Committee. In addition, due to the Company's s1utus as a foreign private issuer. the officers. directors and princ ipal shareholders of the Company are exempt from
lite short-swing insider disclosure and profit recovery provisions of Sec lion 16 of the Exchange Ac t. The foregoing exemption results in shareholders having less data in this regard than is available with
respect to U.S. issuers.
lf th e Company i.,. clwrt1cterizetl as a passive foreign im1eshmmt cnmpmiy, m,r U.S. slwrehnhlers may suffer adverse tux cmuequences.
As more fully described below in ITEM 10.E. "Taxation" - United States Federal Income Ta x Considerations -
Pass ive Foreign lnvestmcnl Company Status"', if for any taxable year our passive
income, or the va lue of our assets that produce (or arc held for the production oO passive income , exceed specified levels, we may be characterized as a passive foreign investment company ("PF lC") for
U.S. federal income tax purposes. This characterization could result in adverse U.S. tax conscqueaccs to our U.S. shareholders, inc luding gain on the disposition of our common shares being 1rea1ed as
ordinary income and any resulting U.S. federul income tux being increased by an interest churge. Rules similar to those applicable 10 dispositions generall y will app ly to certain "excess distributions" in
respect of our common shares.
The actual u/Jocatitm of proceetls from 1myft111rm:ing mulert11ken ""'J' differ from the Compnny's initial or current illte11ti1ms.
The Company !ms discretion in lhe use o r the net proceeds from any offering of equity securities. The Company may elect to allocate proceeds differently from its initial or current intentions. The failure
by the Company's management to app ly these funds effectively could have a material adverse effect on its business.
18
Warrants included with fi11u11ci11gs
Warrants offered with finan c ings are not lis1ed on any exchange. Investors may be unable to sell 1he warrants al the prices desired or at a ll. There is no existing trading market for the warranls and the re
can be no assurance that a liquid market will deve lop or be maintained for the warrants, or that an investor will be able to sell any of the warrants at a purticular time (ifat all). The liquidity of the trading
market in the warrants, and the market price quoted for the warrants, may be adverse ly affected by, among other things:
changes in the overall market for the wo rrnnts;
changes in the Corporation's financial perfonnance or prospects;
c hanges or percei ved changes in the Corporati on's creditworthiness;
the prospects for companies in the industry generally;
the number of holders of the warrants;
1he interest of securit ies dea lers in making a market for the warmnts: and
prevailing interest rates.
ITEM 4. INFORMATION ON Tl-IE COMPANY
A. Hi story and Develo pment of the Company
The legal and commercial name of the Company is POET Technologies lnc. The Company was originally incorporated under the British Columbia Compa ny Act on February 9, 1972 as Tandem
Resources Ltd. On November 14, 1985, Tandem Resources Ltd. amalgamated with Stanmar Resources Ltd . and Kcczic Resources Ltd., to continue as one company under the name Tandem Resources
Ltd. under the British Columbia Company Act. By Articles of Continuance dated Junuury 3, 1997, Tandem Resources Lid. was continued under the OBCA. By Articles of Amendment dated September
26. 2006, Tandem Resources Ltd. changed its name to OPEL International 1.nc. By Certificate of Continuance dated January 30, 2007 , OPEL lntenmtional Inc. was continued under the New Bnmswick
Business Corporations Act. By Articles of Cont inuance 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 ,201 I, OPEL So lar Inte rnational Inc. changed its name to OPEL Techno logies Inc. By Articles of Amendment dated July 23, 2013, OPEL Technologies lnc .
changed it s name to POET Technologies Inc .
On May 11 , 2016, in an all-stock transaction. lhc Company acqui red all the issued and outstanding shares of Dense Li ght Semiconductor Ptc . Ltd . (Dense Light) , a privately held Singapore company that
provides opticul solutions. Denselight des igns. manufac tures and sells opt ical light source products. Dense Light was acquired for SI 0,500,000 of the Company's slack. The Company issued 13 .61 I, 150
common shares to the fonncr shareholders of Dcnsclight.
On June 22. 20 16. in an all -stock transact ion, the Company acquired all the issued and o uls landing shares of BB Photonics Inc .. a privately held US Company with a wholly owned subsidiary, BB
Photonics UK Ltd. Both companies design integrntcd photonics solutions for the data communications market. BB Photonics and its subsidiary were acquired for consideration of $1,550,000. The
acquisition was sen led with the issuance of 1,996,090 common shares of the Company to the former shareholders of BB Photonics.
The following is a graphic description of the Company and its subs idiaries:
O
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