As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/13/15  Poet Technologies Inc.            20FR12G               14:3.6M                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20FR12G     Registration of Securities of a Foreign Private     HTML   1.64M 
                          Issuer                                                 
 2: EX-1.2      Underwriting Agreement                              HTML     83K 
 3: EX-4.04     Instrument Defining the Rights of Security Holders  HTML    139K 
 4: EX-4.07     Instrument Defining the Rights of Security Holders  HTML     32K 
 5: EX-4.08     Instrument Defining the Rights of Security Holders  HTML     22K 
 6: EX-4.09     Instrument Defining the Rights of Security Holders  HTML     71K 
 7: EX-4.10     Instrument Defining the Rights of Security Holders  HTML    280K 
 8: EX-4.11     Instrument Defining the Rights of Security Holders  HTML     20K 
 9: EX-4.13     Instrument Defining the Rights of Security Holders  HTML     68K 
10: EX-11.1     Statement re: Computation of Earnings Per Share     HTML     34K 
11: EX-12.1     Statement re: Computation of Ratios                 HTML     14K 
12: EX-12.2     Statement re: Computation of Ratios                 HTML     14K 
13: EX-13.1     Annual or Quarterly Report to Security Holders      HTML     10K 
14: EX-13.2     Annual or Quarterly Report to Security Holders      HTML     10K 

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

 

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

o Yes   x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

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

o Yes   o No

 

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

 

 

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

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

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INTRODUCTION

 

POET Technologies Inc. is organized under the Business Corporations Act (Ontario).  In this Annual Report, the “Company”, “we”, “our” and “us” refer to POET Technologies Inc. and its subsidiaries (unless the context otherwise requires).  We refer you to the documents attached as exhibits hereto for more complete information than may be contained in this Annual Report.  Our principal Canadian corporate offices are located at Suite 501, 121 Richmond Street West, Toronto, Ontario M5H 2K1, Canada.  Our principal operations office is located in the U.S. on the campus of the University of Connecticut, P.O. Box 555, Storrs-Mansfield, CT 06268.  Our telephone number in Toronto is (416) 368-9411 and out telephone number in Connecticut is (203) 612-2366.

 

We file reports and other information with the Securities and Exchange Commission (“SEC”) located at 100 F Street NE, Washington, D.C. 20549.  You may obtain copies of our filings with the SEC by accessing their website located at www.sec.gov.  We also file reports under Canadian regulatory requirements on SEDAR; you may access our reports filed on SEDAR by accessing the website www.sedar.com.

 

Business of POET Technologies Inc.

 

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

 

The Company currently operates at a loss. We have no revenues. Our expenses, directly or indirectly, relate to the development and commercialization of the POET process or our status as a publicly traded Company. During the fiscal year ended December 31, 2014, research and development expenses were $2,277,927 while general and administration expenses were $9,677,705. Included in general and administrative are non-cash share based expenses of $6,055,895 relating to the fair value of stock based compensation and the fair value of shares issued as a reduction of a license fee.  We have yet to commercialize the POET technology.  To date, proceeds from the issuance of its common shares have financed the Company’s continuing operations and research and development initiatives.

 

As of December 31, 2014, the Company had over $11.5 million in current assets and approximately $451,000 of accounts payable and accrued liabilities. We are confident that the current level of working capital is sufficient to support the Company over the next 12 months as the Company works toward the goal of monetizing the POET process.

 

Financial and Other Information

 

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

 

Forward-Looking Statements

 

This Annual Report on Form 20-F contains forward-looking statements and information within the meaning of U.S. and Canadian securities laws.  Forward-looking statements and information can generally be identified by the use of forward-looking terminology or words, such as, “continues”, “with a view to”, “is designed to”, “pending”, “predict”, “potential”, “plans”, “expects”, “anticipates”, “believes”, “intends”, “estimates”, “projects”, and similar expressions or variations thereon, or statements that events, conditions or results “can”, “might”, “will”, “shall”, “may”, “must”, “would”, “could”, or “should” occur or be achieved and similar expressions in connection with any discussion, expectation, or projection of future operating or financial performance, events or trends. Forward-looking statements and information are based on management’s current expectations and assumptions, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.

 

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

 

·                  we have a limited operating history;

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

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

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

·                  research and development risks;

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

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

 

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·                  manufacturing and development risks;

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

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

 

For all of the reasons set forth above, investors should not place undue reliance on forward-looking statements. Other than any obligation to disclose material information under applicable securities laws or otherwise as maybe required by law, the Company undertakes no obligation to revise or update any forward-looking statements after the date hereof.

 

Data relevant to estimated market sizes for the Company’s technologies under development are presented in this Annual Report. These data have been obtained from a variety of published resources including published scientific literature, websites and information generally available through publicized means. The Company attempts to source reference data from multiple sources whenever possible for confirmatory purposes. Although the Company believes the foregoing data is reliable, the Company has not independently verified the accuracy and completeness of this data.

 

PART I

 

ITEM 1.                                              IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

A.  Not Applicable.

 

ITEM 2.                                              OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

ITEM 3.                                              KEY INFORMATION

 

A.  Selected Financial Data

 

The selected financial data of the Company for the years ended December 31, 2014, 2013 and 2012 was derived from the audited annual consolidated financial statements of the Company, which have been audited by Marcum LLP, independent registered public accounting firm.  Selected financial data of the Company for the years ended December 31, 2011 and 2010 was derived from the consolidated financial statements of the Company, which are not included in this Annual Report.

 

The information contained in the selected financial data for the 2014, 2013 and 2012 years is qualified in its entirety by reference to the Company’s consolidated financial statements and related notes included under the heading “ITEM 17.  Financial Statements” and should be read in conjunction with such financial statements and with the information appearing under the heading “ITEM 5.  Operating and Financial Review and Prospects.”  Except where otherwise indicated, all amounts are presented in accordance with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”).

 

Since its formation, the Company has financed its operations from public and private sales of equity securities, proceeds received upon the exercise of warrants and stock options, research and development contracts from U.S. government agencies and, prior to 2012, by sales of solar energy equipment products.  The Company has never been profitable, so its ability to finance operations has been dependent on equity financings.  The Company believes that it will continue to rely on the sale of its equity securities to provide funds for its activities.  While the Company is not planning to seek additional equity financing at this time, because we believe it is well capitalized for the next 12 months, nevertheless the Company may effect a future financing if an appropriate opportunity presents itself.  See ITEM 3.D.  “Risk Factors.”

 

The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future.

 

Restated Financial Information

 

During the 2014 fiscal year, the Company made an accounting policy change to capitalize its patent registration costs (see note 20 to the financial statements which are included at item 17). The previous accounting policy was to charge patent registration costs against profit and loss in the year those costs are incurred.

 

The new accounting policy was adopted in 2014 and has been applied retrospectively. Management believes that the change in accounting policy will provide more relevant and reliable information. The Company is developing an intangible process which is

 

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D.  Risk Factors

 

In addition to the other information presented in this Annual Report, the following should be considered carefully in evaluating the Company and its business.  This Annual Report contains forward-looking statements and information within the meaning of U.S. and Canadian securities laws that involve risks and uncertainties.  The Company’s actual results may differ materially from the results discussed in the forward-looking statements and information.  Factors that might cause such differences include those discussed below and elsewhere in this Annual Report.

 

Risks Related to Our Business

 

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

 

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

 

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

 

We have not yet commercialized the POET technology and there is no certainty that we will be able to do so.

 

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

 

·                  the adoption of our technology by semiconductor device designers and manufacturers;

·                  the competitive environment;

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

·                  the adequacy and success of sales and marketing efforts regarding licensing our technology.

 

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

 

The Company’s primary focus is on the research and development of a specific semiconductor technology, which requires the expenditure of significant amounts of cash over a relatively long time period.  As at December 31, 2014, the Company’s total deficit was $78,780,502, with net losses in fiscal years 2014 and 2013 of $11,785,800 and $7,849,017 respectively.  There can be no assurance that the Company will ever record any earnings.

 

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

 

As stated above, the Company expects to incur losses for the foreseeable future. As of December 31, 2014, 2013 and 2012, the Company’s working capital was $11,079,641, $3,272,349 and $1,433,392 respectively.

 

The increase and maintenance of higher working capital in 2014 was due to the $4.5 million dollars financing completed on February 13, 2014 in addition to $9.9 million dollars raised through the exercise of stock options and warrants during the year ended December 31, 2014.  The Company has no capital commitments. The Company anticipates spending a minimum of $2,390,000 over the next two years on research and development activities.

 

The increased working capital from 2012 to 2013 was due to CA$7.2 million of financing completed on February 14, 2013 in addition to CA$5.4 million raised in the second half of 2012.  The Company used a portion of the funds raised in 2012 to settle the high accounts payable balances and the credit facility that were carried for most of 2012.  Additionally, $900,236 has been spent in 2013 and 2012 procuring machinery and equipment.

 

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applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S. and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected.

 

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

 

·                  stop using or exploiting the challenged intellectual property;

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

·                  redesign our technology to make it non-infringing.

 

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

 

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

 

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

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

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

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

 

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

 

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

 

Our results may fluctuate significantly and be unpredictable.

 

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

 

·                  the timing of entering into agreements with licensees;

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

·                  the demand for products that incorporate our technology;

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

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

 

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·                  the timing of orders from and shipments to systems companies of POET-based devices from semiconductor manufacturers;

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

·                  new litigation or developments in current litigation.

 

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

 

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

 

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

 

·                  reduction in scope, delay in completion or cancellation of licenses to one or more potentially significant customers;

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

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

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

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

 

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

 

Our success will depend substantially on systems companies.

 

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

 

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

·                  the engineering and marketing capabilities of the systems company;

·                  market acceptance of the systems company’s products;

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

·                  the financial and other resources of the systems company.

 

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

 

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

 

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

 

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

 

From time to time, we may be required to raise additional funds for our future capital needs through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive

 

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terms, or at all. Furthermore, any additional financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business.

 

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

 

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

 

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

 

A key part of our strategy is to form collaborations with semiconductor, defense and electronics companies that will assist us in developing, testing, and commercializing the POET platform. We currently have a collaborative agreement for process development with BAE Systems, Nashua, New Hampshire (“BAE”), which provides for a potential joint development program of the Company’s POET technology and undivided 50% joint interest in process development intellectual property, only in circumstances where such intellectual property is jointly developed at BAE Systems facilities thereunder (subject to the Company’s and its subsidiaries’ obligations to UCONN), with royalties running from each to the other in connection with revenues generated from the intellectual property.  To date, we have engaged with BAE in such a manner that BAE does not participate in the development of our core POET process technology, and we intend to maintain that separation of activities in the future.  We have recently entered into a supplement to our agreement with BAE which provides for incremental development work to be performed by BAE in connection with the commercial development of the POET technology.  BAE is not exclusive in this development program.  If we are required to engage a new company to undertake development work due to BAE’s inability to do so, we may be delayed in one or all stages of our progress, which could prove costly both operationally and strategically.

 

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

 

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

 

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

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

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

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

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

 

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

 

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

 

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

 

·                  minute impurities;

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

 

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

·                  electrical and/or optical performance; or

·                  wafer breakage.

 

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

 

Our POET platform incorporates technology licensed from third parties.

 

We incorporate technology (including software) licensed from a limited number of third parties in the deployment of our POET platform, including from UCONN.  We could be subjected to claims of infringement regardless of our lack of involvement in the development of the licensed technology.  Although a third-party licensor may, in some cases, indemnify us if the licensed technology infringes on another party’s intellectual property rights, such indemnification is typically limited in amount and may be worthless if the licensor becomes insolvent.  Our agreement with UCONN does not provide for indemnification of us for intellectual property infringement. Furthermore, any failure of third-party technology to perform properly would adversely affect the development or exploitation of POET.

 

Our intellectual property indemnification practices may adversely impact our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

There are foreign exchange risks associated with our Company.

 

Because we have historically raised funds in both the Canadian and U.S. markets, a portion of our costs are denominated in Canadian dollars and our funding is subject to foreign exchange risks.  A decrease in the value of the U.S. dollar relative to the Canadian dollar

 

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could affect our costs and potential future profitability.  We do not currently hold forward exchange contracts or other hedging instruments to exchange foreign currencies for U.S. dollars to offset potential currency rate fluctuations.

 

Risks Related to Our Common Stock

 

Our stock price has been and may continue to be volatile.

 

The trading price for our common stock on the TSX Venture Exchange (“TSXV”) has been and is likely to continue to be highly volatile.  Although we are registering our stock with the U.S. Securities Exchange Commission (“SEC”), no significant U.S. market may develop, and if such a market develops, prices on that market are also likely to be highly volatile.  The market prices for securities of early stage technology companies have historically been highly volatile.

 

Factors that could adversely affect our stock price include:

 

·                  fluctuations in our operating results;

·                  announcements of partnerships or technological collaborations and announcements of the results or further actions in respect of any partnerships or collaborations, including termination of same;

·                  innovations by us or our competitors;

·                  governmental regulation;

·                  developments in patent or other proprietary rights;

·                  the results of technology and product development testing by us, our partners or our competitors;

·                  litigation;

·                  general stock market and economic conditions;

·                  number of shares available for trading (float); and

·                  inclusion in or dropping from stock indexes.

 

As of March 15, 2015, our 52-week high and low closing market price for our common stock on the TSXV was CA$2.87 (US$2.614 and CA$0.65 (US$0.57), respectively, based on the closing exchange rates on the respective dates.

 

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

 

The Company has not earned profits, so its ability to finance operations is chiefly dependent on equity financings. Since 2012 the  Company has raised over CA$28.2 million (US$26 million) in equity financing through private placements or the exercise of stock options and warrants in support of the POET initiative, which has resulted in significant dilution to existing shareholders.  Further equity financings will also result in dilution to existing shareholders, and such dilution could be significant.

 

Future sales of common stock or warrants, or the prospect of future sales, may depress our stock price.

 

Sales of a substantial number of shares of common stock or warrants, or the perception that sales could occur, could adversely affect the market price of our common stock. Additionally, as of March 15, 2015, there were outstanding options to purchase up to 20,656,500 shares of our common stock that are currently exercisable and additional outstanding options to purchase up to 2,940,000 shares of common stock that are exercisable over the next several years.  As of March 15, 2015, there were outstanding warrants to purchase 21,432,163 shares of our stock. The holders of these options and warrants have an opportunity to profit from a rise in the market price of our common stock with a resulting dilution in the interests of the other shareholders. The existence of these options and warrants may adversely affect the terms on which we may be able to obtain additional financing. The weighted average exercise price of issued and outstanding options is $0.51 and the weighted average exercise price of warrants is $0.44, which compares to the $1.10 market price at closing on March 15, 2015.

 

Dilution through exercise of share options could adversely affect the Company’s shareholders.

 

Because the success of the Company is highly dependent upon its employees, the Company has granted to some or all of its key employees, directors and consultants options to purchase common shares as non-cash incentives. To the extent that significant numbers of such options may be granted and exercised, the interests of the other stockholders of the Company may be diluted.  As of March 15, 2015, there were 23,596,500 share purchase options outstanding with a weighted average exercise price of $0.511 and 21,432,163 share purchase warrants outstanding with a weighted average exercise price of $0.441. If all of these securities were exercised, an additional 45,028,663 common shares would become issued and outstanding. This represents an increase of 25.55% in the number of shares issued and outstanding and would result in significant dilution to current shareholders.

 

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The risks associated with penny stock classification could affect the marketability of the Company’s common shares and shareholders could find it difficult to sell their shares.

 

The Company’s common shares are subject to “penny stock” rules as defined in 1934 Securities and Exchange Act Rule 3a51-1. The SEC adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Transaction costs associated with purchases and sales of penny stocks are likely to be higher than those for other securities. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).

 

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the Company’s common shares in the United States and shareholders may find it more difficult to sell their shares.

 

The rights of our shareholders may differ from the rights typically afforded to shareholders of a U.S. corporation.

 

We are incorporated under the Business Corporations Act (Ontario) (the “OBCA”).  The rights of holders of our common shares are governed by the laws of the Province of Ontario, including the OBCA, by the applicable laws of Canada, and by our Articles of Continuance and all amendments thereto (collectively, the “Articles”), and our by-laws (the “By-laws”).  These rights differ in certain respects from the rights of shareholders in typical U.S. corporations.  The principal differences include without limitation the following:

 

Under the OBCA, we have a lien on any common share registered in the name of a shareholder or the shareholder’s legal representative for any debt owed by the shareholder to us.  Under U.S. state law, corporations generally are not entitled to any such statutory liens in respect of debts owed by shareholders.

 

With regard to certain matters, we must obtain approval of our shareholders by way of at least 66 2/3% of the votes cast at a meeting of shareholders duly called for such purpose being cast in favor of the proposed matter.  Such matters include without limitation: (a) the sale, lease or exchange of all or substantially all of our assets out of the ordinary course of our business; and (b) any amendments to our Articles including, but not limited to, amendments affecting our capital structure such as the creation of new classes of shares, changing any rights, privileges, restrictions or conditions in respect of our shares, or changing the number of issued or authorized shares, as well as amendments changing the minimum or maximum number of directors set forth in the Articles.  Under U.S. state law, the sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation generally requires approval by a majority of the outstanding shares, although in some cases approval by a higher percentage of the outstanding shares may be required.  In addition, under U.S. state law the vote of a majority of the shares is generally sufficient to amend a company’s certificate of incorporation, including amendments affecting capital structure or the number of directors..

 

Pursuant to our By-laws, two persons present in person or represented by proxy and each entitled to vote thereat shall constitute a quorum for the transaction of business at any meeting of shareholders.  Under U.S. state law, a quorum generally requires the presence in person or by proxy of a specified percentage of the shares entitled to vote at a meeting, and such percentage is generally not less than one-third of the number of shares entitled to vote.

 

Under rules of the Ontario Securities Commission, a meeting of shareholders must be called for consideration and approval of certain transactions between a corporation and any “related party” (as defined in such rules).  A “related party” is defined to include, among other parties, directors and senior officers of a corporation, holders of more than 10% of the voting securities of a corporation, persons owning a block of securities that is otherwise sufficient to affect materially the control of the corporation, and other persons that manage or direct, to a substantial degree, the affairs or operations of the corporation.  At such shareholders’ meeting, votes cast by any related party who holds common shares and has an interest in the transaction may not be counted for the purposes of determining

 

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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.

 

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

 

·                  an acquisition of our common shares if the acquisition were made in connection with the person’s business as a trader or dealer in securities;

·                  an acquisition of control of the Company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and

·                  an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control of the Company, through the ownership of voting interests, remains unchanged.  Under U.S. law, except in limited circumstances, restrictions generally are not imposed on the ability of non- residents to hold a controlling interest in a U.S. corporation.

 

We have adopted a Shareholders Rights Plan, which may discourage takeover offers, and limit the price investors may be willing to pay for our stock.

 

In 2014 our Board of Directors adopted and our shareholders ratified a Shareholder Rights Plan, the effect of which would cause substantial dilution to acquirors of more than 20% of our outstanding Common Shares, which could have the effect of delaying, deferring or preventing a change in control of our Company even if a change in control would be beneficial to our shareholders.  These provisions could limit the price that certain investors might be willing to pay in the future for shares of our Common Stock.

 

As a “foreign private issuer”, the Company is exempt from certain sections of the Exchange Act which results in shareholders having less complete and timely data than if the Company were a domestic U.S. issuer.

 

As a “foreign private issuer,” as defined under the U.S. securities laws, we are exempt from certain sections of the Exchange Act. In particular, we are exempt from Section 14 proxy rules which are applicable to domestic U.S. issuers. The submission of proxy and annual meeting of shareholder information (prepared to Canadian standards) on Form 6-K has typically been more limited than the submissions required of U.S. issuers and results in shareholders having less complete and timely data, including, among others, with respect to disclosure of: (i) personal and corporate relationships and age of directors and officers; (ii) material legal proceedings involving the Company, affiliates of the Company, and directors, officers promoters and control persons; (iii) the identity of principal shareholders and certain significant employees; (iv) related party transactions; (v) audit fees and change of auditors; (vi) voting policies and procedures; (vii) executive compensation; and (viii) composition of the compensation committee. In addition, due to the Company’s status as a foreign private issuer, the officers, directors and principal shareholders of the Company are exempt from the short-swing insider disclosure and profit recovery provisions of Section 16 of the Exchange Act. Therefore, these officers, directors and principal shareholders are exempt from short-swing profits which apply to insiders of U.S. issuers. The foregoing exemption results in shareholders having less data in this regard than is available with respect to U.S. issuers.

 

If the Company is characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.

 

As more fully described below in ITEM 10.E. “Taxation” — United States Federal Income Tax Considerations — Passive Foreign Investment Company Status”, if for any taxable year our passive income, or the value of our assets that produce (or are held for the

 

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production of) passive income, exceed specified levels, we may be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our U.S. shareholders, including gain on the disposition of our common shares being treated as ordinary income and any resulting U.S. federal income tax being increased by an interest charge. Rules similar to those applicable to dispositions generally will apply to certain “excess distributions” in respect of our common shares.

 

ITEM 4.                                                INFORMATION ON THE COMPANY

 

A.  History and Development of the Company

 

The legal and commercial name of the Company is POET Technologies Inc.  The Company was originally incorporated under the British Columbia Company Act on February 9, 1972 as Tandem Resources Ltd.  On November 14, 1985, Tandem Resources Ltd. amalgamated with Stanmar Resources Ltd. and Keezic Resources Ltd., to continue as one company under the name Tandem Resources Ltd. under the British Columbia Company Act.  By Articles of Continuance dated January 3, 1997, Tandem Resources Ltd. was continued under the OBCA.  By Articles of Amendment dated September 26, 2006, Tandem Resources Ltd. changed its name to OPEL International Inc.  By Certificate of Continuance dated January 30, 2007, OPEL International Inc. was continued under the New Brunswick Business Corporations Act.  By Articles of Continuance dated November 30, 2010, OPEL International Inc. was continued under the OBCA and changed its name to OPEL Solar International Inc.  By Articles of Amendment dated August 25, 2011, OPEL Solar International Inc. changed its name to OPEL Technologies Inc. By Articles of Amendment dated July 23, 2013, OPEL Technologies Inc. changed its name to POET Technologies Inc.

 

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

 

Through our subsidiary ODIS, we develop the technology to produce a monolithic, integrated opto electronic microchip having several potential major market applications: infrared sensor arrays for Homeland Security monitoring and imaging along with the unique combination of optical lasers, and electronic control circuits on the same microchip for potential applications in various military programs and potentially telecom for Fiber-to-the-home. ODIS’ technology also provides the opportunity for higher speed computing capabilities.

 

Capital Expenditures

 

Our capital expenditures for the last two years, which principally consist of purchases of research and development equipment and instrumentation and patents are as follows:

 

Period		Capital Expenditure			Purpose
Fiscal 2014		$	527,068		Instruments, equipment and patents
Fiscal 2013		$	1,000,783		Instruments, equipment and patents

 

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

 

B.  Business Overview

 

Corporate Overview

 

The Company is a fabless semiconductor company developing a novel semiconductor technology called POET (Planar Opto Electronic Technology) which is anticipated to allow the integrated fabrication of digital, analog and optical components on a single integrated circuit (“IC” or “die”), a capability that is not offered by the processes and materials commonly used in the industry today.

 

The POET platform allows the simultaneous fabrication of electronic and optical devices on a single integrated circuit, an achievement that has not been accomplished using the silicon-based technologies currently dominating the market.  Key benefits of the ability to integrate electronic and optical devices are anticipated to include: (i) faster semiconductor device speeds; (ii) increased device output power; (iii) decreased need for device cooling; (iv) greater reliability; and (v) total system cost reductions.  With POET’s materials system incorporating periodic table element groups III, IV and V (“Group III-V”), we expect that active optical elements and high-performance electronic elements can be packed in a single integrated circuit built around a GaAs wafer at a density similar to that of silicon, the market’s traditional integrated circuit material.

 

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

 

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

 

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

 

POET technology currently under development has not yet been utilized in production environments, and there are no assurances that our development and marketing efforts will ever result in POET being utilized by any manufacturer or otherwise commercialized.

 

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

 

·                  Pad, Tablet and Cloud OS-type PC devices — Demand continues to surge for tablet-class devices, and the market for tablet PCs built on cloud-based services is expanding.  Examples of devices key to this market are DRAM and logic circuits. These markets are projected in 2015 at $43.6 billion and $97.6 billion, respectively. Within such devices, POET’s platform is anticipated to allow analog and digital devices to be integrated in the same die. This is expected to reduce the number of parts on the bill of material (BOM), thereby reducing manufacturing costs, increasing functionality and reducing power usage.

 

·                  Smartphones — 3G/4G smartphones are set to impact on the future of analog, DSP, logic, and NAND flash memory integrated circuit markets.  The mobile phone IC market alone is projected to be $85.4 billion for 2015.  The Company anticipates that the POET platform’s performance and power saving boosts resulting from the incorporation of POET’s functional capabilities in GaAs ICs will be attractive to manufacturers of intelligent portable devices because of the potential speed, power utilization and space advantages offered by integrating analog, mixed signal and digital functions. The same advantages of reducing the BOM part count, reducing manufacturing costs and reducing power consumption prolonging battery life apply in this market as well.

 

·                  Digital and Smart TVs — Streaming capability via the Internet will be the must-have technology over the next few years; this points to increased revenues for LED drivers, power management ICs, and MCUs/MPUs. MPUs/CPUs which are forecast at $73.5 billion for 2015.  Advances in Smart TV technology will require increased bandwidth to the panel technology.  POET may enable integration of analog and faster digital device performance and lower total power usage.

 

·                  Smart Grids and Advanced Metering Infrastructure (AMI) — Residential appliances and related electrical systems are now being designed for interaction with power utilities via the Internet and local networks. Smart grid technology investment is forecast to grow 9.5% annually through 2017. Smart Grids and AMI devices are small and cost sensitive.   POET may

 

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enable manufacturers to reduce the number of parts in such devices, thereby requiring less assembly time and better final product yields.

 

·                  “Internet of Things” — The identification, monitoring, and control of objects with an addressable Internet protocol has been gaining momentum for over a decade with no abatement in sight.  The sensor and actuator semiconductor market, one of the areas impacted by this sector, is projected to be an $11.4 billion market in 2015. POET’s low power attribute and potential ability to integrate the analog front end with a processor core and an energy harvester in a one-chip solution may be important in the emerging Internet of Things market.

 

*Data in the first four bullet points was sourced from IC Insights’ IC Market Drivers 2014 Report. Data in the last bullet (sensors/actuators) was sourced from the 2014 edition of IC Insights’ Opto-Sensor-Discrete (O-S-D) Report.

 

PTI’s POET technology is applicable in a large portion of this semiconductor market as it represents an integrated comprehensive solution to increasing semiconductor performance in an economical and functional manner.  The ability to be adapted to existing fabs with a minimum of re-tooling requirements, compared to alternatives, is an important differentiator.  Business indicators suggest that POET may provide significant value to ever growing markets, where it addresses a need for lower power consumption, speed, solution size, and cost efficiency.

 

We are striving to develop the POET platform to provide the following advantages to the industry:

 

·                  Application Performance up to 10x faster than existing technologies

·                  Up to 90% power savings improvement over existing technologies (depending on application)

·                  Flexible and integrated application solutions that can be applied to a broad range of technical applications, including memory, digital/mobile, sensor/laser and electro-optical, among many others

·                  POET process can be deployed into existing silicon fabs — Since POET is a CMOS friendly technology fabricated using standard lithography techniques; it could be easily integrated into current semiconductor production facilities, extending the utilization of fabrication equipment and production lines.

 

No assurances can be given that we will be able to achieve these goals in the near future, if ever.  PTI’s strategy is to continue research towards the expansion of the IP portfolio and the aggressive development of devices for the POET platform.

 

The disruptive potential of the POET technology was first recognized within the military community, and this recognition has remained strong.  Despite this connection, historical military development work does not constrain the commercial application of the POET Technology.

 

Military

 

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

 

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

 

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

 

POET could have the ability to offer a low-cost monolithic solution to multi-spectral imaging.  The compact array could provide: (i) detection, readout and analog-to-digital conversion on a single chip; (ii) a common axis for ultraviolet, visible and infrared imaging; (iii) wavelength scanning; and (iv) 300K operation with no cooling required.  The Space Foundation has indicated that this technology

 

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D.  Property, Plants and Equipment

 

The Company’s head Canadian office is located in a 1,400-sq. ft. leased office space in Toronto, Ontario, Canada.  The Company has its operational office in a 5,996-sq. ft. leased office space in Storrs-Mansfield, Connecticut, on the campus of UCONN.  We also have access to office space on a month to month basis in San Jose, California.

 

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

 

ITEM 4A.                                       UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 5.                                                OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2014, 2013 and 2012 and the accompanying notes thereto included elsewhere in this Annual Report.  This discussion contains forward-looking statements that involve risks and uncertainties.  Actual results could differ materially from those anticipated by forward-looking information due to factors discussed under “ITEM 3.D. Risk Factors” and “ITEM 4.B. Business Overview.”

 

A.  Operating Results

 

Restated Financial Information

 

During the 2014 fiscal year, the Company made an accounting policy change to capitalize its patent registration costs (see note 20 to the financial statements which are included at item 17). The previous accounting policy was to charge patent registration costs against profit and loss in the year those costs are incurred.

 

The new accounting policy was adopted in 2014 and has been applied retrospectively. Management believes that the change in accounting policy will provide more relevant and reliable information. The Company is developing an intangible process which is increasing the net worth of the Company. This retrospective change in accounting policy provides more transparent information relating to these assets as they are expected to provide future economic benefits and can be measured reliably.

 

Factors Affecting Our Results of Operations

 

The Company is a research and development company that does not have any revenue sources. We are developing a technological process that demands significant investments of cash and other resources. The Company has not earned a profit since its inception. Due to current stage of the process development, the Company’s most significant expenses are human resources related, either directly as wages and benefits or through the valuation of stock options granted to employees as part of their compensation.

 

Taxation

 

See ITEM 10.E. “Taxation.”

 

Critical Accounting Policies and Estimates

 

The Company prepares its audited consolidated financial statements in accordance with IFRS as issued by the IASB.  The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting assumptions and estimates. These assumptions are limited by the availability of reliable comparable data and the uncertainty of predictions concerning future events.  It also requires management to exercise judgment in applying the Company’s accounting policies.  The Company believes that the estimates and assumptions upon which it relies are reasonable based upon information available at the time that these estimates and assumptions are made.  Actual results could differ from these estimates.  The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below.

 

Basis of presentation

 

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

 

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Year Ended December 31, 2014 compared to Year Ended December 31, 2013

 

Costs and Expenses

 

The loss for the year ended December 31, 2014 increased by $3,936,783 from $7,849,017 for the year ended December 31, 2013 to $11,785,800 for the year ended December 31, 2014. The increased loss was a result of a few significant factors, the most significant of which was the one-time non-cash issuance of 2,000,000 common shares to the University of Connecticut valued at $1,439,898 for the reduction of certain royalty rights in exchange for an investment in the Company.  The parties agreed to restructure the payment provisions of the License Agreement by reducing royalty payments to three percent (3%) of amounts received from unaffiliated third parties in respect of the exploitation of the Intellectual Property defined in the License Agreement, in consideration for 2,000,000 common shares of the Company.

 

Non-cash stock-based compensation increased by $594,844 from $4,021,153 for the year ended December 31, 2013 to $4,615,997 for the year ended December 31, 2014.  Stock based compensation is calculated on the date of the stock option grant and is amortized and expensed in the year that the stock options vest.   Criteria such as stock price at the grant date, and number of stock options granted will affect the value of the granted stock and in turn the stock option compensation as this amount is amortized at the stock option vest date.   It is important to note that this non-cash expense is considered an integral part of the Company employing and maintaining highly qualified and competent personnel to reach its goals.  For the purposes of clarity and simplicity, the Company reclassified any stock based compensation included in research and development costs to stock-based compensation.

 

The Company granted 6,155,000 stock options during the year in 2014 while 7,310,000 were granted in 2013.

 

The increase of $868,650 in wages and benefits is due to the addition of the COO, Stephane Gagnon ($172,000 in 2014 and $26,000 in 2013), severance package to the former CEO ($185,000 in 2014, and nil in 2013), bonuses  ($475,000 in $2014 and $60,000 in 2013), and increase in director fees of $110,000 ($233,000 in 2014 and $123,000 in 2013). Having the “right people in the right places” is a key success driver of the Company. The Company is therefore committed to appropriate investments in human capital to ensure that the right people are in place to help the Company reach its strategic goals.

 

General expenses increased by $103,778 from $558,560 in 2013 to $662,668 in 2014. The increase was attributed to increased travel expenses, filing and regulatory fees and shareholder communications.

 

During the year, professional fees increased by almost 44% or $275,635 from $632,159 in 2013 to $907,794 in 2014.  On January 24, 2014, the Company submitted a registration statement on Form 20-F in connection with the registration of its common stock under the U.S. Securities Exchange Act of 1934. In preparation for this filing, the Company incurred substantial legal and accounting fees.  The filing of the Form 20-F is the first step in the Company’s plan to list the Company’s securities on a U.S. exchange. If successful, it is anticipated that this would result in more liquidity for the Company’s shares, access to other capital markets and greater visibility to prospective partners during the process of monetization.   There can be no assurances that the Company’s shares will be registered on a U.S. exchange. Additionally, the Company paid fees relating to the update of the Pellegrino valuation report previously commissioned by it.  Legal fees for the Company continue to be a significant expense due to the regular contract reviews, patent reviews and legal costs associated with being a publicly traded Company. The Company also incurred $110,000 of recruitment fees related to the Company’s executive recruitment program.

 

Depreciation and amortization increased by $163,704. Depreciation and amortization was $73,535 in 2013 as compared to $237,239 in 2014.  The Company added new equipment and patent registration throughout 2013 and 2014 totaling $1,528,000.  The new equipment provides the Company with the opportunity to advance the POET process within the confines of its own lab and advance its timelines toward monetization.  The current year is the first full year of depreciation for these new assets added in 2013 and partial depreciation for assets added in 2014.

 

Research and development increased by $276,023 from $1,360,728 in 2013 to $1,636,751 in 2014.  The increase was primarily due to the increased wages and benefits of $207,653 resulting from the appointment of the new VP Product Development, currently the Company CTO, and annual wage increases.  The CTO brings to the Company two distinct experiences: strategic product roadmap definition - addressing server and storage vertical markets; and broad integrated circuit development encompassing analog mixed signal through large digital application specific integrated circuits.  The Company also added 2 new R&D employees to help support the R&D and monetizing efforts. Additionally, subcontract fees and R&D supplies increased by an aggregate $68,370.  The increase in subcontract fees was primarily due to fees paid to a “3rd party foundry” for specialty work done in replicating the fabrication process and consulting towards shrinking the PET process to 40-nm.

 

The Company has completed all its projects under SBIR grants. As a result  SBIR grant income in 2014 was $169,832 as compared to $342,874 in 2013.  During 2014 the Company decided to eliminate its use of SBIR grants in order to focus all of its resources on developing and monetizing the technology.

 

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