POET Technologies Inc. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. Amounts are U.S. dollars unless noted. Financial statements are prepared under IFRS and audited by Marcum LLP, which issued an unqualified opinion.
Business context
POET develops its Optical Interposer platform for integrating electronic and photonic devices, targeting data-center transceivers and other photonics applications. On November 8, 2019, it sold DenseLight, its major operating subsidiary, for $26.0 million and shifted toward a “fab-light” model focused on Optical Interposer development. DenseLight’s results are presented as discontinued operations. POET reported delivery of certain component prototypes in 2019 and expects further prototype work; it is developing Optical Engines and components for 400G transceivers.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Continuing-operations loss before tax | $11.73 million | $8.42 million |
| Continuing-operations loss after tax | $11.43 million | $8.42 million |
| Discontinued-operations income (loss), net of tax | $5.48 million | ($7.90 million) |
| Net loss | $5.95 million | $16.32 million |
| Net loss per share | $0.02 | $0.06 |
| Operating cash used | $9.39 million | $9.29 million |
| Cash and cash equivalents at year-end | $1.43 million | $2.57 million |
| Total assets | $24.08 million | $25.14 million |
| Total liabilities | $5.04 million | $4.04 million |
| Working capital | $15.35 million | $3.85 million |
- FY2019 discontinued operations—DenseLight through November 8—reported revenue of $4.43 million and gross profit of $3.22 million, a 73% gross margin. These are not continuing-operations sales after the divestiture.
- Continuing-operations selling, marketing and administrative expense was $6.70 million, up from $6.17 million; research and development was $2.08 million, down from $2.26 million.
- Continuing operations recorded $1.76 million of impairment charges, including $1.05 million of BB Photonics goodwill and $714,000 of in-process R&D. Interest expense was $820,000 and debt-issuance cost amortization was $372,000.
- Year-end current assets were $20.26 million, largely comprising an $18.0 million receivable from the DenseLight sale. Cash flow from investing activities was $5.40 million, including sale-related proceeds; financing activities provided $3.14 million.
- At December 31, convertible debentures had a carrying value of $3.09 million. The company reported $3.43 million outstanding as of April 22, 2020. The debentures bear 12% annual interest and mature two years after issuance.
Material changes versus prior periods
- Net loss narrowed to $5.95 million from $16.32 million, principally because 2019 included an $8.71 million gain on the DenseLight sale and 2018 included a discontinued-operations loss. However, continuing-operations loss increased to $11.43 million from $8.42 million.
- DenseLight’s 2019 discontinued-operations revenue rose 14% to $4.43 million compared with its full-year 2018 revenue of $3.89 million, despite 2019 covering only January 1 through November 8. Its gross margin increased to 73% from 62%.
- Cash used in operations remained high at $9.39 million, compared with $9.29 million in 2018. Year-end cash declined by $1.14 million.
- POET had 288,363,553 common shares outstanding at year-end. Headcount fell from 99 full-time employees at December 31, 2018 to 16 at December 31, 2019, mainly reflecting the DenseLight divestiture.
Outlook, risks and unusual items
- Management said available resources were sufficient for operating requirements over the next 12 months. The filing also says POET has never been profitable, has a history of operating losses and may need further financing; it maintains no credit facility.
- Of the $26.0 million sale consideration, $8.0 million was received at closing. The company reported subsequent receipts of $4.75 million on February 14, 2020 and $8.25 million on March 30, 2020; the remaining $5.0 million was expected by May 31, 2020. An additional $2.0 million received with the later tranches was paid to Oak Capital for buyer-related due-diligence, legal and other expenses.
- Debenture holders may have a right, subject to restrictions, to require repurchase following completion of the DenseLight sale. POET warned that redemptions could divert cash from operations, particularly if the final sale payment were not received. The company cited COVID-19-related uncertainty and potential material adverse effects.
- Key execution risks include obtaining customer qualification and design wins, converting development discussions and non-recurring engineering work into sustained revenue, achieving high-volume manufacturing with third parties, protecting intellectual property after the divestiture, and competing against better-resourced companies. The filing says no customer had fully committed to adopting an Optical Interposer product in a production product.
- Additional risks include dependence on limited or sole-source suppliers, financing and dilution risk, debt servicing and redemption risk, share-price volatility, and foreign-exchange exposure. Management estimated a 10% change in the Canadian and Singapore dollars could change other comprehensive loss by about $291,000.
- Management assessed disclosure controls and internal control over financial reporting as effective at year-end; the auditor was not engaged to opine on internal-control effectiveness. POET has not paid dividends and does not anticipate doing so in the foreseeable future.
Important facts for investors to verify
- Whether and when the final $5.0 million DenseLight sale payment was received, and the related escrow/share-release status.
- The debenture terms, amount currently outstanding, holder redemption rights and any resulting cash obligations.
- Current cash, operating cash burn and the assumptions supporting management’s stated 12-month funding sufficiency.
- Customer qualification progress, paid development engagements, production commitments and commercial timing for the 400G Optical Engine roadmap.
- Potential dilution from outstanding options, warrants and convertible securities, and the financing required to fund continuing development.
- The impact of the DenseLight sale and discontinued-operations presentation when comparing reported revenue, margins and losses across periods.