SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
-------------------------------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________________ to___________________
Commission File Number: 0-27977
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Lumenon Innovative Lightwave Technology, Inc.
---------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 98-0213257
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8851 Trans-Canada Highway, Ville Saint-Laurent (QC) Canada H4S 1Z6
---------------------------------------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
(514) 331-3738
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 ( ) No
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 36,069,153 shares of Common Stock,
$.001 par value, as of November 8, 2000.
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and June 30, 2000 3
Consolidated Statements of Operations (unaudited) for the
three months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
(unaudited) for the three months ended
September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
PART II. OTHER INFORMATION 21
Item 2. Change in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Balance Sheets
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
September 30, September 30, June 30,
2000 2000 2000
----------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(note 6)
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 304 $ 458 $ 1,125
Term deposits 30,866 46,515 4,300
Interest and sales tax receivable 1,313 1,979 366
Research tax credits receivable 201 303 191
Prepaid expenses 77 116 77
----------------------------------------------------------------------------------------------------------------------
32,761 49,371 6,059
Deposits (note 7) 1,229 1,852 1,525
Property and equipment (note 3) 12,618 19,016 4,603
Other assets 11 16 13
----------------------------------------------------------------------------------------------------------------------------
$ 46,619 $ 70,255 $ 12,200
============================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,293 $ 6,470 $ 1,047
Accrued liabilities 387 583 325
Obligations under capital leases 357 538 235
----------------------------------------------------------------------------------------------------------------------
5,037 7,591 1,607
Convertible notes (note 4) 14,120 21,278 -
Obligations under capital leases 514 775 279
Stockholders' equity:
Share capital (note 5) 35 53 49
Additional paid-in capital (note 5) 194,211 292,676 234,864
Accumulated deficit (167,298) (252,118) (224,599)
----------------------------------------------------------------------------------------------------------------------
26,948 40,611 10,314
Commitments (note 7)
Subsequent events (note 9)
----------------------------------------------------------------------------------------------------------------------------
$ 46,619 $ 70,255 $ 12,200
============================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
On behalf of the Board:
______________________ Director
______________________ Director
-3-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Operations
(Unaudited)
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Three months Three months hree months From
ended ended ended inception to
September 30, September 30, ptember 30, September 30,
------------------------------------------------------------------------------------------------------------------------------------
2000 2000 1999 2000
------------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$)
(note 6)
<S> <C> <C> <C> <C>
Expenses:
Research and
development $ 966 $ 1,457 $ 2,069 $ 220,926
Research tax credits (75) (113) (35) (439)
------------------------------------------------------------------------------------------------------------------------------------
891 1,344 2,034 220,487
General and administrative
expenses 2,415 3,639 487 8,519
Depreciation 364 548 91 1,441
------------------------------------------------------------------------------------------------------------------------------------
2,779 4,187 578 9,960
Other expenses (income):
Loss (gain) on foreign
exchange (472) (711) 55 (782)
Interest expense 484 729 13 771
Interest income (526) (793) (16) (1,081)
------------------------------------------------------------------------------------------------------------------------------------
14,591 21,988 52 21,671
------------------------------------------------------------------------------------------------------------------------------------
Net loss $ 18,261 $ 27,519 $ 2,664 $ 252,118
------------------------------------------------------------------------------------------------------------------------------------
Net loss per share $ 0.53 $ 0.80 $ 0.13
-----------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding 34,511,352 34,511,352 21,116,992
-----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Three months Three months Three months From
ended ended ended inception to
September 30, September 30, September 30, September 30,
------------------------------------------------------------------------------------------------------------------------------------
2000 2000 1999 2000
------------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$)
(note 6)
Cash flows from:
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (18,261) $ (27,519) $ (2,664) $ (252,118)
Adjustment for items not
involving cash:
Depreciation 364 548 91 1,441
Interest expense on
convertible notes 15,587 23,489 23,489
Compensation cost 469 707 - 999
Shares issuable for
services - - 1,892 217,359
Unrealized loss on
foreign exchange 431 650 - 650
Net change in operating assets
and liabilities (note 8) (805) (1,211) (231) (954)
------------------------------------------------------------------------------------------------------------------------------------
(2,215) (3,336) (912) (9,134)
Financing activities:
Proceeds from issuance of
common shares 3,911 5,893 3,985 23,141
Cash from the acquisition of a
subsidiary - - - 814
Share issue expenses (18) (27) (292) (1,125)
Principal repayments of
capital lease (54) (81) - (171)
Proceeds from issuance of
convertible notes 34,003 51,243 - 51,542
Debt issue costs (1,898) (2,861) (2,861)
------------------------------------------------------------------------------------------------------------------------------------
35,944 54,167 3,693 71,340
Investing activities:
Additions to property and
equipment (5,941) (8,953) (535) (13,365)
Deposits (217) (327) - (1,852)
Purchases of term deposits (38,594) (58,162) (2,787) (77,975)
Disposals of term deposits 10,582 15,947 - 31,460
Additions to other assets (2) (3) - (16)
------------------------------------------------------------------------------------------------------------------------------------
(34,172) (51,498) (3,322) (61,748)
------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash
and cash equivalents (443) (667) (541) 458
Cash and cash equivalents,
beginning of period 747 1,125 1,723 -
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 304 $ 458 $ 1,182 $ 458
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Unaudited)
Three-month periods ended September 30, 2000 and 1999 and period from inception
(March 2, 1998) to September 30, 2000 (in thousands of Canadian dollars, except
per share amounts)
--------------------------------------------------------------------------------
In the opinion of management, the accompanying unaudited interim financial
statements, prepared in accordance with US generally accepted accounting
principles, contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the Corporation's financial position
as at September 30, 2000, June 30, 2000, its results of operations and
cash flows for the three months ended September 30, 2000 and 1999 and from
inception to September 30, 2000.
While management believes that the disclosures presented are adequate to
make the information not misleading, these consolidated financial
statements and notes should be read in conjunction with the Corporation's
Consolidated Financial Statements at June 30, 2000.
1. Organization and business activities:
The Corporation's principal business activity is to develop products
related to the Dense Wavelength Division Multiplexing market and other
photonics markets.
The Corporation is subject to a number of risks, including successful
development and marketing of its technology and attracting and retaining
key personnel. The Corporation has entered into the process of
establishing its production facilities during the three-month period ended
September 30, 2000. In order to achieve its business plan, the Corporation
anticipates the need to raise additional capital.
2. Molex agreements:
(a) Stock Restriction Agreement:
As part of financing arrangements of 1999 with Molex Incorporated
("Molex"), the Corporation entered into a stock restriction
agreement whereby no primary stockholders can sell any share to
competitors of Molex without Molex's prior consent. The agreement
includes Right of First Refusal and Preemptive rights except that
Lumenon can issue 6,000 units (one common share and a warrant for
the purchase of one common share at a price not less than $1.32
(US$0.90) per share) at a price not less than $0.74 (US$0.50) per
unit to raise capital within 24 months from the date of the
agreement.
Certain rights or restrictions might be terminated upon completion
of a Public Sale or a Public Offering as defined in the agreement.
-6-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended September 30, 2000 and 1999 and period from inception
(March 2, 1998) to September 30, 2000 (in thousands of Canadian dollars, except
per share amounts)
--------------------------------------------------------------------------------
2. Molex agreement (continued):
(b) Teaming Agreement:
Under the terms of a teaming agreement, Molex is committed to
purchase a certain number of photonic devices of Lumenon for the
first twelve months. After the twelve-month period, Molex will have
the option to purchase up to 50% of the excess capacity of Lumenon
and both Lumenon and Molex will share Molex's profit upon resale of
those devices. Under certain circumstances, Molex may have the right
to manufacture all components of the devices in return of a royalty
as defined in the agreement.
3. Property and equipment:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
September 30, 2000
--------------------------------------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer equipment and software $ 672 $ 91 $ 581
Office equipment and fixtures 782 57 725
Leasehold improvements 1,550 140 1,410
Pilot plant equipment and
laboratory installation 6,601 1,153 5,448
Production equipment and laboratory
installation 10,852 - 10,852
-------------------------------------------------------------------------------------------------
$ 20,457 $ 1,441 $ 19,016
-------------------------------------------------------------------------------------------------
</TABLE>
Cost and net book value of pilot plant and production equipment held under
capital leases amount to $1,528 and $1,395 respectively as at September
30, 2000.
The Corporation is in the process of establishing its production
facilities. No depreciation was recorded with respect to production
equipment and laboratory installation.
-7-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended September 30, 2000 and 1999 and period from inception
(March 2, 1998) to September 30, 2000 (in thousands of Canadian dollars, except
per share amounts)
--------------------------------------------------------------------------------
4. Convertible notes:
On July 25, 2000, the Corporation closed a financing involving the
issuance of $51,243 (US$35,000,000) five-year convertible notes bearing
interest at 7.5% per annum. Interest is payable upon the earlier to occur
of the repayment or conversion of the notes. The notes are convertible at
any time into the Corporation's common stock at a conversion price based
on the closing bid price of the common stock at the time of conversion
with a floor of US$7 and a ceiling of US$25.
The investors also received five-year common stock purchase warrants
entitling them to acquire a total of 5,000,800 shares exercisable on or
after January 25, 2002 and expiring on July 25, 2005. Exercise price of
the warrants is based on a formula whereby such price may vary from US$10
to US$30. In addition, the exercise price will be lower than the fair
market value except if the fair market value is equal or lower than US$10.
Related debt issue costs amounted to $2,861.
The Corporation applied APB-14 ("Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants") and EITF 98-5 ("Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios"). As a result, the convertible notes were
discounted by $34,394 and are presented net of the debt discount which is
amortized over the term of the notes. Interest expense with respect to the
beneficial conversion feature of convertible notes and amortization of
debt discount was recorded in the amount of $20,960. Additional paid-in
capital was increased by $51,243 as a result of the amount allocated to
the stock purchase warrants and the beneficial conversion feature of the
notes.
-8-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended September 30, 2000 and 1999 and period from inception
(March 2, 1998) to September 30, 2000 (in thousands of Canadian dollars, except
per share amounts)
5. Share capital:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
September 30, June 30,
2000 2000
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized:
1,000,000 preferred shares, par value
of US$0.001 per share
100,000,000 common shares, par value
of US$0.001 per share
Issued and outstanding:
35,452,739 common shares (June 30, 2000 - 32,970,039) $ 53 $ 49
-----------------------------------------------------------------------------------------------------------
</TABLE>
During the three-month period ended September 30, 2000, the Corporation
concluded the following share capital transactions:
(a) Issue of shares:
2,482,700 common shares were issued for a cash consideration of
$5,893 upon exercise of options and warrants.
(b) Stock option plan:
Changes in outstanding options for the three-month period ended
September 30, 2000 were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Weighted average
Number exercise price per share
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, June 30, 2000 2,277,150 $13.92 (US$9.24)
Granted 1,105,000 $35.67 (US$23.67)
Exercised (144,500) $1.53 (US$1.03)
--------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 2000 3,237,650 $21.90 (US$14.53)
--------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 2000, 204,650 outstanding options are exercisable
and 3,033,000 outstanding options vest over a period of one to seven
years.
-9-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended September 30, 2000 and 1999 and period from inception
(March 2, 1998) to September 30, 2000 (in thousands of Canadian dollars, except
per share amounts)
5. Share capital:
(c) Warrants:
The following warrants are outstanding at September 30, 2000:
-----------------------------------------------------------------------------
Warrants Expiry date Exercise price per share
-----------------------------------------------------------------------------
10,000 October 2000 $23.36 (US$15.50)
43,011 December 2000 $45.21 (US$30.00)
700,000 June 2001 $2.26 (US$1.50)
14,000 July 2003 $37.68 (US$25.00)
5,000,800 July 2005 *
-----------------------------------------------------------------------------
5,767,811
-----------------------------------------------------------------------------
* The exercise price per share, to be established in 18 months,
may vary from $15.07 (US$10.00) to $45.21 (US$30.00) subject
to the then traded value of the stock (note 4).
6. Functional currency and convenience translation:
The functional currency of the Corporation is the Canadian dollar.
US dollar amounts presented on the balance sheets, statements of
operations and cash flows are provided for convenience of reference only
and are based on the closing exchange rate at September 30, 2000, which
was $1.507 Canadian dollar per US dollar.
-10-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended September 30, 2000 and 1999 and period from inception
(March 2, 1998) to September 30, 2000 (in thousands of Canadian dollars, except
per share amounts)
7. Commitments:
(a) Since July 1, 2000, the Corporation entered in new capital leases at
interest rate varying from 11.75% to 13.96%. Minimum lease payments
under capital lease agreements for the next four years are as
follows:
--------------------------------------------------------------------------------
2001 $ 277
2002 279
2003 236
2004 3
--------------------------------------------------------------------------------
$ 795
--------------------------------------------------------------------------------
(b) As at September 30, 2000, the Corporation is committed to purchase
equipment in the amount of $2,469 for which $1,852 was disbursed and
recorded under deposits.
(c) In addition, the Corporation is committed to acquire equipment
through capital leases in the amount of $1,464 repayable over a
period of approximately three years.
(d) On July 21, 2000, the Corporation entered into a non-exclusive
license agreement with a third party. Under the terms of this
agreement, Lumenon is committed to pay royalties on sales of
products as defined in the agreement.
-11-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended September 30, 2000 and 1999 and period from inception
(March 2, 1998) to September 30, 2000 (in thousands of Canadian dollars, except
per share amounts)
--------------------------------------------------------------------------------
8. Supplemental cash flow disclosure:
(a) Net change in operating assets and liabilities:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Three months Three months Three months From
ended ended ended inception to
September 30, September 30, September 30, September 30,
2000 2000 1999 2000
------------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$) (CAN$)
Interest and sales
<S> <C> <C> <C> <C>
tax receivable $ (1,071) $ (1,613) $ (136) $ (1,979)
Research tax credits
receivable (75) (113) (38) (303)
Prepaid expenses (26) (39) 23 (116)
Accounts payable and
accrued liabilities 367 554 (80) 1,444
------------------------------------------------------------------------------------------------------------------------------------
$ (805) $ (1,211) $ (231) $ (954)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Non-cash investing and financing activities:
Acquisition of property and equipment through capital leases amounts
to $880 for the three- month period ended September 30, 2000.
Capital expenditures of $5,127 are included in accounts payable at
September 30, 2000.
9. Subsequent events:
(a) On October 16, 2000, $10,549 (US$7,000) of the principal amount of
the convertible notes plus interest were converted into 616,414
common shares.
(b) In October 2000, the Corporation granted under its stock option
incentive plan 352,500 options to certain employees for the purchase
of 352,500 common shares at price varying from $23.92 (US$15.87) to
$41.50 (US$27.54)
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believe,"
"anticipate," "estimate" "expect" and words of similar import, constitute
"forward-looking statements." You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us as described below and elsewhere in this
Quarterly Report, and in other documents we have filed with the SEC.
All numbers in this management's discussion section are rounded to
the nearest thousand.
RESULTS OF OPERATIONS
We are a development stage company that has not yet realized any
revenues from operations.
Research and development expenses for the three-month period ended
September 30, 2000, net of tax credits and grants, were CDN$1,344,000
(US$891,000) compared to CDN$2,034,000 during the same period in 1999. The
decrease of CDN$690,000 in research and development expenses is due to a
CDN$1,892,000 non-cash expense resulting from the issuance of our common stock
in consideration of certain services rendered by Molex Incorporated under the
terms of a teaming agreement during the 1999 period. The exclusion of these
charges of CDN$1,892,000 from research and development expenses in the quarter
ended September 30, 1999 would result in an effective increase of CDN$1,202,000
compared to the 2000 period. This effective increase is due to the fact that the
Company increased its research and development headcount by six to meet demands
of increased work volume as the research and development team focused its
efforts on the introduction of new designs, on the refinement of its
microfabrication processes, and on the transfer of process technology to
manufacturing.
General and administrative expenses were CDN$4,187,000
(US$2,779,000) during the period ended September 30, 2000 compared to
CDN$578,000 for the same period in 1999, an increase of CDN$3,609,000. The
increase is mainly attributable to the fact that we hired 93 employees during
the last twelve months. In addition to the increased number of employees, we
also moved our headquarters to a new building and continued to develop our
infrastructure.
Other expenses, net of interest income and gain on foreign exchange,
amounted to CDN$21,988,000(US$14,591,000) during the quarter ended September 30,
2000 compared to CDN$52,000 during the same period in 1999, an increase of
CDN$21,936,000. The increase is mainly due to the CDN$51,243,000 (US$35,000,000)
convertible notes the Company issued on July 25, 2000. The interest expense
portion of the other expenses are mainly made of the fact that this convertible
notes bear interest at 7.5% per annum. The financing charge, an expense not
involving cash and totaling CDN$22,763,000 (US$15,105,000) is explained below.
Interest income during this quarter amounted to CDN$793,000 (US$526,000),
compared to CDN$16,000 in the same period in 1999, an increase of CDN$777,000.
This increase is due to the fact that we had more cash and term deposits during
this quarter as a result of capital raised through the exercise of warrants and
options and the issuance of the convertible notes.
-13-
<PAGE>
As a result of the above expenses, our net loss for the three-month
period ended September 30, 2000 was CDN$27,519,000 (US$18,261,000) or CDN$0.80
(US$0.53) per share, compared to CDN$2,664,000 or CDN$0.13 per share for the
same period in 1999.
Our activities are being ramped-up to our planned production levels.
The increased activities will require us to have additional employees, equipment
and resources to manage the organization. This should increase our monthly burn
rate by approximately CDN$1,000,000 by the end of Fiscal 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On July 25, 2000, we sold CDN$51,243,000 (US$35,000,000) aggregate
principal amount of five-year convertible notes due July 25, 2005 to two
institutional investors. The notes bear interest at a rate of 7.5% per annum and
are convertible at any time into common stock at a conversion price based on the
closing bid price of the common stock at the time of conversion, with a minimum
conversion price of US$7 per share and a maximum conversion price of US$25 per
share. On October 16, 2000, notes in the aggregate principal amount of
CDN$10,549,000 (US$7,000,000), together with accrued interest, were converted
into 616,414 shares of common stock at a price equal to US$11.55 per share.
In connection with the financing, the investors also received
five-year warrants to purchase an aggregate of 5,000,800 shares of common stock.
The warrants are exercisable on or after January 25, 2002. The exercise price of
the warrants is based on a formula whereby the price may vary from US$10 per
share to US$30 per share. Based on the formula, the exercise price of the
warrants will be lower than the fair market value of the common stock at the
time that the warrants vest unless the fair market value of the common stock is
equal to or lower than US$10 per share.
We will apply APB-14 ("Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants") and EITF 98-5 ("Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios") to determine the accounting treatment of the notes and the
warrants. These bulletins require that we allocate the proceeds from the notes
among the notes and the warrants. As a result, the notes will be discounted and
the beneficial conversion feature of notes will be recorded as financing
charges.
Because the notes are convertible at any time, financing charges of
CDN$21,581,000 (US$14,321,000) are recorded as expenses at the date of the
transaction. In addition, amortization of debt discount for the period ended
September 30, 2000 amounting to CDN$1,182,000 (US$784,000) is also recorded as
financing charges. However, these additional charges are non-cash transactions
and accordingly will have no effect on our cash flows.
-14-
<PAGE>
If the notes and unpaid interest calculated at the rate of 7.5% are
not converted into common stock, we will be required to pay an aggregate of
CDN$41,694,000 (US$28,000,000) plus accrued interest to the investors upon
maturity.
During the quarter ended September 30, 2000, we actively acquired
equipment in order to open our plant on October 6, 2000. As such, we disbursed
CDN$8,953,000 (US$5,941,000) in equipment as well as CDN$327,000 (US$217,000) in
related deposits and infused CDN$3,336,000 (US$2,215,000) in our operating
activities. Finally, we raised CDN$5,893,000 (US$3,911,000) through the issuance
of shares from the conversion of warrants and the exercise of stock options.
As of September 30, 2000, as a result of the above activities, we
had cash, cash equivalents and term deposits of CDN$46,973,000 (US$31,170,000).
We do not believe that inflation has had a significant impact on our
results of operations.
RISK FACTORS
WE ARE A DEVELOPMENT STAGE COMPANY WITH NO EXPERIENCE IN MANUFACTURING AND
MARKETING OUR PRODUCTS.
We have no history in manufacturing and marketing our products. We
are a development stage company and, to date, have not had any revenues from
sales of our products. Our operating history provides no basis for evaluating us
and our prospects. We must successfully develop and commercialize our products,
meet competition, attract, retain and motivate qualified employees, expand our
operations and market and sell products using our licensed proprietary
technology in volume to have significant revenues and to be profitable.
Our future will depend on our ability to develop, manufacture and
commercialize products based upon our licensed proprietary technologies. Our
first product, the DWDM optical chip, has only recently entered production in
limited quantities and we expect to make only limited shipments of prototype
chips in 2000. Potential customers may not accept our products, they may be
difficult to produce in large volumes at an acceptable cost, fail to perform as
expected, cost too much or be barred from production by the proprietary rights
of others.
We expect to spend considerable sums to develop and market our new
products. We expect our operating expenses to increase as we develop our
technology and products, increase our sales and marketing activities and expand
our assembly operations. We will not have revenues from product sales before
2001. The amount that we will lose and when, if ever, we will have profits is
highly uncertain.
WE MAY BE UNABLE TO OBTAIN FUNDING TO MEET OUR FUTURE CAPITAL NEEDS.
-15-
<PAGE>
We will require substantial additional funding over the next several
years to develop our technology, to broaden and commercialize our products and
to expand assembly capacity. Additional funding could be unavailable on
favorable terms, or at all. We may then have to delay or abandon some or all of
our anticipated spending, cut back our operations significantly, sell assets, or
license to third parties potentially valuable technologies that we currently
plan to commercialize ourselves. Our capital needs will depend on a number of
factors, including:
o How many new products we develop
o How fast we develop and commercialize our products and expand
our assembly operations
o The response of competitors
o The level of acceptance of our products
o Competing technological developments
o Changes in market demand.
If we borrow funds, we may become subject to restrictive financial
covenants and our interest obligations will increase. If we issue more stock,
our present stockholders may experience substantial dilution.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE MANUFACTURE OF OUR PRODUCTS.
We have never assembled large amounts of products. The manufacture
of our chips is a complex, sophisticated process, requiring clean room and
precision assembly equipment. Very small amounts of contaminants in assembly,
defects in components, difficulties in the assembly process or other factors can
cause a significant number of chips to be nonfunctional or to have unacceptable
defects. This could significantly reduce yields and increase the cost of our
products. Many of these problems are difficult to find and require much time and
expense to fix.
We must effectively transfer production information from our
research and development department to our new manufacturing facility and
rapidly achieve volume production. If we fail to effectively manage this process
or if we experience delays, disruptions or quality control problems in our
manufacturing operations, our shipments of products to our customers could be
delayed. Unforeseen additional capital expenditures could be required to remedy
these problems.
Changes in our manufacturing processes or the inadvertent use of
defective materials could significantly reduce our manufacturing yields and
product reliability. Because most of our manufacturing costs are relatively
fixed, manufacturing yields are critical to our results of operations. Lower
than expected production yields could delay product shipments and reduce our
gross margins. We may not obtain acceptable yields.
WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE AND CONTINUE NEW PRODUCT
DEVELOPMENT.
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<PAGE>
We must become a key supplier of components to the photonics
industry to be successful. The photonic market is highly competitive and marked
by rapidly changing technology. We may be unable to adapt to rapid technological
change and to continue new product development.
We must
o Anticipate what our clients and their end-users will need and
demand in the manufacture of products, both for general
industry use and specific custom-made usage
o Incorporate those anticipated features and functions into our
products o Meet specific and exacting design requirements
o Price our products competitively
o Introduce our products at the right time to meet market
demand.
The life cycle of a product we make may be short. We must introduce
new products on a timely basis and we must spend a great deal to develop new
products. We could experience delays in introducing new products, because they
are complex. The success of our new products will depend on many factors,
including
o Proper product definition
o Timely completion and introduction of designs
o Ability of our customers to incorporate our product into
theirs
o Quality and performance of our products
o Differentiation of our products from those of our competitors
o Acceptance of our products and those of our customers.
OUR AGREEMENTS WITH MOLEX CONTAIN SIGNIFICANT RESTRICTIONS.
We have entered into agreements with Molex Incorporated that contain
restrictions on our ability to sell our products and grant to Molex preferential
rights to acquire up to 50% of our production at favorable prices. In the event
we are unable to supply Molex on a timely basis with a commercially reasonable
quantity of the devices or in the event we experience a change of control, Molex
has the non-exclusive right to manufacture all components of the devices in
return for a royalty equal to 50% of the profits from sales of functionally
unmodified packaged products and 30% of the profits from sales of other final
products.
THE SMALL NUMBER OF POTENTIAL CUSTOMERS FOR OUR PRODUCTS WILL GIVE THEM
CONSIDERABLE LEVERAGE OVER US.
For the foreseeable future, we intend to market our products to only
a limited number of leading original equipment manufacturer customers. We will
rely on these customers to develop their own systems, creating demand for our
products. Our customers may be expected to exert considerable leverage in
negotiating purchases from us. The telecommunications equipment industry
-17-
<PAGE>
is dominated by a small number of large companies with few optical components
suppliers. Existing suppliers could exert pressure to keep out new entrants.
OUR COMPETITION MAY BE ABLE TO MORE EFFECTIVELY DEVELOP AND MARKET THEIR
PRODUCTS, MAKING OURS OBSOLETE.
Our competitors include large companies that have substantially
greater financial, technical, marketing, distribution and other resources,
broader product lines, greater name recognition and longer standing
relationships with customers than we do. Our competitors include both companies
already manufacturing large volumes of products based on established
technologies, as well as companies selling emerging technological solutions.
Potential competitors could also include our own customers, which may decide to
manufacture products competitive with ours, rather than purchasing our products.
WE ARE DEPENDENT ON KEY PERSONNEL; WE MAY NOT BE ABLE TO ATTRACT, TRAIN AND
RETAIN SUFFICIENTLY QUALIFIED PERSONNEL.
Our success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including Dr.
S. Iraj Najafi, our President and Chief Executive Officer, Dr. Mark Andrews, our
Chief Technical Officer, and Dr. Chia-Yen Li, our Chief Operating Officer. We do
not currently maintain key-man life insurance on any of our personnel.
Our success will also depend on our ability to attract, train and
retain additional management and other highly skilled personnel. Currently, we
are seeking to hire skilled engineers for our assembly process. Our competitors
for qualified personnel are often long-established, highly profitable companies
and the process of hiring qualified personnel is often lengthy. Our management
and other employees may voluntarily leave us at any time. We may not be able to
meet our sales forecasts if we cannot attract, train and retain sufficient
qualified personnel.
Our future profitability will also depend on our ability to develop
an effective sales force. Competition for employees with sales and marketing
experience is intense. We may be unable to attract and retain qualified
salespeople or build an effective sales and marketing organization. We require
sales people with a good technical understanding of our products and of the
industry.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE PROTECTION OF OUR INTELLECTUAL
PROPERTY.
Problems associated with the protection of our intellectual property
or potential infringement of the intellectual property of others could have a
significant negative impact on our business and our financial condition.
The patent positions of technology companies, including ours, are
uncertain and involve complex legal and factual questions. The coverage claimed
in a patent application can be significantly reduced before a patent is issued.
Our patent applications may not result in patents
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<PAGE>
being issued. Patents issued to us may not provide protection against competing
technologies and may not be held valid if challenged. Others may independently
develop products similar to ours or design around or otherwise avoid patents
issued to us.
Others may assert claims against us that will result in litigation.
Litigation, regardless of its outcome, would result in significant cost to us,
as well as diversion of management time. If we were to infringe upon a valid
patent, we might have to change our products or obtain licenses from the patent
owners. Licenses may not be available on favorable terms. In addition, we could
be liable for significant monetary damages.
We also rely on trade secret and copyright law and employee and
third-party nondisclosure agreements to protect our intellectual property
rights. We may be unable to secure meaningful protection of our trade secrets,
copyrights, know-how or other proprietary information in the event of
infringement by others and others may independently develop similar
technologies.
WE ARE CONTROLLED BY INSIDERS, WHICH MAY PREVENT A CHANGE OF CONTROL OR OTHER
CORPORATE TRANSACTIONS.
As of the date hereof, our management, Molex, Polyvalor and McGill
University collectively own in excess of 50% of our outstanding common stock.
Together, they determine the composition of the Board of Directors and will be
able to determine the outcome of corporate actions requiring stockholder
approval. This ability may have the effect of preventing a change in control
that may be favorable to other stockholders or causing a change of control that
may not be favorable to other stockholders.
Under the agreements with Molex, Molex will acquire the
non-exclusive right to manufacture and sell jointly developed optical chip
products in the event we experience a change of control. Molex also has rights
of first refusal with respect to most sales of stock by members of our
management. Their rights may have the effect of preventing a change of control
that may be favorable to other stockholders.
PROVISIONS OF OUR CORPORATE DOCUMENTS AND APPLICABLE LAW MAY PREVENT OR HINDER A
CHANGE OF CONTROL.
Provisions of our certificate of incorporation and by-laws and of
applicable law could make it more difficult for another party to acquire us or
discourage another party from attempting to acquire us. This may reduce the
value of our common stock. For example, we could issue preferred stock with
rights senior to the common stock without any further vote or action by
stockholders. The issuance of preferred stock as part of a future financing
could have the effect of preventing a change of control and could make it more
difficult for holders of our common stock to take certain corporate actions,
including the replacement of incumbent directors. Additionally, preferred stock
may have preference over and harm the rights of the holders of common stock.
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<PAGE>
WE HAVE A SIGNIFICANT NUMBER OF OUTSTANDING WARRANTS AND OPTIONS, WHICH COULD
ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK AND OUR ABILITY TO SELL
ADDITIONAL COMMON STOCK.
As of October 31, 2000, we had outstanding options to purchase a
total of 3,590,150 shares of common stock at a weighted average exercise price
of US$ 7.84 per share and outstanding warrants to purchase an aggregate of
757,011 shares of our common stock at a weighted average exercise price of
US$3.55 per share. We also have outstanding warrants to purchase an aggregate of
5,000,800 shares of common stock, subject to anti-dilution provisions, at a
price to be determined in the future. The $28,000,000 five-year convertible
notes issued in July 2000 and still outstanding are also convertible into a
maximum of 5,000,000 shares of common stock, unless a default under the notes
has occurred.
No holder may convert any portion of the July 2000 notes or exercise
any portion of the July 2000 warrants to the extent that the conversion or
exercise would result in that holder or any of its affiliates beneficially
owning more than 4.99% of our outstanding common stock. Therefore, a holder may
have to sell shares of common stock in order to be able to convert notes or
exercise warrants. The following table sets forth the number of shares of common
stock issuable upon conversion of the July 2000 notes and exercise of the July
2000 warrants at various prices and the percentage of our common stock
represented by the shares of common stock issuable upon conversion of the notes
and exercise of the warrants at such prices assuming we have not defaulted on
the notes:
<TABLE>
<CAPTION>
% of total
warrants vs. Number of % of total
Share Number of % of shares vs. Number of outstanding shares and warrants and
Price Shares outstanding shares Warrants shares warrants shares
----- ------ ------------------ -------- ------ -------- ------
Outstanding $28,000,000
Note
Amount
<S> <C> <C> <C> <C>
36,069,153 36,069,153 36,069,153
Maximum $25.00 1,120,000 3.11% 5,000,800 13.86% 6,120,800 16.97%
Exercise
Price
Minimum $7.00 4,000,000 11.09% 9,000,800 24.95%
Exercise
Price
Variable $24.00 1,166,667 3.23% 6,167,467 17.10%
$23.00 1,217,391 3.38% 6,218,191 17.24%
$22.00 1,272,727 3.53% 6,273,527 17.39%
$21.00 1,333,333 3.70% 6,334,133 17.56%
$20.00 1,400,000 3.88% 6,400,800 17.75%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
% of total
warrants vs. Number of % of total
Share Number of % of shares vs. Number of outstanding shares and warrants and
Price Shares outstanding shares Warrants shares warrants shares
----- ------ ------------------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
$19.00 1,473,684 4.09% 6,474,484 17.95%
$18.00 1,555,556 4.31% 6,556,356 18.18%
$17.00 1,647,059 4.57% 6,647,859 18.43%
$16.00 1,750,000 4.85% 6,750,800 18.72%
$15.00 1,866,667 5.18% 6,867,467 19.04%
$14.00 2,000,000 5.54% 7,000,800 19.41%
$13.00 2,153,846 5.97% 7,154,646 19.84%
$12.00 2,333,333 6.47% 7,334,133 20.33%
$11.00 2,545,455 7.06% 7,546,255 20.92%
$10.00 2,800,000 7.76% 7,800,800 21.63%
$ 9.00 3,111,111 8.63% 8,111,911 22.49%
$ 8.00 3,500,000 9.70% 8,500,800 23.57%
$ 7.00 4,000,000 11.09% 9,000,800 24.95%
</TABLE>
The exercise of outstanding options and warrants and the conversion
of outstanding notes will dilute the then current stockholders' ownership of
common stock. Sales in the public market of common stock acquired upon exercise
of options and warrants and conversion of notes could depress the price of our
common stock. This may adversely affect our ability to sell common stock.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following unregistered securities were issued by us from July 1,
2000 to September 30, 2000:
<TABLE>
<CAPTION>
Number of Shares
Issued/Subject Offering/
Date of Description of To Options or Exercise
Sale/Issuance Securities Issued Warrants & Notes Price Per Share
------------- ----------------- ---------------- ---------------
<S> <C> <C> <C>
July 18, 2000 Common Stock issued to 210,000 US$0.90
Lavery, de Billy as
nominee
for Consultants
Alconsultex, an
accredited investor, upon
exercise of warrants
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
July 20, 2000 Common Stock issued to 50,000 US$0.90
Lavery, de Billy as nominee
for Jean-Louis Pulin, an
accredited investor, upon
exercise of warrants
July 20, 2000 Common Stock issued to 50,000 US$0.90
Lavery, de Billy as nominee
for 2973-9711 Quebec,
Inc., an
accredited investor, upon
exercise of warrants
July 24, 2000 Common stock issued to 500,000 US$0.90
Pinetree Capital Corp., a
accredited investor, upon
exercise of warrants
July 25, 2000 Warrants to purchase 10,000,800 to be
shares of determined
common stock and
convertible
notes into shares of common
stock issued to Capital
Ventures International and
Castle Creek Technology
Partners LLC
July 25, 2000 Common stock issued to 400,000 US$0.90
Brant
Investments Limited Global
Securities Services, an
accredited investor, upon
exercise of warrants
August 1, 2000 Common stock issued to 60,000 US$1.50
Lavery, de Billy as nominee
for accredited investor,
upon
exercise of warrants
August 1, 2000 Common Stock issued to 175,000 US$0.90
Lavery, de Billy as nominee
for Rush & Co., an
accredited
investor, upon exercise of
warrants
August 1, 2000 Common Stock issued to 39,750 US$0.90
Lavery, de Billy as nominee
for Jacques Paul-Hus, an
accredited investor, upon
exercise of warrants
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
August 1, 2000 Common Stock issued to 25,000 US$0.90
Lavery, de Billy as nominee
for Pierre Genest, an
accredited
investor, upon exercise of
warrants
August 11, 2000 Common Stock issued to 300,000 US$0.90
Lavery, de Billy as nominee
for Klug Investments, an
accredited investor, upon
exercise of warrants
August 25, 2000 Common Stock issued to 160,000 US$0.90
Lavery, de Billy as nominee
for Pierre L. Baribeau, an
accredited investor, upon
exercise of warrants
August 25, 2000 Common Stock issued to 50,000 US$0.90
Lavery, de Billy as nominee
for Diane Nadau, an
accredited
investor, upon exercise of
warrants
August 29, 2000 Common Stock issued to MDL 100,000 US$6.00
Investments Ltd., an
accredited
investor, upon exercise of
warrants
September 5, 2000 Common Stock issued to 26,000 US$6.00
Egger
& Co., an accredited
investor,
upon exercise of warrants
September 6, 2000 Common Stock issued to 40,700 US$6.00
National Bank Financial, an
accredited investor, upon
exercise of warrants
September 6, 2000 Common Stock issued to NBC 26,000 US$6.00
Clearing Services Inc., an
accredited investor, upon
exercise of warrants
September 6, 2000 Common Stock issued to NBC 26,000 US$6.00
Clearing Services Inc., an
accredited investor, upon
exercise of warrants
September 6, 2000 Common Stock issued to 26,000 US$6.00
First
Marathon, an accredited
investor, upon exercise of
warrants
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 6, 2000 Common Stock issued to NBC 26,000 US$6.00
Clearing Services Inc., an
accredited investor, upon
exercise of warrants
September 7, 2000 Common Stock issued to 26,000 US$6.00
Sassoon Shahmoun, an
accredited investor, upon
exercise of warrants
September 20, 2000 Common stock issued to 21,500 US$9.00
accredited investors upon
exercise of warrants
</TABLE>
The issuances of all of the securities listed in this Item 2 were
exempt from registration pursuant to Section 4(2) of the Securities Act as
transactions not involving a public offering. All of the securities listed in
this Item 2 were deemed by us to be restricted securities and were appropriately
legended and restricted as to subsequent transfer. No underwriter was involved
in these transactions. For each of the issuances listed in this Item 2, there
were no solicitations or advertising by Lumenon, and investors completed an
investor questionnaire as to their qualifications and level of experience.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27.1 Financial Data Schedule - September 30, 2000
Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K on July 28, 2000
reporting under Item 5 - "Other Events" - the sale of convertible
notes to two institutional investors.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LUMENON INNOVATIVE LIGHTWAVE
TECHNOLOGY, INC.
By: /s/ S. Iraj Najafi
-------------------------------------
S. Iraj Najafi
President and Chief Executive Officer
By:/s/ Vincent Belanger
-------------------------------------
Vincent Belanger
Vice President Finance,
Chief Financial Officer and
Treasurer (Principal Financial
Officer and Chief Accounting Officer)
Dated: November 14, 2000
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