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: December 31, 1999
------------------------------------------------
/ / 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
---------------------------------------------------------
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)
9060 Ryan Avenue, Dorval, (QC), Canada H9P 2M8
- -------------------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
(514) 631-0023
--------------
(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.( ) Yes (X) No Explanatory Note: The issuer became subject to such filing
requirements on January 4, 2000.
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 24,551,189 shares of Common Stock,
$.001 par value, as of February 1, 2000.
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC. and SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31,
1999 (unaudited) and June 30, 1999
Consolidated Statements of Operations
(unaudited) for the three months ended
December 31, 1999 and 1998 and the six
months ended December 31, 1999 and 1998
and the period from inception (March 2, 1998)
to December 31, 1999
Consolidated Statements of Cash Flows
(unaudited) for the three months ended
December 31, 1999 and 1998, the six
months ended December 31, 1999 and 1998
and the period from inception (March 2, 1998)
to December 31, 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Signatures
-2-
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
-3-
<PAGE>
Consolidated Financial Statements of
(Unaudited)
LUMENON INNOVATIVE
LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Three-month period ended December 31, 1999 and 1998 and
period from inception (March 2, 1998) to December 31,
1999
-4-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Financial Statements
(Unaudited)
Three-month period ended December 31, 1999 and 1998 and period from inception
(March 2, 1998) to December 31, 1999
Financial Statements
Consolidated Balance Sheets...........................................1
Consolidated Statements of Operations.................................2
Consolidated Statements of Cash Flows.................................3
Notes to Consolidated Financial Statements............................4
-5-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
December 31, December 31, June 30,
1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(note 7)
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 2,903,107 $ 4,190,055 $ 1,722,871
Term deposits 1,920,348 2,771,201 -
Interest and sales tax receivable 169,395 244,488 237,539
Research tax credits receivable 109,539 158,097 34,218
Prepaid expenses 13,435 19,390 49,956
- --------------------------------------------------------------------------------------------------------------------------
5,115,824 7,383,231 2,044,584
Property and equipment 1,988,338 2,869,589 1,492,495
Other assets 8,744 12,620 10,001
- --------------------------------------------------------------------------------------------------------------------------
$ 7,112,906 $ 10,265,440 $ 3,547,080
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 897,319 $ 1,295,016 $ 523,550
Accrued liabilities 13,330 19,243 180,312
Convertible promissory notes - - 298,720
- --------------------------------------------------------------------------------------------------------------------------
910,649 1,314,259 1,002,582
Stockholders' equity:
Share capital 26,060 37,612 30,330
Additional paid-in capital 17,428,232 25,153,618 3,404,408
Deposit on subscription of shares - - 146,820
Accumulated deficit (11,252,035) (16,240,049) (1,037,060)
- --------------------------------------------------------------------------------------------------------------------------
6,202,257 8,951,181 2,544,498
- --------------------------------------------------------------------------------------------------------------------------
$ 7,112,906 $ 10,265,440 $ 3,547,080
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
______________________ Director
______________________ Director
-6-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three months Three months Three months
ended ended ended
December 31, December 31, December 31,
1999 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(note 7)
<S> <C> <C> <C> <C>
Revenues - interest $ 35,780 $ 51,641 $ 7,869 7
Expenses:
Research and development 8,245,831 11,901,208 14,440 5
Research tax credits (48,292) (69,700) (2,149) )
- ------------------------------------------------------------------------------------------------------------------
8,197,539 11,831,508 12,291
General and administrative expenses 547,406 790,071 226,546
(Gain) loss on foreign exchange (22,383) (32,304) (1,975)
Interest expense 1,059 1,528 -
- ------------------------------------------------------------------------------------------------------------------
8,723,621 12,590,803 236,862
- ------------------------------------------------------------------------------------------------------------------
Net loss $ 8,687,841 $ 12,539,162 $ 228,993
- ------------------------------------------------------------------------------------------------------------------
Net loss per share $ 0.37 $ 0.53 $ 0.01
- ------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 23,583,147 23,583,147 16,455,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Six months Six months From
ended ended inception to
December 31, December 31, December 31,
1999 1998 1999
- ------------------------------------------------------------------------------------------------------------------------
(CAN$) (CAN$) (CAN$)
<S> <C> <C> <C>
Revenues - interest $ 67,876 $ 7,869 $ 76,917
Expenses:
Research and development 13,969,796 14,440 14,178,675
Research tax credits (104,893) (2,149) (139,111)
- ------------------------------------------------------------------------------------------------------------------------
13,864,903 12,291 14,039,564
General and administrative expenses 1,368,197 290,435 2,228,090
(Gain) loss on foreign exchange 22,657 (7,348) 34,155
Interest expense 15,108 - 15,157
- ------------------------------------------------------------------------------------------------------------------------
15,270,865 295,378 16,316,966
- ------------------------------------------------------------------------------------------------------------------------
Net loss $15,202,989 $ 287,509 $ 16,240,049
- ------------------------------------------------------------------------------------------------------------------------
Net loss per share $ 0.68 $ 0.02
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 22,350,069 15,926,739
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-7-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months Three months Three months
ended ended ended
December 31, December 31, December 31,
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
(US$) (CAN$) (CAN$)
(note 7)
Cash flows from:
Operating activities:
<S> <C> <C> <C>
Net loss $ (8,687,841) $ (12,539,162) $ (228,993)
Adjustment for items not involving cash:
Compensation cost - - -
Shares issuable for services 8,015,691 11,569,049 -
Depreciation 69,476 100,274 -
Change in operating assets and liabilities:
Interest and sales tax receivable 89,754 129,541 (11,302)
Research tax credits receivable (59,640) (85,967) (2,149)
Prepaid expenses 5,176 7,470 21,235
Accounts payable and accrued liabilities 478,340 690,388 94,880
Advance to shareholder - - 24,500
- ----------------------------------------------------------------------------------------------------------------------------------
(89,044) (128,407) (101,829)
Financing activities:
Proceeds from issuance of common shares 2,904,503 4,192,070 -
Cash from the acquisition of a subsidiary - - -
Share issue expenses (24,938) (35,993) (32,818)
Proceeds from issuance of convertible
promissory notes - - -
- -----------------------------------------------------------------------------------------------------------------------------------
2,879,565 4,156,077 (32,818)
Investing activities:
Additions to property and equipment (715,909) (1,033,272) -
Additions to other assets (1,815) (2,619) (243)
Purchase of term deposits (531,420) (766,985) -
Disposal of term deposits 542,565 783,084 -
- -----------------------------------------------------------------------------------------------------------------------------------
(706,579) (1,019,792) (243)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,083,942 3,007,878 (134,890)
Cash and cash equivalents, beginning of period 819,165 1,182,177 664,560
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,903,107 $ 4,190,055 $ 529,670
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Six months Six months From
ended ended inception to
December 31, December 31, December 31,
1999 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------
(CAN$) (CAN$) (CAN$)
Cash flows from:
Operating activities:
<S> <C> <C> <C>
Net loss $(15,202,989) (287,509) $ (16,240,049)
Adjustment for items not involving cash:
Compensation cost - - 241,058
Shares issuable for services 13,461,670 - 13,461,670
Depreciation 191,138 - 191,138
Change in operating assets and liabilities:
Interest and sales tax receivable (6,949) (21,093) (244,488)
Research tax credits receivable (123,879) (2,149) (158,097)
Prepaid expenses 30,566 - (19,390)
Accounts payable and accrued liabilities 610,397 119,349 1,314,259
Advance to shareholder - - -
- ------------------------------------------------------------------------------------------------------------------------------
(1,040,046) (191,402) (1,453,899)
Financing activities:
Proceeds from issuance of common shares 8,177,352 372 11,088,841
Cash from the acquisition of a subsidiary - 814,322 814,322
Share issue expenses (328,070) (93,379) (713,381)
Proceeds from issuance of convertible
promissory notes - - 298,720
- ------------------------------------------------------------------------------------------------------------------------------
7,849,282 721,315 11,488,502
Investing activities:
Additions to property and equipment (1,568,232) - (3,060,727)
Additions to other assets (2,619) (243) (12,620)
Purchase of term deposits (3,554,285) - (3,554,285)
Disposal of term deposits 783,084 - 783,084
- ------------------------------------------------------------------------------------------------------------------------------
(4,342,052) (243) (5,844,548)
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,467,184 529,670 4,190,055
Cash and cash equivalents, beginning of period 1,722,871 - -
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,190,055 $ 529,670 $ 4,190,055
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-8-
<PAGE>
LUMENON
INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
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 December 31, 1999 and June 30, 1999, its results of operations and
cash flows for the three-month and six-month periods ended December 31,
1999 and 1998 and from inception to December 31, 1999.
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, 1999.
1. Organization and business activities:
Lumenon Innovative Lightwave Technology, Inc. ("Lumenon"), a shell
company, was incorporated in the State of Delaware in February 1996 under
the name of WWV Development Inc.
In July 1998, under an acquisition plan, Lumenon acquired LILT Canada Inc.
("LILT"), a Canadian corporation, by issuing 12,200,000 common shares to
the shareholders of LILT which resulted in the change in control of
Lumenon. Accordingly, LILT has been determined the acquiring corporation
and these consolidated financial statements present the results of
operations and cash flows of LILT since its inception, March 2, 1998.
Under the plan mentioned above, Lumenon issued 4,000,000 common shares to
acquire Dequet Capital, Inc., a Nevada corporation. Dequet Capital, Inc.'s
only asset was cash in the amount of $814,322 (US$540,000). This company
was subsequently dissolved.
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. In order to achieve its business plan, the Corporation
anticipates the need to raise additional capital (see notes 3 and 4).
2. Property and equipment:
During the six-month period ended December 31, 1999, the Corporation
purchased property and equipment totalling $1,568,232 (US$1,086,560) of
which $1,286,360 (US$891,263) relate to laboratory and pilot plan
equipment.
-9-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
3. The Molex agreements:
(a) Under the terms of a Stock Purchase Agreement:
Molex Incorporated (Molex), a Delaware corporation, agreed to
purchase from Lumenon 3,000,000 common shares at $0.74 (US$0.50) per
share in two transactions. The first closing was held in June 1999
for 1,500,000 common shares and the second closing will take place
in March 2000 for an additional 1,500,000 common shares. The second
closing is contingent on the progress made by Lumenon proving out
its technology and its ability to manufacture and deliver certain
devices.
Lumenon granted to Molex a Services Common Stock Purchase Warrant to
receive 5,800,000 common shares. The warrant expires in June 2001
and is subject to Molex fulfilling its obligations pursuant to a
Teaming Agreement. Value of the shares issued will be recorded as
Molex fulfills such obligations (see (c) thereafter). In addition,
if Molex elects not to proceed with the second closing referred to
above, all rights related to the warrant will be extinguished except
to the extent of expenses incurred under the Teaming Agreement.
Lumenon granted to Molex a Cash Common Stock Purchase Warrant to
purchase 1,666,667 common shares at a price of $1.32 (US$0.90) per
share. The warrant was exercised in November 1999.
(b) Under the terms of a Stock Restriction Agreement:
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
6,000,000 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, a Public Offering as defined in the agreement, or
if Molex elects not to proceed with the second closing referred to
above or if the teaming agreement is terminated.
-10-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
3. The Molex agreements (continued):
(c) Under the terms of a Teaming Agreement:
Lumenon and Molex agreed to jointly develop certain products related
to the Dense Wavelength Division Multiplexing market and other
photonics markets. Under the terms of the agreement, Molex is
committed to provide services towards the development of the
products. Subject to Lumenon proving out its technology and its
ability to manufacture and deliver certain devices, Molex is
committed to purchase the entire production of Lumenon for the first
twelve months with a maximum number of units per month. After the
twelve-month period, Molex will have the option to purchase all
production of Lumenon at fair market value. Under certain
circumstances, Molex may have the right to manufacture all
components of the devices in return of a royalty of 25% of gross
cost of Molex. For the six-month period ended December 31, 1999, an
amount of $13,461,670(US$9,327,008) was recorded under research and
development expenses (see note 4 (a)).
4. Share capital:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
September 30, June 30,
1999 1999
- -----------------------------------------------------------------------------------------------
<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:
25,175,036 common shares
(June 30, 1999 - 20,215,000) $ 37,612 $ 30,330
- -----------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended December 31, 1999, the Corporation
concluded the following share capital transactions:
(a) Issue of shares:
For the three-month period ended September 30, 1999:
(i) 1,397,000 common shares were issued for cash consideration of
$3,685,281 (US$2,503,000) of which $146,820 (US$101,725) was
received prior to June 30, 1999;
-11-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
4. Share capital (continued):
(a) Issue of shares (continued):
(ii) promissory notes of $298,720 (US$200,000) were converted into
400,000 common shares;
(iii) stockholders' equity was adjusted to reflect 262,253 common
shares issuable for services received from Molex in the amount
of $1,892,621 (US$1,311,315); the transaction was accounted
for by using the average market price of the shares of the
Corporation for the three-month period then ended;
(iv) in connection with issuance of common shares referred to in
(i) and (ii) above, 1,767,000 warrants were issued to be
exercised at prices varying from $1.32 (US$0.90) to $8.80
(US$6.00) per share.
For the three-month period ended December 31, 1999:
(i) 31,500 common shares were issued for cash consideration of
$376,318 (US$255,000) with 31,500 warrants to be exercised at
prices varying from $13.20 (US$9.00) to $22.74 (US$15.50) per
share;
(ii) 2,421,667 common shares were issued upon exercise of warrants
and options for cash consideration of $4,115,756
(US$2,822,000);
(iii) stockholders' equity was adjusted to reflect 447,616 common
shares issuable for services received from Molex in the amount
of $11,569,049 (US$8,015,693); the transaction was accounted
for by using the average market price of the shares of the
Corporation for the three-month period then ended;
(b) Stock option plans:
Under a stock option incentive plan established in May 1999, the
Corporation may grant options to purchase common shares to key
employees, directors, officers and service-providers. The terms,
number of common shares covered by each option as well as the
permitted frequency of the exercise of such options will be
determined by the Board of Directors. The plan contemplates that a
maximum of 2,500,000 common shares may be optioned under the stock
option plan. In addition, no optionee shall hold options to purchase
more than 5% of the number of shares issued and outstanding at any
one time. The subscription price for each share covered by an option
shall be established by the Board of Directors but such price shall
not be lower than the fair market value at the date of grant.
-12-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
4. Share capital (continued):
(b) Stock option plans (continued):
Options granted have to be exercised over a period not exceeding ten
years. At December 31, 1999, 750,000 outstanding options are
exercisable and 1,657,500 outstanding options vest over a period of
two to five years.
(i) Changes in outstanding options for the year were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Number Exercise price per share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, January 1, 1999 - $ -
Granted 1,860,000 1.47 (US$1.00)
Granted 80,000 0.74 (US$0.50)
- --------------------------------------------------------------------------------------------------------------
Options outstanding, June 30, 1999 1,940,000
Granted 85,000 2.94 (US$2.00)
Exercised (30,000) 1.47 (US$1.00)
- --------------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 1999 1,995,000
Granted 150,000 33.20 (US$23.00)
Granted 12,500 21.65 (US$15.00)
Granted 250,000 18.76 (US$13.00)
Granted 50,000 11.55 (US$8.00)
Exercised (50,000) 1.47 (US$1.00)
- --------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1999 2,407,500
- --------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
4. Share capital (continued):
(ii) Stock-based compensation:
The Corporation applies APB Opinion 25, Accounting for Stock
Issued to Employees, in accounting for its stock option plan.
Had compensation cost for the Corporation's stock option plan
been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of FASB
Statement 123, Accounting for Stock-Based Compensation ("SFAS
123"), the Corporation's net loss would have been adjusted to
the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three months Six months From
ended ended inception to
December 31, December 31, December 31,
1999 1999 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss As reported $ 12,539,162 $ 15,270,865 $ 16,240,049
Pro-forma 12,877,793 15,646,548 16,986,543
- ------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest
rate of 5.5%, dividend yield of 0%, expected volatility of 90%
and 210%, and expected life of 3 to 5 years. The per share
weighted average fair value of stock options granted during
the three-month period was $21.29 (US$14.75).
The effects of applying SFAS 123 for the pro-forma disclosures
are not representative of the effects expected on reported net
earnings in future years since valuations are based on highly
subjective assumptions about the future, including stock price
volatility and exercise patterns.
-14-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
(c) Warrants:
The following warrants are outstanding at December 31, 1999:
- --------------------------------------------------------------------------------
Warrants Expiry date Exercise price per share
- --------------------------------------------------------------------------------
1,210,000 August 2000 $ 1.32 (US$0.90)
282,000 September 2000 8.80 (US$6.00)
21,500 September 2000 12.99 (US$9.00)
10,700 September 2000 8.80 (US$6.00)
10,000 October 2000 14.43 (US$10.00)
960,000 June 2001 2.20 (US$1.50)
500,000 August 2001 1.32 (US$0.90)
5,090,131 August 2001 *
400,000 October 2001 1.32 (US$0.90)
30,000 October 2001 1.32 (US$0.90)
- --------------------------------------------------------------------------------
8,514,331
- --------------------------------------------------------------------------------
* As per the Services Common Stock Purchase Warrant granted to
Molex. Exercise price to be fair value of the shares when the
services are received.
5. Commitments:
Under employment agreements, the Corporation is committed to pay to
certain employees an aggregate of $375,000 per year for the next four
years and approximately $280,000 during the fifth year.
6. Agreements:
In December 1999, the Corporation entered into an agreement with Molex in
connection with the issuance of common shares at $34.00 (US $23.19) per
share for an aggregate of $4,445,000 (US $3,000,000). Molex will receive
also one half common share purchase warrant per share purchased to be
exercised before December 2000 at a price of $43.00 (US $29.00).
-15-
<PAGE>
LUMENON INNOVATIVE LIGHTWAVE TECHNOLOGY, INC.
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month and six-month periods ended December 31, 1999 and 1998 and period
from inception (March 2, 1998) to December 31, 1999 (in Canadian dollars)
- --------------------------------------------------------------------------------
6. Agreements (continued):
The Corporation also entered into an agreement with a private investor in
connection with the issuance of common shares at $34.45 (US $23.25) per
share for an aggregate of $2,963,000 (US $2,000,000). The private investor
will receive also one half common share purchase warrant per share
purchased to be exercised before December 2000 at a price of $44.50 (US
$30.00). Closing of this financing was held in January 2000.
7. 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 December 31, 1999, which was
$1.4433 Canadian dollar per US dollar.
8. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the Corporation, including those related to
customers, suppliers, or other third parties, have been fully resolved.
-16-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
The Company is a Development Stage Enterprise, which has not, during the three
months ended December 31, 1999, realized any revenues from operations. Interest
income, consisting of interest on cash and term deposits, earned during the
three month period ended December 31, 1999 amounted to US$35,780 (CDN$51,641)
compared to US$5,133 (CDN$7,869) for the three month period ended December 31,
1998, an increase of US$30,647 (CDN$43,772). The increase is due to the fact
that the Company had more cash on hand during this quarter than the same quarter
last year as a result of capital raised through private placements and the
exercise of warrants.
Research and development expenses for the three month period ended December 31,
1999, net of research tax credits, were US$8,197,539 (CDN$11,831,508). Of these
costs, US$8,015,691 (CDN$11,569,049) are non-cash expenses resulting from the
issuance of the Company's common stock in consideration of certain services
rendered by Molex under the terms of a Teaming Agreement dated May 19, 1999
between the Company and Molex for the joint development of certain products
related to the Dense Wavelength Division Multiplexing market and other photonics
markets. The common stock will be issued to Molex on partial exercise of a
Services Common Stock Purchase Warrant for 5,800,000 common shares granted to
Molex in connection with the services to be rendered under the Teaming
Agreement. The warrants expire in June 2001 and are subject to Molex fulfilling
its obligations under the Teaming Agreement. During the three months ending
December 31, 1999, based on Molex's estimate of the cost of its work under the
Teaming Agreement, 447,616 common shares would be issuable to Molex at the
average market price of the shares of the Company for the three-month period
then ended.
The Company's research and development expenditures, other than those recorded
under the Services Common Stock Purchase Warrant, net of research tax credits,
were US$181,848 (CDN$262,459) during the three month period ended December 31,
1999, compared to US$8,018 (CDN$12,291) for the three month period ended
December 31, 1998, an increase of US$173,830 (CDN$250,168). During the three
month period ended December 31, 1998, the Company incurred no research and
development expenses because it was not yet engaged in operations (only
financing activities). During the three months ended December 31, 1999, the
Company had an existing operation consisting of a team of 15 employees, a
facility, a teaming agreement with Molex and an expansion project underway.
During this period, the Company developed a new DWDM design and adapted
materials and processes accordingly.
-17-
<PAGE>
As of December 31, 1999, the Company's research and development staff consisted
of 15 employees, all of whom are located in Dorval, Quebec with most of the
employees holding science, engineering or other advanced technical degrees.
General and administrative expenses (including foreign exchange and interest
expenses) were US$526,082 (CDN$759,295) during the three month period ended
December 31, 1999, compared to US$146,491 (CDN$224,571) for the three month
period ended December 31, 1998, an increase of US$379,591 (CDN$534,724). The
charges for this period consist mainly of salaries as a result of the increased
number of administrative personnel and related expenses to manage the increased
activities of the Company from its expansion project.
As a result of the above, the Company's overall loss for the three month period
ended December 31, 1999 amounted to US$8,687,841 (CDN$12,539,162) or US$0.37
(CDN$0.53) per share, compared to US$149,376 (CDN$228,993), or US$0.009
(CDN$0.014) per share for the comparable period in 1998.
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31,
1998
The Company is a Development Stage Enterprise which from its inception to June
30, 1998 did not have any significant business activities, other than seeking
potential financing to grow the Company. During the six months ended December
31, 1999, the Company did not realize any revenues from operations. Interest
income, consisting of interest earned on funds received from the private
placements of the Company and the exercise of warrants, during the six month
period ended December 31, 1999, amounted to US$47,028 (CDN$67,876) compared to
US$5,133 (CDN$7,869) in the same period last year, an increase of US$41,895
(CDN$60,007). The increase is due to the fact that the Company had more cash on
hand during this period than the equivalent period last year as a result of
capital raised through private placements and the exercise of warrants.
Research and development expenses for the six month period ended December 31,
1999, net of research tax credits, were US$9,606,390 (CDN$13,864,903). Of these
costs, US$9,327,008 (CDN$13,461,670) are non-cash expenses resulting from the
issuance of the Company's common stock in consideration of certain services
rendered by Molex under the terms of a Teaming Agreement dated May 19, 1999
between the Company and Molex for the joint development of certain products
related to the Dense Wavelength Division Multiplexing market and other photonics
markets. The common stock will be issued to Molex on partial exercise of a
Services Common Stock Purchase Warrant for 5,800,000 common shares granted to
Molex in connection with the services to be rendered under the Teaming
Agreement. The warrants expire in June 2001 and are subject to Molex fulfilling
its obligations under the Teaming Agreement. At December 31, 1999, based on
Molex's estimate of the cost of its work under the Teaming Agreement, 709,869
common shares would be issuable to Molex at the average market price of the
shares of the Company for the six-month period then ended.
-18-
<PAGE>
The Company's research and development expenditures, other than those recorded
under the Services Common Stock Purchase Warrant, net of research tax credits,
were US$279,382 (CDN$403,233) during the six month period ended December 31,
1999, compared to US$8,018 (CDN$12,291) for the equivalent period in 1998, an
increase of US$271,364 (CDN$390,942). During the six months ended December 31,
1998, the Company incurred no research and development expenses because it was
not yet engaged in operations (only financing activities). During the six month
period ended December 31, 1999, the Company had an existing operation consisting
of a team of 15 employees, a facility, a teaming agreement with Molex and an
expansion project underway. During this period, the Company developed a new DWDM
design and adapted materials and processes accordingly.
As of December 31, 1999, the Company's research and development staff consisted
of 15 employees, all of whom are located in Dorval, Quebec with most of the
employees holding science, engineering or other advanced technical degrees.
General and administrative expenses (including foreign exchange and interest
expenses) were US$974,130 (CDN$1,405,962) during the six months ended December
31, 1999, compared to US$184,662 (CDN$283,087) for the same period in 1998, an
increase of US$789,468 (CDN$1,122,875). The increase is a result of additional
salaries arising from an increased number of administrative personnel and
related expenses to manage the increased activities of the Company from its
expansion project.
As a result of the above, the Company's overall loss for the six month period
ended December 31, 1999 amounted to US$10,533,491 (CDN$15,202,989) or US$.47
(CDN$0.68) per share, compared to US$187,547 (CDN$287,509), or US$0.01
(CDN$0.02) per share for the comparable period in 1998.
Financial Condition, Liquidity and Capital Resources
For information in respect of certain risks to which the Company is subject,
reference is made to the material under the caption "Risk Factors" in the
Company's Registration Statement on Form 10.
At December 31, 1999, the Company had cash and cash equivalents of US$2,903,107
(CDN$4,190,055). In addition, the Company had US$1,920,348 (CDN$2,771,201) of
term deposits with maturity date no later than February 18, 2000 and with no
restriction in their use. At December 31, 1999, the market value approximated
the carrying value.
Since June 30, 1999, the Company collected US$5,438,427 (CDN$7,849,282) from the
issuance of common shares, net of share issuance expenses of US$227,305
(CDN$328,070). These funds have been partially offset by operating activities
amounting to US$720,603 (CDN$1,040,046) and investments in property and
equipment of US$1,086,560 (CDN$1,568,232), consisting of investments in
laboratory equipment (US$891,263) (CDN$1,286,360), leasehold improvement
(US$161,932) (CDN$233,716), computer equipment and software (US$18,390)
(CDN$26,543) and office equipment and fixtures (US$14,975) (CDN$21,613).
Depreciation of US $132,431 (CDN$191,138) has been charged to expenses.
-19-
<PAGE>
Subsequent Event
The Company accepted in January 2000 an offer to lease space for its future
manufacturing facilities. Under the terms of the offer, annual minimum payments
for a twelve year lease agreement commencing on July 1, 2000 will amount to
US$246,882 (CDN$356,325) per year for the first six years and to US$292,195
(CDN$421,725) per year for the remaining period. Total payments amount to
US$3,234,255 (CDN$4,668,000). The Company has made a deposit in the amount of
US$519,642 (CDN$750,000) in connection with the offer. The Company estimates the
necessary funding for the construction of such facility and installation of
manufacturing equipment therein to be approximately US$20 million (CDN$29
million). The Company is actively investigating potential sources for such
funding.
Lumenon is jointly developing its 8, 16 and 32-channel DWDM devices for use in
the DWDM market pursuant to a Teaming Agreement with Molex. (See "Material
Agreements Agreement with Molex" for a description of the terms of the Teaming
Agreement.) The Company will initially rely on this relationship for the
marketing and distribution of its jointly developed products. This reliance on
Molex poses an operating risk to the Company. Termination of the Teaming
Agreement could materially and adversely affect the Company's business,
financial condition and the results of operations.
Year 2000
As of February 16, 2000, the Company has not experienced any difficulties or
delays as a result of Year 2000.
Foreign Currency Transactions
Because the Canadian dollar is the primary currency in the economic environment
in which the Company operates, the Canadian dollar is its functional currency.
Accordingly, monetary amounts maintained in currencies other than the Canadian
dollar (principally short-term investments) are provided, in the financial
statements of the Company, for convenience of reference only and are based on
the closing exchange rate at September 30, 1998, December 31, 1998, June 30,
1999, September 30, 1999 and December 31, 1999, which were CDN $1.526,
CDN$1.533, CDN$1.472, CDN$1.467 and CDN$1.4433 per US dollar, respectively. The
rate stated is from the Bank of Canada for each respective date.
The effects of foreign currency remeasurement are reported in current operations
and have been immaterial to date.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Registrant hereby incorporates by reference the information contained in
Item 10. Recent Sales of Unregistered Securities. of its Registration Statement
on Form 10, insofar as such information relates to the period for which this
report is filed.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
27.1 Financial Data Schedule - December 31, 1999
Reports on Form 8-K:
The Registrant did not file any Current Report on Form 8-K during
the period covered by this report.
-20-
<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/ Iraj Najafi
----------------------------------------
Iraj Najafi
President and Chief Executive Officer
By: /s/ Vincent Belanger
----------------------------------------
Vincent Belanger
Chief Financial Officer (Principal
Financial Officer and Chief Accounting
Officer)
Dated: February 17, 2000
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10 FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.4433
<CASH> 2,903,107
<SECURITIES> 1,920,348
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 5,115,824
<PP&E> 1,988,338
<DEPRECIATION> 69,476
<TOTAL-ASSETS> 7,112,906
<CURRENT-LIABILITIES> 910,649
<BONDS> 0
<COMMON> 26,060
0
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<OTHER-SE> 6,176,197
<TOTAL-LIABILITY-AND-EQUITY> 7,112,906
<SALES> 0
<TOTAL-REVENUES> 47,028
<CGS> 0
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