EX-99.1 2 exh_991.htm EXHIBIT 99.1

Exhibit 99.1

 

 

 

 

 

 

 

NOTICE TO SHAREHOLDERS

For the Three and Six Months Ended June 30, 2017

(Unaudited and Expressed in US Dollars)

 

POET TECHNOLOGIES INC.

 

 

 

 

 

 

 

Auditors' involvement

 

The auditors of POET Technologies Inc. have not performed a review of these condensed unaudited consolidated financial statements for the three and six months ended June 30, 2017 and June 30, 2016.

 

 

 

 

POET TECHNOLOGIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION      Audited 
(Expressed in US Dollars)  June 30,   December 31, 
   2017   2016 
Assets          
Current          
Cash  $9,165,466   $14,376,282 
Short-term investments (Note 2)   609,423    589,275 
Accounts receivable (Note 4)   529,869    292,849 
Prepaids and other current assets (Note 5)   642,655    758,917 
Inventory (Note 6)   969,309    1,116,880 
    11,916,722    17,134,203 
Property and equipment (Note 7)   8,670,548    9,364,210 
Patents and licenses (Note 8)   454,997    449,676 
Intangible assets (Note 9)   858,251    876,865 
Goodwill (Note 2)   7,681,003    7,681,003 
Total Assets  $29,581,521   $35,505,957 
Liabilities          
Current          
Accounts payable and accrued liabilities (Note 10)  $729,776   $1,624,344 
    729,776    1,624,344 
           
Deferred tax liability   1,447,337    1,596,307 
Deferred rent   34,271    42,665 
Total Liabilities   2,211,384    3,263,316 
Shareholders' Equity          
Share capital (Note 11(b))   103,572,736    103,357,862 
Warrants (Note 12)   5,985,378    5,985,378 
Contributed surplus (Note 13)   30,004,641    29,062,874 
Accumulated other comprehensive loss   (1,774,325)   (2,088,117)
Deficit   (110,418,293)   (104,075,356)
    27,370,137    32,242,641 
Total Liabilities and Equity  $29,581,521   $35,505,957 

 

Commitments and contingencies (Note 15)

 

On behalf of the Board of Directors

 

 

 

 

 /s/ Suresh Venkatesan    /s/ Chris Tsiofas 
 Director    Director 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  Page 2

 

POET TECHNOLOGIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

(Expressed in US Dollars)

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
                 
Revenue  $648,382   $576,741   $1,360,932   $576,741 
Cost of sales (1)   320,857    280,563    609,048    280,563 
Gross margin   327,525    296,178    751,884    296,178 
                     
Operating expenses                    
Selling, marketing and administration (Note 20) (1)   2,127,083    3,095,609    4,923,477    5,345,092 
Research and development (Note 20) (1)   1,244,258    654,139    2,482,678    1,323,958 
Impairment loss (Note 2)   -    -    -    63,522 
Loss on disposal of property and equipment   -    -    -    16,931 
Other income, including interest   (142,557)   (14,950)   (162,364)   (35,752)
Net loss before income tax recovery   (2,901,259)   (3,438,620)   (6,491,907)   (6,417,573)
Income tax recovery   (74,485)   -    (148,970)   - 
Net loss   (2,826,774)   (3,438,620)   (6,342,937)   (6,417,573)
                     
Deficit, beginning of period   (107,591,519)   (93,829,625)   (104,075,356)   (90,850,672)
Net loss   (2,826,774)   (3,438,620)   (6,342,937)   (6,417,573)
                     
Deficit, end of period  $(110,418,293)  $(97,268,245)  $(110,418,293)  $(97,268,245)
                     
Basic and diluted net loss per share (Note 14)  $(0.01)  $(0.02)  $(0.02)  $(0.01)

 

(1) Certain prior period figures have been represented to conform with the current period's presentation.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Expressed in US Dollars)

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
                 
                 
Net loss  $(2,826,774)  $(3,438,620)  $(6,342,937)  $(6,417,573)
                     
Other comprehensive income - net of income taxes                    
Exchange differences on translating foreign operations   194,694    32,920    313,792    703,060 
Comprehensive loss  $(2,632,080)  $(3,405,700)  $(6,029,145)  $(5,714,513)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  Page 3

 

POET TECHNOLOGIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Expressed in US Dollars)

 

For the Six Months Ended June 30,  2017   2016 
Share Capital          
Beginning balance  $103,357,862   $81,027,171 
Funds from the exercise of warrants and compensation warrants   -    1,756,375 
Fair value of warrants and compensation warrants exercised   -    706,772 
Funds from the exercise of stock options   102,045    1,185,600 
Fair value assigned to stock options exercised   112,829    1,249,864 
Commons shares issued on business acquisitions   -    12,050,000 
Common shares issued to settle liabilities   -    1,843,629 
June 30,   103,572,736    99,819,411 
           
Warrants          
Beginning balance   5,985,378    2,013,747 
Fair value of warrants and compensation warrants exercised   -    (706,772)
Fair value of expired warrants   -    (1,110,775)
June 30,   5,985,378    196,200 
           
Contributed Surplus          
Beginning balance   29,062,874    25,618,159 
Stock-based compensation   1,054,596    2,147,041 
Fair value of stock options exercised   (112,829)   (1,249,864)
Fair value of expired warrants   -    1,110,775 
June 30,   30,004,641    27,626,111 
           
Accumulated Other Comprehensive Loss          
Beginning balance   (2,088,117)   (2,388,987)
Other comprehensive income attributable to common shareholders - translation adjustment   313,792    703,060 
June 30,   (1,774,325)   (1,685,927)
           
Deficit          
Beginning balance   (104,075,356)   (90,850,672)
Net loss   (6,342,937)   (6,417,573)
June 30,   (110,418,293)   (97,268,245)
Total shareholders' equity  $27,370,137   $28,687,550 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  Page 4

 

POET TECHNOLOGIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in US Dollars)

For the Six Months Ended June 30,  2017   2016 
         
CASH (USED IN) PROVIDED BY:          
           
OPERATING ACTIVITIES          
           
Net loss  $(6,342,937)  $(6,417,573)
Adjustments for:          
Depreciation of property and equipment (Note 7)   1,054,497    304,695 
Amortization of patents and licenses (Note 8)   26,201    23,107 
Amortization of intangibles (Note 9)   18,614    - 
Loss on disposition of property and equipment   -    16,931 
Impairment of non-current asset held for sale   -    63,522 
Stock-based compensation (Note 13)   1,054,596    2,147,041 
Income tax recovery   (148,970)   - 
    (4,337,999)   (3,862,277)
Net change in non-cash working capital accounts:          
Accounts receivable   (217,879)   (459,962)
Prepaid and other current assets   149,145    (12,221)
Inventory   199,752    (80,493)
Accounts payable and accrued liabilities   (916,927)   (253,426)
Cash flows from operating activities   (5,123,908)   (4,668,379)
           
INVESTING ACTIVITIES          
           
Cash proceeds from acquisitions   -    18,791 
Proceeds from the disposal of property and equipment   -    2,195 
Purchase of property and equipment (Note 7)   (293,290)   (118,085)
Purchase of patents and licenses (Note 8)   (31,522)   (29,936)
Cash flows from investing activities   (324,812)   (127,035)
           
FINANCING ACTIVITIES          
           
Advances made prior to acquisition   -    (500,000)
Issue of common shares for cash, net of issue costs   102,045    2,941,975 
Cash flows from financing activities   102,045    2,441,975 
           
EFFECT OF EXCHANGE RATE CHANGES ON CASH   135,859    703,060 
           
NET CHANGE IN CASH   (5,210,816)   (1,650,379)
CASH, beginning of period   14,376,282    14,409,996 
           
CASH, end of period  $9,165,466   $12,759,617 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  Page 5

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

1.DESCRIPTION OF BUSINESS

 

POET Technologies Inc. is incorporated in the Province of Ontario. POET Technologies Inc. and its subsidiaries (the "Company") are developers of the planar opto-electronic technology (“POET”) platform semiconductor process IP for monolithic fabrication of integrated devices containing both electronic and optical elements on a single die ("monolithic integration") and in a single package ("hybrid integration"). The Company also designs, manufactures and sells photonic sensing and optical light source products. The Company's head office is located at 120 Eglinton Avenue East, Suite 1107, Toronto, Ontario, Canada M4P 1E2. These condensed unaudited consolidated financial statements of the Company were approved by the Board of Directors of the Company on August 10, 2017.

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

These condensed unaudited consolidated financial statements of the Company and its subsidiaries were prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB").

 

These condensed unaudited interim consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 2016.

 

The preparation of financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below:

 

Basis of presentation

These condensed unaudited consolidated financial statements include the accounts of POET Technologies Inc. and its subsidiaries; ODIS Inc. ("ODIS"), Opel Solar Inc., BB Photonics Inc., BB Photonics UK Limited (collectively "BB Photonics") and DenseLight Semiconductors Pte. Ltd ("DenseLight"). All intercompany balances and transactions have been eliminated on consolidation.

 

Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The acquisition cost is measured at the acquisition date at the fair value of the consideration transferred, including all contingent consideration.

 

Subsequent changes in contingent consideration are accounted for through the condensed consolidated statements of operations and deficit and condensed consolidated statements of comprehensive loss in accordance with the applicable standards.

 

Goodwill arising on acquisition is initially measured at cost, being the difference between the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree and the net recognized amount (generally fair value) of the identifiable assets and liabilities assumed at the acquisition date. If the net of the amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain.

 

Acquisition-related costs, other than those that are associated with the issue of debt or equity securities that the Company incurs in connection with a business combination, are expensed as incurred.

 

Foreign currency translation

These condensed unaudited consolidated financial statements are presented in U.S. dollars ("USD"), which is the Company's presentation currency.

 

  Page 6

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Items included in the financial statements of each of the Company's subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities not denominated in the functional currency of an entity are recognized in the statement of operations and deficit.

 

Assets and liabilities of entities with functional currencies other than U.S. dollars are translated into the presentation currency at the year end rates of exchange, and the results of their operations are translated at average rates of exchange for the year. The resulting translation adjustments are included in accumulated other comprehensive loss in shareholders' equity. Additionally, foreign exchange gains and losses related to certain intercompany loans that are permanent in nature are included in accumulated other comprehensive loss.

 

Financial Instruments

Financial instruments are required to be classified as one of the following: held-to-maturity; loans and receivables, fair value through profit or loss; available-for-sale or other financial liabilities.

 

The Company's financial instruments include cash, short-term investments, accounts receivable, accounts payable and accrued liabilities. The Company designated its cash and short-term investments as fair value through profit or loss and its accounts payable and accrued liabilities as other financial liabilities.

 

Fair value through profit or loss financial assets are measured at fair value with gains and losses recognized in operations. Financial assets, loans and receivables and other financial liabilities are measured at amortized cost. Available-for-sale financial assets are measured at fair value with unrealized gains and losses recognized in other comprehensive loss.

 

Fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, the fair value of a financial instrument that is quoted in active markets is based on the bid price for a financial asset held and the offer price for a financial liability. When an independent price is not available, fair value is determined by using a valuation methodology that refers to observable market data. Such a valuation technique includes comparisons with a similar financial instrument where an observable market price exists, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. If no reliable estimate can be made, the Company measures the financial instrument at cost less impairment as a last resort.

 

Short-term investments

The short-term investments of $609,423 consist of guaranteed investment certificates (GICs) held with one Canadian chartered bank and earn interest at a rate of 0.50%. The GICs have maturity dates between October 2017 and May 2018. Investments are carried at fair value.

 

  Page 7

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounts receivable

Accounts receivable are amounts due from customers from the sale of products or services in the ordinary course of business. Accounts receivables are classified as current (on the consolidated statements of financial position) if payment is due within one year of the reporting period date, and are initially recognized at fair value and subsequently measured at amortized cost.

 

The provision policy for doubtful accounts of the Company is based on the ageing analysis and management's ongoing evaluation of the recoverability of the outstanding receivables. A considerable amount of judgement is required in assessing the ultimate realization of these receivables, including the assessment of the creditworthiness and the past collection history of each customer. If the financial conditions of these customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As at the balance sheet date, no provision was required for accounts receivable.

 

Inventory

Inventory consists of raw material inventory, work in process, and finished goods and are recorded at the lower of cost and net realizable value. Cost is determined on a first in first out basis and includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventory to its present condition.

 

An assessment is made of the net realizable value of inventory at each reporting period. Net realizable value is the estimated selling price less the estimated cost of completion and the estimated costs necessary to make the sale. When circumstances that previously caused inventories to be written down no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of any write down previously recorded is reversed so that the new carrying amount is the lower of the cost and the revised net realizable value. Raw materials are not written down unless the goods in which they are incorporated are expected to be sold for less than cost, in which case, they are written down by reference to replacement cost of the raw materials, as this is the best indicator of net realizable value.

 

Property and equipment

Property and equipment are recorded at cost. Depreciation is calculated based on the estimated useful life of the asset using the following method and useful lives:

 

Machinery and equipment  Straight Line, 5 years
Leasehold improvements  Straight Line, 5 years or life of the lease, whichever is less
Office equipment  Straight Line, 5 years

 

Patents and licenses

Patents and licenses are recorded at cost and amortized on a straight line basis over 12 years. Ongoing maintenance costs are expensed as incurred.

 

Impairment of long-lived assets

The Company’s tangible and intangible assets are reviewed for indications of impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. An assessment is made at each reporting date whether there is any indication that an asset may be impaired.

 

  Page 8

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

An impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss for the year. The recoverable amount is the greater of the asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit ("CGU") to which the asset belongs.

 

An impairment loss is reversed if there is an indication that there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

 

The Company reported an impairment loss of $63,522 for the six months ended June 30, 2016 and year ended December 31, 2016. No impairment loss has been recorded for the six months ended June 30, 2017.

 

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable assets acquired net of liabilities assumed. Goodwill is measured at cost less accumulated impairment losses and is not amortized. Goodwill is tested for impairment on an annual basis or whenever facts or circumstances indicate that the carrying amount may exceed its recoverable amount. Goodwill amounting to $7,681,003 arose in connection with the acquisition of DenseLight ($6,630,544) on May 11, 2016 and BB Photonics, Inc. ($1,050,459) on June 22, 2016.

 

Income taxes

The Company follows the liability method of accounting for income taxes. Under this method, deferred income taxes are provided on differences between the financial reporting and income tax bases of assets and liabilities and on income tax losses available to be carried forward to future years for tax purposes. Deferred income taxes are measured using the substantively enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are provided to reduce deferred income tax assets to the amount expected to be realized.

 

Revenue recognition

Sale of goods

Revenue from the sale of goods is recognized when significant risks and rewards of ownership are transferred to the buyer, there is persuasive evidence of an arrangement, collection is probable and fees are fixed and determinable.

 

Service revenue

Revenue from services that are one year or less is recognized when the services are completed. Revenue from services of a long-term nature is recognized by reference to the stage of completion of the transaction at the end of the reporting period determined by services performed to date as a percentage of total services and the amount of revenue, stage of completion, and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

 

Interest income

Interest income on cash or short-term investments classified as fair value through profit or loss is recognized as earned using the effective interest method.

 

  Page 9

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Intangible assets

Research and development costs

Research costs are expensed in the year incurred. Development costs are also expensed in the year incurred unless the Company believes a development project meets IFRS criteria as set out in IAS 38, Intangible Assets, for deferral and amortization. IAS 38 requires all research costs be charged to expense while development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. Development costs are tested for impairment whenever events or changes indicate that its carrying amount may not be recoverable.

 

In-Process Research and Development

Under IFRS, in-process research and development ("IPR&D") acquired in a business combination that meets the definition of an intangible asset is capitalized with amortization commencing when the asset is ready for use (i.e., when development is complete). The Company acquired $714,000 of IPR&D when it acquired BB Photonics Inc.

 

Customer relationships

Intangible assets include customer relationships. Customer relationships is an externally acquired intangible asset and is measured at cost less accumulated amortization and any accumulated impairment losses. Customer relationships are amortized on a straight-line basis over their estimated useful lives and is tested for impairment whenever events or changes indicate that their carrying amount may not be recoverable. Customer relationships of $186,131 was acquired when the the Company acquired DenseLight. The useful life of customer relationships was determined to be 5 years.

 

Stock-based compensation

Stock options and warrants awarded to non employees are accounted for using the fair value of the instrument awarded or service provided whichever is considered more reliable. Stock options and warrants awarded to employees are accounted for using the fair value method. The fair value of such stock options and warrants granted is recognized as an expense on a proportionate basis consistent with the vesting features of each tranche of the grant. The fair value is calculated using the Black-Scholes option pricing model with assumptions applicable at the date of grant.

 

Loss per share

Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period after giving effect to potentially dilutive financial instruments. The dilutive effect of stock options and warrants is determined using the treasury stock method.

 

  Page 10

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

3.RECENT ACCOUNTING PRONOUNCEMENTS

 

The following is a summary of recent accounting pronouncements that may affect the Company:

 

IFRS 15, Revenue from Contracts with Customers ("IFRS 15"). The IASB issued IFRS 15, which is effective for annual periods beginning on or after January 1, 2018. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time and over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The Company is in the process of assessing the impact of this standard on its consolidated financial statements.

 

IFRS 16, Leases (“IFRS 16”) sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, the customer (lessee) and the supplier (lessor). This will replace IAS 17, Leases (“IAS 17”) and related Interpretations. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities for leases with terms of more than 12 months, unless the underlying asset is of low value, and depreciation of lease assets is reported separately from interest on lease liabilities in the income statement. Under IFRS 16, lessor accounting for operating and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply IFRS 15, Revenue from Contracts with Customers. The Company is in the process of assessing the impact of this standard on its consolidated financial statements.

 

4.ACCOUNTS RECEIVABLE

 

The carrying amounts of accounts receivable approximate their fair value and are originally denominated in the following currencies before conversion to US dollars below:

 

      June 30,   December 31, 
      2017   2016 
              
Product sales  United States dollar  $529,869   $292,849 

 

In determining the recoverability of a trade receivable, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The trade receivables that are neither past due nor impaired relates to customers that the company has assessed to be creditworthy based on the credit evaluation process performed by management.

 

5.PREPAIDS AND OTHER CURRENT ASSETS

 

The following table reflects the details of prepaids and other current assets:

 

   June 30,   December 31, 
   2017   2016 
         
Sales tax recoverable and other current assets  $88,392   $147,119 
Security deposits on leased properties   270,350    272,026 
Deposits on materials and services   283,913    339,772 
           
   $642,655   $758,917 

 

  Page 11

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

6.INVENTORY

 

   June 30,   December 31, 
   2017   2016 
         
Raw materials  $415,565   $662,458 
Finished goods   349,701    358,386 
Work in process   204,043    96,036 
           
   $969,309   $1,116,880 

 

7.PROPERTY AND EQUIPMENT

 

   Equipment not   Leasehold   Machinery and   Office     
   in service   improvements   equipment   equipment   Total 
                     
Cost                         
Balance, January 1, 2016  $-   $16,072   $1,400,103   $81,691   $1,497,866 
Additions   602,830    667,342    8,498,051    244,860    10,013,083 
Disposals   -    (16,072)   (64,747)   (11,734)   (92,553)
Reclassification   -    -    (98,522)   -    (98,522)
                          
Balance, December 31, 2016   602,830    667,342    9,734,885    314,817    11,319,874 
Additions   -    -    280,690    12,600    293,290 
Reclassification   (263,780)   -    263,780    -    - 
Effect of changes in foreign exchange rates   16,953    -    44,444    6,148    67,545 
Balance, June 30, 2017   356,003    667,342    10,323,799    333,565    11,680,709 
                          
Accumulated Depreciation                         
Balance, January 1, 2016   -    3,104    523,198    24,457    550,759 
Depreciation for the year   -    83,189    1,320,050    45,286    1,448,525 
Disposals   -    (3,104)   (34,940)   (5,576)   (43,620)
Balance, December 31, 2016   -    83,189    1,808,308    64,167    1,955,664 
Depreciation for the period   -    94,837    931,762    27,898    1,054,497 
Balance, June 30, 2017   -    178,026    2,740,070    92,065    3,010,161 
                          
Carrying Amounts                         
At December 31, 2016  $602,830   $584,153   $7,926,577   $250,650   $9,364,210 
At June 30, 2017  $356,003   $489,316   $7,583,729   $241,500   $8,670,548 

 

8.PATENTS AND LICENSES

 

     
Cost     
Balance, January 1, 2016  $537,249 
Additions   72,638 
      
Balance, December 31, 2016   609,887 
Additions   31,522 
Balance, June 30, 2017   641,409 
      
Accumulated Depreciation     
Balance, January 1, 2016   110,436 
Amortization   49,775 
Balance, December 31, 2016   160,211 
Amortization   26,201 
Balance, June 30, 2017   186,412 

 

  Page 12

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

8.PATENTS AND LICENSES (Continued)

 

Carrying Amounts    
At December 31, 2016  $449,676 
      
At June 30, 2017  $454,997 

 

9.INTANGIBLE ASSETS

 

       Customer     
   Technology   Relationships   Total 
             
Cost               
Balance, January 1, 2016  $-   $-   $- 
Acquired through the acquisition of DenseLight   -    186,131    186,131 
Acquired through the acquisition of BB Photonics   714,000    -    714,000 
Balance, December 31, 2016 and June 30, 2017   714,000    186,131    900,131 
                
Accumulated Depreciation               
Balance, January 1, 2016   -    -    - 
Depreciation for the year   -    23,266    23,266 
Balance, December 31, 2016   -    23,266    23,266 
Depreciation for the period   -    18,614    18,614 
Balance, June 30, 2017   -    41,880    41,880 
                
Carrying Amounts               
At December 31, 2016  $714,000   $162,865   $876,865 
At June 30, 2017  $714,000   $144,251   $858,251 

 

10.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

   June 30,   December 31, 
   2017   2016 
         
Trade payable  $371,044   $768,066 
Payroll related liabilities   284,312    628,378 
Accrued liabilities   49,058    183,037 
Lease commitment   25,362    44,863 
   $729,776   $1,624,344 

 

  Page 13

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

11.SHARE CAPITAL

 

(a)      AUTHORIZED

Unlimited number of common shares

One special voting share

 

(b)      COMMON SHARES ISSUED

 

   Number of     
   Shares   Amount 
         
January 1, 2016   197,097,815    81,027,171 
Shares issued on public offering   34,800,000    9,349,254 
Cost of shares issued on public offering   -    (1,165,017)
Fair value of warrants issued   -    (5,985,378)
Shares issued to settle subsidiary accounts payable   2,386,386    1,843,629 
Shares issued on business combination   15,607,240    12,050,000 
Shares issued on the exercise of stock options   5,648,000    1,654,988 
Fair value of stock options exercised   -    1,737,879 
Shares issued on the exercise of warrants and compensation warrants   3,794,412    1,943,919 
Fair value of warrants exercised   -    901,417 
           
Balance, December 31, 2016   259,333,853    103,357,862 
Shares issued on the exercise of stock options   590,000    102,045 
Fair value of stock options exercised   -    112,829 
           
Balance, June 30, 2017   259,923,853   $103,572,736 

 

12.WARRANTS

 

The following table reflects the continuity of warrants:

 

   Average Exercise   Number of   Historical 
   Price   Warrants   Fair value 
             
Balance, January 1, 2016  $0.79    8,369,233   $2,013,747 
Warrants issued   0.39    34,800,000    5,985,378 
Warrants and compensation warrants exercised   (0.51)   (3,794,412)   (901,417)
Expired   (1.02)   (4,574,821)   (1,112,330)
Balance, December 31, 2016 and June 30, 2017  $0.39    34,800,000   $5,985,378 

 

13.STOCK OPTIONS AND CONTRIBUTED SURPLUS

 

Stock Options

On July 7, 2016, shareholders of the Company approved amendments to the Company's fixed 20% stock option plan (as amended, referred to as the "2016 Plan"). Under the 2016 Plan, the board of directors may grant options to acquire common shares of the Company to qualified directors, officers, employees and consultants. The 2016 Plan provides that the number of common shares issuable pursuant to options granted under the 2016 Plan and pursuant to other previously granted options is limited to 44,352,885 (the “Number Reserved”). Any subsequent increase in the Number Reserved must be approved by shareholders of the Company and cannot, at the time of the increase, exceed 20% of the number of issued and outstanding shares. The stock options vest in accordance with the policies determined by the Board of Directors from time to time consistent with the provisions of the 2016 Plan which grants discretion to the Board of Directors.

 

  Page 14

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

13.STOCK OPTIONS AND CONTRIBUTED SURPLUS (Continued)

 

Stock option transactions and the number of stock options outstanding were as follows:

 

       Historical Weighted 
   Number   Average Exercise 
   of Options   Price 
         
Balance, January 1, 2016   26,718,500   $0.89 
Expired/cancelled   (1,290,000)   0.96 
Exercised   (5,648,000)   0.37 
Granted   4,025,000    0.62 
           
Balance, December 31, 2016   23,805,500    0.96 
Expired/cancelled   (3,455,209)   0.91 
Exercised   (590,000)   0.24 
Granted   4,225,000    0.28 
Balance, June 30, 2017   23,985,291   $0.86 

 

During the period ended June 30, 2017, the Company granted 4,225,000 (2016 - 300,000) stock options to officers, employees and consultants of the Company to purchase common shares at an average price of $0.28 (2016 - $0.74) per share.

 

During the period ended June 30, 2017, the Company recorded stock-based compensation of $1,054,596 (2016 - $2,147,041) relating to stock options that vested during the period.

 

The stock options granted were valued using the Black-Scholes option pricing model using the following assumptions:

 

   2017   2016 
         
Weighted average exercise price  $0.28   $0.74 
Weighted average risk-free interest rate   1.73%   1.29%
Weighted average dividend yield   0%   0%
Weighted average volatility   103.48%   105.7%
Weighted average estimated life   10 years    10 years 
Weighted average share price  $0.28   $0.74 

 

Share price on the various grant dates were:

 

First grant  $0.32   $0.75 
Second grant   0.27    0.74 
Third grant   0.25    - 
Fourth grant   0.28    - 
Fifth grant   0.22    - 

 

The underlying expected volatility was determined by reference to the Company's historical share price movements, its dividend policy and dividend yield and past experience relating to the expected life of granted stock options.

 

  Page 15

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

13.STOCK OPTIONS AND CONTRIBUTED SURPLUS (Continued)

 

The weighted average remaining contractual life and weighted average exercise price of options outstanding and of options exercisable as at June 30, 2017 are as follows:

 

Options Outstanding  Options Exercisable 
      Historical   Weighted       Historical4 
      Weighted   Average       Weighted 
      Average   Remaining       Average 
Exercise  Number   Exercise   Contractual   Number   Exercise 
Range  Outstanding   Price   Life (years)   Exercisable   Price 
$0.11 - $0.25   270,000   $0.23    4.63    270,000   $0.23 
$0.28 - $0.31   587,500   $0.28    1.85    487,500   $0.28 
$0.34 - $0.37   550,000   $0.34    8.98    50,000   $0.33 
$0.38 - $0.86   9,306,000   $0.43    6.94    2,731,000   $0.45 
$0.87 - $1.64   13,271,791   $1.24    2.83    8,800,772   $1.31 
    23,985,291   $0.86    4.56    12,339,272   $1.05 

 

Contributed Surplus

 

The following table reflects the continuity of contributed surplus:

 

   Amount 
     
Balance, January 1, 2016  $25,618,159 
Stock-based compensation   4,070,264 
Fair value of stock options exercised   (1,737,879)
Fair value of expired warrants   1,112,330 
      
Balance, December 31, 2016   29,062,874 
Stock-based compensation   1,054,596 
Fair value of stock options exercised   (112,829)
Balance, June 30, 2017  $30,004,641 

 

14.LOSS PER SHARE

 

   Three Months Ended   Six Months Ended 
   June 30,    June 30, 
   2017   2016   2017   2016 
                 
Numerator                    
Net loss  $(2,826,774)  $(3,438,620)  $(6,342,937)  $(6,417,573)
                     
Denominator                    
Weighted average number of                    
common shares outstanding   259,800,132    180,201,853    259,566,993    199,133,270 
Weighted average number of common                    
shares outstanding - diluted   259,800,132    180,201,853    259,566,993    199,133,270 
Basic and diluted loss per share  $(0.01)  $(0.02)  $(0.02)  $(0.03)

 

The effect of common share purchase options, warrants, compensation warrants and shares to be issued on the net loss in 2017 and 2016 is not reflected as they are anti-dilutive.

 

  Page 16

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

15.COMMITMENTS AND CONTINGENCIES

 

The Company has three facilities; head office located in Toronto, Canada, design and testing operations located in San Jose, California and operating facilities located in Singapore. The Company has operating leases for development operations and operating facilities. The Company's design and testing operations terminated a lease on January 31, 2017 and initiated a new lease an February 1, 2017 which expires on January 31, 2020. The lease on the Company's operating facilities expires on February 15, 2019. As at June 30, 2017, the Company's head office was on a month to month lease term.

 

Rent expense under these leases was $107,273 and $213,626 for the three and six months ended June 30, 2017 (2016 - $61,915 and $128,781).

 

Remaining minimum annual rental payments to the lease expiration date is as follows:

 

July 1, 2017 to June 30, 2018  $411,349 
July 1, 2018 through 2020   285,793 
   $697,142 

 

16.RELATED PARTY TRANSACTIONS

 

Compensation to key management personnel were as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
                 
Salaries  $218,500   $1,171,333   $487,133   $1,725,623 
Share-based payments (1)   557,345    775,842    1,280,798    1,684,305 
Total  $775,845    1,947,175   $1,767,931   $3,409,928 

 

(1) Share-based payments are the fair value of options granted to key management personnel and expensed during the various periods as calculated using the Black-Scholes model.

 

The Company paid or accrued $28,313 and $55,556 in fees for the three and six months ended June 30, 2017 (2016 - $28,996 and $56,333) to a law firm, of which a director is counsel, for legal services rendered to the Company.

 

During the period ended June 30, 2017, the Company paid the final installment of $25,000 on a total of $150,000 of consulting fees to a director which were charged against the financing concluded on November 2, 2016.

 

All transactions with related parties have occurred in the normal course of operations and are measured at the exchange amounts, which are the amounts of consideration established and agreed to by the related parties.

 

  Page 17

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

17.SEGMENT INFORMATION

 

The Company and its subsidiaries operate in a single segment; the design, manufacture and sale of semi-conductor products and services for commercial applications. The Company’s operating and reporting segment reflects the management reporting structure of the organization and the manner in which the chief operating decision maker regularly assesses information for decision making purposes, including the allocation of resources. A summary of the Company's operations is below:

 

ODIS

Odis is the developer of the POET platform semiconductor process IP for fabrication of integrated circuit devices containing both electronic and optical elements on a single die ("monolithic integration") and in a single package ("hybrid integration").

 

BB Photonics

BB Photonics develops photonic integrated components for the datacenter market utilizing embedded dielectric technology that is intended to enable onchip athermal wavelength control and lower the total solution cost of datacenter photonic integrated circuits.

 

DenseLight

DenseLight designs, manufactures, and delivers photonic optical light source products and solutions to the communications, medical, instrumentations, industrial, defense, and security industries. DenseLight processes III-V based optoelectronic devices and photonic integrated circuits through its in-house wafer fabrication and assembly & test facilities.

 

On a consolidated basis, the Company operates geographically in Singapore, the United States and Canada. Geographical information is as follows:

   2017 
As of June 30,  Singapore   US   Canada   Consolidated 
Current assets  $2,244,153   $7,664,163   $2,008,406   $11,916,722 
Property and equipment   8,349,684    318,737    2,127    8,670,548 
Patents and licenses   -    454,997    -    454,997 
Goodwill and intangibles assets   7,067,535    1,471,719    -    8,539,254 
Total Assets  $17,661,372   $9,909,616   $2,010,533   $29,581,521 
                     
Six Months Ended June 30,   Singapore    US    Canada    Consolidated 
Sales  $(1,360,932)  $-   $-   $(1,360,932)
Cost of sales   609,048    -    -    609,048 
Selling, marketing and                    
administration   1,464,967    3,047,999    410,511    4,923,477 
Research and development   1,119,598    1,251,517    111,563    2,482,678 
Other income including                    
Investment income   (145,044)   (2,395)   (14,925)   (162,364)
Net loss from operations                    
before income tax recovery  $1,687,637   $4,297,121   $507,149   $6,491,907 

 

  Page 18

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

17.SEGMENT INFORMATION (Continued)
   2016 
As of December 31,  Singapore   US   Canada   Consolidated 
Current assets  $2,118,561   $10,058,018   $4,957,624   $17,134,203 
Property and equipment   9,039,069    322,633    2,508    9,364,210 
Patents and licenses   -    449,676    -    449,676 
Goodwill and intangible assets   7,086,149    1,471,719    -    8,557,868 
Total Assets  $18,243,779   $12,302,046   $4,960,132   $35,505,957 
                     
Six Months Ended June 30,   Singapore    US    Canada    Consolidated 
Sales  $(576,741)  $-   $-   $(576,741)
Cost of sales   280,563    -    -    280,563 
Selling, marketing and                    
administration   487,069    4,140,642    717,381    5,345,092 
Research and development   156,853    1,167,105    -    1,323,958 
Impairment loss   -    63,522    -    63,522 
Loss on disposal of property                    
and equipment   -    -    16,931    16,931 
Other income including                    
Investment income   -    -    (35,752)   (35,752)
Net loss from operations                    
before income tax recovery  $347,744   $5,371,269   $698,560   $6,417,573 

 

18.FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

 

The Company's financial instruments consist of cash, short-term investments, accounts receivable, and accounts payable and accrued liabilities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest risk arising from these financial instruments. The Company estimates that the fair value of these instruments approximates fair value due to their short term nature.

 

The Company has classified financial assets and (liabilities) as follows:

 

   June 30,   December 31, 
   2017   2016 
Fair value through profit or loss, measured at fair value:          
Cash  $9,165,466   $14,376,282 
Short-term investments   609,423    589,275 
Loans and receivable, measured at amortized cost:          
Accounts receivable   529,869    292,849 
Other liabilities, measured at amortized cost:          
Accounts payable and accrued liabilities   (729,776)   (1,624,344)

 

Financial instruments recorded at fair value on the balance sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

 

Level 1 - valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities.

Level 2 - valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.

 

  Page 19

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

18.FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)

 

Level 3 - valuation techniques based on inputs for the asset or liability that are not based on observable market data.

 

Cash was determined using level 1 inputs. Short-term investments were determined using level 2 inputs.

 

Credit Risk

The Company is exposed to credit risk associated with its accounts receivable. The Company has accounts receivable from both governmental and non-governmental agencies. Credit risk is minimized substantially by ensuring the credit worthiness of the entities with which it carries on business. Credit terms are provided on a case by case basis. The Company has not experienced any significant instances of non-payment from its customers.

 

The Company's accounts receivable ageing was as follows:

 

   June 30,   December 31, 
   2017   2016 
         
Current  $408,764   $125,610 
31 - 60 days   22,745    16,346 
61 - 90 days   -    75,816 
> 90 days   98,360    75,077 
   $529,869   $292,849 

 

Exchange Rate Risk

The functional currency of each of the entities included in the accompanying consolidated financial statements is the local currency where the entity is domiciled. Functional currencies include the US, Singapore and Canadian dollar. Most transactions within the entities are conducted in functional currencies. As such, none of the entities included in the consolidated financial statements engage in hedging activities. The Company is exposed to a foreign currency risk with the Canadian and Singapore dollar. A 10% change in the Canadian and Singapore dollar would increase or decrease other comprehensive loss by $363,677.

 

Liquidity Risk

The Company currently does not maintain credit facilities. The Company's existing cash and cash resources are considered sufficient to fund operating and investing activities beyond one year from the issuance of these unaudited condensed consolidated financial statements.

 

19.CAPITAL MANAGEMENT

 

In the management of capital, the Company includes shareholders' equity (excluding accumulated other comprehensive loss and deficit), cash and short-term investments. The components of capital on June 30, 2017 were:

 

Cash and short-term investments  $9,774,889 
Shareholders' equity  $139,562,755 

 

The Company's objective in managing capital is to ensure that financial flexibility is present, a) to increase shareholder value through growth; b) to respond to changes in economic and/or market conditions; c) to maintain a strong capital base so as to retain investor, creditor and market confidence; d) to sustain future development of the business; and e) to safeguard the Company's ability to obtain financing should the need arise.

 

  Page 20

 

POET TECHNOLOGIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

 

 

19.CAPITAL MANAGEMENT (Continued)

 

In maintaining its capital, the Company has a strict investment policy which includes investing its surplus capital only in highly liquid, highly rated financial instruments.

 

The Company reviews its capital management approach on an ongoing basis.

 

20.EXPENSES

 

Research and development costs can be analysed as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
                 
Wages and benefits (1)  $543,365   $330,568   $1,098,144   $589,770 
Subcontract fees   438,464    204,288    843,754    424,816 
Supplies   204,213    41,217    391,147    91,956 
Stock-based compensation   58,216    78,066    149,633    217,416 
   $1,244,258   $654,139   $2,482,678   $1,323,958 

 

Selling, marketing and administration costs can be analysed as follows:

 

Wages and benefits (1)  $604,608   $1,054,413   $1,250,488   $1,537,582 
Depreciation and amortization   558,919    239,958    1,099,312    327,802 
Stock-based compensation   101,567    809,924    904,963    1,929,625 
General expenses (1)   387,254    350,059    655,992    535,128 
Rent and facility costs (1)   266,679    196,567    544,993    272,262 
Professional fees   167,726    272,287    323,468    412,487 
Management and consulting fees   40,330    172,401    144,261    330,206 
   $2,127,083   $3,095,609   $4,923,477   $5,345,092 

 

(1) Certain prior period figures have been represented to conform with the current period's presentation.

 

 

 

 

 

 

 

 

 

Page 21