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Lumenon's Last Chance?

Is Lumenon Innovative Lightwave Technology Inc. (Nasdaq: LUMM) close to reaching the point when it will finally start manufacturing the integrated optical components that it’s talked about for so long?

That’s what Gary Moskovitz, Lumenon’s CEO, would have a Canadian bankruptcy court believe as he tries to fend off creditors that are closing in on his company.

"I'm on the record for the courts saying that we will transition to early manufacturing in late March, early April," he says. "When we do, anyone else making PLCs [planar lightwave circuits] will be left in the dust."

Brave words, and something that Moskovitz probably has to say to keep his company alive.

Moskovitz has until March 6 to convince a Canadian court to continue providing Lumenon protection from its creditors. "By that time, we hope to show a term sheet for interim financing," he says. Moskovitz’s prospects of achieving this probably hinge on convincing financial institutions that Lumenon really is within reach of going into mass manufacture of the CWDM and other components that it’s announced in the past.

It has to be said that so far, Lumenon has a poor record of delivering on its promises in this respect:
  • In April 2000, it issued a press release saying that it would be in "volume manufacturing in Spring 2001" (see Lumenon To Make Low Cost WDM Chip);
  • In October 2000, it issued another press release saying "production capacity of the new plant will reach 500 market-ready units per day in 2001" (see Lumenon to Open Optical Plant);
  • A year later (October 2001), Lumenon said volume manufacturing would start by the end of the third quarter in 2002 (see Lumenon On Track).

    In each case, the date has come and gone with no sign of a big breakthrough at Lumenon.

    Not surprisingly, many of Lumenon's existing creditors have lost patience and want to wind up the company before it burns through any more cash.

    Things came to a head on 7 February when Lumenon's noteholders demanded immediate repayment of their convertible notes (see Lumenon's in Default). That pushed the public holding company, which is incorporated in the U.S, into Chapter 11 bankrupcty protection. The filing was made on 10 February (see Lumenon Files for Chapter 11).

    Lumenon's private subsidiary, LILT Canada, Inc., which is incorporated in Canada, had already been granted credit protection under the Canadian Companies' Creditors Arrangement Act (CCAA) -- equivalent to a Chapter 11 filing (see Lumenon Is Looking Lame).

    Lumenon's affairs are more complicated than most because of the company structure. Founded in March 1998, Lumenon began life as a privately-held startup incorporated in Canada. It became public later that year by doing a reverse merger with a U.S. company, which effectively became a holding company for the Canadian subsidiary.

    Having both public and private faces had its advantages, says Moskowitz. The private subsidiary was able to benefit from research grants and incentives only available to startups in Canada. And having a public face made it easier to raise money.

    Lumenon the holding company raised all the funds including CDN$35 million from Capital Ventures International and Castle Creek Technology Partners LLC, CDN$11 million from private investors, and a small amount (around CDN$1 million) from Molex Inc. (Nasdaq: MOLX/MOLXA).

    But it seems that money raised on the public markets is easier come, easier go. When LILT Canada went into credit protection, it put Lumenon in default of the terms of its convertible notes. In effect, the noteholders -- Capital Ventures and Castle Creek -- suddenly wanted their money back. On 4 February they demanded that the outstanding amount of approximately CDN$12.7 million (US$8,4 million) be paid within five trading days.

    But the noteholders didn't stop there. The only assets of Lumenon are shares in LILT Canada. With LILT Canada under credit protection, the noteholders couldn't get their hands on any real assets. So they also filed a motion to have LILT Canada's credit protection revoked see Lumenon Noteholders vs LILT).

    Luckily for Lumenon, the judge delayed hearing the motion, which made it ineffective, says Moskovitz. By the time it was heard, the original period of credit protection had expired anyway.

    Unlike a Chapter 11 filing, CCAA protection has to be renewed on a regular basis. LILT Canada was granted an initial stay of 30 days, expiring on 8 February. To get the stay extended, the company had to convince a court judge it had made progress towards resolving the situation. Clearly LILT managed to present a convincing case, because last Tuesday (11 February) it was granted a further stay of 30 days, this time until March 6.

    Moskovitz implies that Lumenon's burn rate is around half a million Canadian dollars a month. "We were running at CDN$1 million a month when we had 80 people," he says. The company now has half that number of staff.

    — Pauline Rigby, Senior Editor, Light Reading
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