Nanovation in Crisis

Integrated optics startup Nanovation Technologies Inc. is in deep crisis today as it struggles to finalize an emergency infusion of cash to keep it going.

Yesterday the company was forced to lay off two thirds of its 169 employees following the collapse of a $75 million Series C round of funding. In a note to Light Reading today, Nanovation's CEO, Bob Chaney writes: "We are currently attempting to obtain funding to hold on to the remaining one third of our employees while focusing only on two silica photonic IC products and two indium phosphide photonic IC products."

Nanovation's crisis appears to have been triggered by Stamford International Inc., a shell company that provided a backdoor way of investing in Nanovation ahead of its planned IPO, which never actually materialized (see Nanovation Prepares the Ground for an IPO).

As Nanovation's largest common shareholder, Stamford derailed the latest funding round and is now offering Nanovation cash in exchange for control of its Board of Directors, according to Chaney's note.

In the note, Chaney says that Nanovation had secured a $10 million bridge loan with Motorola Inc. (NYSE: MOT) for its Series C round, in which Salomon Smith Barney was the placement agent. The money had been placed in an escrow account on June 29. Motorola is an existing Nanovation investor (see Nanovation Bounces Back).

Nanovation needed shareholder approval for the issuance of additional shares for this offering, according to Chaney. "The overwhelming majority of our preferred and common shareholders approved," he writes. "However, our largest common shareholder blocked this deal for nearly two weeks, causing Motorola enough concern to pull out on July 13, and the bridge round then collapsed.

"Nanovation still plans to deliver in August the industry's first true photonic IC, consisting of a switch, splitter, and monitoring taps all on a single substrate," Chaney concludes.

Nanovation has raised a total of $91 million in funding. The identities of many of its investors, apart from Motorola, have been kept quiet. A September 24, 1999, press release announcing a $16.5 million round of financing made no reference to where it came from. Similarly, a press release announcing a further $30 million round of funding, dated Dec 6, 1999, merely referred to an unidentified "crossover group of 13 mutual funds and mutual fund managers" as the source of the funds.

As it happens, it's almost exactly a year since Nanovation dumped its original CEO, G. Robert Tatum, and switched strategy -- bringing to an end an era of spending big bucks in order to pump up Nanovation for a whopper of an IPO (see Nanovation's CEO Gets The Heave-Ho).

At that time, Nanovation was already entangled in litigation with Stamford International, although John Ofenloch, Nanovation's VP of Finance, made light of it at the time. "It's just a monkey on our back," he said. Now the monkey has turned into an organ grinder.

— Peter Heywood, Founding Editor, Light Reading
http://www.lightreading.com