By Tom Henderson
Small Times Senior Writer

July 18, 2001 — Nanovation Technologies Inc., which makes integrated components for optical switching networks, announced Wednesday that it has laid off about 120 of its 169 employees following the collapse of an expected $10 million funding round.

The firm is headquartered in Northville Township, Mich., with an on-campus research facility at Northwestern University in Evanston, Ill., and a subsidiary, Apollo Photonics, in Burlington, Ontario.

Company officials said the layoffs came when its largest shareholder, Stamford International Inc., a Toronto-based holding company that owns about 9 million shares, or roughly 40 percent, of Nanovation stock, refused to approve the issuance of more stock.

Stamford is publicly traded, over the counter, and its sole asset is its shares of Nanovation, which allowed people to, in effect, invest in Nanovation prior to any official public offering.

“They wouldn’t authorize additional shares and if you can’t issue additional shares, you can’t raise money,” said Melanie Ofenloch, vice president of corporate communications. She said the brunt of the layoffs was felt among departments supplying general support and administration “as opposed to engineers.”

In a prepared statement, Nanovation CEO Robert Chaney said, “Nanovation had to make a hard decision to significantly downsize our operations,” adding, “I will be tied up in meetings trying to ensure the company has the funds to go forward in the next 48 hours.”

Ofenloch said Chaney was in meetings and unavailable for further comment. “It’s pretty much 24/7 around here trying to figure this out,” she said.

The company needed the money to cover the cost of ramping up production for contracts calling for an August delivery of optical circuits. The $10 million had already been raised and was placed in an escrow account on June 29, pending shareholder approval.

Motorola Inc. had chipped in $4 million of that amount, which was part of what was expected to be a total of $75 million that was being raised by Salomon Smith Barney.

On July 13, faced with Stamford rejection, Motorola pulled its money out and the deal collapsed.

Prior to this current round, Nanovation had raised $91 million in equity funding since it spun off from Northwestern in 1996.

Ofenloch said that following its refusal to approve the issuance of more stock, Stamford offered to infuse cash into the company in exchange for control of the board of directors.

That offer and other ways to raise money were being discussed, said Ofenloch. “The board of directors and senior management are trying to figure out the next step. Stamford’s offer certainly is one option they are considering.”

A Stamford official was contacted by smalltimes.com but did not respond to a message on his cell phone.

Insiders in the venture capital community say Nanovation had a reputation for free spending. When original chief executive G. Robert Tatum was replaced a year ago, unconfirmed reports circulated that it was a result of the company’s so-called burn rate.

In January of 2000, for example, Nanovation made headlines in the industry when it agreed to pay $90 million over six years to the Massachusetts Institute of Technology to establish a photonics center in exchange for access to intellectual property.

Universities nationwide were said to use that as an example when other companies tried to form licensing agreements with them.

The layoffs come just a week after Nanovation had announced a partnership with Opthos Inc. Under that agreement, Nanovation would have supplied components on a trial basis to the California-based maker of networking equipment.

Opthos had placed a large purchase order for next year contingent on the success of the parts ordered for trials.

Ofenloch said Nanovation will try to meet contractual obligations to supply a component that it calls “the industry’s first true photonic integrated circuit” to three firms in August.

“We have nondisclosure agreements in place so I can’t identify them, but they are very large telecommunications companies you would know,” said Ofenloch. “We will provide that equipment provided we are still a going concern.”

Nanovation grew out of research at Northwestern into indium phosphide, a compound that interacts very strongly with light. In 1996, Nanovation was spun off as a for-profit company to pursue photonic switches based on that material.

Later, officials decided to put research on indium phosphide on hold and focus on integrated optical circuits that used silica-on-silicon waveguides to direct light between MEMS-actuated components.

Last July, Nanovation moved its headquarters from Miami to a 108,000-square-foot plant on 20 acres that was formerly owned by Optical Imaging Systems Inc. (OIS), a once-high-flying public company that made flat-panel optical displays for the U.S. military before going bankrupt.

The move was prompted by the low cost it paid for the state-of-the-art facility — described by officials as “a fraction” of the $100 million OIS spent to build it — and by $9.7 million in tax credits granted by the Michigan Economic Growth Authority.

At the time, officials said they would invest $41.6 million in the facility and eventually employ about 540 at the site, making it one of the largest area employers.

The move was very controversial in Northville Township. The township board was deeply divided over whether to go along with tax abatements, an incentive it had previously resisted offering. Finally, they approved the tax relief.

In September, the good news continued for Nanovation, when the company closed on a $27.5 million round of funding, including $10 million from Motorola.

In June, officials said they were engaged in talks for the next round of funding, which they said would fund large-scale production of components, following years of research and developing, prototyping and testing. They told smalltimes.com to check back in a month.

A month later, however, that round had collapsed, and the company now fights for its life.


Tom Henderson at [email protected] or call 734-528-6292.


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