Thanks ITTR. Vivek's audio quality slowed down the process a bit. I relistened and looked through the transcript and I think we got all we could. Enjoy.

POET Technologies Discusses Significant Progress on Super Photonics Xiamen Joint Venture

2:58, George Tsiolis: [GT gives a standard intro…] Guys, welcome back.

3:00, Tom Mika & Vivek Rajgarhia: Thank you.

3:02, GT: Sorry you guys had to listen to that intro—I know you guys know it inside out—but for new investors, we’re just getting great feedback from people that they’re really, you know, getting this. Before we talk about… if you don’t mind, before we talk about this joint venture… they’re going to… because of new people that are tuning in, what is this joint venture to begin with, and then we’ll go down in some of the specifics about this news release.

3:25, VR: So about a year ago we started working on a relationship with the largest compound semiconductor manufacturer in the world, Sanan, which is based in China and headquartered in Xiamen, in the Fujian Province. Tom and myself, Suresh (Venkatesan) the CEO, we made a trip there in the first week of January 2020 to go and see their facilities and what they’re about. We were all flabbergasted, frankly speaking: the scale, the world-class facilities, the know-how in scaling manufacturing in semiconductors, was just incredible. They have aspirations of really becoming a big player in data centers. They set up a world-class fab for it for indium phosphide. And they saw that the POET platform—the interposer platform—had great synergies with what they are doing, in order to provide a solution to customers, to module manufacturers, that could really change the game here, and make an impact in the overall data center market. So we decided to set up a venture where POET would provide their know-how of using the interposer into an optical engine, which includes photonic devices [garbles], all passively like semiconductor manufacturing, which is all at wafer level, and doing wafer level tests and then supplying to customers. So we have all that know-how. Sanan saw that they have the opportunity to invest in such a joint venture. So Sanan is providing all the capital, including OpEx and CapEx, to fund the whole joint venture.

5:25, GT: Wow.

5:26, VR: Poet gets our value through the IP that we transfer there. And we have set up this company, Super Photonics Xiamen, which will now assemble these optical engines using our interposer, and devices from Sanan, as well as devices that POET has qualified or is working on, and produce and supply these optical engines. So it’s assembly, test, and sales. So it’s commercializing POET’s interposer platform into a product, and then supplying those products to customers.

6:09, GT: It seems like—correct me if I’m wrong, I mean it depends on how you measure time [George, like Prufrock, measures out his life with coffee spoons] and so on and so forth—but has it taken a long time for this to get up and running? Have there been challenges? Or is that just a perception because this is such a sophisticated joint venture, that maybe you’re running right on schedule?

6:30, VR: George, I would say everything is relative. What we are doing, and what we are doing in China, factoring that in, I would say we are moving at a pretty good pace, especially getting a joint venture of such… where there’s technology know-how transfer, there’s capital investments, there’s incorporation of the company in China. Doing all that, and doing it during these times where we can’t even travel there during the pandemic. So, doing all that and having a joint [garble] venture where companies are incorporated in China with foreign partners and all, it goes through regulations, as you can imagine. So, the answer to your question: no, it hasn’t taken more than the due time. I do believe—again with my experience working in China’s market for the last 25 years—that we’ve done… again, not to pat ourselves on the back, but we have moved forward at the right schedule. It also comes with support, which has been tremendous, from our partners in China.

GT, 7:45: The magic question that everyone’s probably thinking of is When do you think this joint venture, SPX (Super Photonics Xiamen), will be in a position to start assembling and testing optical engines?

VR, 7:58: Yes, a great question. As we put in our press release, today the equipment has all been ordered, they are now getting, based on lead times… so in the April/May timeframe. The facility’s already set up and this facility right now is in the same [garble] facility as Sanan. So they have leased a portion of that with a clean room and highly set up for manufacturing—semiconductor manufacturing—which is already there. So the equipment, guys, will be installed. So in the April to May timeframe we are expecting that all the first-phase equipment would be in place, and then subsequently we start building samples, and doing low-volume production, and going from there.

TM, 8:52: George, I’d just like to point out that we signed this agreement on October 21st, so what is that? Four months, five months? Where it took us about four of those months to actually get the company registered in China because that’s a complex process. I think Vivek signed and chopped at least four original documents that I know of, or you sign one document four times… multiple times… that was coming back and forth via FedEx. So all of the translations that are required… everything took a fair amount of time, but now everything’s in place and POs are being issued. We have staff that Vivek will talk about later. So I think it’s really been a good effort in a very short period of time. And our shareholders will remember that a less complex deal, which was the sale of DenseLight Semiconductors, took some two years to complete. So that’s just the way things are in international business, especially with China.

GT, 10:12: Tom, while we’re talking to you, you guys valued the joint venture at 50 million dollars US, so this is no small joint venture—this isn’t George.com and POET Technologies getting together and throwing something on the wall and seeing if it sticks. What was the basis of the 50 million valuation of the JV?

TM, 10:30: Well, the Chinese government requires that any intangible that is counted as capital that’s contributed to a company be valued by an independent third-party valuation firm. So we did use a firm that’s approved in China. We described the limited amount of IP that we were transferring to the joint venture. And, by the way, that IP has to do with the assembly, the test of devices, not with the fundamental IP related to the fabrication of the interposer itself. So, it’s only taking the interposer wafer and flip-chipping devices onto that, testing at wafer scale, singulating, which is a number of process steps, along with the know-how how to operate the equipment that’s used for that. So that valuation came in at 22.5 million dollars, from the third party evaluation firm, and the balance of the 50 million is, essentially, the capital that has been committed by Sanan, that they will be putting into the JV over a period of about 18 months to two years. So they’ve committed that amount of capital. Once that’s in, we will have about 47 or 48% of the joint venture ownership and Sanan will have 52 to 53%, depending on how everything works out. Beyond that, we don’t really expect there to be much needed from either of the partners, we think that the JV will be self-sustaining after that, but if it is, then we’ll put in proportionate to retain our proportionate ownership interests.

GT, 12:35: And if all this goes well, Tom, you’ve previously disclosed that the revenue opportunity for sales of optical engines through this joint venture could reach 250 million dollars by the 2024-2025 timeframe. How did you arrive at that figure?

TM, 12:58: Well, fortunately we have in the company some real experts on photonics devices, that have been engaged with other customers in their previous lives and know how photonics devices are priced and what their true cost is and the cost of certain fabrication and testing steps. So we went through a pretty detailed cost analysis of what’s in the market today. We looked at the kind of discount we could provide to our customers while maintaining a good, healthy margin for the joint venture company. When we looked at that, those price reductions were still pretty substantial. They were, depending on the device, in the range of 25 to 40%, which could spell the difference between a customer being profitable or not being profitable in the sale of optical transceivers. So when you’re giving a customer that kind of discount, and you’re giving them the possibility of being profitable, we think we can acquire a market share pretty rapidly in each of the segments. So we looked at each of the speeds and the types of optical engines that we would be delivering, the kinds of discounts we could offer, and I think in no case do we exceed about 30% of the market that’s being projected for these devices over time. Of course we expect those market shares to not be instantaneous, but to rise over time and then plateau, and then even decline. And so, given our knowledge about what the pricing is going to be for transceivers and the optical engine component within those transceivers, we developed a model for the revenue generation. So that was the basis. It was a fairly detailed business plan that included that. And so that’s where that opportunity of $250 million, $200-$250 million came in. And so, we wanted to let people know when we announced this joint venture of the size of the opportunity, and these [garble] would amount to relatively limited opportunities for Poet overall.

15:35 GT: Vivek, in order to hit those kind of numbers… execution, planning, everything, you have to have a good team of people in this joint venture. And it looks like Poet had a major role in both appointing board members and management team members to the joint venture. Can you comment on some of the people who have been hired because they look like there are some impressive people there.

16:00 VR: Sure. Yeah. One thing to add, again, you know what Tom was mentioning on the positioning and the value proposition. Geographically also this is also very strategic, because we are a supplier of these optical engines to module manufacturers, optical module companies. And most of them are in China and Taiwan, basically. So to your question, we did have access to really experienced talent. We needed [garble] as well as have enough credibility to attract them to join a startup, Super Photonics. So we have been able to attract significant talent. The leadership… of course it starts with the leadership, and leadership attracts more talent. So, the general manager of the joint venture is the one who headed up Oclaro’s operations in China, also had a worldwide role, also has worked in big companies like W.L. Gore and Huawei, and was able to attract the next level of talent. The VP of R&D, or head of R&D, comes from Huawei, Hisilicon, Oclaro in China. [garble] done his PhD from the China Academy of Sciences. And then [garble] the next level, and so there’s a network that we were able to tap into to get this top notch talent into Super Photonics. So, we are building on that [garble] In the press release by end of the year we [garble] come [garble] in the joint venture here. And then also you mentioned about the board. So, the board was very clear in the joint venture that Poet would appoint or identify the general manger which would be one of the board members. [garble] appoint or identify the CFO which will be one of the board members. So those were two Poet identified. Then Sanan has nominated Dr Weizhong Sun who is the CTO of Sanan IC to the board. Dr. Sun is a [garbles] technologist and executive in this field. He’s worked at companies like Finisar, Huawei and now heading up Sanan IC’s 5G and optical business. And we also jointly appointed a fifth board member together, who is a prominent scientist and researcher in the field of photonics in China. Dr. Huang. He’s from China Institute of Sciences. Very, very prominent and well regarded individual in the field. So it’s [garble] You know we… Sanan also and we [garbles] ..you know I’m a board member and Dr. Sun has appointed me as a vice-chairman. So this team of individuals, or board that I’m part of is also quite significant. Very few companies, even companies that have been in this business for decades, can say they have such prominent stature of individuals on the board.

[19:40 GT] Well I was about to say, “Should shareholders take a great deal of comfort in that third-party validation? That you are able to attract this level of team members, both board and management team? To the joint venture?” Because on the outside we don’t really know, most of us, right, you know how good is this joint venture going to be? So it’s great to see that almost, before customers, the first third-party validation comes from the people that join it. And should we all take a lot of great comfort in that?

[20:10 VR] Absolutely George. You know, personally I would say that [garble] we’re able to attract talent because when people who are moving from other prominent roles in prominent companies, you know moving to another company. And in this case Poet Technologies. They are doing their own due diligence. They’ve been in the industry. They know the network and they know the reputation. There’s [garbles] so that they are providing on [garbles] endorsement and confidence is substantial. We’ve said this before, a company like Sanan IC or Sanan to take also a joint venture with Poet gives a lot of credibility to what we are doing.

[21:04 GT] I’m glad you brought up the last point because joint ventures like any relationship, marriages, partnerships, they can start out with the best of intentions, but sometimes personalities and just philosophy can get in the way, right? What’s it been like working with Sanan so far?

[21:20 VR] Yeah that’s a very good point, especially [garble] is cultures which are .. not only where what  the heritage of the people are, but the culture of the business. The location. You know how work is done. Like the question, the earlier question, did it take a long time and so on. You know the support and the proactiveness that we have seen from Sanan IC, to me, I’m not seeing [garble] experienced companies [garble], you know doing acquisitions and all, that they were so open and available to execute on things. Even before the company was incorporated, officially, they already provided the support team. Provide [garbles] team on board, had their own people supporting… I could go on and not stop. I believe Sanan IC, culturally, technologically, strategically, and geographically provides a great opportunity.

[22:30 GT] So the marriage is still going strong.

[22:33 VR] Yeah. It’s a [garble] we know [garble] okay. I think we are looking forward to a great partnership and a great business success.

[22:44 GT] Last question guys. I want to go outside of the JV, outside of Poet. Just doing some reading there’s been a lot of press about industry-wide delays in the production of semiconductors. Even to the point of auto plants being shut down for lack of components. Does this impact Poet at all?

[23:06, VR] It is unprecedented, or lets say in the last 20 years. In 2000 there’s probably a close comparison when there was a big hype of [garble] optics and [garble] all if you recall. So the fabs are oversubscribed by multiple times. So we do use a fab, a CMOS fab, which although the relationship is great there are delays. So we did suffer getting our wafers back, getting our tape-outs masked, an so on by a couple of months. Luckily with our influence and relationship we were able to limit it to 2-3 months [garble]. What impact it really had on us is getting our samples out, that we were counting on these, by a couple of months. So that’s really the impact. It does not change our goals, our timelines, and getting to customers, getting things going. But there has been an impact I cannot say otherwise.

[24:10 GT] But I would also probably jump in and say that’s not a negative impact because it’s not as if this is unique to Poet. So wherever you’re getting the samples out they are understanding that it is industry-wide, not Poet specific.

[24:25 VF] Yes just today in fact I was talking to a customer that we are working with and we’ve been sharing. And they were like, “Yeah”. They are seeing it everywhere. From all other components and things like [garble]. You’re right.

[24:38 GT] Go ahead Tom. You wanted to add something,

[24:40 TM] I just wanted to add to that. We’ve been saying all along that this year is a time for getting samples into customer’s hands and that our expectation for significant revenue doesn’t appear until 2021 [Did he mean 2022?]. I mean even though we’re a couple of months delayed with the samples we don’t think its going to have a material effect on 2021. And the reason is that we’re producing this year very limited samples of.. for alpha and beta samples for… beta samples go into the hands of customers. What we should be focused on and what we are focused on are design needs. Because that’s what’s going to determine what 2021’s revenue profile looks like. And we don’t see that that’s going to be impacted, except for the fact that, you know, there’s going to be somewhat of a delay in getting beta samples in customer’s hands. But we don’t think it’s a material concern. That’s why we haven’t put out a press release saying we think our business is going to be materially impacted. We just don’t think it’s a significant delay.

[25:54 GT] And does the industry think that this is like… Look every industry goes through these kind of situations every once in a while… bottlenecks. I don’t think there’s an industry in the world that hasn’t gone through. But does it look like the problem will be rectified in short order I guess? How does it look?

[26:25 TM] I think it depends on the supplier. But its been the practice of Poet for as long as I have been there to always have plans a, b, and c. And so, you know, if one mask shop can’t deliver within the period of time that we need it, we’ll find another mask shop. We have backup relationships. So even if it continues we will do everything we can to mitigate the effect on us because obviously this is an important time for us getting samples out to customers.

[goodbyes…]