Poet Technologies Inc (POET)

[prototype_101]

AGM Transcript 2: Lily Wu's Talk

59:25 (Tom Mika): Maybe Lily, you could shed some light on that? Thank you. This is Lily Wu, who is the chief investment officer of China Prosper Group, who is both an investor in DenseLight Shanghai and managing the investors into that company.



59:48 (Lily Wu): Thank you Tom. I certainly appreciate some of the uncertainty, or questions, regarding this transaction process. China, as I think many of you know, is a closed-currency economy and, as such, its “?” currency is not globally available, nor is it globally tradable. In previous decades it was very freely flowing in and out of the country, and even here in Canada we see that in a lot of property purchases and investments, but within the last two-to-three years that flow has stopped tremendously. And that has a lot (to do) with the government’s orientation toward protecting and stabilizing its currency and economy. Coming back to our transaction, this has been… we are largely on-track in terms of closing this deal but, frankly, the regulatory environment has only become increasingly tougher. The reason’s because, not in small part, also because of the trade wars and also because of the global technology environment as we mentioned on the datacom side, 400G has been pushed out. On the telecom side, 5G has been pushed out. So all this “?” technology supply-chain and the investor base that we have assembled is a combination of government investors, financial investors like ourselves, and also industry investors. And the industry investors are all companies that have products, process, or market synergy with both DenseLight and also with POET. All of those companies are in this overall technology environment which, generally speaking, has been in a very up-and-down and slightly slowing year, with push-outs of new technologies and also with the political trade-wars going on, which has had all companies stopping for a moment, taking a breath, revisiting their supply-chains, revisiting their investment strategies, and so now just minor things which normally took a week or two, take two or three weeks, things that normally take one look take two looks. Even from regulators’ perspectives in China, foreign currency remittance over off-shore—what we call the ODI process—is also taking longer than normal. Not having specifically to do with our deal, but with everything overall. And I think many of you see headlines of China/Overseas investments slowing down dramatically, being pushed back, being recalled so, from this prospective, we are doing this transaction caught up in this overall environment.



1:02:33: The reason why we have the two tranches is because we are working with a number of investors, we wanted a balanced set that no one investor will dominate. Denselight, in the future, will report to a full board of both industry and also financial investors, plus also one government, which will be the location of the volume-fab in the future for DenseLight, so that in can support down-stream customers like POET when it has large volume requirements. And so, from that prospective, each of the different players are going through the OGI process, and at different rates. And so, one good thing is that, the OGI process is something like a two-plus month process, so once the process is launched we have great visibility into the readiness and availability of the capital. Of course the unknown is the speed by which the regulators move. China Prosper has done numerous cross-border transactions similar to this one in nature, not necessarily in this industry only, so we have a good idea of what the process is going to be like. Rather than give ourselves… to do multiple tranches—two tranches—actually relieves the pressure, it doesn’t put us in a situation where we’re forcing numerous investors to all walk in lock-step. As I mentioned, they are very different in nature—some are within the industry, some are financial investors, some are government—so each one has a different level of readiness and familiarity with working the OGI process. We’ve actually already launched pushing the first group that are most familiar with the process through. And the others we’re shepherding along for the second closing. From a POET prospective, as shareholders, you’re right to worry about what happens if China doesn’t… if the Chinese investors do not pay up, but at no point are the assets, or the equity interests of POET, at risk. We are always… nothing gets transferred to DenseLight Shanghai that hasn’t been paid for in cash, in hand. What hasn’t been paid for remains in the hands of POET and also we commit to taking the full operating cost, and burden, and liabilities of DenseLight from October 31st onward, so that comes off of POET’s requirement and POET’s cash flow, so that they may focus on their R&D. So in that regard we are also putting our intention and our capital forward of the deal. So I hope that kind of summarizes and wraps up.



1:05:27 (question off-mike, perhaps from David Lazovsky?): “?” big picture “? in deference to?” shareholders, can you help them understand if there is a fundamental transactional risk here, or if there’s primarily a capital risk?



1:05:38 Lily Wu: There is no fundamental transaction risk. Actually, numerous investors are very excited and interested to bring DenseLight into their ecosystem’s fold so, really, it has been a processing and a regulatory issue, having to do with the OGI process. So the timing is what we’ve been looking to control, as opposed to the reality of it. And just to put a word or two about that, you all know and understand the value of POET and its technologies, from Chinese shareholders’ perspective, DenseLight has two sides of its business. Its larger and primary aspect of its business is actually sensing chips. Sensing chips go into a wide-range of industrial manufacturing applications. China, as you know, is often referred to in the press as the factory of the world. For us, in China, the manufacturing, the industrial, the equipment machine-ing applications of DenseLight are ever so important, perhaps more so than for traditional Western countries for whom manufacturing has mostly migrated out of those countries. So DenseLight has great interest to our investor base, perhaps even more so than it would, for example, to POET who’s more facing leading-edge datacom-type, or telecom-type, applications. Of course we also have that need, so we hope to develop both, but it’s the machining and traditional manufacturing which for us is so important and so valuable to complete our supply-chains, to complete our technology capabilities. So that’s the other side of the DenseLight story and why it’s so meaningful to the Chinese investors.



1:07:30 (question off-mike from audience about why investors in DenseLight aren’t known)



1:07:37 (Lily Wu): We do know. We are not publishing… we are not publicizing it. The primary reason is because as regulators—and this is in deference to the regulators—right now we are in the OGI approval process, and one thing that we have seen in the last couple of years that we’ve learned from, is that a number of… and this reminds me of Japan in the 1980’s, when I was working already, where very high-profile investors do very high-profile global acquisitions—big headlines—only to end up with egg on their face because the acquisitions were grossly over… you know, they were just wrong-footed. Within the China market as well, in the last couple of years, big purchases—the Waldorf Astoria or AMC (?) or that kind of thing—so now what we find, in deference to the regulators, rather than making announcements while they are in the process of doing their approvals, we’re basically saying, Oh, this has been approved, and then from the regulator’s perspective, from the government agency’s perspective, Wait, I’m in the middle of this application and you’ve gone and made your announcement, so in deference to them we’re letting them complete the process before we make a public announcement to say, Oh this is going to happen. And they don’t want to feel, Oh, so you made a public announcement to pressure me to make this happen. So from that perspective, it’s a respectful, much more conservative way to do so. But, having said that, it’s not to say there are risks that they won’t approve it. We are deferring to them to make that final decision before we go and say it. In fact, from China Prosper as a financial investor’s perspective… and we in China, actually, we are a joint-venture company with the Bank of China, so we have had multiple conversations on this process even before we launched the OGI process. So this type of pre-conversation, if you will, has already gone on for a few weeks so we’re confident that they are comfortable with the transactions. They are going through a process… OGI is actually a three agency process—this is probably more information than you need, but—one is with SAFE, the State Administration of Foreign Exchange, one is with the Ministry of Commerce, and the next is with NDRC (National Development and Reform Commission), so they are basically vetting that: 1) the capital sources are correct, 2) the transaction is in compliance with overall… that the contract is correct, and finally NDRC is that is in an industry that is recommended, i.e. it’s not in high-end property, it’s not a Waldorf Astoria type situation. And so that’s why the process also takes so long, it’s a three-agency approval process, not single.



1:10:36 (off mike question about How can we be unsure about where the money is coming from at this point?)



1:10:47 Lily Wu: Well, we do know. We’re allowing the regulators to finish their process of approval. So it’s not a matter of Where are we looking for the capital? We are looking for approval to remit this capital oversees to complete this transaction. It’s the so-called ODI process, on the one hand it’s not transparent, application by application, but the overall process is well known. I encourage you in fact to google China’s Offshore Direct Investment Policy and Process. You will find that often times it’s actually quoted by most law firms as longer than what we’re stating to you. We’ve gone through this process multiple times for many transactions, so we’re pretty comfortable that these time-frames, that Mr. Mika has mentioned, are realistic and achievable.



1:11:45 (Off mike question if we’re past the stage of due-diligence on this transaction?)



1:11:57 Lily Wu: Absolutely. Due-diligence was done through the Spring and Summer time-frame. That’s finished.

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