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Sep 27, 2023

POET: The Q1 Highlight is SPX’s and POET’s First Orders

By Lisa Thompson NASDAQ:POET READ THE FULL POET RESEARCH REPORT During Q1 POET

By Lisa Thompson

NASDAQ:POET

READ THE FULL POET RESEARCH REPORT

During Q1 POET (NASDAQ:POET) announced a deal for itself as well as for its joint venture company SPX. On April 25, POET announced a new product "POET Starlight™", which is a packaged light source solution for AI applications. Celestial AI, the AI chip provider has ordered Starlight for use in its products. POET expects to complete design verification testing and reliability qualification of the Starlight engines by the end of 2023 and start production in the second half of 2024. These POET Starlight products are packaged light engines based on POET's LightBar platform. The two companies are working together to create a packaging solution that is up to 75% lower in cost than competing solutions and is highly scalable for the volumes that Celestial AI and several other AI hardware companies need. POET's LightBar platform, based on the POET Optical Interposer, allows it to attach high-power CW lasers on its platform using traditional pick and place semiconductor equipment in an automated fashion and at wafer scale. The process uses known-good laser chips and eliminates the need for laser arrays which can be cost-prohibitive for high-volume applications. POET has said that this market, once it emerges, which it must given the high bandwidth requirements of AI processing, will far exceed the market for transceiver modules in the data center market.

Then on May 11th, POET announced SPX got its first volume production order. This was from Beijing FeiYunYi Technology for $3 million for its optical engines. This customer plans to produce optical transceiver modules using POET-designed optical engines for sale to telecom and data center markets worldwide. Currently, BFYY plans to buy a total of US$30 million worth of SPX optical engines over the next three years. Design verification testing and reliability qualification are expected to be completed by Q4 2023 and production shipments to BFYY should start in early 2024.

These are not the only orders we expect for POET to meet our forecasts. We already know ADVA is buying from POET and we know they are talking to many more companies that have not been announced. Included in NREs have been sales of samples that will evolve into production orders.

Q1 2023 Earnings Report

Q1 2023 revenues were $180,836 and came from NREs paid by AI Celestial and others versus no revenue in Q1 2022. We expect the company to book NREs again in Q2. Total operating expenses were $5.5 million compared to $5.0 last year. SM&A expenses increased by $274,000 to $2.7 million from $2.4 million last year. R&D expenses increased to $2.8 million from $2.6 million last year. Stock-based compensation increased by $205,000 to $1.2 million in Q1 2021 from $1.0 million in Q1 2022.

Although the joint venture generated a loss of $1.1 million in the quarter, POET was unable to book 80% of the loss as its partner's equity position was reduced to zero from the JV losses. So, until the JV starts making money, or the partner adds more cash the number will be zero. Given that the JV was only given about $5 million in cash and has had losses greater than that (including non-cash items) we expect that it will need more cash in Q3 or Q4. POET will then declare 80% of that cash as a gain on the contribution of IP and can subtract up to that amount from the JV's losses on its income statement. We have adjusted our model accordingly.

Nevertheless, regardless of the accounting treatment, the prospect of initial revenues from shipments of devices from the Super Photonics JV signals a step function increase in the value of this significant asset in the POET portfolio. Photonics companies are highly valued in China, and there are few companies that are competing today in the AI hardware space. POET currently owns 80% of the JV, whose stated objective is to IPO, in a market that values such companies at 5X that of any other market in the world. POET expects that the value of this asset will eventually be reflected in its market cap.

The net loss was $5.3 million down from $5.4 million in Q1 2022. This resulted in an IFRS loss per share of $0.14 per share and a non-IFRS loss of $0.10 per share, compared to a loss of $0.15 and a non-IFRS loss of $0.12 last year. The total common shares outstanding on March 31, 2022, were 39.8 million, and there were 42.5 million shares fully diluted. On May 15, 2023, there were 39,818,516 shares outstanding.

Balance Sheet

POET Technologies ended the March quarter with $11.0 million in cash and marketable securities, no convertible debentures, and no debt.

Working capital was $8.2 million. The company had a negative cash flow (excluding changes in working capital) of $3.6 million and a negative free cash flow of $3.6 million. The company is burning about $1.3 million a month. Between January 1, 2023, and April 3, 2023, POET received $6.2 million from the exercise of warrants. The company still has another $1.4 million it can raise through the exercise of warrants that will expire by September. It will need to raise cash again before it reaches profitability.

At its current burn rate, the company has a potential of nine months of cash. We expect it needs to do another capital raise which should get easier as it starts to generate product revenues in Q3. As revenues ramp, we expect the burn rate to decline.

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