01 Quantum Inc. (ONE) Earnings Call Transcript & Summary

Hello, everyone. I'd like to welcome you to the Annual General Meeting of 01 Communique. My name is William Train. And as Chairman of the 01 Communique, I would like to introduce you to our proposed Board of Directors. First of all, Andrew Cheung is our Chief Executive Officer and a Director; Gary Kissack is a Director; and Jane Yang, also Director. Also, you may see on the screen, our Corporate Secretary and Controller, Ms. Gigi Loo; and our CFO, Brian Stringer. I ask Ms. Loo to act as Secretary of the meeting and Lori Winchester of TMX Equity Transfer Services to act as Scrutineer. Ladies and gentlemen, notice and proxy materials for this meeting were duly mailed to shareholders. Additional copies are available on SEDAR. I have been advised by the scrutineers that prior to the meeting, proxies were received from the holders of more than 16, 894,790 common shares or 18.4% of all shares entitled to be voted. As a result, we have a quorum for this meeting, and the meeting is properly constituted for the transaction of business. In view of the need to attend to a number of formal corporate matters, certain shareholders have volunteered to move and second resolutions where required. While this procedure will facilitate the handling of the formal matters, any shareholder or proxy holders may speak on a matter when that matter is before the meeting. When I recognize you, please give your name and state whether you are a shareholder or a proxy holder. The meeting -- the minutes of the last Annual Meeting of Shareholders held on April 21, 2020, are available for inspection from the company via e-mail from Gigi Loo at [email protected]. I am also tabling a copy of the 2020 audited financial statements. You will have received them with the proxy materials, and additional copies are available on SEDAR. After the formal portion of the meeting, there will be a presentation by management, which will then be followed by an opportunity for questions. The first item of business for which this meeting has been called is to fix the number of directors. It is intended to determine the number of directors at 4 and to elect 4 directors for the ensuing year. May I have a motion that the number of directors be fixed at 4, please?

Brian Stringer. I am a shareholder. I so move.

Is there a seconder?

I'm Gary Kissack. I'm a shareholder of the company, and I second the motion.

Thank you, Gary. Is there any discussion on the motion? I hear none. Based on proxies received in favor of management, if the ballot vote were conducted on this matter, more than 95% of the votes eligible to be cast at this meeting would be voted in favor of setting the number of directors to be elected at 4. Therefore, I declare that the number of directors to be elected is set at 4 in accordance with the motion. We now turn to the election of directors for the term expiring in 2022. 4 directors are to be elected, and 4 nominees are named in the proxy circular for this meeting. The Secretary will now read their names.

Names of the nominees are Andrew Cheung; William Train; Gary Kissack; and Jane Yang.

Thank you, Gigi. I would like to note that the company has adopted a policy whereby any nominee for election as a director for whom the number of votes withheld exceeds the number of votes cast in his or her favor will be deemed not to have received the support of shareholders, even if he or she is elected. A director elected in such circumstances must immediately offer his or her resignation to the Chairman of the Board within 90 days of receiving the final voting results. The Board will issue a press release and announce the resignation of the director or explaining the reasons justifying its decision not to accept such resignation. This policy only applies in the context of an uncontested election of directors. May I have nominations please?

My name is Brian Stringer, and I'm a shareholder. I nominate the 4 persons whose names have been read to this meeting by the Secretary for election as directors of the company and to serve until the Annual Meeting of Shareholders to be held in 2022.

Does any shareholder or proxy holder wish to make a further nomination? I do not hear any other nominations Since there are no further nominations. I declare the nominations closed. 4 persons have been nominated as directors, and there are 4 directors to be elected. Accordingly, I declare that the 4 nominees whose names have been read by the Secretary have been elected directors of the company to hold office until the close of the next Annual Meeting of Shareholders or until his or her successor is duly elected or he or she otherwise ceases to hold his office. The next item on the agenda is the appointment of the auditors of the company. I will now entertain a motion in this regard.

My name is Brian Stringer, I am a shareholder. I move that McGovern Hurley LLP, chartered professional accountants, be appointed auditors of the company to serve until the Annual Meeting of Shareholders to be held in the year 2022 at a remuneration to be approved by the Board of Directors of the company.

Is there a seconder?

My name is Gary Kissack. I'm a shareholder of the company, and I second the motion.

Thank you. A motion has been made and seconded to appoint McGovern Hurley LLP as the company's auditors. Based on proxies received in favor of management, if a ballot vote were conducted on this matter, more than 95% of the votes eligible to be cast at this meeting would be voted in favor of the reappointment of the auditors at a remuneration to be fixed by the Board of Directors of the company. Therefore, the motion is carried, and I declare that McGovern Hurley LLP have been reappointed auditors of the company in accordance with the motion. The next item of business for which this meeting has been called is to consider and if thought appropriate, to approve a resolution ratifying the stock option plan of the company as more particularly described in the management information circular. The full text of the proposed resolution is set out in the management information circular. In order to be approved, the resolution must be approved by at least a majority of the votes cast thereon. May I have a motion for the approval of this resolution?

My name is Brian Stringer. I am a shareholder. Mr. Chairman, I hereby move that the resolution approving the ratification of the company's stock option plan in the form set out in the management information circular being passed without variation.

May, I have a seconder?

My name is Gary Kissack. I'm a shareholder of the company, and I second the motion.

A motion has been made and seconded to approve the ratification of the company's stock option plan. Based on proxies received in favor of management, if a ballot vote were conducted on this matter, more than 95% of the votes eligible to be cast at this meeting would be voted in favor of the ratification of the company's stock option plan. Therefore, I declare that the company's stock option plan in the form set out in the management information circular be ratified and passed without variation. We've now covered the formal parts of the meeting. I think it is appropriate to terminate the meeting now. May I have a motion to terminate this meeting?

My name is Brian Stringer. I'm a shareholder. Mr. Chairman, I move that the meeting be terminated.

May I have the seconder?

My name is Gary Kissack. I'm a shareholder, and I second the motion.

Thank you. A motion has been received and seconded to terminate the meeting. Management will now make a short presentation about the company, after which there will be an opportunity for questions. Thank you all very much for attending the meeting.

Thank you, Bill. Good morning -- sorry, good afternoon, everyone. My name is Andrew Cheung, CEO of 01 Communique and IronCAP. I think, first of all, I'd like to welcome all to our 2021 Annual Meeting. Before I summarize our achievement in 2020, our plan for 2021 and well beyond, let's first discuss the ecosystem in which we operate, especially in the areas of our expertise, which is cybersecurity and quantum-safe encryption. So here it goes. This last year, both cybersecurity and quantum computing had experienced massive changes, something we have never seen before. And first of all, we have witnessed a huge number of global sized cyberattacks on governments and major corporations. The worse of which was the attack of SolarWinds, which given the database of literally hundreds of government agencies and huge corporation is being breached. According to the Wall Street Journal, part of the Pentagon, the U.S. Department of Homeland Security, the Justice Department, the Department of Energy and the Federal Treasury and Commerce Department were among the numerous U.S. agencies that were hacked. And then the big hacks on the corporate side, including FireEye, Microsoft Exchange recently Cisco, Intel, Deloitte and many more. So just in the last few weeks, we probably also heard that the Facebook and LinkedIn have been hacked and struck with more than 0.5 billion of the users' data now being exposed on hackers forum. And these are only the things we know. And let me quote the U.S. Federal Reserve Chairman, Jerome Powell, he said cyber attacks are now the foremost risk to the global financial system, even more so than the lending and liquidity risk that led to the 2008 financial crisis. So I think in short, cybersecurity is now front and center, okay? And this is -- what I said was only the intro. When Henry Mancini, everyone knows it was a love story. But then when cyber threat meet quantum computing, it is a recipe for disaster. As we expected, quantum computing advances rapidly in 2020. And we saw a huge number of technical advances and nation investing billions of dollars every year into it. For example, as reported by Forbes, The U.S. National Science Foundation, the NSF, and the Department of Energy, DOE, had announced the investment of more than $1 billion over 5 years for quantum information science centers. In quantum encryption, quantum hackings are a significant subset of that. Now in the open world, which is really the tip of an iceberg, Amazon, IBM and Honeywell are investing heavily in quantum computing advancement with lots of start-up about. Now head of our Honeywell quantum computing solution, Tony Uttley, he said, our expectation is that quantum computing power is on the trajectory for a tenfold increase per year over the next 5 years. Now that's 100,000x in 5 years, beyond more all that we know, and there's a lot of horsepower after this. And in addition, quantum computing is already publicly accessible to anyone here in this call through Amazon's Cloud Service and D-Wave's Cloud Service at nominal costs. Bob Gordon, the Executive Director at CCTA said in our recent quantum-safe readiness webinar, he said the threat that is being posed here is universal. It is going to affect every business and particularly going to be important for those who has a long shelf life. This means you're looking at a critical infrastructure, oil, gas, sort of anything that produces something that would last for many years. So as I keep saying that when we started IronCAP quantum-safe encryption a few years ago, we were informed that quantum computing was a generation away. Now guess what? It is mainstream now and so is the threat to our data. The critical intersection between cybersecurity and quantum computing is either here now already or coming very soon, but the world is nowhere near prepared. Quantum computing's power will render current encryption systems such as RSA obsolete, leaving data unprotected. And this is why build IronCAP. The first-to-market patent-pending quantum-safe encryption proven secure and available today, I mean commercially will be available. Now 2020 was a breakthrough year for 01 and IronCAP. Let me highlight 3 major milestones here. Now first of all, remote access technology. As a lot of people already know that we have been in this business for over 20 years. And due to COVID and the trend of work from home, the number of users of our remote access products has been dramatically increased after a successful co-marketing activities campaign with our Japanese partner, Hitachi. This led to a fourfold increase in the number of the user base and revenue, provided us with sustainable cash flow sufficient enough to, a, pay down our debt and become debt free; and b, pay for the R&D and marketing initiatives for IronCAP, which is the star sibling of our remote access technology and c, improve our corporate balance sheet. In addition, we have also listed our shares on the U.S. OTCQB market. And secondly, the traction and acceptance of our IronCAP quantum-safe encryption technology grew rapidly in 2020, moving from the design space to a fully developed and marketable product. North American cyber powerhouse CGI has signed up as a sales and marketing partner after a full year of due diligence. And IronCAP is now being presented at the innovation center in their head office -- Montreal head office, and we are set to begin sales and marketing activities of IronCAP to their major clients. PricewaterhouseCoopers China has also jumped on board, demonstrating their confidence in our technology by sponsoring a global $100,000 Hackathon last month. With over 800 participants couldn't even dent the IronCAP encryption, let alone cracking. Mr. Samuel Sinn, partner in the cybersecurity and privacy services at PwC China stated, he said the hackathon has objectively demonstrated that IronCAP is a robust product to protect system from cyber attacks. Now last but not least, IronCAP is commercially available. While the usage of the engine will be charged at $150 per year per machine, we have also launched a vertical solution called IronCAP X, to safeguard users from the phishing scans. A freemium version can be downloaded today. Significant resources have been spent on IronCAP X, which is our antidote to the phishing problem. As we all know, phishing e-mails are currently the main point of penetration for hackers. So this is very important. IronCAP X provide a secure end-to-end quantum-safe encryption and digital signature, so users can easily distinguish between a phishing e-mail and the legit one, even though they both appear sending from the same person. And most importantly, we were able to achieve all these and at the same time, increase our cash position as well as turning debt-free. So I think bottom line is that, as I mentioned before, we had a very, very good year of 2020. So for the coming years, we expect the following things. First, as we probably would anticipate that, work from home is now the norm for all businesses. This causes excessive dependency on VPN and remote access meeting. A number of these have already been breached, and they are all vulnerable to quantum hacks. We have acted quickly and are upgrading our remote access solution to incorporate our quantum-safe engine. And we are confident that this upgrade will significantly increase our remote access market share and anticipate an explosive uptick once the publicly disclosed quantum hack occurs. And we expect a rapid growth in this high-margin software-as-a-service product over the next year and beyond. The Japanese market alone can accommodate at least 1 million user of which we already have tens of thousands of them today. It should be music to the shareholders' ear that this is achieved through revenue sharing with our partner and virtually no operating cost on our side. And this can develop into a recurring $20 million per year direct flow to our bottom line. And secondly, we expect revenue from our IronCAP business phishing solution to join the fleet. 2020 saw more than 100% rise in phishing scam, as we all know. And thanks to the none or at best weak encryption system and the trend of work from home. And once again, IronCAP X provides end-to-end quantum-safe encryption and digital signature to protect you from phishing scams. IronCAP X has been years in the making and with a freemium version already launched. Now the business version charging $100 per year will be out in the summer, and we expect this to be another revenue drive in 2021. We also expect the IronCAP quantum-safe encryption, we're getting in front of many major clients in 2021 as our partnership with CGI and PricewaterhouseCoopers bear fruits, major global institution will recognize the need for quantum-safe protection and the first mover advantage of IronCAP. We spent the last year sowing seeds with our global partners and host the recent bounty contest to prove that we are rock solid. Whilst we know no hackers will disclose their progress, and we are confident that IronCAP is poised to be the solution of choice for any forward-thinking organization that's serious about protecting is better today and in the post-quantum era. Now finally, the recent significant cyber incident that I mentioned a little earlier, such as the FireEye, SolarWind hacks, data breaches at Microsoft Exchange, Facebook, Linkedln, et cetera, et cetera, suggests that today, we have already arrived quietly. The quantum rate is kind of like the new cold war. And I'm confident that IronCAP has an important role to play in this marketplace. And we shuffle already and have a commercially available quantum-safe encryption solution in the marketplace already. And alongside, we have built a sophisticated reseller and partner network that can deliver IronCAP to end user right now while missed recommendation is still 2 or 3 years away. It may well be too late by then. So the world must act now and it takes time to actually implement infrastructure changes within organization. So I think I would like to take a pause, allowing sometimes for question and answers. I'm sure you will have some question and answer that you want to ask me. But before I do that, let me summarize. I am very happy with our achievement in 2020. Massive increase in cyber attack at all levels, the game-changing advances in quantum computing have moved us from the fringe to leading edge. The trend of work from home has also transformed a traditional business line to rapid growth, creating both cash flow now and tremendous future opportunity for us. And IronCAP and IronCAP X rollout have gathered momentum, and the technology is now proven, visible and being offered by major industry player to the global clients. So I guess, we will expect significant the partner engagement and cash flow ramping up in 2021. And of course, a massive transformational growth spurt when Q-day arrives. So now I think we can turn to a question-and-answer. As usual, if you have question, please use the question-and-answer, Q&A button of the Zoom conference the tool. And Brian Stringer, our CFO, will be acting as the moderator for the Q&A section. So here it goes. I'm very happy to answer any questions you have.

Okay, Andrew. And the first one comes in on -- with respect to financials. And this comes from John, and he's asking, are you now sustainable cash flow positive? And could you comment on your financial position at the end of 2020?

Well, this first question is a very good question. Our remote access revenue is recurring revenue. I'd like to stress the point. So this means it is very sustainable and is growing too. We are using the cash flow to fund our IronCAP development as how I presented a little earlier in the presentation. So short answer to your question is, yes, it is sustainable and is increasing cash flow, paying off a lot of the IronCAP development costs. So yes, I am very happy with that development.

The second one, Andrew, what's happening in Japan? You've been there for years, but now you're finally starting to see some traction. Can you talk about the size of the opportunity and give us a realistic growth projection?

Yes, sure. Happy to do that. As how I have briefly talked about it during the presentation, this market has exploded. So we are very happy. Now I'm going to give you some background about why that happens. I kind of like echoing to your question that our remote access product has been marketed by Hitachi for many years. However, the work culture in Japan does not really require remote access. So they work in their office and they don't work at home. They work long hour in the office. That's their working culture. So they don't really need the remote access. So the market never really kick off in Japan. However, now with COVID and the work from home was a game changer. And this kind of like you can view that as kind of like an alarm clock waking up this giant market. As mentioned in my presentation, we believe the market in Japan alone can accommodate at least 1 million users, and this is untapped. Like the rest of the world remote access market has been saturated, but the market in Japan is kind of untapped and it is just being open and being woken up now, and we already have tens of thousands of those potential users already. And we are currently working with Hitachi to further develop and upgrade this product so that we can dominate this market and get the lion share. I am very happy with the opportunity there.

Okay. And the next one, Andrew, has to do with the size of the industry. Cyber -- and I have trouble reading it. Cybersecurity is a multibillion-dollar industry. How can 01 Communique with IronCAP hope to play in this industry?

Well, this is kind of a loaded question. Let me answer it this way. The cyber attack event, first of all, as how I presented a little earlier of 2020 and 2021 have proved that the industry is fragmented and dysfunctional. So we have planned to -- planned for a post-quantum encryption for 5 years already. And now the industry has largely been ignoring this issue and now it's trying to receive reward for our early insight into the market. And the way that we try to play in this market, is like we are signing up with our partners, doing revenue sharing with our partners, almost like repeating the same kind of a software-as-a-service model that we had with Hitachi over the years because it has been proven to be a very low-cost and low-risk and very lucrative market for us that our partners are doing the sales and marketing activities, whereby they are sharing a certain percentage back to us. So that's how we are supporting them in terms of their sales and marketing activities and technical as a second tier or second line technical support. So that's how and why we are having a very heavy dependence on signing-up partners in the 2020 and 2021 so that we can be represented in the global market with very minimum sales and marketing costs on us.

The next one comes and they're asking about the bounty hunt. And I was wondering if there was an update from the results from the hackathon or the bounty hunt?

I think we have made the announcement on a public press release that we had attracted over 800 whatever you call them hackers or professional computer scientists or whoever that are interested in testing out and trying to -- try to win the $100,000 cash. And over a stretch of 1 month, none of them can crack IronCAP. Now this is actually not surprise to us given our confidence level in our encryption technology. And what I'm really happy hearing is because we require them to submit a paper when they try to submit a denser. So when we read the paper, it is not even close, none even -- none of them even providing any meaningful the paper about how they attempt to find the wrong answer. That is echoing exactly the known for 50 years almost already in the academia world that our technology, the Gopher code-based encryption technology has really no mathematic cracking theory. So let alone people making the cracking. There's not even a theory exist in the last 50 years. And this is really -- what we found is really echoing that known fact for 50 years. So I'm very happy with that we saw and so does our sponsor, PricewaterhouseCoopers into the event.

Thank you, Andrew. And the next question has to do with the sales. And what's your strategy to sell through these strategic partnerships, which you've listed quite a few? And who would you say are the major partners? And how developed is your sales cycle giving that the business version of IronCAP X is coming out later this year?

I think this is kind of like a supplementary of one of the earlier questions about which one about the partner. So I would like to expand a little bit from that to give a bit more clarity. As mentioned in my presentation, our strategy, again, is to revenue share with our partners. So Hitachi has been our partner for over 20 years, and we are on our way to capture the lion's share of the remote access market in Japan together with them. And the CGI and PricewaterhouseCoopers are 2 major players in the global cybersecurity market, and they are both promoting IronCAP technology to the major global clients as we speak. So this is what is happening right now. And in addition to that, you may recognize that like bitcoin and blockchains are new -- are big news these day. And unfortunately, they are all vulnerable to quantum attacks. And IronCAP's encryption is available to save blockchain from the inevitable quantum. And I'm very happy that one of our partner is a fintech partner called ixFintech a few months ago, had successfully used IronCAP technology to build the world's first quantum safe bitcoin ATM machine. And it is now getting prepared to roll out in the many Asian area. So again, I believe we have built a sophisticated reseller/partner network that can deliver IronCAP to end user right now. So yes, I'm very excited about the development.

Okay. And I think we've got time for one more Andrew here. We've witnessed systematic -- systemic cybersecurity failure at all levels with SolarWinds and Facebook and recent Microsoft hacks. Can you tell us how -- how IronCAP can help?

Well, yes, I think the answer for this one is long but simple. Our IronCAP encryption has been proven secure and immune to attack to methodologies that are applicable to traditional encryption, but not on the Gopher code encryption. This means IronCAP can protect you today all the way into the post-quantum of the world. And please allow me to -- I think this is also dovetail into the hackathon, right? Because one of the participants is actually a professional white-hacking company call rThreat. And their CTO, after failing to crack the IronCAP, he made a comment to us saying that the attack methodologies for traditional asymmetric encryption algorithm, such as RSA, do not apply to IronCAP. And therefore, it is uncrackable algorithm and it is highly reliable. So I'm very happy hearing that. This is almost like when someone say, "You couldn't beat them, you like them." So this is like a fully demonstrated of that kind of statement. I'm very happy about that.

Okay. And the last one, Andrew, I think we've got time is if somebody wants to steal 01's trade secret technology, would they be able to crack all the messages? And second to that part is, where did we sit on the patent application?

The -- let me answer the second part first. We applied for patent protection in December of 2018. So we are just under 2.5 years into that process already. So while there is no guarantee of any time line in the patent application. Based on our experience, it take anywhere from about 2 to 3 years to 5.5 years to obtain a patent. So in other words, we are quite some way into that process already. So I don't think we'll be too far away from hearing back from the patent office. And in this industry, it is different from others, like having a patent is very important, just like having a lock on your door, but it cannot protect you from everything. The main protection that we'll have is really the market penetration, the early mover advantage that we have. For example, we are already 2 years into the build, more than 2 years actually into the build for the IronCAP X, the phishing the e-mail product. And we are about completing the transformation for our remote access solution to become the world's first quantum-safe remote access solutions. All these kind of leading early mover advantage is it takes years for competitors to even want to imitate or copy or something. So we will just keep maintaining that leading edge. And those are a much more better way to protect the market share than the patent. Like patent is kind of like the last we saw of protection. The best protection is what we enjoy right now. And giving you a like example is that remote access is already many, many years, even our patent is about to expire in about 2 years' time. And -- but the thing is these kind of leading -- market leading with Hitachi in Japan is very difficult for any people to crack into it. So yes, I'm very confident in owning the post-quantum security, cybersecurity market.

Okay. Thank you. That wraps it up, and I'll turn it back to you, Andrew.

Okay. Yes. So thank you, Brian. So once again, I'd like to thank you for all joining our 2021 AGM. The wind direction has definitely changed to a tailwind for us. We are completely prepared to capitalize on the Q-day and so should you as an investor of 01. So I hope to see you all in person at our AGM next year. But until then, please stay safe, stay healthy and most importantly, stay encrypted. Thank you.