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

Well, good morning, and welcome to 01 Second Quarter Conference Call. For those of you who don't know me, I'm Brian Stringer. I'm the CFO for 01. And with me on the call today is our CEO and Founder, Andrew Cheung, for those who don't know. Now the format for today will be a presentation by Andrew. He'll cover our Q2 results and give you an update on the progression of our business over the past quarter. Following the presentation, there will be time for questions and answers. [Operator Instructions] I'll act as the moderator for the Q&A portion at the end. Now before I pass it over to Andrew, I'd like to draw your attention to the forward-looking statement on the screen. Please take the time to review it as it forms part of this presentation. I'd also like to add that our financial statements as well as our MD&A for the current quarter have been filed, posted on SEDAR. And now I'll turn it over to Andrew for the presentation.

Thank you, Brian. Welcome, everyone. My name is Andrew Cheung, President and CEO of 01 Communique. Welcome to our 2021 second quarter financial results and corporate update. Now before I present our second quarter results, I would like to give you some background and updates. They will be summarized into 3 main points: First, I will talk about the current environment and the risk in cybersecurity. And then I would also give you an update on our progress since our last quarter. And finally, also talk about our expectations and goals for the balance of 2021 and beyond. Now when we started IronCAP several years ago, we were aware of the cybersecurity threats. But what's happening today is far worse than what we had imagined. At the time, Yahoo! just had the biggest user data breach, but the situation today is much worse than that. As we all know, ransomware is on the rise. It is almost like the third guarantee in life besides death and tax. If you think this is terrible enough, I have another bad news for you because what we see today is only the tip of an iceberg after Q-Day, the day when bad actors are using quantum computers to do the dirty works. This is because the excessive computing power of quantum computers will render current encryption systems such as RSA totally useless, leaving data unprotected. Now we responded with IronCAP and we are now one of the first to market enterprise-level cybersecurity providers for the post-quantum era. Following the famous SolarWind hack last year, as we all heard about it, we have witnessed several server-breaching incidents. Just in the last 6 weeks, we saw another massive ramp-up in cyber attacks in the likes of Colonial pipeline, JBS Meat Processing Company, hospitals of the entire Irish health care system, et cetera, et cetera. And SolarWind alone opened up the databases of literally hundreds of government agencies and huge companies. Wall Street Journal reported that U.S. agencies, including part of the Pentagon, the Department of Homeland Security, the State Department, the Department of Energy and the Treasury were all breached. Just 2 days ago, we also heard that a company providing user engagement platform for U.S. politicians was hit by ransomware affecting nearly 60 offices of the U.S. lawmakers. Statistically, 91% of the hacking are started with a simple phishing unit. And the world is being now hit by a tsunami of cyber attacks, and the winds are only going to get stronger with the fast approaching quantum computing era. Now there's no wonder why the U.S. Federal Reserve Chairman, Jerome Powell, says, cyber attacks are now the foremost risk to the global financial system, even more so than the lending and liquidity risk that netted 2008 financial crisis. In other words, cybersecurity is now front and center. Well, there's a good news, at least. Less than 2 weeks ago, we heard that on June 1, the Biden administration proposed to commit $10 billion on cybersecurity. The trillion-dollar question is, is that enough? When cyber threat and quantum computing meet, it is a recipe for disaster. As we expect, quantum computing has advanced rapidly hitting major technological milestones and big nations are investing billions of dollars into it every year. Forbes reported that the U.S. National Science Foundation, NSF, and the Department of Energy, DOE, have announced the investment of more than $1 billion over next 5 years for Quantum Information Science Center. Quantum-safe technology is a significant subset of that. It is now loud and clear that cyber threat is in the focus during the last -- the 1 year. The bad news is that cyber threat and quantum computing have already met, but we are nowhere near prepared for the threat. This is why we built IronCAP, the solution to this threat. IronCAP is simply the first to market quantum-safe encryption, proven, secure and available today. We have some big boosts in the last quarters. Let me highlight some of the major 4 area of achievements: First of all, working from home has dramatically increased our remote access business users in Japan. Remote access has never been a necessity there because people work days and night in the office, but COVID has changed that dramatically. This triggered a significant increase in revenue this quarter. A new version has been released by our partner, Hitachi, to entice more users in that geographical zone. And secondly, we have also signed up several major partners recently. One of them is a cyber powerhouse, CGI. Another one is PricewaterhouseCoopers in Asia. Ongoing joint marketing efforts have been conducted, aiming to sell IronCAP to the enterprise customers. Also, our IronCAP X, which is the world's first quantum-safe end-to-end e-mail encryption and digital signature solution, can effectively stop phishing. It is free for personal usage and low cost for business users. Last but not least. I think today, no one can escape not talking about crypto-currencies these days. So let's talk a little bit about cryptocurrency and underlying blockchain. Many of you will really don't recognize that blockchain's endpoints are indeed vulnerable to quantum hack. So one of our partners, ixFintech, had launched the world's first quantum-safe bitcoin ATM machine in 2020, and then a crypto e-wallet last month, both being protected by IronCAP quantum-safe technology. Now for the remaining of 2021 and beyond, we are expecting the following. Now first, we expect the work-from-home to continue being a social norm, which increases the dependency on remote access technology. Quantum hack is soon approaching, if not already here. We have acted quickly in converting our I'm InTouch remote access solution to become quantum-safe, using our own IronCAP quantum-safe technology. This means we will be the first one in the world with a quantum-safe remote access product, potentially letting us to significantly increase our market share. Obviously, once a publicly-disclosed quantum hack occurs, we expect an explosive growth in this high-margin SaaS product area. We also expect co-marketing activities with our existing partners to ramp up and more partnerships to be announced. We are confident that IronCAP is poised to be the solution of choice for any forward-thinking organization who is serious about protecting their data today and in the post-quantum era. As mentioned earlier, once we -- once being held as unhackable, blockchain are indeed vulnerable at the endpoints. So in this aspect of cryptocurrency, it is the wallet, the miner, et cetera, et cetera. So we expect quantum-safe bitcoin ATM machine will continue to roll out. Finally, we also expect the delivery and first sale of our IronCAP X business phishing protection solution. As I mentioned earlier, 91% of the attack started with a single phishing e-mail, and IronCAP X provides quantum-safe end-to-end encryption and digital signature to protect enterprises from phishing scams. A free premium version is already available and the business version will be released shortly, and we expect this to join our fleet as a revenue generator soon. And as a result, we cannot be in a better position to capitalize on this multibillion-dollar market. My reason of saying that is very simple. Just like any paradigm-shifting opportunity, the determining factor is often not about who has a better product, but about who has sustaining power to go through the cash-burning yields without being eliminated. The post-quantum cybersecurity market is no different. The fact that we have our existing remote access product actively generating recurring revenue is giving us an infinite staying power to embrace Q-Day. So I'm very happy today to report that our second quarter of fiscal 2021 has been exceeding our expectation. First of all, the revenue has been more than quadrupled to almost $300,000 from under $100,000 a year ago. And then the P&L, the adjusted P&L, excluding noncash items, is flirting a breakeven position, dramatically down from a loss of over $200,000 a year ago. Cash position has also seen a massive improvement to almost $1 million from a little over $100,000 last year. We have also eliminated $400,000 worth of debt from the book and now operating debt-free. Most importantly, we are achieving all this while increasing our sales and marketing activities for the IronCAP business. In other words, the remote access business unit is, in itself, profitable and funding this IronCAP segment. So as a summary, I am very happy with the achievement in the last several quarters. I'm confident that we have this staying power to embrace Q-Day, which is a huge advantage over our competitors. The number of corporate users of our remote access product will continue to grow. An efficient killer, IronCAP X business version will be launched soon to produce revenue. And we expect all these seeds that we have planted in the last couple of quarters to turn fruitful very soon. I'm fully convinced that when the first public disclose how quantum hack happens, the gold rush starting right away. I think I will take a pause from here to allow more time for question and answer. I'm sure that there will be a lot of questions in your mind. So I'd like to answer as many as possible. So as mentioned by Brian earlier, [Operator Instructions] Brian will moderate the question, and I will try to answer as many as time allows. Over to you, Brian.

Okay. Thank you, Andrew. And there have been a couple in throughout the presentation. And the first one, Andrew, is the remote access service that we're offering in Japan. And the question is, is your remote access product quantum-safe?

A short answer to that, I think I have kind of mentioned a little bit in the presentation. We are in the process of converting the remote access solution to become quantum-safe using our own IronCAP technology. So it will be quantum-safe in about 6 months' time, and we expect this is going to be the first in the world quantum-safe remote access solution to really capture more market shares.

Okay. And the next one has to do with, I suppose, a combination of our financials and our business highlights. Going forward, how do you see the next 2 quarters unfolding?

That's a good question. I believe no one has a crystal ball, but I believe the trend would continue as how I mentioned all the initiatives have been in the right direction. So the trend will continue, and we expect to sign more customers and more partners. So I am very confident in the positive trend that has been demonstrated in the last few quarters.

Okay. Good. And I'd just like to add that we're feeling very good about our control over expenses as with the revenue coming in from the remote access that's allowing us to make that investment into IronCAP. And now the next one has to do with patents. Andrew, can you give us some insight into the patent applications from a time frame perspective?

Yes. It is all over the place for patent application. But regardless of which angle you're looking at it, we are quite into the process already. The patent application has been filed 2.5 years ago. Actually, slightly more than 2.5 years ago. So in my past experience, I think we are getting closer and closer each day to the office actions, and I'm confident in the merits of our technology. So yes, short answer is, it's probably not far away. It's -- because it's already more than 2.5 years into the process.

Okay, good. The next one has to do with, are your services available to Canadian companies?

Absolutely. Absolutely. It is actually worldwide. Our product and services is not limited to any particular geographical area. And it's everywhere worldwide. So yes, definitely, Canadian is more than welcome to sign up our product, our services. And yes, not just because we're a Canadian company, just because we are a business. We serve the whole world.

Okay. Can you elaborate on what vertical markets that would be well suited for quantum-safe technology? And what is 01 doing to get in front of these companies?

Yes. That is slightly loaded, this question, but it is a very good one. The IronCAP quantum-safe technology literally is applicable to anything under the sun that needs security. So for example, the e-mail, as we mentioned, blockchain, credit card payment process, 5G/IoT devices, digital identity, almost anything. So a little bit more into the detail will be given an example like credit cards, that Visa and Master alone, they have a combination of 2 billion number of credit cards. And on the credit card, you notice that they have a chip these days. And that chip is having an RSA private key there. But this is vulnerable to quantum attack. So they need to upgrade the card to become quantum-safe and will be a perfect potential customer of IronCAP. So that's the credit card side. And then money transfer, every transaction that involved in a money transfer like the swift transaction is nothing more than a secure message, like a private message, e-mail message sending from the sender to the receiver that I am sending so much money to this person. That's it. So this has to be totally safe, but then it's now vulnerable to quantum computing attack. So they have to upgrade themselves to become quantum-safe. So it's a perfect customer of IronCAP. Digital identity is another perfect example, too. Giving you one example like the car industry. The car industry has gone through a few iteration in the key innovation from the first generation of a physical key that you stuck it in and turn, to a fob. And then now from a fob to keyless identity like the fingerprint, the retina kind of thing, and they have to be totally secure in the post-quantum world, right? So that's a long-winded answer to the question, and I will just repeat again, the short answer to that is almost anything under the sun that require security, we have to upgrade themselves to become quantum-safe and, therefore, they are a potential customer of the IronCAP technology.

Okay. We have time for a couple more. You signed a lot of partners. Can you expand a bit on how you see the revenue being deprived from derived -- sorry, derived from these partnerships and what are the costs for 01?

Fundamentally, our partnership model is a revenue-sharing model. So in other words, it is that our partners are promoting their product and their services alongside with IronCAP. So we are selling IronCAP to their customer, and we would cut a certain percentage back as a revenue-sharing to our partners. So -- or the other way that our partner is selling their product and they cut a certain percentage to 01. So it's a revenue-sharing model. In other words, the cost -- glad that you asked that question, is mixed to nothing because we do not need to cover the sales and marketing expenses. So the revenue generated from a partnership program is very efficient. Efficient means like it is directly flow all the way from the upper line to the bottom line without having to extract out sales and marketing support core -- not even the support core is needed with this kind of business model.

A couple more. This one, I think you might have covered, but it's being asked, so I'm going to ask it again, is bitcoin hackable using quantum computers?

As I mentioned, we couldn't escape not talking about cryptocurrency these days. So again, we talked kind of a little bit of the technology, but not exactly about bitcoin. Bitcoin is using blockchain, as we all know, like fundamental technology is blockchain. And the ones being held as unhackable, people didn't recognize that it is still unhackable. Don't get me wrong. It's still unhackable during the post-quantum era, but the endpoints are hackable. The endpoints means the wallet, the miner, kind of things are totally vulnerable in the post-quantum era. And I keep saying that the world may have already got hold of a quantum computer that can do these kind of things already, but just not in the hands of normal consumer. You may recognize that the recent Colonial Pipeline hacking, the famous hacking, that the dark side, the people, got hold of a lot of like bitcoin as a ransom money. And then the FBI managed to crack the private key of one of the wallets. And I -- personally, I will be surprised if they don't have -- if they don't get hold of some quantum computing technology to do that kind of thing. So a short answer to the question is it is definitely hackable at endpoints, so they have to be protected. Otherwise, it will be a disaster one day. And that one day is ever closer and a lot of people like to [ agree. ]

Now the last question here has to do with -- and I think you've covered most of it, but been asked again. Can you talk about the remote access rollout in Japan? And what the impact do you think is going to be on the company's cash flow going forward?

I think I will answer the last part of this question first. The impact on the cash flow is definitely on the positive side. Because kind of like how I answered one of the earlier question about the revenue generation. Like these revenues are revenue share, revenue that generated from our partners. So it is directly flow to the bottom line. So we got $1 million, $1 million go to the bottom line. $10 million, $10 million go to the bottom line. So it's very, very efficient revenue. And their rollout is very simple. As I always keep saying, we recognize that we are a small company, so it is very difficult for us to penetrate the enterprise by ourselves, right? Not alone just in Japan, but everywhere, it's the same way. And that's the whole reason we sign up partners like big name partners to enter into revenue-sharing model with us so that they piggyback our product into their customers, which are large enterprise customers. So we have been in a lot of the major enterprise customers in Japan through Hitachi. And we expect this to continue and I couldn't be happy about this model and we are going to use the same model here with CGI, with PricewaterhouseCoopers and other people. So yes, this has proven to be a very effective and risk-free, the model, for us.

Great. And one last question because I've had multiple questions come through, and I'm going to paraphrase them because they seem to be saying the same thing. And considering the recent rise in high-profile cyber attacks, which we're all well aware of, and how extremely disruptive and costly they can be, how important do you feel it is that companies review their cybersecurity with respect to the quantum impact?

Oh, this is a clearly end-all question, Brian. My opinion is that corporation has to be very, very serious about doing that exercise, evaluating what they have and get themselves ready. Because otherwise, as I keep saying that the cyber attack is now becoming almost like the third guarantee in life besides death and taxes. So giving you an example, like most of -- I think I alluded a few times, 91% of cyber attacks, whether they are a mild attack or a very serious attack of like the Colonial Pipeline, they are initiated from a simple e-mail phishing scam. That's it. They're very effective and the reason why this is effective is, because it's so difficult to distinguish. And when you receive an e-mail, everyone here, I can almost guarantee, we have received phishing e-mail before. It's so difficult to distinguish because they appear to be sending from your best friend. And you have to be aware of which one is real, which one is not. So it's very, very difficult. And IronCAP X, with the digital signature -- quantum-safe digital signature can very effectively stop this kind of phishing scam because it is exactly like the identity that you can identify. All you have to do if you're using the IronCAP X and your friends are using IronCAP X, within the community like you receive an e-mail from John Smith at rogers.com, right? You don't know if that John Smith is a real John Smith. All you have to do is click the button and we would tell you the signature. And only the good one will have the signature. As simple as that. And then you can ignore the bad one without you even need to open. So yes, the world has to get repaired. Otherwise, this would just become a nonstop process, and it can only get worse.

Okay. Thank you, Andrew. And that wraps up the questions. Thank you all for participating. I'll turn it to Andrew for final comments.

Yes. Thank you for joining our 2021 Q2 corporate update. The wind direction has definitely changed to a tailwind for us. We are completely prepared to capitalize on Q-Day and so should you as an investor of 01. So see you all next time, I couldn't wait. Thank you.