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

Well, good morning, everyone, and welcome to our conference call today for our third quarter results. And I'm Brian Stringer, I'm the CFO for 01 for those of you who don't know me. And with me on the call is Andrew Cheung, our Founder and CEO, for those of you who don't know. And let's get started. First, the disclaimer, if you take time to read it in just the forward-looking statements. The agenda for today, I will be passing over with Andrew in a few seconds. And Andrew will give you an update on our business development so far as well as our third quarter results, and then at the end, there will be time for questions and answers. [Operator Instructions] And now I'll turn it over to Andrew. Andrew, you're on.

Thank you, Brian. Welcome, everyone. My name is Andrew Cheung, as introduced by Brian Stringer, our CFO. I am the President and CEO of 01 Communique. Welcome to our 2021 third quarter financial results and corporate update. Today's presentation will contain 3 parts. First, I will talk about the current environment and the risks in cybersecurity. And then I'll give you an update on our progress since the last quarter as well as talking about our expectation and goals for the balance of 2021 and beyond. First of all, the world has changed very, very quickly. I remember when I was a student, there was a day I traveled to the state and saw a bank called M&T Bank. And I thought to myself, "Man, who would name a bank as Empty Bank?" Well, it turns on that they are very, very futuristic. And because soon, banks won't have cash there anymore. Bank robbery is becoming a thing in the past. I can imagine sooner or later, gangster recruitment will ask how many degree -- like PhD degree of math and computer science you have. But joking aside, this is really the new norm because the criminals are stealing through the Internet. As we all know, ransomware is on the rise almost like a third guarantee in life besides death and tax. You think this is terrible enough? Well, I have another bad news for you because what we see today would only be the tips of an iceberg after Q-Day, the day when the criminals, the bad guys are using quantum computers to do the dirty works. This is because the excessive computing power of quantum computer will render current encryption systems such as RSA totally useless and leaving our data totally unprotected. We have responded with the innovation of our IronCAP technology, and we are one of the first-to-market enterprise-level cybersecurity provider for the post-quantum era. Now following the infamous SolarWind hack last year, we all know that we have witnessed super breaching incidents. Still in our recent memory, there was the massive attack of Colonial Pipeline, JBS meat processing company, Kaseya, LinkedIn and the entire Irish health care system. In our backyard, Bombardier has also been -- experienced a massive attack earlier this year. And the Wall Street Journal reported that several U.S. agencies, including the Department of Pentagon, the Department of Homeland Security, the State Departments, the Department of Energy and the Transportation has all been breached. And the average cost of the downtime is actually 24x higher than the average ransom amount requested. And statistically, 91% of these attacks are starting with just a simple phishing e-mail. In other words, the world is being hit by a tsunami of cyber attacks, and the winds are only going to blow stronger with the fast-approaching quantum computing era. In other words, when cyber threat and quantum computing meet, it is a recipe for disaster. The bad news is they have met already, but we are nowhere near prepared for that threat. This is why we built IronCAP, the solution to these threats. IronCAP is the first-to-market quantum-safe encryption, proven secure and available today. We provide IronCAP engine for other vendors to transform their products to become quantum-safe, and we also create vertical solutions ourselves using IronCAP as the quantum-safe cryptographic engine. So IronCAP has quickly gathered attention from companies in the cybersecurity business around the globe. While our partners include global names such as Hitachi, PricewaterhouseCoopers, CGI, there are also many other small names who are prominent in the geographical area. But independent of their size, they are actively engaging into co-marketing activities with us to promote IronCAP to their customers. Now first of all, our global partners such as the cyber powerhouse, CGI and PricewaterhouseCoopers, are currently promoting IronCAP to their enterprise customers. And to cope with the activities of PricewaterhouseCoopers in Asia, we have committed and set up a wholly-owned subsidiary in Hong Kong to provide local support to them. Another partner of us in the Middle East market is implementing their e-tax solution and gas meter of IoT device solutions to their -- using IronCAP engine. And on another front, working from home has dramatically increased our Remote Access business users base in Japan. Remote Access has never been a necessity there because people worked in the office. But COVID has changed that completely. A new version of our software with security update has been released by our partner Hitachi to entice more users. And last month, while penetrating the corporate market, our Remote Access product is effectively paving the inroad for our IronCAP engine to be integrated, whereby creating the world's first quantum-safe Remote Access product. And another front is that probably the most important achievement in this quarter is that with more R&D spending, the business version of IronCAP X, which is the world's first quantum-safe e-mail security product, is slated to be released in the October time, and which is only about a month from now. This product is a very effective solution to prevent phishing, which is a major source of ransomware attack. Now IronCAP X for business is very powerful. Most importantly, we understand it can be used now in the pre-quantum era and continue to be safe into the future quantum computing era. I keep emphasizing that it is end-to-end, it is true end-to-end because the term end-to-end encryption has been widely abused by marketing jargons while in the marketplace. And most, if not all, of the e-mail encryption product today are only a man-in-the-middle type of encryption, whereby it is only end-to-end with their server, not really end-to-end between the sender and the recipient. In other words, the server hold the keys that can decrypt your messages, so I don't need to tell you how insecure this is. To some extent, in my opinion, it is even worse than before because now, not only their servers are track hackers but they also possess all the keys to decrypt your confidential messages. This means you are really at their mercy. To the contrary, IronCAP X is a true 100% end-to-end e-mail encryption security product. Now true end-to-end simply means you as a sender, for example, are encrypting e-mails at your computer, and the encrypted message stay encrypted all the way to the recipient. And it can only be decrypted at the recipient computer using the product key that only the recipient possesses. In other words, no one in between can see anything, including the FBI or CIA or whoever, even ourselves, as -- let alone hackers. So why hasn't anyone provided a true end-to-end encryption is because it's very difficult to implement, but we did it. Using IronCAP X means even the hacker managed to obtain your e-mails, they can't read them. So when they can't read them, there's no chance for them to impersonate you by sending e-mail, for example, asking your customers to wire payment to a new account, et cetera, et cetera. On another front, using IronCAP X also means if you receive an e-mail from someone you know but the content seems suspicious, you can easily check the digital signature to confirm that this is a real sender. Most effective -- the most effective phishing e-mails are those impersonated ones. And this is going to be a thing in the past with end-to-end digital signature to prove its authenticity. So it doesn't take a rocket scientist to figure out a huge market that we are tapping here. IronCAP X for business is charging 100% per year -- $100 per year per user so we are aiming a mass market. Most importantly, IronCAP X operates on current classical computers. And this quantum-safe nature is just a huge icing on the cake that can protect you all the way from today into the future, fast approaching quantum computing era. Now for the remaining part of 2021 and beyond, we expect ransomware attack will continue to increase, and the most effective way to protect against this is to shut down 91% of the main source, which is phishing emails. We don't -- please don't get me wrong. All those current IAI-based malicious activity detection product are still important utility to have. However, they should be served as a second line of defense. We expect working from home also to continue being a social norm, which increases the dependency on our Remote Access technology. We have a strong grip of this trend in Japan with our long-time partnership with Hitachi, so rapid growth is expected. As mentioned earlier, quantum hack is soon approaching, if not already there. And we have acted quickly and are currently integrating our IronCAP quantum-safe technology into our Remote Access product. This means we will be the first in the world with a quantum-safe Remote Access product, potentially leaving us significantly increase our market share. We also expect to co-market -- expect co-marketing activities with our existing partners to ramp up and the new partnership will be announced. We have confidence that IronCAP is poised to be the solution of choice for any -- the forward-looking, forward-thinking organization who is serious about protecting their data and the customers in the post-quantum era. So as a result, we cannot be in a better position to capitalize on this multibillion-dollar market. My reason for saying that is very simple. Just like any paradigm-shifting opportunity, the determining factor is not about who has the best, better product or whatever but about who has the better -- who can stay through a cash burning year 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 Internet staying power to embrace Q-Day. I'm very happy to report that our third quarter of financial -- fiscal '22 -- 2021 has been exceeding our expectation. Practically, through 3 quarters, we have already achieved the goal we set last year for the whole 2021. Year-to-date revenue has been more than doubled from last year. It is important to note that recurring revenue this year was actually up from last year. And the slightly higher revenue from Q3, same quarter last year, was a result of some onetime revenue. Cash position, very important, has also been a significant improvement to over $1.1 million from a little over $100,000 last year, representing an increase of more than $1 million. We have also eliminated $400,000 worth of debt from the book and now operating debt-free compared to the same quarter last year. Our current financial position allow us to accelerate on the R&D as well as sales and marketing activities without having to raise money. The math is very simple. If we extrapolate the $156,000 cash requirement in this quarter, our cash position is enough for almost 2 years. But in reality, we are looking to break even the operations sometimes in 2022, and therefore, self-funding our business growth. As a summary, I'm very happy with the achievement in these last several quarters. I'm confident that we have the same 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. And our phishing killer, IronCAP X business version, will be launched in October. We expect all these seeds we have been planting in the last couple of years will turn out fruitful very soon. I'm also fully convinced that when the first publicly disclosed quantum happens, the gold rush started right away. So I think this would be the best position for me to take a pause here to allow more time for question and answer because I think you would likely having some questions in your mind. So here it goes.

Okay. Thank you, Andrew. I see some coming in. I have one that has already come in. Andrew, can you give us an update on your patent applications?

Okay, yes. The patent application, if anyone follow our story, the patent -- time really flies, it is almost 3 years after we have filed the patent application. So in my experience, I think very soon, we will see the first of this action. And so we are not very far away from some back-and-forth discussion with the patent office. So yes, this is well into the process and it is probably in the 7th or 8th inning already using the term of baseball.

And the next one, Andrew, has to do with revenue. I see revenue for the year is up nicely, but year-over-year for the quarter, it is down. I read your explanation on server licenses. We'd like you to expand a bit, if you can, as to what the difference is. Also, going forward, can you give me some insight on the buildup of subscribers of revenue in Japan?

Okay. This is a good question. There are 2 types of revenue in a high tech business. One is onetime revenue, which we are selling like servers and the other types are the recurring revenue. They're both good but they are different in nature. Onetime revenue, you will get a higher bump in revenue for that particular month or quarter, but they don't recur. But the recurring revenue are stable and is very, very predictable of what you're going to have this quarter, next quarter, the quarter after. And so our recurring revenue actually went up from last year. But -- sorry, from the same quarter last year. But the onetime server selling revenue, we have one -- we actually have sold 1 server to a large financial institution in Japan last year, the same quarter. So the onetime revenue was a little higher from that point of view. But the recurring -- the number of users actually was up quite a bit from last year. So that is the dilemma between onetime and recurring revenue. And moving forward, we expect recurring revenue to continue to go up. And the onetime revenue are those which is like relatively unpredictable. If we get onetime like the last -- the same quarter last year, we will get 1 bump in 1 quarter. And on and on, we will have some of those onetime revenue coming in and -- which can happen any quarter.

And I think it's fair to say, Andrew, that it's easier to predict recurring revenue, which allows us to manage our expenses a little more prudently and effectively.

Yes. I think, yes this is a very good way to put it.

And on expenses? Continuing on this, both the SG&A and R&D have increased substantially. Going forward, can we expect them to remain at this level?

In fact, as I -- a part of my presentation, I was using this quarter's cash requirement as a yardstick to extrapolate. So if we extrapolate the $156,000 cash usage this quarter, we have almost 2 years' worth of run rate. And expenses is kind of like a 2-edged sword. If you don't spend money wisely, it doesn't matter what it is, it's bad. And -- but last -- this particular quarter, we actually was increasing the R&D expenses to cope with the new development on, as I mentioned, the IronCAP X product launching as well as the new version for Hitachi in Japan. So all these are spent for future revenue growth, to be more precise. And so what I expect would be when opportunity comes, just like the present quarter, it will go up to entice more revenue coming in the future. And otherwise, we will be staying more or less same or maybe even reduced a little bit. And -- but in reality, as I presented, I am expecting revenue to grow. So regardless, the cash spending may go up, but then you will see that we would actually reducing the capital loss or even crossing the line into profitability very soon, if revenues are going up as expected. So yes, so that would be my answer to that. It's the same, more or less the same, but I would expect the cash requirement to be going down from this point into the next few quarters.

You mentioned a new business version of IronCAP X coming out later this year. I think we covered what it's all about. But the question is, what are you planning for a product launch? And what else is in the pipeline from your development team?

As I kind of briefly presented, we are providing IronCAP engine for others to integrate into their product to become quantum-safe. But on the other hand, we are also -- this is what differentiates ourselves with our competitors. We are also providing the vertical solutions to directly catching revenues for the post-quantum product. And one of them, like you mentioned, is the IronCAP X product, which is the world's first quantum-safe e-mail security product, which I term it as a phishing killer. And after that, we would also -- as in the presentation, too, I would also -- we'll also be integrating IronCAP technology into our own Remote Access product and becoming the world's first quantum-safe Remote Access product and gaining market share over there. And beyond that, too, we would also have something coming up like the quantum-safe VPN product and different things. But at the same time, too, even after we have released the IronCAP X business version in October, it is also a continued development because we are looking to release a mobile version of IronCAP X, too, later into 2021 and 2022. So yes, so there are many, many vertical solutions in the pipeline.

And a follow-on to this one and I've only got 2 questions that's left. Can you -- what are we planning for a -- to launch this product from a marketing perspective?

The -- I think what you mean is the IronCAP X product?

IronCAP X, yes, the business version of IronCAP, the one coming out in October.

Right. The business version of IronCAP X, again, will be launched in October. And we will have some marketing activities to cope with that, including webinar and different things to promote the IronCAP X business version. So yes, please stay tuned. And we will announce, at the appropriate time, with the activities that we are going to pursue with the launching activities.

And the last question I have here, can you give us some update on your partnerships, in specific, CGI and PwC?

Yes. Particularly, every -- not just CGI and PwC, many other partners are also engaging in co-marketing activities. But particularly, your question about CGI and PwC is because they are large. And the CGI is focusing on co-marketing activities with a financial institution in North America. While the PricewaterhouseCoopers is engaging into activities promoting IronCAP product to enterprises in China, Hong Kong, Macau, the Asian area. And as I mentioned earlier, we have committed to them to have created a wholly-owned subsidiary based in Hong Kong to cope with their activities, basically is providing local support to them. So a quick answer to your question, yes, they are very active engaging into activities, promoting IronCAP to their enterprise customers.

Okay. Just one last question, and please ask Andrew to clarify that the mobile version will be available on the App Store and Google Play?

Yes. As I briefly mentioned, after the release of the desktop version of IronCAP X, we are proceeding with the development of a mobile version. So once it's ready, it is going to be ready in not just 1 platform but more or less across the platform with iOS and Android. So it will be available on the Apple Store, App Store and the Google Play. So it's more or less available on any kind of device all the way from iPhone, iPad, Android phone, Android tablet and Chromebook, all kinds of things.

Okay. Well, that wraps it up for questions, and I'll turn it back to Andrew for any final comments.

So yes, thank you, Brian. So thank you for joining our 2021 Q3 corporate update. The wind direction has certainly changed to a tailwind for us. We are prepared to capitalize on Q-Day and so should you, as an investor of 01. So hopefully, I will see you again in our next quarter result. Thank you very much again. Bye for now. Have a good day.