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

Okay, everyone, let's get started. It's 10:00. And good morning, and welcome to our 2021 Fourth Quarter Results and Business Update Presentation. I'm Brian Stringer. I'm the Chief Financial Officer with 01 Communique. And with me is Andrew Cheung, our President and CEO and Founder. Andrew, if you could just flip the page? Now the agenda today, I will turn over to Andrew in a moment, who will provide a presentation of our results and give a good business update, following which there will be an opportunity for Q&A. And if you look at the button at the Q&A at the bottom, please feel free to submit your questions as we go through. I'll hold until the end. And then Andrew will give you the answers at the end of the session. And now before we get started, if you would take a quick look at our forward-looking statements, which form a portion of this presentation. And now I'll turn it over to Andrew, who will give you an update on our results.

Thank you, Brian. Welcome, everyone. My name is Andrew Cheung, President and CEO of 01 Communique. Welcome to our 2021 Fourth Quarter Financial Results and Corporate Update. Now today, I am going to first talk about the current environment and the risk of cybersecurity. And then I'll give you an update of our latest progress, and finally, our financial position, update on the business and the growth moving forward. First of all, the world is really changing very quickly. Since my last update, which is only a few months ago, ransomware has gone even more rogue to environment. Researchers suggested that 281 million people have been affected by a data breach in 2021, and 60% of the U.S. infosec professionals, they believe ransomware is not as serious as terrorism because it is very easy to achieve a ransomware. It is just like 91% of a successful ransomware simply begins with an easy phishing e-mail. So as of the end of 2021, it was estimated that a ransomware attack would happen every 11 seconds, so yes, every 11 seconds, I'm not kidding. You can think this is bad enough. I have another bad news for you because what we see now is only the tip of an iceberg after Q-Day, the day when bad actors are using quantum computers to do their dirty works. This is because the excessive computing power of quantum computers will render current encryption systems such as RSA totally useless and leaving our data unprotected. Now unfortunately, the infamous human nature is to bury the heads under the sand when disaster is approaching. Quantum computers actually are not futuristic because they are already commercially available 2 years ago from the likes of IBM, Google, Honeywell, BUA, Amazon, you name it, the list just goes on. It is only that the commercially available model -- as a commercial available model are not powerful enough to make Q-Day yet. But here's the catch. You may remember the Colonial Pipeline hackers have pocketed $90 million worth of Bitcoin only a few months ago, maybe half a year ago. And within 2 weeks, the FBI said, they have managed to crack the wallet of the hackers and recovered half of the ransom money. They were never disclosed, but what do you think they used to do to achieve that? And so in fact, Q-Day has already arrived at a national level, such as the U.S., China, Russia, this has already arrived. And even on a commercial level, IBM had openly said that they would deliver a 1,000 cubic quantum computer in 2023. That's enough power to crack RSA. And if IBM can do that, what do you think the competitor would do? So in other words, when cyber threat and quantum computing hits, it is a recipe for disaster. And the bad news is they have already met. And we are no way near having any solution to counter that yet. And the reality is that the sensitive data that we all have, right, in this world are meant to exist in the original form for a long time, like decades. If they are unencrypted like most e-mail in use today or encrypted using an obsolete technology, it is begging for disaster. In the latter case, it's even worse, more troublesome because they have to be decrypted first and then re-encrypted in a quantum-safe fashion followed by properly discarding the original data. And that's why we build IronCAP, the solution to the threat. IronCAP is the first-to-market quantum-safe encryption system, providing secure -- and it is available today. We provide IronCAP engines for other vendors to transform their product to become quantum-safe. We also create vertical solutions ourselves using IronCAP SDL quantum-safe cryptographic engine. IronCAP has quickly gathered attention from companies in the cybersecurity world around the globe. And they are a household powerful name like PricewaterhouseCoopers, CGI, Hitachi as well as other smaller regional players. Now for the remaining of 2022 and beyond, we expect ransomware attacks will continue to increase, and most effectively, the way to protect that is to shut down 91% of the main source, which I mentioned before, is phishing e-mails. This very simple phishing fishing e-mail is 91% of the source of all ransomware happening in the world. Now please don't get me wrong, all those current AI-based malicious activity detection products are still very important tools to have. However, they should be used as a second line of defense. We expect -- with also other than -- we expect never ending world to -- the working from home will continue. So all these combined together, remote access, quantum problem e-mail is going to be the most important work for the years to come. And for the remote access side, right, we have a strong group of this trend in Japan with our strong partnership with Hitachi. Rapid growth is expected as a result. And as mentioned earlier, quantum hacks is still approaching, if not, already there, and we have acted quickly and are integrating our IronCAP quantum-safe technology into our remote access product. And this means, we will be the first one in the world with a quantum-safe remote access product, potentially letting a significant increase of our market share. Finally, we are confident that IronCAP is poised to be the solution of choice by any kind of forward-thinking organization who is serious about protecting the data today and into the future world of post-quantum era. And as a result, we cannot be in a better position -- or maybe let me go back to another chart first. A significant milestone for IronCAP and 01 this year is to have -- we have been -- we have received a note -- this order here. Then we have received the notice of allowance from the U.S. Patent office 2 months ago in November. It is a huge milestone being patent protected. Another point is that we are working closely with our existing partners such as CGI, PricewaterhouseCoopers. And as a result, we have created a wholly-owned subsidiary in Hong Kong to provide local support to PricewaterhouseCoopers. And new partnerships are also on the horizon, so watch out for our press releases to come. On another front, working from home, as I mentioned, has dramatically increased our remote access business user base in Japan. While penetrating the corporate market, our remote access product is effectively paving the road for our IronCAP engine to be integrated, whereby creating the world's first quantum-safe remote access product. And probably the most significant achievement lately is that with more R&D spending, the business version of IronCAP X, which is our e-mail security product, is slated to be released very soon. This product is a very effective solution to prevent phishing, which I mentioned many times, it is the 91% source of all ransomware in the world today. Now here is a little bit of the IronCAP X product. It's very powerful, but most importantly, it is allowing to be use today in the pre-quantum era and continue to be saved into the future world of post-quantum computing era. I'm emphasizing that it is end-to-end secure because the term end-to-end encrypting has been widely abused by market jargon of many other products out there. Now most, if not all, of the e-mail encryption products today in the world are only a man in the middle type of encryption technology, whereby their server actually holds the key that can decrypt your message. Now I don't need to tell you how insecure it is because to some extent, it is even worse than before as their server now is not only attracting hackers, but also processes all the keys to decrypt your confidential messages. This means you are really at their mercy. But to the contrary, IronCAP X, as you can see in this diagram, is 100% end-to-end e-mail security product. Now true end-to-end simply means you as the sender are encrypting e-mails at your computer and the e-mail stays encrypted all the way to the recipient. And it can only be decrypted at the recipient computer and no one in between can see anything, including the FBI, the CIA or whoever authority. So I keep jokingly saying that if Clinton had this in 2016, she will be in the Oval office not Trump, right? Probably. Now why hasn't anyone provided a true end-to-end e-mail security is because it's very difficult to implement, but we did it. Practically speaking, now using IronCAP X, as you can see the end-to-end nature of it, it means hacking, they even managed to obtain the e-mail, they can't read them. When they can't read them, there's no chance for them to impersonate you by sending like a fake e-mail or something, asking your customers to wire payment to a new account, right, et cetera, et cetera. Now on the other hand, using IronCAP X also means if you have an e-mail from someone you know, but the content seems suspicious, you can easily check the digital signature to confirm that it is a real send. Now with this digital signature, the phishing will be a thing in the past when authenticity of the center can be determined. Now it doesn't need a rocket scientist to figure out the huge market that we are tapping into. IronCAP X for business is only charging $100 per year per user. So you can see that we are really aiming the mass market. And most importantly, IronCAP X operates on current classic computers. It is quantum-safe. So that quantum-safe nature basically ensures you that it will work all the way from today and then give you peace of mind into the quantum, the future. Now for the remaining of 2022, as you can see there, there are a few points that we want to make. First of all, we expect, as I mentioned before, that ransomware attack will continue to increase. And the most effective way is to shut down this 91% of the main source, phishing e-mail. And secondly, we expect the never-ending COVID that working from home will continue. So with the increased dependency on remote access technology, we have a strong grip of this market in Japan with our partnership with Hitachi, and rapid growth therefore is expected. As mentioned earlier, we will be integrating quantum-safe technology by using IronCAP engine into our remote access product and expecting to have the world's first quantum-safe remote access technology to be available. And we are very confident that IronCAP is poised to be the solution of choice for any forward-thinking company. So as a result, we cannot be in a better position to capitalize on this multibillion dollar market. And among our competitors, also as hinted before, we are the only one providing not only the encryption engine, but also vertical solutions, products to generate great revenues. IronCAP X is step number one, and followed closely by the quantum-safe remote access and beyond. So I am very happy to report a solid 2021. While Q4 revenue was more or less the same as last year, the fiscal 2021 revenue has been actually 70% up from 2020, reaching almost $900,000. It's very important to note that our revenues are comprised of remote access -- comprised of recurring revenue and onetime engineering fees. This means we have no direct costs associated with it and therefore, 100% contributing to offset the operating costs. Our cash operating loss continued to reduce year-over-year to $466,000 this year, while cash position was maintained at about $1 million with zero debt. This simple math tells us that our cash position is good enough for at least 2 years, and this allows us to conduct sales and marketing activities aiming for more partners while servicing our existing partners. And practically, we expect to cross the breakeven position within this period of time. So this is very strong and very encouraging for us. As a summary, I am very happy with the achievement in 2021 and confidence that we have the power to embrace Q-Day. 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 very soon. I am fully convinced that when the first public is close, quantum attack happen, the gold rush just starts. And I think I will take a quick pause from here to allow more time for question-and-answer. I'm sure many of you would have some questions. So as mentioned by Brian a little bit earlier, please use the question-and-answer feature and type your question there. And Brian will try to pick whatever possible within the time allowance, and then read the question to me and I will answer the question. So over to you, Brian.

Okay. Thank you, Andrew. Well, our first question is your announcement said you received the patent approval. Can you tell me when you actually think you will get the patent? And just how important is this patent?

Yes. Well, I think the first question is probably the best question. We have applied for a patent protection about 3 years ago, a slightly more than 3 years ago. And this patent granting actually surprises us because it came a little bit faster than normal, which is a very good sign for us, meaning that it is a very unique technology that we have. And the -- what we have received is actually, they call the notice of allowance. So from the notice of allowance, it would take another about 3 to 4 months for them to actually issue the patent with the patent number. So that was November. So I guess, it would be around next month, February, that we will receive the actual pattern number that we can quote. And this patent, again, as I said, is very important to us because not only that it's a protection, but it is also serving as an indication that our technology is very unique. And time and also the time that it took, we sold like only about 3 years for us to get the patent versus like 5 years in the normal course of patent application as indicating that the examiner found that it is very, very unique of the technology that we have. So I am very happy about the patent approval.

Okay. The next question centers around activities for the last fiscal year.

I'm sorry, I was -- I think your microphone wasn't picking up about -- for about 10 seconds.

Can you hear me now?

Yes, very good. Thank you, Brian.

Yes, the next question, Andrew, centers around activities for the last fiscal year. And you say, we've added 6 new partners. How many do we presently have? And what activity is there at the current time with these partners?

I think in one of my earlier charts, it is actually showing some geographical indication of the partners. So we have a little bit more than a dozen partners. And among them, there are some big household names such as Hitachi, PricewaterhouseCoopers, CGI, plus other smaller regional players, and they are all actively engaging with their customers to introduce IronCAP technology to them. As also I mentioned in the presentation that PricewaterhouseCoopers has engaged many activities in Asia. And as a result, we have set up an Asian branch 100% owned subsidiary to facilitate and provide local support for them to engage with large customers, enterprise customers over there.

Okay. And a follow-on to that is a second part of that question. How crucial will your partnerships be in securing business in the future?

It is actually very crucial because as I mentioned before, our strategy is to rely on partnerships. We understand that we are -- yes, we are a public company, but we are still a small entity, a small player in the -- in terms of company size. So to be very practical is giving you a live example. It is very difficult for Royal Bank, for example, to deal with us directly. But Royal Bank will deal with CGI, right? And it's very difficult for, say, Toyota to deal with us directly, but they will deal with Hitachi. So we rely on this kind of partnership with the brand name in their geographical area to piggyback the IronCAP solutions to their customers. So a short answer to your question is that the partnership is extremely crucial for our business development.

The next point is, has to do with IronCAP X. And can you expand a bit on the launch date? And what are you doing from a sales and marketing perspective to generate revenue from IronCAP X?

Yes IronCAP X, we haven't announced a launch date yet, but it's getting very, very close. And so I think you can expect very soon. Like don't quote me, but probably within a month or something or two, for sure, it would be announced. And the marketing of IronCAP X, again, is through partnerships. And secondly is a direct download book. So anyone can download the IronCAP X product from our website. The free personal usage version is already available on our website. So anyone can download and try. And what we are about to release is actually the business version, whereby people first download the free version for us, just like any product, the marketing today. and then there will be an option for them to subscribe if you are a business user. And the only different or additional feature that a business version has that the personal version doesn't have is the multi-user management tool, allowing the IT in the corporation to manage all the security for the users. While the personal free version is only for one user like pressure users is only for one user without the multi-user management capability. So yes, so to some extent, it is already available, but the business version will be available very soon.

Okay. And the next one turns a bit to more about the financial status of the company, Andrew. And you have about $1 million in cash and burned about $0.5 million last year, as you've said. And this implies you have 2 years of cash. Now at this current burn rate, do you have plans for a financing? And can you expand a bit on when do you think you cross the line to profitability and generate revenue from IronCAP X?

Yes. This is actually a lot of questions. The short answer to your question is that we don't have any pressing need to raise the financing. And -- but I always use that line is the extra money can always compress time to capture market -- So -- but there is no pressing need for us to raise money because like you said, simple math is we have at least 2 years of run rate based on the current burn rate. And secondly, we are planning to cross the line of profitability within these 2 years. So as you can see from the last probably the trend for the last 2, 3 years, our cash burn is keep reducing year-over-year, which is normal in any new market development kind of venture like IronCAP. First of all, you're starting with 0 revenue and you're burning a lot of cash because of you're spending a lot in R&D on everywhere without generating anything. And then you keep reducing the burn rate year-over-year, and we are demonstrating the same kind of trend. So now that has been reduced to a little less than $0.5 million to $466,000 last year, and it will keep reducing. And we -- again, we expect to cross the line of profitability within this -- within the run rate, let's put it this way. I think that would be a short answer, right?

Now the next one, and I think this is the last one that I have on the screen right now and I'm going to combine it because several people have asked a similar thing. With respect to partners, do you expect more partners this year? And what activity is going on to generate more partners in the upcoming year?

Yes. I think this is kind of like touching a little bit earlier in one of the earlier questions. Let me answer the future partner first. We continue to expand sales and marketing activities to engage more partnerships. And we expect more to come. And in fact, we have some in the very advanced stage of discussion already. It takes a long time to negotiate a partnership. Sometimes when you see, for example, when you saw the CGI partnership came out the last year, actually, it was 24 months ago when we started talking to them. It takes a long time. The larger the company, the longer time it takes to get them. And so we have many fronts in discussion and some of them are in very advanced stage that announcements are kind of like very close imminent. And some of them are in a longer-term department. So please keep watching and you will see many new partnerships that are coming up from us. And then on existing partnerships, as I mentioned before, we keep supporting them when they need us to go with them and making a proposal to the existing customers, that's the kind of support we have for existing partners, and we'll continue to do that because as I mentioned, partnership is a very crucial business development strategy for us as we are looking to piggyback the IronCAP product into their customer rather than reselling to -- directly to the customers. right? So we're looking at that kind of like multiplying effect. So yes, I hope that is kind of like a long-winded answer to a loaded question, but I hope I answered that precisely.

Thank you, Andrew. That wraps up the questions. And now I'll turn it over to Andrew for closing comments.

Well, thank you again, Brian. And also thank you for the audience of all these very intelligent to-the-point questions. Again, thank you for joining our 2021 Q4 corporate update. The wind direction is to actually continue to be a tailwind for us, and we are well prepared to capitalize on Q-Day and so should you as an investor of 01. So see you all next time with more good news. Thank you.