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

Welcome to our 2023 1st quarter results. I'm Brian Stringer, CFO for 01 Communique and with me is Andrew Cheung, our President and CEO. The agenda today will be a brief overview by myself at start and then I'll turn it over to Andrew and Andrew will give you a presentation on our results and where we're going from here, followed by Q&A. Now with respect to Q&A, everybody is well used to using Zoom these days. And if you look at the bottom, you can click on a Q&A and you can type a question, and I'll moderate the questions at the end of Andrew's session. So any questions you have, please send them forward, and we'll get to them at the end. Now first, I'd like to draw your attention to our disclaimer with respect to forward-looking statements, which form an integral part of this presentation, just take a brief second to look them through. And now I'll turn it over to Andrew. Andrew, over to you.

Thank you, Brian. Welcome, everyone. Again, my name is Andrew Cheung, President and CEO of 01 Communique, and welcome to our 2023 1st quarter financial results and corporate update. Now it has only been 8 weeks ago since we last met. Before I give you the update on our Q1 results, let me reiterate the IBM Quantum Computer road map, which I believe is the single most important piece of information for the cybersecurity world. This road map clearly shows that quantum's threat are already here. The question is, can you see them? Only 4 months ago in November, IBM has fulfilled their promise delivering 433 qubits quantum computer called, Osprey. What does it mean? It means qubit development is predictable. IBM's road map is publicly available and they plan to deliver 1,100 qubit this year, I mean this year, not 2024, this year 2023 and then 1,400 qubits next year, then followed by 4,000 qubits in 2025 and 100,000-plus qubits in 2026. Now please don't get me wrong. And don't forget, this is just IBM. And their competitors like Google, Amazon, Honeywell, D-Wave, et cetera, are all striving to [ beat them. ] After all, these are just the commercial level and the national level is usually 5 to 10 years ahead. So logically, they already have what we will get in 2026 at least 2 years ago. So everyone, I bet, remember the famous crack by FBI in 2021, breaking the Bitcoin wallet of the Colonial Pipeline hackers within 2 weeks. What did they use to crack it? Of course, they won't tell you. And only 3 months ago, in early January, a group of Chinese crypto scientists have published a paper, claiming the possibility of cracking RSA 2K with just 372 qubits. While it is still waiting to be proven, this is an alarming and this kind of advancement seems accelerating worldwide. But here, let's first disregard the January for paper assuming that it is a host and focus on the general belief. And with the exception of those who prefer to bury their heads in the sense, cybersecurity experts around the world are generally believing that a 1,000 qubit quantum computer can crack RSA 2K in a reasonable time. Reasonable time means like currently, the brute force cracking using classical computer or classical supercomputer require over 150 years to do that. So reasonable time means like the cracking doesn't have to be within the second to pose a threat because the damage is catastrophic already, if the cracking can happen within a few days, even a few months, it is just unthinkable what would happen when we have 100 qubit by 2026. But if IBM's road map is correct, 2023 seems to be the year we will cross the line of qubit. Now if it is like -- if this is not like -- still not clear enough, I keep saying that please take a look at this announcement from government agencies. First of all, NIST, the National Institute of Standard & Technology originally expected to announce its post-quantum cryptographic recommendation in 2024. And all of a sudden in July of last year, they rushed [ our field ] recommendation and said they will continue to add more by 2024. Now what does this mean? It is a clear indicator that NIST sees an urgency to enhance something for the world so that it won't be standing naked against the quantum threat tsunami when it comes. In addition, the U.S. National Security Memorandum, NSM 10 announced in May of last year, gave a clear deadline of October 18 for the federal agencies to assess funding requirement to achieve quantum safety. I don't know why October 18, to be frank, which is a Wednesday, maybe they know something that they are not revealing to the world. Last but not least, around 9 months ago, the Bank of International Settlement, BIS, has announced their intention to assess the use case in quantum safety. IronCAP's goal is to capitalize on this massive post-quantum cryptographic market. The strategy of IronCAP has been reiterated year-over-years. And instead of waiting for NIST recommendation, we jumpstarted the gun using our deep knowledge in post-quantum cryptographic to predict the final winner out of 82 NIST candidate at the beginning. This means if we were correct, our global partners such as CGI, Thales, PricewaterhouseCoopers, Hitachi, et cetera will have something in lockstep with the NIST process without having to wait years for the development of an API around NIST-approved algorithm. Live example, is our integration with Thales Luna HSM. This project started about a year ago and was like about 4 months before the NIST announcement in July. But we have already jumped the gun as we said, incorporated the algorithm later approved by NIST in their July announcement. And similarly, the blockchain project that we have completed in September has also incorporated the NIST-approved algorithm, which we have correctly predicted prior to the July NIST announcement. I know a lot of people ask me who is Thales. So let me give you a bit more information about them. First of all, they are a French conglomerate in the cybersecurity world. They are called Thales, like not thales, but they're not a household name, right? I'm pretty sure. But everything that you use today in your everyday life basically depend on their relatively great product for cybersecurity, such as your banking, your credit card, your national defense or everything because their customers are the major enterprises, the bank, the central banks, the government, national defense, et cetera. They have more than 80,000 staff with over EUR 20 billion in sales. So for a company of that size, they won't even return our call if we don't have what they need. This partnership was signed about a year ago in March 2022 and required us to integrate IronCAP post-quantum cryptography as a functional module for the Luna HSM machine. This way, their clients can easily purchase the IronCAP FM to upgrade kind of like an app running on the HSM machine to upgrade the infrastructure to become quantum safe. Since Thales Luna HSM has already been approved by virtually all security-sensitive organization around the world, this is actually a shortcut for us to reach the highly secure -- highly security-sensitive end-user customers. The development has been completed and the co-marketing phase has started. We will elaborate a little bit more in a few minutes. The -- in fact, the major reason for Thales to sign with IronCAP is because unlike our competitors, we are a product company. And our competitor, most of them, as we know, are basically just created an encryption engine, but we, as a product company, can create end-user product to help the integration with their customers. A typical example is our proof-of-concept development for Talent Summit. We have spent about 7 months to successfully complete a practical demonstration of a quantum-safe wallet, having our quantum native token floating on the Solana blockchain. Our method was so flexible that we can operate on top of just about any blockchain such as Bitcoin and Ethereum. This means a shortcut to provide quantum safe version of Bitcoin, Ethereum, et cetera, et cetera, and plus using the Thales Luna HSM as the security backlog. This put us in a global leading position to help converting any blockchain, private or public, to become quantum safe. A new patent application, as I mentioned before, related to this new technology has been filed in November, and we expect office action happening any time from now. With the unexpected NIST announcement in July, 8 months ago, we have decided also to incorporate the NIST-approved algorithm into our IronCAP X product which gives us significant marketing value. This will be released like in the current quarter, as in the first business e-mail security product that is quantum safe using NIST-approved algorithms. It is a SaaS model, Software-as-a-Service model, charging $100 a year per user with a free personal usage version available. Beside end-to-end encryption that no one in the middle -- man in the middle of the industry card can intercept, and its e-digital signature ensures also the authenticity of the sender, and therefore, it can effectively kill phishing e-mail because 91% source of ransomware attacks are coming from a phishing e-mail. And also, subsequent to our last corporate update in January, we have already made quite a bit of great progress. And first of all, as I mentioned a few minutes ago, the integration with Thales Luna HSM has been completed, and we are now entering into the co-marketing phase. The first co-marketing activity is a major global event called RSA Conference held in San Francisco on April 24 to 27. IronCAP will be featured at the Thales PQC, post-quantum cryptography palooza event during the conference and this RSA conferences, you don't know them, is the largest cybersecurity conference in the world held every year in San Francisco. And secondly, we have also completed the incorporation of NIST-approved algorithm in our IronCAP X product. It is currently in its final QA process and will be ready -- publicly released imminently. Last but not least, as publicly announced in February, just about a month ago, our remote access product is also upgraded to quantum safe now. Now looking forward to 2023, okay? First of all, IronCAP will be, as I said, will be publicly -- IronCAP X will be publicly released once we have completed the QA process. But most importantly, we expect 2023 to cross the line of -- the critical line of Q-Day. More enterprises should begin to adopt quantum safety, and therefore, we'll engage more proof-of-concept in implementation project with IronCAP. With the completion of the R&D after spending millions of dollars, we have entered a new phase of operation. This new phase of operation will see a significant reduction in operating expenses as R&D has reached an important milestone whereby we are set to embrace the PQC market expecting corporation to begin spending on quantum safety in 2023. In terms of number, we actually -- accounting point of view, we recognize a onetime engineering fee. We charge our customers as they were booked. This means onetime fee can be up 1 quarter, down 1 quarter and up another 1 et cetera, et cetera on top of the more important recurring revenues. And without a onetime engineering fee this quarter as compared to the same quarter last year, the Q1 revenue was down from the same quarter in 2023. And adjusted loss, which we call R&D investment, was slightly larger as a result of the R&D development with our global partners, which I have reiterated before. But most importantly, I'm very happy with the cash usage despite all the R&D investment in the last 12 months has been reduced to about [ 374,000 ] in the last 4 quarters. As mentioned just a few minutes ago, with the completion of IronCAP R&D, we expect a significant reduction in operating expenses moving forward while embracing the massive PQC market. This will immediately put us in a more or less breakeven position effective the next quarter, Q3. And practically, this means we can be immediately profitable once PQC revenue begin to kick in. And let me give a quick summary before we enter the Q&A section. I think I mentioned, I am very happy with the achievement in the Q1 of 2023 and the plan of moving forward from here. Again, Q-Day has arrived and gather serious attention to. We expect to continue our technological leadership, which allow us to embrace the Q-Day multibillion-dollar -- multibillion-dollar opportunity. The strategy we made 5 years ago has begun to bear fruit and has also proven correct. Bottom line is that our recurring revenue gives us a luxurious option to extend the runway to embrace the imminent massive PQC market potential, but I must say that there is no chance of achieving this without your support. So please allow me to say thank you for your support all the way from being a quantum story several years ago to this critical inflection point. So at this point, I would like to take a pause from here to allow more time for question and answer. As mentioned by Brian before, there's a Q&A button that if you have any question, please type your question there, and Brian will moderate the question in a first-come-first-serve base and I would answer them as Brian reads to me. Thank you. Back to you, Brian.

Okay. Thank you, Andrew. I've got several questions here in the group and various [indiscernible]. I'll try to group them here. Andrew, the first has to do with what's going on in the general malaise of the financial industry -- the banking industry now with Silicon Valley Bank and the question is, are we impacted, the simple answer is no. But do you see anything other than our impact with respect to competitors or whatever?

That's actually a pretty good question. I've been expecting someone to ask. I just know that would be the first question. Yes, short answer, we have no exposure to SVB, but to be frank, we believe we might have indirectly benefited by that because first of all, we are not VC backed. R&D expenses, R&D investment are backed by our own cash flow basically. And so a lot of our competitors are VC backed, so maybe some of them will be affected by this situation. And so I would say that to some extent, I believe you would be indirectly benefiting us because of that reason. So yes, so -- but we definitely have no exposure to SVB.

Okay. The next one has to do with Bitcoin. And with what's happening with cryptocurrencies where they seem to be making a bit of a comeback, is this good or bad for our blockchain solution?

I think this is good to some extent because, as I mentioned before, that our patent-pending method of adding quantum safety to a blockchain is applicable to any blockchain, existing blockchain, public blockchain, private blockchain or anything. So at some point in time, if they haven't chosen to do that, Bitcoin or Ethereum or just about every cryptocurrency must be upgraded to become quantum safe. And our technology, the patent pending technology can do that. Just -- can just convert them and help them converting, becoming quantum safe. So the coming back of Bitcoin or someone called the ending, it looks like ending of the crypto winter is definitely a huge benefit to that. And especially the timing couldn't be better than our patent process has been there for a few months. So office action, as I mentioned, will be starting soon. And so I believe that the timing for the ending of the crypto winter cannot be better for us.

And the next one, Andrew, has to do with conferences that are going on, and there's a couple of them. So I'm going to combine them together here. You can elaborate on our participation in these conferences and what we expect to get out of or what we've learned and I think you have covered the first one. There's an RSA conference in San Francisco next month. [indiscernible] but if you could reiterate it because I think this guy missed it. And the second has to do with the Economist, which has sponsored the Quantum commercialization conference in San Francisco. Now that's just recently concluded. And the question really is when will this show up in user acceptance and hopefully, an order book for us?

Yes. This is -- this seems like a pretty loaded question. Let me answer in parts. First of all, the quantum event by Economists. Yes. You're absolutely right that there are lots of attention to quantum safety in the last, I would say, I shouldn't say the last 12 months but actually started a few years ago and gradually increasing and up to this point, there are a lot of attention from banks, national defense and central banks and things like that. So it has been receiving a lot of attention in that. And that's also dovetailing into why Thales signed with IronCAP and also why it is the first time that Thales is hosting a side event within the RSA conference next month -- right at RSA conference and that event is featuring PQC, post-quantum cryptography, and it's going to be featuring the IronCAP FM with the Luna HSM product. So yes, so all these things are culminating together, and we expect in 2023 and beyond, there will be more and more conferences that is focusing on the PQC situation because it's a real, real serious issue coming to the world of cybersecurity and it is being unfolding now.

Okay, thank you. And for those of you who are interested because it's quite an interesting -- and they've got quite a bit on the Internet. If you just Google the second Annual Commercializing Quantum Global 2023. That will take you to the Economist website where you can take a look at what's going on. It's quite interesting. So it's the Second Annual Commercializing Long-Term Global 2023. Okay. And we've got one last question, and this is the financial one. And they're asking if you can elaborate on how we -- how -- and I'm going to paraphrase this how we plan to extend our runway, as we mentioned in the press release and you covered in summary form, at least in your presentation.

Yes. Yes, I have covered a little bit in the presentation, but I can elaborate a little bit more here. As I said, over the last few years, we have invested millions of dollars in IronCAP technology. And again, as I keep saying that we were not VC backed. So our investment are basically our own cash flow. We are funding it by our own cash flow. But unfortunately, in the accounting principle, these investments are called operating loss on the book. So we cannot capitalize on them. So they are all being expensed. And -- but our R&D projects have completed now. So moving forward, the investment has tapered. And unlike our competitors who against us like as far as we know, who do not have sustainable recurring revenue and our recurring revenue or our own cash flow, I keep saying, allow us to extend the runway to embrace or capitalize this pivotal point of post-quantum cryptographic market. So yes, so a short answer to that is we are relying on our recurring revenue, okay? And with the completion of the R&D and that the runway will be here extended to embrace this market. And that's basically a long-winded answer to how we do it.

Okay. Well, thank you. That's it for questions. And I'll just turn it over to Andrew for conclusion.

Yes. Thank you, Brian, and thank you, again, for all those very good questions. And again, as I keep saying, thanks for joining the 2023 Q1 business update. We are completely prepared to capitalize on this Q-Day market potential. So again, we have entered a very interesting pivotal point in this PQC market. And 2023 is going to be a very interesting inflection point moving forward. So stay tuned and see you again soon. Oh, by the way, just to take this opportunity to mention that after COVID, we are hosting our first face-to-face AGM in April, which is just one day before the RSA conference, so I will have a very hectic few days. After the AGM, I will have to go to San Francisco for that Thales event within RSA conference. But hopefully, I will see you at our AGM, and there will be information actually mentioned in our press release. So please read that and hopefully to see you there next month. Thank you again.