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

Welcome to 01's First Quarter 2024 Results and Business Update. I'm Brian Stringer. I'm the CFO for 01. And with me today on the call is Andrew Cheung, our President and Chief Executive Officer. The format today Ilac is the moderator. Andrew will provide a presentation on our progress during the first quarter. And then that will be followed by a Q&A. And I think by now, all of us are well versed in the use of Zoom. And if you could click on the Q&A at the bottom, I'll simulate the questions at the end, and Andrew will answer them. Now prior to getting started, if you just take a look here at our forward-looking statements, which form an integral part of this presentation, just take a second to take a look at them. And then now I'll pass it over to Andrew, who will give you the presentation. And remember, if you've got any questions along the way, you can type them in and I will assimilate them at the end of the presentation. Now over to you, Andrew.

Yes. Thank you, Brian. Welcome, everyone. My name is Andrew Cheung, President and CEO of 01 Communique. Welcome to our 2024 first quarter financial results and corporate update. I guess I want to emphasize nothing but the fact that activities in the post-quantum cybersecurity market continue to move in light speed and is accelerating. After the announcement from IBM just 3 months ago in December that they had broken the 1,000 cubic barrier, in February, Apple announced the first milestone of the quantum-safety journey, which is to upgrade the iMessage service in iOS 17.4 to achieve quantum-safety. This is an important industry wake-up call for all the competitors. Because Apple is the first major player announcing real lending of quantum-safe upgrade of their own product. Now while the [indiscernible], last week Vitalik Buterin, the founder of Ethereum has also proposed a method to [indiscernible] the Ethereum chain to save most Ethereum users fund in the quantum emergency diagram. Now while this is likely to take a long time to achieve the consensus in a widely spread community of open source developers, it is actually the second along clock within a month that indicates more and more people are expecting Q-Day will arrive soon. And these [indiscernible] 2 news are definitely not a coincident. I kept reiterating that quantum computer development is progressing faster than most people want to believe. After breaking the 1,000 cubic barrier by IBM, their next stop is 1,400 kilobit later this year and followed by 4,000 cubic next year with 100,000 plus the year 2026. This is a double exponential growth, as I always keep emphasizing, and it cannot be more obvious that the tsunami is already within visible distance, and the reasons are simple. Number one, it takes time to convert the application, any application to become quantum-safe. And on back to that, Apple started their conversion at least 2 years ago in order to achieve the iMessage quantum-safety today. And number two, hackers can always conduct the famous HNDL attack, Harvest Now Decrypt Later. This essentially has fast tracked the effective Q-Day for those industry that data has a long lifespan such as financial, health care, et cetera. And believe it or not, there are still a lot of people wearing their hats by saying that quantum threat or quantum problem is decades away or it would never happen, but the writing is on the wall, very clear. In fact, my ChatGPT is really amazing. Only a few months ago, when I tested them by asking the question how many kilobits are required to crack RSA 2K. They had no answer to that question. When I tested again last week with the same question and guess what? Now they said, the answer is 4,000 qubit. Think about 4,000 qubit, what is it right? That line is actually 4,000 qubit by IBM later in 2025, okay? So I always fall back to this famous formula that takes being the number of years for your encrypted data that needs to be secure? And what is the number of years that will take you to implement quantum-safety in Apple's case, like we believe is 2 years or more? And is that giving the time it takes for hackers to get hold of a quantum computer. So if X+Y greater than Z, then you are hosted. X and Y are different, obviously, for each industry. For the industry -- example, for the industry of cryptocurrencies X is forever. And the larger the open source community, the longer is why. So no wonder the founder of Ethereum tried to propose some emergency paper last week. So I would say, "Hello, Satoshi. Where are you?" Obviously, the White House is not sitting still, of course, and they know fully well what is happening. And the White House, as I keep saying -- and the White House is not sitting still because they know full well about what's going on. In late 2022, the executive office of the President has already issued a memorandum directing all federal agencies to adhere to the NSM National Safety memory of #10 and the head that line of October 18 of last year for the agencies to assess the funding requirement to achieve quantum-safety. And this memorandum reiterated the famous HNDL attacks also. And this is also quantified by NIST, the National Institute of Standards and Technology in the U.S. It is probably not a coincidence that NIST has started their PQC post-quantum cryptography standardization process in 2016, almost in line with the inception of the IronCAP business unit. Originally, they proposed to have the standard start finalized in 2024, but due to the faster-than-expected development in quantum computers, they had the first draft of standard FIPS 203, 204, 205 in August last year, and they expect to add one more standard or recommendation later this year to wrap up the process. And our in-depth knowledge in PQC allowed us to study the original [indiscernible] NIST submission and predicted the 5 final winners so that we can build our crypto engine ahead of the curve. So after the 4 rounds, 4 out of 5 prediction -- of our acquisition have been correct. We believe the last one is also within IronCAP engine already. We will know, I guess, when the fifth recommendation come out later this year. And our ability of predicting the standard actually allowed us to be a few years ahead of the world in creating end-user quantum-safe applications. So while our competitors are busy creating their quantum-safe encryption engine according to the [indiscernible], we are already conducting some POCs proof-of-concept projects for our partners using the predicted recommendation of NIST. While the whole quantum-safe industry is still largely in this [indiscernible] stage, we believe the tipping point is imminent for all the reasons I mentioned a couple of minutes earlier. We also believe real revenue will be coming from the end-user application rather than the encryption engine. So as a result, the go-to-market plan is to generate revenue from both end-user applications and quantum-safe professional services while our competitors are only doing the latter. Latest vertical that we are exploring with the potential partners are in the areas of AI and cryptocurrencies. Now AI is a very interesting industry because it developed very fast. But it actually has been there for like at least 30 years because actually when I was in university, like a long time ago, my graduation paper was actually in the AI. And the AI today is like the early stage of Internet when everything is basically unencrypted. The machine language process or the machine learning process is kind of feeding with unencrypted knowledge. And therefore, the final trained knowledge database are also unencrypted. And the same as a query that are performing at an encrypted format. So it seems okay. It doesn't affect the AI process, it still works, right? And -- but the problem is for the unencrypted data, it is actually raising a huge process and security issue. Imagine an online retailer spending huge money to train the AI about the customer behavior. This knowledge is essentially the crown jewel of the retailer. And it will be a disaster if a hacker manages to steal this trained knowledge and sell to a competitor. This problem is way bigger when applying to other AI applications such as fraud detection, medical image analysis, et cetera. So we are actually in discussion with some potential partners in applying end-to-end privacy for machine learning process. Essentially, this means feeding the machine learning process with encrypted data. And as a result, the trained knowledge are also encrypted as well as the query process and the [indiscernible] result, they are end-to-end encrypted. So in other words what does it mean? This actually means no damage if the trained knowledge are being stolen by a hacker because the query won't work without the private team, okay? And we have a special way of encryption not only that it is quantum-safe but also allow the trained knowledge to be shared among competitors without disclosing anything. So it is actually something very deep in technology, but I can kind of simplify it in plain English to explain a little bit how it works, it's like you train a baby. When you have a baby, the maybe has no knowledge. And if you train the baby 1 plus 1 equal 2. Then the baby will say 1 plus 1 equal 2. But then if you -- this is unencrypted. But if you are -- since day 1, if you're feeding the baby encrypted data, the one that you feed into the baby is actually the letter A. And the 2 that you feed into the baby is actually the latter is Z. And then the 2 that you feed into the baby is actually the letter I, right? So the baby learned from known knowledge is that A plus Z equal I, okay? So this is the kind of like encrypted data feeding and then the trained knowledge is also encrypted, right? So that is how quantum-safe AI will work, and we are actively working in this area with some potential partners. And as I said, this is actually, can be offered as a, we call it a SaaS platform, like a quantum-safe, AI machine learning platform with typical users like a large retailer. As an example, I made a couple of minutes ago or secure of a multiparty computation, machine learning, outsourcing, privacy, preserved machine language, medical record learning, financial modeling, image recognition, fraud detection, supply chain or even smart contract in the blockchain. In other words, it will kind of like [indiscernible] of the AI, where it's like use the concept like the early day of the Internet was totally unencrypted and the next stage has to be encrypted, the Internet traffic. So the same thing that the second generation of AI, we believe it must be encrypted and it has to be also quantum-safe encrypted. So many people -- in addition to AI, many people says that cryptocurrency is indeed traveling along with different space time and who can imagine the behavior of the big content combat or roll back in such a fast and furious fashion. So very recently, there is a renewed interest in our quantum-safe coin technology. And although we can't comment too much on things that are still in discussion, but I believe this represents a huge business opportunity for us. And if anything happen, as usual, we will make a timely announcement to the public. And the fact -- I keep saying the fact that we are leading the world in essentially in the creation of real end user product, quantum-safe end-user product, that gave us the knowledge on how to help other organizations to convert their existing applications to become quantum-safe. Like really large organizations like Apple, they probably have their own knowledge, they all need us. But there are hundreds of other organizations who are not tech-based that we can help them convert their application to become quantum-safe. And our strategy is to act as the SMB, subject matter expert, behind our partners like CGI, PricewaterhouseCooper, Thales, Hitachi, et cetera, to help their customers doing PQC conversion. And while this revenue potential is probably not as big as those AI or the cryptocurrency project that we just talked about, but it can be very profitable with minimum marketing cost. And as a result, I'm actually very happy also to report that the business plan execution started about 2 quarters ago has been progressing well. Even though revenue was less than a year ago without a onetime project, the adjusted loss of we call investment has been reduced to 56,000 from 125,000 in the last quarter. After clearing up some of the long time accounts payables such as the COVID loan from the government, et cetera, we have about 200,000 in the bank with 0 debt. And from the conservative point of view, we expect the reduction to continue without assuming any increase in revenue stream. In other words, any momentum picks up on the revenue side may cross the breakeven line into profitability. An ICAP reiterating that we have invested over $6 million cash into the development of IronCAP, and that 100% of that investment are being expensed in the accounting book. So currently, we are in transition from the R&D stage to revenue generation stage, and I strongly believe 2024 will be the pivotal year for the PQC market. So as a summary, looking forward to the remainder of 2024 and beyond, timing is everything. Things are changing very quickly, and the world is now [indiscernible] in the area or field of AI and also cryptocurrency market has also gone out of the woods. As both of these 2 white [indiscernible] require quantum-safety, our technology basically is squarely fit into the current trend. I will take a pause from here to allow some time for question and answer. As mentioned at the beginning, by Brian, I guess, the people are quite familiar with how to use the Q&A function of Zoom. So please proceed with that and Brian will moderate your question accordingly.

Well, we have one that came in at the beginning. And Andrew, it talks about the partnerships we've developed over the past period of time, and they're not generating revenue yet. And specific with Talos and K-factor, can you give us an update as to how you're progressing?

Yes. In fact -- I think I have kind of crossed about this thing already. Like make no mistake that at this particular point in time, the post-quantum cybersecurity market is still largely in the [indiscernible] stage. And we all know about that and so do our partners like PricewaterhouseCoopers, CGI, Thales, Hitachi, large or small, they all know about it. And the end users have not really opened the checkbook to do the things yet. However, it is beginning. As I pointed out, the announcement of Apple just last month about their iMessage service is actually a wake-up call to not just the tech industry, but also the bank, all those kind of people that will be affected by quantum-safety. And Vitalik Buterin's proposal for Ethereum. He stated that this is urgent matter and hoping that their huge community can come to a consensus soon. And so these are a real wake-up call for other to happen. So I think it is, as I said, while it's still in the pre-money stage, I am strongly believing that 2024 sometimes will be the tipping gear for this money transitioning from pre-money to the to a money producer.

The next one, Andrew, when do you expect NIST to complete their final recommendation?

As mentioned a little earlier, too, that NIST has originally proposed that they will make the final recommendation in 2024. And they already jumped the gun, made a few recommendation for the FIPS 203, 204, 205 August of last year. And they expect to make the final one more recommendation later this year to complete or wrap up their process. So I believe it's likely that they never exactly announced the date, but usually, it is around the early to mid-summer where they made any progress. So it would likely -- I would bet say between May and September. My wild guess will be the final process of NIST.

Okay. And can you elaborate a bit. You talked quite a bit about -- or a bit about cryptocurrencies and how IronCAP had helped with making them quantum-safe. And so the question here is what will happen to the world of cryptocurrencies the day after Q-Day?

I think this is a trillion-dollar question, Brian. More than a good question, it's a trillion dollar question. To be frank, I'm not trying to kind of like [indiscernible] anything or not, like the day after, okay, Q-Day, I believe the value of cryptocurrency, if they are not quantum-safe would virtually be 0 because the private key can be forged and any people -- any hackers potentially can spend your money and or validate a double spending transaction. So the trust within the blockchain is totally gone. So the fact is that people will be running to the exit. And everyone would know what will happen when the particular asset class would do to the value when people are running to the exit, and that would happen. So the whole world of the digital asset has to be converted to become quantum safe -- well, I would say, before Q-Day, I shouldn't say after Q-Day. And the funny thing about the Ethereum proposal was that they are proposing the change after QDay and I don't think that will work to be frank. And it has to be before QDay because it takes time to move asset from pre-quantum to post-quantum as this doesn't happen overnight. That's my humble opinion.

Okay. Thank you. Andrew, that wraps up the questions. So I'll turn it back to you now for final comments. No, I'm sorry, there was no more questions. So back to you, Andrew.

Okay. Yes. Thank you again for joining our 2024 Q1 business update. I guess I am very happy about the continuation of the new phase of operation, and I really can't wait to see what the rest of 2024 brings us. So I really like the line from the [indiscernible] like in business, it's like a box of chocolate. You never know what's the next one that you pick. So I think the next one is going to be quite tasty. And please stay tuned and see you again next quarter.