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

Good morning, everyone. Let's get started. I'm Brian Stringer. I'm the Chief Financial Officer for 01 Communique. And with me today is Andrew Cheung, our President and CEO, and welcome to our second quarter results and business update conference call. Andrew, if I could have the next slide, please. Okay. If you would, as part of this presentation, please take a moment to review our forward-looking statements, which form an integral part of this presentation. Now the agenda today will be I'll turn it over to Andrew. Andrew will take us through our results for the quarter and prospects for the future. Following that, I will act as moderator for a Q&A session. We're on Zoom. And I think by now, everybody understands how to use Q&A. There is a Q&A button at the bottom, just click it, type your question, and I'll present it at the end of this session, Andrew's session. Okay. Now Andrew, with that, I'll turn it over to you.

Thank you, Brian. Welcome, everyone. My name is Andrew Cheung, President and CEO of 01 Communique, and welcome to our 2024 Second Quarter Financial Results and Corporate Update. I would just start by saying that there are actually more and more evidence showing that attentions on the post-quantum cybersecurity are gathering momentums. First of all, we are already halfway into 2024, and that IBM is calling for a 1,400-qubit version delivering this year. So they are once again fulfilling their promise this year. The next step is a 4,000 qubit sometime in 2025. Now only 3 months ago, when Vitalik Buterin, the founder of Ethereum, had proposed a method to hard fork the Ethereum chain to save most Ethereum users' fund in a quantum emergency diagram. He called it quantum emergency. So before that, 99.99%, I would say, of the people in the cryptocurrencies market still believe they are safe. While this will likely take a long time to achieve in the consensus because it is a widely held spread community of open source developers, it is a huge alarm clock for the complacent. And right after Buterin's wake-up call attention, Google had also announced the Chrome version 124 will have post-quantum encryption built in as a default security. I guess the most notable Q-Day preparation during this quarter is the latest action from the National Institute of Standard and Technology, or people call it NIST, in the U.S. To those who don't know NIST, actually, NIST is a semi-government agency in the U.S. who independently standardize different study, I would say, study and standardize different technologies for the U.S., which most other countries will follow suit. It is not a coincident that NIST has started their PQC, post-quantum cryptography, standardization process in 2016, almost in line with the inception of our IronCAP business unit. Originally, they proposed to have the standard finalized in 2024, but due to the faster-than-expected development in quantum computers, they had the first draft of standard, they call it the FIPS 203, FIPS 204 and FIPS 205, in August last year. In April, less than 2 months ago, NIST had their fifth PQC conference held in Maryland and expect that they propose to have one more recommendation from the code-based PQC category later this year to kind of wrap up the process. So, so far, there are 3 candidates in the run, call it Classic McEliece; BIKE, B-I-K-E; and HQC. Our prediction since the inception of our IronCAP has been on Classic McEliece. And therefore, we have jumped the gun by having that included in IronCAP already since day 1 of our encryption engine. If this turns out to be correct, we are indeed 5 out of 5 in our predictions. The other 4 preliminary recommendation in 2025 were already in the IronCAP engine stack. So you can easily figure that, with our ability to predict the standard, is allowing us to be a few years ahead of the world in creating end-user quantum-safe applications while our competitors are busy creating their encryption or quantum-safe cryptographic engines. According to the NIST standard, we are already conducting POC and end-user applications for our partners as well as creating the e-mail applications. This gives us a lot of hands-on experience in the creation of post-quantum end-users application such as end-to-end e-mail securities, our quantum-safe cryptocurrencies, quantum-safe remote access, et cetera. Our business model is quite simple. We are planning to give away basically our encryption engine for free while making money in end-user application as well as helping our partners in converting their applications to become quantum safe. The latest vertical we are exploring with potential partners are in the areas of AI, like quantum, say, AI, machine language -- machine learning; Cryptocurrencies, remote access and file sharing, which we believe are the lower-hanging fruits. So let me take this opportunity also to explain why AI, machine learning require encryptions. As we all know, AI today is like the early days of the Internet when everything is naked. The machine learning process is fed with an encrypted knowledge and therefore, the final query, the final train knowledge are also encrypted. And this actually raises a huge privacy and security issue because you can imagine, for example, an online retailer spending huge effort to train their AI about the customer behavior, this knowledge is essentially the crown jewel of the retailer. It will be a disaster, therefore, if a hacker manages to steal the train knowledge and sell it to a competitor. So the problem is way bigger when applying in other AI applications such as fraud detection, medical image analysis and stuff like that. So adding encryption and privacy to AI, machine learning essentially means you are feeding the machine learning process with encrypted data. What exactly does it mean? As a result, the train knowledge are also encrypted. And therefore, the query process is also encrypted. So let me give you a live example of what exactly that process is. Say, when we were learning about 1 plus 2 equals 3 at the age of 3 or whatever, we were all being shown as like a 1 plus a 2 and equals 3. However, if your -- whoever your trainer or how you train your kids is that you're giving -- instead of 1, you're giving your kid a mouse, okay, as a 1. And then an eraser as a 2 and a pencil as a 3. So you're training your kids like a mouse plus an eraser equals 3, okay? That, to him, the 1 plus 2 equals 3. So this train knowledge of your kid is encrypted because knowledge is a mouse plus an eraser equals to a pencil. So in other words, there's no damage, if the train knowledge are encrypted, train knowledge are being stolen by hackers, because the query won't make any sense without the private key that's encrypted, that the mouse is actually 1, the eraser is 2 and the pencil is 3, right? So we have a special way of encryption not only that it is quantum safe but also allow the train knowledge to be shared among competitors without disclosing the content, right? So quantum-safe AI, machine learning has a wide -- ultra-wide application. Just to name a few, like typical users would be like the large retailers, which I kind of alluded before; or a secure multiparty computation, machine learning, outsourcing, privacy-preserving machine learning, medical record learning, financial model learning, auto trading, the image recognition learning, fraud detection, supply chain optimization; or even a smart contract within a blockchain. So the sky is a limit there. As mentioned during our last meeting, cryptocurrencies have apparently exited the crypto winter. So the renewed interest in our current quantum-safe coin technology has been strong. Although we can't comment too much on our work in progress, I can comfortably talk about the technology we have that is now patent protected. Our technology indeed allow us to apply quantum safety on top of just about any existing blockchain, whether it is private, public, permissioned or permissionless, all applicable. I believe this represents a huge business opportunity. And if and when anything happens, we will make timely announcement to the public. Now another opportunity in discussion involve file sharing on the cloud. This is very common, to share files with colleagues over a cloud storage like iCloud, Google, Box, et cetera. But some of them has AI available for integrators. So we are -- we can easily create a customized share -- file-sharing application that integrate with these cloud providers by encrypting files before uploading while decrypting after downloading. This essentially allows people to share very confidential files with colleagues over the cloud because only the intended recipient have the private key to decrypt them after downloading, right? So after all of these, actually, I am very happy to report that the business plan execution has been progressing well and is proven that the financial -- in the financial figures. We continue to move towards the breakeven line as how I anticipated since we executed the plan several quarters ago. Our operating loss in this quarter was down to just about $28,000, which is essentially around the breakeven point. Revenue was more or less in line with a small uptick. And most importantly, we continue to operate debt-free. In other words, I expect to cross into profitability with any momentum pickup on the revenue side. And I kept reiterating that we have invested over $6 million cash into the development of IronCAP, and 100% of that investment are being expensed in the accounting book. I think it is about time to begin reaping return for our investment when quantum safety market continues to gain momentum for the rest of 2024 and into 2025. As a summary, looking forward into the remainder of 2024 and beyond. As I always say, timing is everything. Things are changing very rapidly, but in closing, I would like to point out something to share with you. Today -- it wasn't given like that 3 months ago. Today, NVIDIA becomes the most valuable company in the world, surpassing everyone. Every overnight happening has 7 to 10 years in the making. And -- but for NVIDIA, this is actually 17 years in the making when they first invested to focus on hashing and linear regression in 2007. I remember vividly when I was an investor of NVIDIA way back then and got fed up with the waiting, so I sold the stock a few years later with a breakeven. I don't need to tell you how I am kicking myself today. So I don't think it needs 17 years for our post-quantum market to hit the launchpad. The world is now white-hot in the field of AI and cryptocurrencies where our technology fits squarely well into the trend. And I will take a pause from here to allow for more time for question and answer. As mentioned by Brian, at the beginning of the meeting, everyone should know how to use Zoom by now, so please use the Q&A feature of Zoom. And Brian will moderate your questions accordingly. So over to you, Brian.

Okay. Thank you, Andrew. We had some questions come in throughout your presentation, and I'll start with them in order. The first one has to do with quantum-safe AI and generative AI. And the question is, does quantum-safe AI apply to generative AI? And what is the difference?

I think this is a very good question. It must be from someone who has some technical background, as how I feel. In fact, the -- so far the quantum-safe AI applies to every aspects of AI except generative AI. So to those who actually doesn't know the AI, let me just give some very brief background here. And the AI is kind of like -- kind of segregated into 2 categories: one is generative AI or non-generative AI. Generative AI is what people normally know about AI from the general public because of ChatGPT that they are gathering knowledge and then you type in your question and then it is actually answering you as -- similar to a human being. That's generative AI. And generative AI involves a lot of parameters that is -- that today's computer is not fast enough to do encryption and decryption within. But then non-generative AI is actually a market even bigger than generative AI, which applies to everything else, like what I mentioned about the fraud detection machine learning; medical data machine learning; customer behavior machine learning; and the natural language processing and everything else other than generative AI. So the encryption technology applies to non-generative AI, so I hope I would -- kind of like clarified a little bit about the technology side.

Okay. Thank you, Andrew. And the next question has to do with cryptocurrencies. How do you see 01 benefiting from the cryptocurrency market?

When -- if someone paid attention to what we did 2 years ago, actually, the technologies we have created allow us to essentially insert quantum safety into any blockchain. So whether you are the bitcoin or Ethereum, Solana, Avalanche, or any new cryptocurrencies, our technology is applicable. So in other words, we can create -- we can help our partners to create the quantum-safe version of the coin. So using Solana as an example, why use Solana as an example, because it was Solana that our proof-of-concept project in 2022 was based on as the sandbox. So using Solana as an example, Solana today is trading at between $140 to $170, plus or minus. So let's use $150 as an example, for a round number. And so if someone is issuing a quantum-safe version of Solana at their original Solana ICO price of $0.22, there's a huge gap between the quantum-vulnerable version, $150, and the quantum-safe version of $0.22. So that huge gap, it represents a huge arbitrage opportunity as well as a hedging or insurance opportunity. So 01 technology will be applied to that, and we will be compensated with some percentage of those new coins. And this is huge. The opportunity is just huge. You can imagine the size of it, right, from that kind of data because safe Solana has about $450 million number in the flow, and that is equivalent to hundreds of billion dollars. So the arbitrage opportunity is representing a few hundred billions over there. So some percent, a very small percentage of that, is very meaningful.

Okay. Andrew, the next question has to do with revenue and with our existing partners. Can you comment on what's going on with our existing partners?

Yes, we have signed up a number of different partners around the world. And some of them move faster than the others. And so I have to say that in general, 2024 has been a year when the PQC market is waking up. So we are experiencing that the partner will all sign up like in the last maybe 3 years, some coming earlier, some coming later, and they were kind of like preparing themselves to embrace the PQC market. So it wasn't happening 3 years ago, and it was more and more people talk about it the year after year. So 2024, they are experiencing more customers asking about the quantum safety. Rather than asking what is quantum safety, now the question has kind of like shifted gear into asking how we can be benefited from quantum safety, what you can do for me in quantum safety, things like that. So I think it's not a coincidence. They're all more or less experiencing the shift in gear from their customer base.

Okay. And the last one is financial, Andrew, and -- we've got $175,000 in cash. And the question is, are you concerned?

Well, of course, I'm concerned. But why do you think the stock is trading at $0.05? Otherwise, I think that people are seeing risk in the company, but that's exactly what I have been doing since about 2, 3 quarters ago, was to first reduce the operating loss since all the major development has been done. So I'm trying to mitigate the risk and extend the runway so that we can embrace and capitalize on the coming of the PQC market. And so as you can see now, as I mentioned, we have kind of achieved -- successfully achieved the goal and reducing the operating loss to around the breakeven point. So I am quite optimistic on the outlook because once we have any revenue coming up, plus our recurring -- reliable recurring revenue, we will cross into profitability. And so yes, so short answer, yes, I am concerned, and that's why I have executed what I have been doing and it was successful. And I'm quite comfortable with the future quarters coming up.

Thank you, Andrew. That wraps it up. Thank you all for attending, and have a great day.

Yes. In closing, thank you again for joining the 2024 Q2 business update. I'm very happy about the continuation of the new phase of our operation and can't wait to see what's the rest of 2024 brings us. So please stay tuned and see you again next quarter.