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

Good morning, everyone, and welcome to our 2024 Fourth Quarter Results and Business Update Conference Call. I'm Brian Stringer. For those of you who don't know me, I'm the Chief Financial Officer for 01. With me on the call today is Andrew Cheung, our President and Chief Executive Officer. Now before I get started, I'd like you to just pay brief attention to our disclaimer here, our forward-looking statements, which form an integral part of this presentation. Now the agenda today will be Andrew Cheung will take us through our business update and our financials, after which there will be time set aside for Q&A. Now, I think by now, we're all familiar with the Q&A process using Zoom at the bottom. There's a button there, Q&A, click it, and you can ask the question and I'll table the questions after Andrew's presentation. And now, I'll pass it over to Andrew. Andrew, over to you.

Thank you, Brian. Well, I see that we have a pretty large audience today, a lot more than our previous quarters. Welcome, everyone. My name is Andrew Cheung, President and CEO of 01 Communique. Over the last few weeks, I have talked to a number of long-time shareholders and would like to take this opportunity to extend my appreciation to all of you who have been supporting us over the years. I have also talked to a number of new shareholders and would like to also welcome you to the 01 community. So let's get started. It is almost a golden rule that an overnight success has many invisible years behind it. I have been preaching for many years about the fact that there is an urgent need for enterprises and governments to become quantum-safe before Q-Day. The day when hackers are using quantum computers to crack current encryption that is protecting virtually everything under the sun in today's world. This has to be done immediately not only because it takes years to implement the transition, but also because there is no set date for Q-Day. It can come any day, and I can guarantee you that the hackers won't give you a call before they attack. 01 received little attention until recently when Google announced their groundbreaking achievement in quantum computing. Now let's look at some of the chain of events happened over the last few months that heightened awareness of quantum safety. They are all large enterprise talking, by the way. First, there is the -- as I said, Google announcement in December that they have achieved a breakthrough in quantum computing more in the terms of error corrections. This is huge because it means that they can achieve efficient qubits. Technically, 372 qubits, quiet qubit or 4,000 somewhat quiet qubits can cross the line of Q-Day already. You don't need millions of qubits to cross Q-Day if you have good qubits. No wonder why Microsoft said in 2025 that this -- they said late in 2024 that 2025 is a year that you should get moving on your quantum strategy and heightened awareness regarding the risk of data being compromised by hackers using quantum computers. In addition, Gartner also stated that 2025 is the year of business need to have quantum strategy. The CEO of SandboxAQ also stated last week in an interview urging companies to transition to PQC compliance protocol supported by NIST or the semi government agencies in the U.S. that scrutinize and standardize encryption algorithms that the rest of the world will follow. Of course, everyone also remember the CEO of NVIDIA has said that he believes using quantum computers to run critical applications are a decade or so away. While I agree with him, this is also sending a serious misunderstanding message to the world that they don't need to worry about Q-Day as of yet. The truth always lie in the fine print. All he said was that quantum computers won't be replacing classical computers for a while. And this is correct. I think he's also wanting to convey a message us that it is still a long way before AI modeling will be using quantum computer instead of his NVIDIA chips. Realistically, let's not forgetting that quantum computers -- using quantum computers to crack encryption is not a critical application. It is just hacking. The best comparison is the machine that used to crack the Enigma code during World War II created by the allies. That machine was clumsy, not a general-purpose computer and it was unstable. The industry nick name of such kind of a machine is rubber band chewing gum version, but it did the job. So the same thing applies to Q-Day. We are not there yet, at least not on the commercial level, but it's awfully close. I personally hold a strong belief that Q-Day has arrived at least 2, 3 years ago on the national level because they are usually about 5 years ahead of the commercial world. I'm sure you'll be surprised if the U.S., Russia and the China National Security have not already contracted their quantum computing vendors to create such a rubber band chewing gum, special purpose quantum computers that does nothing, but cracking RSA and elliptic curve. I guess the bottom line is that we believe the huge demand on quantum-safe end-user application will come many years before the demand of general-purpose quantum computers. We are ready to capture that market now, not tomorrow, okay? So let's jump into exactly what we do. Our focus is post-quantum cybersecurity or quantum-safe cybersecurity. Our expertise is encryption, cybersecurity and end-user product development. After spending millions of dollars over the last 5 years, I would like to tell you what we have today to take the full advantage of our expertise and how we are going to capitalize on it. We don't talk strategy today, we talk logistics. We don't talk scientific theory now. Let's talk revenue. First of all, we built our quantum-safe cryptographic engine based on our spot-on correct prediction of NIST final recommendations in order to jump the gun gaining 3 years of lead time. For example, the proof-of-concept projects we did for our partners 2, 3 years ago were already using algorithms we predicted will be in the NIST. And we are banged on when NIST published their recommendation 5 months ago in 2024. We don't plan to sell our cryptographic engine, but instead, we believe revenue reside in applications that end users are touching, using and most importantly, paying. While everything under the sun must be quantum safe in order to survive beyond Q-Day, we cannot be everything at the same time. So besides helping PQC projects of our partners and revenue share with them, we are strategically choosing and have chosen 4 verticals to set our focus. And these 4 verticals are quantum-safe e-mail security, quantum-safe cryptocurrencies, quantum-safe AI platform, quantum-safe mobile messaging. And the simple reason for these 4 verticals is because they are mass market ready without the need of end user education. In other words, once marketing dollars are pouring in, revenue will start to grow. And the reason we picked e-mail to be the first quantum-safe end user solution is not only because it has a huge market with 700 million business e-mail accounts worldwide, but also e-mail is the most insecure but globally adopted business tool. Since its inception, we all know that e-mails are virtually sent unencrypted, all of them. And even though there's a small percentage of e-mail being sent encrypted; the encryption is not truly end-to-end. This means it is not secure because not -- being not end-to-end, meaning people other than the recipient can also decrypt your message, like the man in the middle. And let alone being quantum-safe. We took this opportunity to leapfrog an e-mail security product that is not only quantum-safe, but also end-to-end -- truly end-to-end encrypted. This means no one other than your recipient will have the key to decrypt your message. In other words, it is 100% guaranteed privacy that even government authority are unable to tap into it. Even more important than encryption for e-mail is the authenticity of the senders. Virtually all e-mail senders today are unauthenticated. That's why 91% of all ransomware attacks in the world are initiated by a simple phishing e-mail. And the end-to-end e-mail signature in our IronCAP X product is not only quantum-safe, but also allowing sender to digitally sign the message proving the senders' authenticity. In other words, this alone can pluck 91% of the source of ransomware. IronCAP X is already available on our website for public usage, and the first version is limited to Windows Office Outlook users, and we are expanding as we speak to provide an e-mail client for Windows, Mac [indiscernible], iOS and Android for cross-platform users and expecting commercial availability within 2025. I bet the lowest hanging fruit for commercial -- the quantum hacking will be cryptocurrencies because they are trillions, not billions, but trillions dollars protected by a digital signature, which was assumed to be safe when Satoshi, whether he, she or they invented Bitcoin in 2009, that was then this is now. The bad news is that digital signature is an integral portion of each and every transaction. So this cannot be changed easily without several years of work. So 2 years ago, we had completed a proof-of-concept with a partner using Solana as the sandbox to integrate our IronCAP quantum-safe technology. The project was completed so successfully that not only we can create a quantum-safe Solana layer 1 chain, but also retain this ultrafast TPS transaction per second and smart contract capability. The method we used was subsequently granted a U.S. patent in June 2023, and we are planning to complete commercialization in 2025 with a partner. We have also decided to focus on AI machine -- AI -- security AI platform, okay. So similar to Internet, I think virtually all new technology started off with no cybersecurity built in. So AI is no different. There are hugely need for secure AI platform. At this point, we have a couple of potential invention that we are proceeding with patent applications. So obviously, I cannot disclose beyond that line, at least until after the application have been filed. Practical applications of secure AI platforms include the like of secure multiparty computation, private set intersection, outsourcing machine language, privacy-preserved machine language, medical record learning, financial model learning, image recognition, and novelty detection or supply chain optimization, et cetera, et cetera. We plan to have a public demonstration before the end of this fiscal year and a full commercialization thereafter. Now last but not least, we might remember several months ago that the CEO of a popular messaging -- mobile messaging platform, Telegram was arrested in France. He was arrested because people are accusing him or accusing Telegram being noncooperation with authorities in censoring the message on the platform. Some people said the arrest was a pure political move, and I'm not a politician nor do I care. I'm a cybersecurity guy. And from the cybersecurity point of view, the balance between privacy and security is a very controversial topic. Like a true zero trust system will have no technical backdoor to the encryption, but this may facilitate communication of illegal activities such as drug trafficking, money laundering, et cetera, et cetera. However, from the flip side, a non-zero trust system with a back door or with a master key may facilitate breaking of national security. It is kind of like picking the less of a devil. Frankly, being a cybersecurity person, obviously, I personally believe the less of the devil to me is a true zero trust system because the consequence of breaking national security is way worse than the risk of being misused by the bad guys. And bottom line is that most techies believe Telegram is not a truly zero trust system, and they possess the master key. And maybe this is one of the reasons for the CEO's arrest. Someone is trying to gain access to those messages. The real motive is outside the scope of this discussion here, and we may never know, and I don't even want to know. All I know is that the world is strongly in need of a mobile messaging platform that is not only quantum-safe, but also truly end-to-end encrypted, whereby there's no master key to share, and we are committed to build this product. I guess 2024 was an important pivotal year to 01. With a number of projects reaching critical milestone, essentially, the operation was breakeven in 2024 using only a little more than $130,000 of cash flow for the full year. Most importantly, we expensed all R&D expenses as well as always operating in a debt-free mode. This dovetails into a great start for 2025 when we completed a strategic equity financing 2 weeks ago, allowing us to accelerate on a few strategic milestones. We continue to receive reliable recurring revenue from our legacy product, although suffering slightly by the unfavorable exchange rate. It has never been -- it has nevertheless provided us with good cash flow, and it did the job of funding our R&D development in the last 5, 6 years. Our focus from 2025 onward will be towards building quantum-safe related revenue, which is most important to us. In summary, 2025 is expecting to be the reflection point to capitalize on this massive quantum trend. We have patent-protected technology and a mass market-ready product line that we have already signed up by a number of world-class partners that you can see the name here. So I guess 01 is poised to be the world leader in the creation of practical PQC compliant end-user applications. So we expect 2025 to be a massive year in achieving more major product milestone, while revenue will begin to accelerate. I'm going to take a quick pause here. I'm sure that you have a lot of questions. So I'm going to allow more time for question-and-answers. As mentioned at the beginning, I guess everyone is familiar with Zoom these days using the Q&A feature. So Brian will moderate your questions accordingly. So over to you, Brian.

Thank you, Andrew. I've had several questions come in, and I'll group them by the topic, Andrew. The first has to do with revenue. And the question centered around, where -- and I think you just covered it, where is your existing revenue coming from? So that question had come in earlier. And when do you expect to see revenue start to build?

Yes. I'm fully expecting a question coming from this because we -- the quantum-safe market over the last few years has been in the pre-money stage. It is no different from the AI market a few years ago, okay? So currently, our revenue are coming from our recurring revenue of the legacy product, okay? This recurring means it is well predictable and also help paying the bills, so to speak. However, as we all expected, our revenue future is from the quantum-safe technology and quantum-safe product. That is -- this is the IronCAP related revenue. So with respect to your question of when, well, it is hard to answer because, as I said, this is an emerging market. But when it starts, watch out. I'm fully convinced that it will be explosive. We are now at the stage of preparing for that and setting up and expanding our -- the partnerships and getting our name out there in the market and most importantly, not waiting for others because we have developed more than the engine. We have end-user application. This is where, as I said, those markets are ready, are mass market ready. And once marketing dollars are pouring in, revenue will just start rolling in. So now I have covered like mostly our current opportunity and believe me, there are more to come. But I do expect to start seeing revenue commence in like the second half of this year and possibly sooner. We'll see. It is going to happen.

Thank you, Andrew. The next one, and I'll stick in the financial area. Do you feel like your balance sheet is strong enough to support your development plans?

Yes, absolutely. The balance sheet as of now after the recent financing is more than enough to allow us to complete and accelerate a few more milestones, which I have indicated in my presentation. Just repeating a little bit here would be, number one, to expand the high-end CapEx to a cross-platform support and working with the partner in the cryptocurrency market and kickstarting an AI -- secure AI platform, which actually we have started not just now, but started some earlier in 2024 already, which is accelerating what we have been doing many months ago. And also kickstarting the Quantum-safe mobile messaging platform. I am very comfortable that the current financial resources, the balance sheet, the size of the balance sheet is enough to -- more than enough to support those developments.

Okay. And then a couple of questions have come in on development, Andrew. The first one has to do with the crypto Solana blockchain. And the question is, what exactly do you have as a product today? And what are the milestones we can expect to see as you get to commercialization?