Arqit Quantum Inc.

Good day, and welcome to ARCID's 2022 Fiscal Year Earnings Conference Call. On today's call, we will be referring to the 20F and press release file this morning that details the company's full fiscal year-end 2022 results, which can be downloaded from the company's website at arcid.uk. At the end of the company's prepared remarks, there will be a question-and-answer period for selected equity research analysts. Please note that those selected equity research analysts that would like to ask a question in the Q&A session will need to dial in to the call rather than joining through the webcast link. Finally, a recording of the call will be available in the investor's section of the company's website later today. Please note that this webcast includes forward-looking statements, statements about the company's beliefs and expectations containing words such as may, will, could, believe, expects, anticipate, and similar expressions are forward-looking statements and are based on assumptions and beliefs as of today. The company encourages you to review the safe harbor statements, risk factors, and other disclaimers contained in today's press release, as well as in the company's filings with the Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to public update or revise any forward-looking statements after this webcast. The company also notes that on this call, it may be discussing non-IFRS financial information. The company is providing that information as a supplement to information prepared in accordance with International Financial Reporting Standards, or IFRS. You can find a reconciliation of these metrics to companies' reported IFRS results in the reconciliation tables provided in today's earnings release. And now I'll turn the call over to David Williams, the company's founder, chairman, and chief executive officer. David.

Hello, and welcome to ARCIT's fiscal year 2022 results conference call. Before discussing ARCIT's performance, I would like to reflect for a moment on the recent passing of our co-founder, colleague, and friend, Andrew Yeomans. Andrew was responsible for early foundational patents at ARCIT. He was a man of great intelligence, ethics, and warmth. and is dearly missed. We will honor his life and achievements by seeking to fulfill the promise which he saw in ARCIT. Promise is an appropriate word for ARCIT's first full fiscal year of commercial operation. For the period ending September 30th, 2022, we generated $20 million in revenue and other operating income compared to $48,000 for the prior fiscal year. However, revenue generation alone does not paint the appropriate picture of the promise which we see for the business. ArcIt has made great strides in our technology, business model, and go-to-market strategy, announcing this week three hyperscale channel partners which validate our technology and give us access to large global customer bases. As a result, we believe we have now built a pathway to success. In May of this year, the White House urged all organizations to prepare transition to post quantum cryptography. Also in May, the National Security Agency stated that symmetric keys are the recommended solution. We believe that Arquette is the only company in the world that can deliver zero trust, cloud fulfilled symmetric key agreement at scale. Customers can now buy our product through three hyperscale channel partners, AWS, Dell, and Fortinet and other trusted partners. We're ready to deliver the requirements of the White House and others. I stated on ARCIT's 2022 half-year earnings call that ARCIT was improving its understanding of how customers want to consume the product. I also said that it's often the ease of implementation that is a major purchasing decision factor. We've learned that end customers largely want to consume our product through products and services that are already part of their technology architecture and therefore easy to implement. Go-to-market strategy was in the short term to be focused on direct enterprise license sales to be followed by the launch of a cloud-based platform as a service. And in the fullness of time, we expected that we would generate channel strategies and market access through leading global technology partners. The assurance of our security proof by the GCHQ accredited University of Surrey in May accelerated the interest in our product by those leading technology vendors. As a result, we reoriented most of our finite sales and marketing resources during the year towards developing those relationships. Whilst the shift in resources was to the detriment of realizing potential short-term enterprise license opportunities, We are delighted with the outcome. The integration of our symmetric key agreement software with the products of AWS, Dell, and Fortinet gives our kit access to very significant global sales and marketing resources into very large existing customer bases. Today's announcement of the integration with the Fortinet FortiGate series of firewalls enables unbreakable quantum safe encrypted connectivity between customer locations, keeping safe both data in transit and at rest. Fortinet has launched the integrated product for all global customers, and the joint proposition is to be found on both companies' websites. Fortinet has consistently shipped more security appliances than any other vendor for nine consecutive years. and is reported to have a greater than 35% market share. For end users, particularly the large existing FortiGate customer base, it makes the rKit purchasing decision and the implementation of our software easy and seamless. For Fortinet, the integration of our product is a potential sales differentiator, which we hope will help them to further drive unit growth and customer retention. For ArcIT, the partnership provides us access to Fortinet's massive installed base and potential new customers, leverages Fortinet's global sales organization, and is expected to result in annual recurring revenue. Similarly, ArcIT and Amazon Web Services announced the integration of Quantum Cloud with Amazon S3, a cloud-based object storage service. The integration of Quantum Cloud with AWS S3 will allow AWS customers to protect their data against attacks today and against the future quantum threat. AWS is the largest global cloud service provider with reportedly a market share greater than 30%. That's over an $83 billion global market. The integration of Quantum Cloud with S3 presents our products to a very large global customer base as an easy to purchase and implement upgrade. For us, it greatly accelerates potential customer reach and joint marketing initiatives with AWS are beginning. We also this week announced a partnering agreement and a joint sales mission with Dell Technologies to integrate ArcIT's product into a range of products available to their US Defense Department and other customers. This solution will be available through the Dell Order Fulfillment System, and made available initially via Dell's federal and technical teams. We're very excited about the immediate opportunity which this partnership presents within the Defense Department and other federal department markets. We see additional broader opportunities with Dell across its business activities globally. We believe that the prioritization and consummation of these channel partner relationships is potentially transformational for ArcIT. We believe that these relationships and others which we are pursuing represent a significant acceleration of our go-to-market strategy, bringing forward the date by several years, the moment where we expected to be doing business with such fantastic hyperscale companies. Two additional important initiatives gained traction for us in 2022. We recently announced that Arquette has signed a contract with Traxpay, a leader in supply chain financing solutions to deliver quantum-safe digital finance instruments, enabling supply chain actors to conduct business more efficiently and securely. Financial institutions such as Deutsche Bank, DZ Bank, Nord LB trust Traxpay's financing solution and maintain strategic partnerships with that company. Deployed directly into Traxpay's supply chain finance platform, which has processed over 65 billion euros of supply chain finance to date. ARCIT's trade secure service uses distributed ledger technology made secure by Quantum Cloud to provide customers with referenceable digital promissory notes and digital bills of exchange, which are easier to manage than paper-based alternatives, unique, transferable, and invariable. What is driving the adoption of digital assets in this market is the UK government's upcoming electronic trade documents bill, which will legalize electronic transferable documents. Other leading trade jurisdictions around the world have also passed or will pass legislation enabling such advancement. This opens up a potential $17 trillion global market for supply chain finance for digital assets. We believe that Arquette is the only company in the world to comply with the requirements of this legislation, namely that the digital asset must be tamper-proof. Only Arquette has published a security proof demonstrating that it is provably secure. Without such proof, no digital asset can be described as tamper-proof. We believe that digital transformation in the financial services market is likely to accelerate at scale now, But banks experimenting with private ledger technology should take note of the importance of quantum security. We're very excited about the opportunity for digital transformation more broadly beyond trade finance. Finally, ARCHIT software has been selected by prime contractors as part of the potential technology solution for two U.S. government programs of record. The contracts were expected to be signed and billed in the fiscal year 2022, but billing slipped into the current fiscal year. There are headwinds in the US government contracting market as a result of continuing budget resolution and also international operational requirements. But despite those headwinds, we are delighted that months of effort by our commercial and technical teams has been rewarded by these important contracts. Participation in these programs of record is important validation of our technology and represents what we believe to be just the beginnings of the opportunity within the United States and other government defense departments. These contracts and our Dell Channel partnership set us up for potential future success in this very important marketplace. In addition to the acceleration of our go-to-market strategy, innovation in our technology is resulting in changes to the financial profile of the company. We announced today under a separate press release that as a result of additional innovation, ARCHIT no longer requires satellite delivery of replicated randomness to data centers as part of the symmetric key agreement process at endpoints. ARCHIT some time ago developed a terrestrial method of delivering this replicated randomness to data centers. The security of encryption keys created on the endpoint using our lightweight software agent is as strong with the terrestrial method as with the satellite method. The security proof work that we published earlier in the year satisfied us of this. Therefore, we've concluded that we do not require satellites and associated ground systems in the background of our technology stack. The implications of this are as follows. We've commenced conversations to sell a partial or complete interest in our satellite system under construction with multiple parties. Some government customers, for very specific reasons, are interested in sovereign, on-premises control of key agreement, which comes with a concept called eavesdropper detection. We will continue to fund the construction of this asset until a sale is agreed. If a sale becomes unlikely, we would discontinue construction. ArcIT will build no further satellite infrastructure beyond this and intends to license its quantum satellite IP to subsequent customers with similar requirements. This would enable those customers to build their own domestic sovereign systems, and we are seeing demand for this offering. We expect that these changes to our technology strategy will result in a positive effect on future results, with a portion of capitalized satellite costs recouped through the planned sale of the satellite currently under construction, additional revenues through the licensing of our quantum satellite IP, and the elimination of future capital and operating expenditures associated with use of satellites as part of our core product offering. ARCA intends to continue to perform under its satellite construction contract with the European Space Agency and to recognize these related project incomes generated there under. We recently completed a new security proof demonstrating that the satellite technology has its own validated security, which is being shared with these new customers under NDA. These are significant changes in our technology infrastructure. We believe that the changes simplify our business model by focusing on selling our symmetric key agreement software platform as a service. The benefits of stepping away from hardware infrastructure are potentially significant from a financial perspective. The most important takeaway is that these benefits are achieved with no negative impact on the security of the keys created at endpoints by our software, and of course, removes capex. It's beyond doubt now that the world wants and needs stronger and simpler encryption. We believe, and leading cryptographic experts have validated, that Archit's symmetric key agreement software delivers just that. The partnerships which we have announced are further validation of our technology. However, our promise is not fulfilled by merely having great technology and people. Our promise is fulfilled by getting our product into the hands of customers to secure their data. The acceleration of our go-to-market strategy offers ARCIT a faster pathway to... ...are focused on fulfilling and maximizing the opportunities which these partnerships represent. With that, let me turn the call over to Nick Poynton, our CFO, for a few remarks on our financials. Nick.

Thank you, David. We only commenced commercialization and began generating revenues late in the second half of our fiscal year 2021. Therefore, a comparison of our fiscal year 2022 results with the comparable period in fiscal year 2021 may not be meaningful across all financial metrics. For the 12-month period ended September 30, 2022, we generated $20 million in revenue and other operating income from new Quantum Cloud contracts and other activities. Our quantum cloud revenue totaled $7.2 million for the period generated by five contracts. The bulk of the quantum cloud revenue was generated by contracts with Virgin Orbit and AU Cloud. As David noted, the reorientation of much of our sales and marketing effort to realize our announced channel partner relationships impacted our direct enterprise license sales activity in the second half of our fiscal year. Other operating income for the fiscal year of $12.8 million resulted from Arquette's ongoing project contract with the European Space Agency. Despite the announced shift in technology strategy, we expect to continue to perform going forward under our contract with ESA, realizing future other operating income. Our administrative expenses equates to operating costs for those more familiar with US GAAP. For the period, our administrative expenses were $72.2 million versus $14.6 million for fiscal year 2021. The material increase in expenses reflects significant post NASDAQ listing growth in our operating infrastructure costs and personnel. Additionally, $22.9 million of the increase reflects non-cash charge for share-based compensation. our employee base grew to 145 from 73 at the beginning of the period. Since the end of the fiscal year, we have undertaken a review of budgeted fiscal 2023 headcount and operating costs growth to align it with revenue and focus on our key partner initiatives. As a result, we have provisionally capped fiscal year 2023 headcount at no more than 195 employees and have reduced non-employee budgeted costs by 8%. In total, we have reduced budgeted costs for the fiscal year 2023 by 18%. In addition, we will accrue benefits from the reallocation of certain employees to support our key partner initiatives and the deferral, reduction or elimination of costs from activities which are not deemed high priority at this time. Operating loss for the fiscal year was $52.1 million versus a loss of $172.6 million for fiscal year 2021. As a reminder, the operating loss for fiscal year 2021 included a $155.5 million reverse acquisition expense associated with our transaction with Centricus. We generated a profit before tax of $65.1 million However, we generated an adjusted loss before tax of $52.3 million, which in management's review reflects the underlying business performance once non-cash charge in warrant value is deducted from operating profit before tax, sorry, from profit before tax. During the period, 1,852,736 warrants were exercised with cash proceeds to arcade of $21.3 million. We ended the period with cash balance of $49 million versus a cash balance of $87 million as of fiscal year end 2021. Please note that we have filed today a universal shelf registration statement and an ATM prospective supplement. The filings represent sound fiscal, sorry, financial housekeeping providing the company flexibility in corporate finance matters in the future. With that, I turn the call back to David.