01 Communique Laboratory Inc.

Good morning, and welcome to our Q4 conference call. I'm Brian Stringer. I'm Chief Financial Officer of Zero One, and with me today is Andrew Chung, our President and CEO. The format for today's call will be a brief presentation by Andrew Chung, followed by Q&A. I'll be moderating the questions, so please throughout the presentation, everybody knows how to use Zoom now. If you could just click on the Q&A button at the bottom, submit your, type your questions and submit them to me. Now, before we get started, if you would take a minute to read our disclaimer or forward-looking statements. as these are an important part of the presentation. And now I'll turn it over to Andrew for his presentation. Over to you, Andrew.

Thank you, Brian. Welcome, everyone. Again, my name is Andrew Chung, President and CEO of Zero One Communicate. Welcome to our 2023 Fourth Quarter Financial Result and Corporate Update. First of all, activities in the post-quantum cryptographic market continue to move in light speed. I think the most notable happening since the last quarter was the breaking of the 1,000 qubit barrier by IBM. In December, just about a month ago, IBM announced their latest quantum computer, Condor, with 1,121 qubits. This is not only a major milestone, but also because it has fulfilled their roadmap they posted a few years ago. So the roadmap becomes a reliable item for the quantum computer industry by itself. And according to their roadmap, they are going to deliver 1400 qubit later this year, followed by 4,000 qubit next year, and then 100,000 plus the year after. It cannot be more obvious that the tsunami is already within visible distance. The reasons are very simple. It takes time, first of all, to convert application to become quantum safe. This can take a minimum of like six months to an upward of three years to fulfill the conversion. And number two, even more importantly, is that hackers can conduct something called a handle attack. Harvest now, decrypt later, or some people call it HNDL attacks. This essentially has fast-tracked the effective queue date for those industries with data with long lifespans such as financial, healthcare, etc., etc. I always fall back to this famous formula, X being the number of years your encrypted data needs to be secured. And Y being the number of years that it would take for you to implement quantum safety. And Z being the time that would take for the hackers to get hold of a powerful quantum computer. So if anywhere X plus Y is greater than Z, then you're toasted. Now X and Y are different for each industry. And as mentioned earlier, it doesn't need a rocket scientist to figure that X plus Y is indeed a big number already. And with the announcement from IBM, which I just talked about, EZ is about one to two years away. In other words, we are already crossing the red line that X plus Y is almost guaranteed to be larger than EZ as of today. Now, this doesn't even include the competitors of IBM, who are all striving to beat them in their quantum computer deliveries. And on top of that, it is always a known fact that technologies on the national level, such as U.S., Russia, China, are at least five years ahead of the conventional level. What does it mean? It means that logically the national level already had what we will have two to three years from now. So no wonder why the White House is also not sitting still, as they know too well about what's going on. In late 2022, the Executive Office of the President had already issued a memorandum directing all federal agencies to adhere to the NSM-10, National Security Memorandum No. 10, and they set a deadline of October 18, 2023, which is only a few months ago, to assess funding requirements to achieve quantum safety. The memorandum also mentioned about the handle attack, which I talked about earlier. This is jointly overseen by the National Institute of Standard and Technology, or short form NIST, N-I-S-T, in the U.S. They have started the PQC standardization process in 2016, a few months ago. That was almost in line with when we started the INCAP division. Originally, NIST proposed to have the standard finalized in 2024, but due to the faster than expected development of quantum computers, they had the first draft of standard FIPS 203, 204, and 205 just about five months ago in August. They expect to add one more standard later this year to wrap up the process. Our in-depth knowledge in PQC post-quantum cryptography allowed us to study the original 82 NIST submissions and try to predict the five final winners so that we can build our crypto engine ahead of the curve. So far, four out of five predictions have been correct. If the last one we have predicted, which we have already included in our INCAP engine, we will be later, which will NIST will come out later this year, 2024. If that has also come out to be the winner, we are five out of five. Now, because of our ability to predict the standard, this actually allowed us to be a few years ahead of the world in creating end-user quantum-safe applications. While our competitors are busy creating their quantum-safe cryptographic engine according to the NIST standard, We have already created the world's first quantum safe end-to-end email security product that everyone can download and use it as of today. Actually, as of like almost a year ago. And while the whole quantum safe industry was still largely in this pre-money stage, we believe the tipping point is imminent. We also believe real revenues will be coming from end-user application rather than the encryption engine. For a simple reason, we all know that we're paying for the car, not the engine itself. So as a result, our 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. We all know that business 101 says you don't need to do or be everything at the same time to begin with, as long as you are doing just one thing and doing it better than all your competitors. And the reason why we picked email to be the first quantum safe end user solution is not only because the market of email is huge, but also because email is indeed the most insecure, but yet a globally adopted business tool. Since its inception, all email are virtually sent unencrypted. And even though there is a small percentage of emails being sent encrypted, the encryption is not end-to-end. This means it is really not secure because people other than the recipient can also decrypt your messages. We took this opportunity to leapfrog an email encryption product that is not only quantum safe, but also end-to-end encrypted. Now, end-to-end encryption really means no one can decrypt your messages other than the targeted recipient. In other words, it is 100% guaranteed privacy that even government authority are unable to tap into your messages. And even more important than encryption is the authenticity of the sender. So authenticity is also built into our email, post-quantum email applications. We all, knowing that like virtually email senders are unauthenticated, and that's why 91% statistically of all ransomware attacks in the world are initiated by a simple phishing email. And the end-to-end email signature in INCAT X, our product, is not only quantum save, but also allow the sender to digitally sign the message. What does it mean? It means that recipient can determine if this is the real person who sent the email. In other words, this alone can plug 91% of the source of ransomware. To capture the mass market, we have a free version for personal usage and a business version at $9.95 per user per month. Another huge market that we have tapped into is cryptocurrency. While this is not our core product, we have conducted a proof of concept POC project for a partner in 2022. The project was to use an existing blockchain called Solana as the sandbox to plug quantum safety into the chain. Just like anything in technology, the concept is a yank out the elliptic curve and replace with QuantumSafe signature for the payers and validate it to sign and endorse the transactions. Very simple, right? Maybe not. After digging deep into the code, we found that the Solana smart contract has been hard-coded to elliptic curve and cannot be expended. We have invented, at the end, a special technique to perform the QuantumSafe validation outside the chain. And this invention has eventually successfully obtained a U.S. patent protection, and it can be applied to create a quantum state version of just about any token in the world, such as we can create a QBTC for Bitcoin, a QETH for Ethereum, or QSOL for Solana, et cetera, et cetera. And public demonstration is available at qnt-demo. .incab.ca, just clearly written on this slide. The good thing never happens easily. Crypto winter actually hit at a time when this project was completed at the end of the 2022. But now with the cryptocurrency market seems showing signs of coming back, this project has been rejuvenated because theoretically all coins will be victim of the upcoming quantum threat. This potentially is a multi-billion dollar market that we can tap into with our partners. And now we all know that remote access is our existing revenue generating business. So it is essentially a zero trust remote access solution. So naturally coming soon, we will integrate INCAP into remote access and VPN solution to become the first in the world in this quantum safe category. Even though remote access market is not as big as email or cryptocurrencies, it is still a sizable market of 200 million a year. So it's really good that we can tap into this too. Last but not least, we came up with a technology using the soon-to-be standardized code-based cryptographic technology by NIST to effectively hide sensitive data into unsuspicious media. I'm sure many of you have watched the movie Da Vinci Code, and really that's the idea, only that in the 18th century, steganography was basically watermark. But in the post-quantum world of the 21st century, we are using code-based technology to randomly insert the sensitive data to be hidden as error syndrome into an unsuspicious media, such as a simple family picture, a JPEG file, or a simple Taylor Swift music MP3 file, or a Oppenheimer video MP4 file, et cetera, et cetera, that only with the private key that the hidden data can be retrieved. This can be widely applied, such as the private key retrieval process in cryptocurrency, replacing the current way that they are using, which is a 18th century paper with a 24 English word. If anyone use the hardware wallet, you know what I'm talking about. And a patent application has also been submitted for this technology. And the fact that we are leading the world in the creation of quantum safe end user products also gave us the knowledge to help other organizations to convert their existing applications to become quantum safe. Typically, we are charging $250 to $400 an hour, which equates to about $35,000 to $56,000 per man month as a PQC consultant. Our strategy is to act as the SMB, subject matter expert, behind our partners such as CGI, PricewaterhouseCoopers, Palace, Hitachi, et cetera, et cetera, to help their customers doing PQC conversion. So while revenue potential is not as big as that of PQC product, it can be very profitable with minimal marketing cost. Finally, the execution of our business plan was clearly reflected in our financials. While revenue was less than a year ago without a one-time project at that time, the adjusted loss has actually been reduced to $125,000, down from $161,000 of last year. The more notable item is that we have reduced cash usage to only $17,000 in this quarter, from $65,000 of the last quarter. I guess most importantly, we have invested over $6 million hard cash into the development of INCAP. And since majority of the R&D work have been completed in this quarter and were 100% expensed from our balance sheet, we managed to continue our plan to reduce operating loss quarter after quarter. The goal is to hover around, break even, and cross into profitability as soon as PQC money kicks in. So as a summary, looking forward to 2024 and beyond, I guess timing is everything. We believe 2024 will be the historic reflection point for the PQC market. I will take a pause from here to allow more time for question and answer. As mentioned earlier by Brian, please use the Q&A feature of Zoom, and Brian will moderate your questions accordingly. So there you go. Back to you, Brian.

Okay, thank you. Andrew, we already have a couple of questions that came in through the presentation, so I'll get started on those. The first one has to do the background is in regards to our investment and talent summit and development of a crypto project involving quantum-saved coin and secure wallet. And the question is, with Bitcoin and other cryptocurrencies coming back, is this project a go and what is the future with respect to this project?

Yeah, thank you, Brian. It's long, but it's a very simple and good question. I think I mentioned briefly during the presentation, this kind of answered half already, that, as I said, we had a POC project for Solana. using Solana as the sandbox. And it was a very interesting timing. Just about at the time when the project was finished in late 2022, the crypto winter hits. That was the famous implosion of FTX. And that was hitting everywhere in the crypto industry. And now, you know, it seems like everyone also know if you follow crypto in the last few months, it actually seems showing signs of coming back. So as I said, the project was done and patent application has been successfully completed with U.S. patent protection already. So this project seems to be rejuvenated at the same time. So when I said we can use the technology to create like a quantum version of just any coin, the concept is very simple. The concept is that today we have, let's use Bitcoin as an example. Bitcoin today is trading at 40,000 U.S., And if there's a Q version of Bitcoin, say QBTC, starting trading at $1 today, there's a gap of $40,000 between the BTC and the QBTC. But as time goes on, day after day, the gap is supposed to be, in theory, narrowing. And then on Q day, when people can crack the original Bitcoins, the original BTC is supposed to go down to zero and then the QBTC is supposed to be the 40,000 or whatever price, you know, is supposed to be there. So it's going to be moving in opposite direction and eventually replacing each other. So that is the concept we believe, you know, is survival. So, yeah, that's a long-winded answer. to your question that because we said every coin in the crypto world is supposed to be affected by quantum safety, this is a really lucrative project in my point of view.

Thank you, Andrew. The next question has to do with our partnerships. And the question is, you set up a number of partnerships in PQC. And we just happen to have them on this particular screen. Andrew, the question is, when will they pay off?

That's a billion-dollar question. You know, as I said at the end of the presentation, we are setting ourselves up at a point where we're waiting, you know, that we're minimizing our operating costs, okay, so that we can extend the runway indefinitely to wait for the PQC money to kick in. And this question is actually asked by each one of those names by their investors saying, you know, like, when would it pay off? When would end user really opening their wallets and start paying for either PQC conversion or PQC product? You know, and we're setting up, you know, here, once they are, opening up the wallet, doing that, it will start the payoff. And I, you know, my personal belief is 2024, as I said, will be an interesting year that is very likely that if you're looking back, you know, say the 10 years from now, this is likely the year of the inflection point where people are beginning to to open the wallet, seeing the tsunami. Like last year or year before, you know, we're hearing the siren of the tsunami, and now they are beginning to see, visually visible, seeing the tsunami. And I keep using that analogy because it's very same. You know, if it has arrived, you just cannot run. There's no time to run. Not, you know, not to mention about the the harvest now and the decrypt later attack, which is really fast forwarding the real threat or the effective date of quantum threat.

And the next one, Andrew, turning to financial side a bit, is given our cash constraints, How much R&D is actually getting done? And to extend that a bit is how are you going to make the cash last until these partnerships start to pay off?

Yeah, as mentioned also in one of the slides, we have spent more than $6 million cash into the INCAP development. which is significant. And that's done. And as I said, that's the majority of the development. So if anyone has been in the high-tech world, we all know that the spending on technology was the most intensive during the first few years when you are pouring resources into developing from ground zero. So that process is done. And after that process, the expected resources going to spend on R&D would be a small percentage of it. It's going to be enhancing the product and doing a new version or something. So we don't expect the R&D would be ramping back to that kind of a level, but really like level off of what we are today. So I'm very confident that with the existing cash flow, we are going to manage the runway to huffle around, like I said, the break-even point and then embrace the upcoming for the PQC, the money to kick in.

Okay, thank you, Andrew. Oh, and this one is from John, and he sees that you've been speaking at a number of quantum and cybersecurity events. Can you share a bit about what these have involved and who you've been speaking with?

Yes, this is a very good one, too. Recently, I would say One of the reasons I believe that 2024 will be the reflection point is because I actually saw the intensity of these kinds of conferences happen a lot more frequent in 2023 than in previous years. So the last one that I was invited as a speaker was the Global PKI Conference, the Public Key Infrastructure Conference, And their members are just about all the name you know in the world of business, such as even as big as the ECB, European Central Bank, to someone as small as you never know about the name. That was a conference happened in November, just a few months ago in Amsterdam. And I was invited to talk about the actual hands-on experience in converting PQC applications to become quantum safe, okay? So they also recognize that everyone in the industry, basically our competitors, are really just providing the engine, okay? And they are just, hey, you know, this is the engine, do whatever you want, right, with your car. But the reality is, people touch that level of encryption for 40 years already, and they don't know how to touch it. And our experience digging our hand deep into helping or even converting our application or helping our partners to convert their applications becomes a very important technique or experience that we can help them understanding the process of PQC conversions. So in that conference, I was basically presenting about what we did for using the Solana sandbox and what we did for email and what we did for steganography and stuff like that. So it was a very intriguing experience for the audience because this is the first one, you know, in the whole conference or two-day conference, that they hear about hands-on conversion rather than just technology and the PhD papers and things like that. So, yeah. So a short answer to your question is those conferences are really accelerating and becoming the kind of like yardstick, you know, for me to kind of having a feeling

that 2024 will be the reflection point in pqc markets okay okay thank you andrew uh the progress of time it's i believe all questions let me just check yeah there are no open questions uh thank you very much for attending everybody and now i'll turn it back to andrew for closing comments well thank you again for uh joining our 2023

fourth quarter business update. I am very happy about the continuation of the new phase of operation, and I really can't wait to see what 2024 brings us. So please stay tuned and see you again next quarter.